-----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, Uv4hOUpbyhfgL+6pfQq9m+VH4j8gRW5BclawuLjJOn1rVcX9z3g4xcKjPMhoifA3 j0bUlxI/g9rPdUZ6iWOKYw== 0000950131-98-002323.txt : 19980403 0000950131-98-002323.hdr.sgml : 19980403 ACCESSION NUMBER: 0000950131-98-002323 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 22 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980402 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-K SEC ACT: SEC FILE NUMBER: 000-17540 FILM NUMBER: 98586480 BUSINESS ADDRESS: STREET 1: ONE MONTGOMERY WARD PLZ CITY: CHICAGO STATE: IL ZIP: 60671 BUSINESS PHONE: 3124672000 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the 53-Week Period Ended Commission file number January 3, 1998 No. 0-17540 -------------------------------------- MONTGOMERY WARD HOLDING CORP. (Exact name of Registrant as specified in its charter) Delaware 36-3571585 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) Montgomery Ward Plaza, 60671-0042 Chicago, Illinois (Zip code) (Address of principal executive offices) Registrant's telephone number, including area code: (312) 467-2000 -------------------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Not Applicable None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, Series 1, $.01 Par Value (Title of class) Class A Common Stock, Series 2, $.01 Par Value (Title of class) Voting Trust Certificates representing Shares of Class A Common Stock, Series 1, $.01 Par Value (Title of class) Voting Trust Certificates representing Shares of Class A Common Stock, Series 2, $.01 Par Value (Title of class) Class B Common Stock, $.01 Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- At March 16, 1998, there were 18,322,247 shares of Class A Common Stock and 25,000,000 shares of Class B Common Stock of the Registrant outstanding. - -------------------------------------------------------------------------------- Item 1. Business Forward-Looking Statements Information included in this Report on Form 10-K may constitute 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: Bankruptcy Court actions or proceedings related to the bankruptcy, 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. General Montgomery Ward Holding Corp., a Delaware corporation ("the Company" or "MW Holding"), and its wholly-owned subsidiary, Montgomery Ward & Co., Incorporated ("Wards"), are engaged in retail merchandising and direct response marketing (including insurance) in the United States. See Note 21 to the Consolidated Financial Statements for financial information regarding these segments. Founded in 1872 and incorporated in Illinois in 1968, Wards is one of the nation's largest retail merchandising organizations. As of January 3, 1998, Wards operated 301 retail stores in 37 states with approximately 24 million square feet of selling space. In addition, Wards operated 6 outlet and liquidation centers which sell overstock merchandise, 17 distribution facilities and 78 product service centers. Wards offers life and health insurance, revolving credit insurance, club products and other consumer services through Signature Financial/Marketing, Inc., a Delaware corporation ("Signature"), and through Signature's subsidiaries (collectively, with Signature, "The Signature Group"). The Signature Group is one of the largest direct marketing companies in the United States. Chapter 11 Filing On July 7, 1997 (the "Petition Date"), MW Holding and certain of its U.S. subsidiaries filed petitions for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). These related proceedings are being jointly administered under the caption "In re Montgomery Ward Holding Corp., a Delaware corporation, et. al.", Case No. 97-1409 (PJW), pursuant to an order of the Bankruptcy Court. The following U.S. subsidiaries were not included in the bankruptcy filings: Signature Financial/Marketing, Inc. and its direct and indirect subsidiaries; Marinco Insurance U.S.A., Inc. ("Marinco"); and Montgomery Ward Foundation. After a long period of negotiation, Wards was unable to reach an out-of-court settlement with its lenders. Accordingly, bankruptcy petitions were filed in order to obtain an opportunity to reorganize and begin implementing the Company's strategies while working to restructure its indebtedness. Pursuant to the Post-Petition Loan and Guaranty Agreement dated July 8, 1997, among Wards and Lechmere, Inc. ("Lechmere"), as borrowers; MW Holding and other debtor subsidiaries of MW Holding, as guarantors; General Electric Capital Corporation ("GE Capital"), as agent and lender; and various lenders, as amended (the "DIP Facility"), the lenders have agreed to provide up to $1 billion in post-petition financing to Wards. 1 Item 1. Business (continued) Chapter 11 Filing (continued) As a result of the Chapter 11 filings, absent approval of the Bankruptcy Court, the Company is prohibited from paying, and creditors are prohibited from attempting to collect, claims or debts arising pre-petition. The consummation of a plan of reorganization is the principal objective of the Company's Chapter 11 case. A plan of reorganization sets forth the means for satisfying claims and interests in the Company and its debtor subsidiaries, including the Liabilities subject to compromise. The consummation of a plan of reorganization for the Company and its debtor subsidiaries will require the requisite vote of impaired creditors and stockholders under the Bankruptcy Code and confirmation of the plan by the Bankruptcy Court. The Company expects to reorganize its affairs under the protection of Chapter 11 and to propose a Chapter 11 plan of reorganization for itself and the other filing subsidiaries, including Wards. The Bankruptcy Court has granted the Company's request to extend its exclusive right to file a plan of reorganization through May 1, 1998. The Company intends to request a further extension of the exclusivity period. There can be no assurance that the Bankruptcy Court will grant such further extension. Although management expects to file a plan of reorganization in 1998, which would contemplate emergence in 1999, there can be no assurance at this time that a plan of reorganization will be proposed by the Company or approved or confirmed by the Bankruptcy Court, or that such plan will be consummated. After the expiration of the exclusivity period, creditors of the Company have the right to propose alternative plans of reorganization. Any plan of reorganization, among other things, is likely to result in material dilution or elimination of the equity of existing shareholders as a result of the issuance of equity to creditors or new investors. At this time, it is not possible to predict the outcome of the Chapter 11 filing, in general, or its effects on the business of the Company or on the interests of creditors or shareholders. The Company's independent auditors have issued a report expressing doubt about the Company's ability to continue as a going concern. See the Consolidated Financial Statements of the Company beginning on page 19. Merchandising The major product offerings by the Company are apparel, furniture and home furnishings, appliances and electronics, jewelry, and automotive, including service. The Apparel offering includes branded, value-oriented merchandise in women's, men's, children's and intimate apparel as well as footwear and accessories. The apparel brand and price point offering is targeted at the large middle market between department stores and discounters. An offering of prominent name brands has been built, including Lee, Playtex, Bugle Boy, Bestform, Converse, Gloria Vanderbilt and Hanes. In addition, the Company has developed licensed and proprietary brands for certain product categories, such as Ship 'N Shore in women's apparel and BIKE in activewear. Furniture and home furnishings include broad selections emphasizing name brands in furniture and small ticket lines for the bath, bedroom and kitchen. Furniture includes accessorized room groupings to provide customers the convenience of coordinated furniture pieces including major brands. The Company offers combined consumer electronics and appliance product categories, including video, audio, telephones, electronic games and kitchen, laundry and other major appliances. The product offering includes significant national brands plus some private label brands. Jewelry offers all major merchandise categories: diamonds, gemstones, gold and watches. Wards has become one of the largest fine jewelry retailers in the country, and its major vendor relationships enable it to offer highly featured products at outstanding prices. 2 Item 1. Business (continued) Merchandising (continued) Automotive focuses on the sale and installation of tires, batteries, brakes and shocks. Wards is one of the leading retailers of branded tires, including Goodyear, Firestone, Michelin, Bridgestone and B.F. Goodrich. Wards currently operates 295 full line stores and 6 stores featuring a variety of other formats, including free-standing automotive and limited line stores. Full line Wards stores average approximately 80,000 square feet of selling space. Wards' retail business is seasonal, with approximately one-third of sales occurring in the fourth quarter. The results of Wards' operations are also subject to changes in consumer demand associated with general economic conditions, which is especially true with respect to demand for durable goods and other "big ticket" merchandise. Wards' retail operations are supported by its corporate buying division which has its principal office in Chicago, and includes foreign purchasing offices in Hong Kong, Taiwan, Japan, and Korea. In addition to its buying staff, the corporate buying division employs technical teams to ensure quality control of Wards' merchandise. Performance Initiatives Facility Closings and Divestitures In 1997, management undertook a review of the retail operations of Wards, and determined that the number of different retail formats then in operation resulted in a lack of focus on Wards' core business. In August 1997, the Bankruptcy Court approved a motion filed by Wards to exit its non-core specialty retail businesses - Lechmere, Home Image by Lechmere and Electric Avenue & More. The closings, which took place in August 1997, resulted in a pre-tax charge of $330 million. Management also reviewed the performance of retail stores operating under the core retail format and closed 45 underperforming retail stores in November 1997. In addition, two outlet and liquidation centers were closed. The closings were approved by the Bankruptcy Court in November 1997 and resulted in a pre-tax charge of $154 million. Wards also closed eight other underperforming retail stores and two other liquidation and outlet stores during 1997. The financial performance of the remaining retail stores will be reviewed on a continuing basis and additional stores may be closed (with the approval of the Bankruptcy Court) if such closures are warranted. Other Divestitures In December 1997, the Bankruptcy Court approved the disposition of Wards' investment in the common stock and warrants to purchase common stock of ValueVision International, Inc. ("ValueVision"). In addition, the agreements relating to ValueVision's sales promotion rights with regard to the Wards credit cardholder file were restructured. Under the restructured agreements, Wards' obligation to purchase advertising from ValueVision was significantly reduced. Additionally, ValueVision and its affiliates agreed to cease solicitations to its customers using the Wards servicemarks after March 31, 1998. ValueVision may continue to use the servicemark in connection with televised home shopping through July 31, 2008. The transaction was consummated on January 15, 1998. New Merchandising Strategy Middle-income females aged 30 to 55 with family incomes of $25,000 to $50,000 have been targeted as Wards' core fashion customer. Wards' core Hardlines customer is defined more broadly, representing both males and females with higher income levels and wider age distributions than the core fashion customer. These core customers share lifestyle characteristics and shopping preferences typical of today's time-pressed, value-conscious families with traditional/conservative values and fashion tastes. 3 Item 1. Business (continued) Performance Initiatives (continued) New Merchandising Strategy (continued) Wards' strategic plan has been developed to focus its merchandise offering around categories of business that meet the needs of the targeted customer, as well as those categories that also offer opportunities to drive sales and gross margin rate improvements. Wards intends to leverage current areas of merchandising strength (major appliances, fine jewelry and furniture, for example) to drive near-term profit improvements and capture additional market share. Additionally, Wards has targeted certain categories, primarily family apparel, domestics, seasonal and home theater, as areas in which growth in terms of penetration and market position must be dramatically improved. Resources will be focused on developing "trend-right" assortments and substantially improving merchandising and marketing in these businesses. Finally, Wards will strive to improve the in-store execution of its important electronics, automotive and housewares businesses in order to maintain its market share, improve margins and achieve a service level comparable to its competitors. Store Operations/Customer Service Strategy Wards is focused on improving its customer service and presenting retail stores that are bright, clean and easy to shop. Wards' goal is to provide knowledgeable and friendly sales associates coupled with quick and efficient completion of sales transactions at the register. Store policies and procedures are currently under review; the objective of the review is to shift time spent from non-service oriented tasks to customer-directed activities. A customer-service culture is being instilled in both corporate headquarters and store associates. As a first step, a Director of Customer Service was appointed in 1997. The primary focus of this position is to improve service and coordination at all levels of the organization. Also in 1997, the "Kick It Up A Notch" program was initiated to reward store associates who provide exceptional customer service. Logistics Strategy Wards is currently in the process of reviewing its logistics network to better serve the retail stores at an optimal cost to Wards. Improved management of the flow of goods through the network is expected to result in improved product velocity and reduced inventory levels, while still maintaining an optimal in-stock level at the retail level. A particular focus is improvement in the home delivery process, including the simplification of the current computer systems and implementation of an automated routing process. These changes are expected to allow a customer delivery to be scheduled for a more precise time window, thereby improving customer service while maximizing the productivity of routing staffs. Systems Strategy Computerized information systems are currently under development that will support the merchandising, customer service and logistics strategies previously discussed. The systems under development are primarily focused on supply chain efficiencies (through the implementation of state-of-the-art buying and warehouse management systems) and customer service improvements (through the implementation of a new point of sale system and the enhancement of customer delivery systems). Additionally, a major initiative is underway to assure the ability of all continuing systems to process dates that occur in the next century. Based on Wards' plans and amounts already expended, the total future cost to address the date change issue is not expected to materially impact future cash flows. 4 Item 1. Business (continued) Direct Marketing The Signature Group, headquartered in Schaumburg, Illinois, is a leading provider of fee-based membership services offered to consumers through direct response marketing. Signature provides consumers with a broad range of continuity club products including credit card registration, auto, dining, dental and legal services as well as insurance products, including credit insurance and various supplemental life and health insurance policies. Signature's products typically are sold through affiliations with major bank, oil or retail credit cards, including the Wards proprietary credit card. Signature's clients include 14 of the top 20 issuers of bank credit cards, 8 of the top 10 issuers of oil company credit cards and a number of leading retailers and affinity groups. Signature's teleservices unit also provides a variety of inbound and outbound telemarketing services as well as customer retention services to various financial, insurance and telecommunications clients. Established in 1966 as a wholly-owned subsidiary of Wards, Signature has over 30 years of expertise developing targeted marketing programs. Signature is the largest outbound telemarketer for the credit card industry in the country, with over 8,000 employees in 41 locations. It operates 37 call centers with 2,578 workstations and annually conducts over 70 million carefully scripted telemarketing presentations. Signature also mails over 400 million solicitations annually. The combination of leading-edge technology and marketing expertise allows Signature to offer a completely integrated marketing plan to its customers. Signature assigns a multi-functional account team to each client to manage every aspect of their marketing program, from the development and execution of marketing plans to the establishment of billing, fulfillment, customer service and post-marketing analysis. In addition to its proven experience marketing directly to consumers, Signature has developed a unique expertise in managing networks of independent contractors. For example, Signature's auto, dining, dental and legal services plans utilize networks of Signature-managed independent service providers and professionals to deliver value and quality customer service to the Company's customers. These networks have been developed over many years and are integral to the successful delivery of Signature's products. Signature works in partnership with its clients and other organizations to offer consumers convenience and significant savings when purchasing a wide array of high-quality goods and services. Signature has a total of 14.5 million consumer members including 5.5 million Wards credit card customers and 9.0 million other credit card customers. Signature has exclusive marketing rights to the entire Wards credit card file. It also markets on behalf of approximately 130 other clients, including some of the nation's largest financial institutions, retailers, airlines, oil companies, associates, unions and employer groups. Signature's major third party clients include American Airlines, AARP, American Express, Amoco, BancOne, Chase, Citicorp, Discover, FirstCard, General Electric, The Limited (Alliance Data Systems), Merrill Lynch, Mobil, Norwest Mortgage, Proffitt's, Shell, Texaco, TWA, United Airlines and Wells Fargo. Since 1994, Signature has aggressively sought to diversify its customer account base through the development of new third party client (non-Wards) relationships and business acquisitions. As of November 30, 1997, 9 million, or 62%, of the Company's total members were from third party clients, up significantly from 3.1 million, or 33%, of total members at the end of 1994. Signature has retained investment advisors to determine whether its core competencies and market opportunities could be maximized as a result of a sale or merger. The study (which includes the solicitation of bids, discussions with potential purchasers and the providing of information to such potential purchasers) has not been completed and management cannot provide any assurance as to whether a sale or merger with respect to Signature or any portion thereof may occur, or the timing of a transaction, if such a transaction does occur. Any transaction would require the approval of the Bankruptcy Court. See Note 21 to the Consolidated Financial Statements for restrictions on dividends which may be paid by insurance subsidiaries of Signature. 5 Item 1. Business (continued) Competition and Regulation The sale of merchandise by Wards is conducted under highly competitive conditions. Buying and selling are each done in open competitive markets. Wards' stores are in competition with specialty stores, department stores and other types of retail outlets in the areas in which they operate. The Company believes that merchandise assortments, brand names, competitive pricing and availability of services such as credit, delivery, installation and repair, are the principal factors which differentiate it from competitors. Certain of Signature's operations are highly regulated and conducted under highly competitive conditions. To date, Signature has been able to compete effectively with other companies which offer programs similar to those provided by Signature. Signature also competes with traditional methods of marketing by unaffiliated dentists and lawyers. Insurance companies operate pursuant to specific state statutes, rules and regulations and are required to file reports with such agencies at least quarterly. Telemarketing and direct mail solicitations are regulated at state and federal levels, and management believes that these activities will increasingly be subject to such regulation. Such regulation may limit Signature's ability to solicit new members or to offer more products and services to existing members and may materially adversely affect Signature's business and revenues. The requirements of environmental protection laws and regulations have not had a material effect upon Wards' operations. Compliance may, in certain cases, lengthen the lead time of expansion plans and could increase construction and operating costs. Account Purchase Agreements Credit is extended to Wards' customers under an open-end revolving credit plan and is an important element in generating sales, especially in the big ticket businesses. Wards' private label credit card sales were 50.7% and 57.1% of total sales for 1997 and 1996, respectively. Bankcard sales were an additional 21.2% and 19.9% of total sales for 1997 and 1996, respectively. Wards entered into a Bank Credit Card Program Agreement ("Card Agreement") effective April 1, 1996 with Monogram Credit Card Bank of Georgia ("Monogram"), and an Account-Related Agreement ("Account Related Agreement") effective April 1, 1996 with Montgomery Ward Credit Corporation ("Montgomery Ward Credit") (collectively referred to as the "Agreements") pursuant to which Monogram and Montgomery Ward Credit (collectively referred to as the "Montgomery Ward Credit Companies" or "MWCC"), both of which are affiliates of General Electric Capital Corporation ("GE Capital"), make payments to Wards as to their receivables generated by sales to customers of Wards, its affiliates and licensees who utilize the Wards private label credit card, and provide services to Wards, all of which are guaranteed by GE Capital. Under the Agreements, Monogram has the exclusive right to operate the Wards private label credit card system and the obligation to pay to Wards the face amount of Monogram's receivables generated by the Wards private label credit card system, up to $7 billion outstanding at any time. If Wards desires to receive payment for receivables generated by the Wards private label credit card system at any time when Montgomery Ward Credit Companies own $7 billion or more of such receivables and do not desire to finance additional receivables, alternative arrangements, such as the sale of receivables to banks or other financial institutions, would be required unless Monogram agrees to fund the excess. As of January 3, 1998, there were $4.2 billion of Wards private label credit card receivables owned by Montgomery Ward Credit Companies, and the average outstanding amount of such receivables owned by Montgomery Ward Credit Companies during 1997 was $4.5 billion. Under the Card Agreement, Wards is required to pay Monogram the excess interest costs on a monthly basis if a blended interest rate applicable to funding costs with respect to the receivables exceeds 10% per annum. This blended interest rate has been less than 10% since 1988. 6 Item 1. Business (continued) Account Purchase Agreements (continued) Wards generally bears the risk of credit losses due to non-payment by cardholders to the extent of (i) the amount of credit losses that are between 3.9% and 5.0% of average outstanding receivables, plus (ii) 50% of credit losses that are between 5.0% and 8.0% of average outstanding receivables, subject to offsets described below relating to Wards' share of certain incremental increases in finance charges and late fees payable by cardholders. Wards is also responsible for losses on certain higher risk starter card accounts to the extent the loss percentage as to those accounts exceeds the loss percentage experience on the rest of the portfolio. Wards' net unpaid liability for credit losses for 1991 through 1997 is to be payable to Montgomery Ward Credit pursuant to a note (Continuation Note) due in early 2003, which is to provide that: (i) the outstanding balance of such note cannot exceed $300 million, (ii) scheduled monthly principal payments ranging from $.4 million to $2.8 million are to be required through 2002, and (iii) starter card losses are to be payable currently. Interest on Wards' unpaid liability for credit losses is payable at a rate equal to rates on comparable borrowings of Wards. A remaining note of $15 million, consisting of losses incurred after July 7, 1997, is to be executed which provides for monthly principal payments in the amount of 5% of the scheduled monthly principal payments for the Continuation Note. Interest on notes outstanding as of July 7, 1997, has been stayed by the Chapter 11 proceedings. In exchange for Wards' agreement to allow Montgomery Ward Credit to increase finance charge rates and late fees in selected states, Wards receives a share of incremental finance charges and late fees resulting from such increases. Such amount is available for offset against Wards' unpaid liability for its share of credit losses, and to the extent not currently paid or offset earns interest at the same rate as amounts owed by Wards to Montgomery Ward Credit. Effective April 1996, Monogram implemented additional finance charge and late fee increases in various states. The amount of these additional incremental finance charges and late fees are calculated each year pursuant to a formula specified in the Account Related Agreement, which makes certain of these amounts available to Wards. As the increased finance charge rate and late fees are added to the credit card balances, this will cause the amount of losses to increase. The higher finance charges and late fees also decrease the credit available by the credit card customer. In the event that, due to the increase in finance charge rates and late fees, refunds are required to be made, Wards and Montgomery Ward Credit have agreed in certain cases to share the financial risk. Legislation has from time-to- time been introduced in certain jurisdictions, which if enacted, may require rescinding all or a portion of such increases, in which case Wards' share of such increases may be substantially reduced. In connection with the foregoing arrangements, Wards paid $28 million in early 1998 and has previously executed notes for certain of its unpaid share of credit losses which totaled $412 million through 1997. The incremental finance charges and late fee assessments due to Wards at the end of 1997 were $112 million for a net obligation of $300 million. Monogram has the right of first refusal to implement certain new financing programs proposed by Wards. The Agreements are scheduled to expire on December 31, 2011, provided the terms shall continue thereafter from year to year unless either party gives ten years prior notice of its election to terminate. Except upon the occurrence of certain events of default, the Agreements may generally not be terminated by either party prior to December 31, 2011. Wards has not yet assumed these agreements and the Montgomery Ward Credit Companies have not exercised the provision in the Agreements allowing the Montgomery Ward Credit Companies to terminate the Agreements in the event of Wards' bankruptcy. Wards has agreed to pay Montgomery Ward Credit $2.5 million per month for the months of January 1998 through June 1998. Wards expects to execute an interim amendment to the Account Purchase Agreement ("Interim Agreement") which will provide the Company with the ability to utilize the private label credit card 7 Item 1. Business (continued) Account Purchase Agreements (continued) through the end of 1999. It is likely that the Interim Agreement will require monthly payments similar to those required for the first six months of 1998. GE Capital has guaranteed Montgomery Ward Credit Companies' obligations under the Agreements. Monogram makes payments in respect of Signature customer accounts receivable pursuant to the Card Agreement. In 1997, Signature paid approximately $5 million to Montgomery Ward Credit for administrative services provided by Montgomery Ward Credit in connection with Signature products. Associates At January 3, 1998, Wards and its subsidiaries employed the equivalent of 46,000 full-time associates. During certain seasons, temporary associates are added and peak employment is approximately 59,000 associates during the Christmas season. Approximately 2,000 Wards associates are covered by various collective bargaining agreements. Wards has experienced no major labor-related interruption or curtailment of operations during the last 15 years. Item 2. Properties At January 3, 1998, the Company owned or leased 381 retail, distribution and other operating facilities. The Company's properties are located throughout the continental United States and cover approximately 49 million square feet. These properties are summarized as follows:
Number of Approximate Total Use Locations Square Feet - ------------------------------ --------- ----------------- Montgomery Ward Retail Stores: Full Line 295 38,829,000 Limited Line 6 473,000 Corporate Office Complex 1 2,975,000 Miscellaneous Operating Locations 79 7,211,000 --- ---------- Total Locations 381 49,488,000 === ==========
Owned and leased retail stores include approximately 24 million square feet of selling space and 15 million square feet devoted to storage, office and related uses. Miscellaneous operating locations include warehouses, office buildings and distribution centers, but exclude vacant land parcels and properties held for disposition. See Note 13 to the Consolidated Financial Statements for information with respect to leased properties. 8 Item 2. Properties (continued) The nationwide scope of Wards' operations helps minimize the impact of changes in the economies of specific regions on the overall performance of its retail stores and allows Wards to merchandise to a variety of demographic profiles. The regional distribution of Wards retail stores, as of January 3, 1998, is indicated in the following table:
State Total ---------- --------- Alabama 2 Arizona 9 Arkansas 5 California 50 Colorado 8 Florida 15 Georgia 3 Idaho 1 Illinois 20 Indiana 5 Iowa 5 Kansas 6 Kentucky 1 Louisiana 6 Maryland 16 Michigan 13 Minnesota 7 Missouri 7 Montana 2 Nebraska 1 Nevada 3 New Mexico 3 New York 6 North Carolina 4 North Dakota 1 Ohio 5 Oklahoma 5 Oregon 8 Pennsylvania 15 South Carolina 2 Tennessee 2 Texas 41 Virginia 14 Washington 3 West Virginia 5 Wisconsin 1 Wyoming 1 --- Total 301 ===
9 Item 3. Legal Proceedings At the close of business on July 7, 1997, Montgomery Ward Holding Corp. and certain of its U.S. subsidiaries filed petitions for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. These related proceedings are being jointly administered under the caption "In re Montgomery Ward Holding Corp., a Delaware corporation, et. al.", Case No. 97-1409 (PJW). The following U.S. subsidiaries were not included in the bankruptcy filings: Signature and its direct and indirect subsidiaries, Marinco; and Montgomery Ward Foundation. The filing of the petitions and the rejection of certain contracts created certain claims related to the filing. Among these cases is "Reliance Insurance Company v. Forum Insurance Company." This case alleges that Forum Insurance Company, an indirectly wholly-owned subsidiary of Signature, is liable under an indemnification agreement of which Wards is a signatory for the surety bonds issued to secure certain of Wards' obligations. The matter is now pending before the United States Bankruptcy Court for the District of Delaware. The potential liability related to the outcome of this claim cannot be estimated at this time. The Company and its subsidiaries are engaged in various litigation, including purported class actions, 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 or the results of operations of the Company. In 1979, a suit entitled "United States v. Midwest Solvent Recovery, Inc., et.al." (Civil Action Number H-79-556) was initiated by the United States Department of Justice on behalf of the Environmental Protection Agency in the U.S. District Court for the Northern District of Indiana, and an Amended Complaint was filed in January 1984. This suit was against Standard T Chemical Company, Inc., a Delaware corporation and wholly-owned subsidiary of Wards ("Standard T"), which ceased operations in 1994 and is currently an inactive entity and is a debtor in the bankruptcy proceedings described above, and others involving two waste disposal sites and seeks reimbursement for the cost of surface clean-up, investigation studies concerning possible contamination of the soil and ground water and remedial action. In January 1990, the United States filed a second Amended Complaint seeking inter alia, treble damages and monetary sanctions. Standard T signed a consent decree, whereby it was obligated to provide a financial assurance up to $3 million for remediation of the site, which has been provided for in the financial statements. The Company currently anticipates that its obligation will not exceed that amount. In 1985, the New York Environmental Protection Agency brought an action for remediation of a site in Staten Island, New York against the owner of the property. The owner asserted that Standard T, among others, generated wastes that were disposed of by a prior owner of the site. Standard T is in the process of completing the clean-up of this site and has purchased the site from the owner for $1.45 million. In February 1986, Standard T, along with approximately 330 other companies, was notified by the United States Environmental Protection Agency that the agency was mandating a remediation of the contamination of the American Chemical Services, Inc. ("A.C.S.") site located in Griffith, Indiana, under authority vested in it by the Comprehensive Environmental Response, Compensation and Liability Act of 1980. Standard T and a Wards paint factory were each identified as a Potentially Responsible Party ("PRP"), under the terms of the Act, because of their alleged status as generators of hazardous waste ultimately disposed of at the A.C.S. site. The Company will pay its proportionate share of the costs of the studies, and may ultimately pay a share of the costs of abating the contamination of the A.C.S. site. One estimate by the EPA of future costs of abating contamination at the A.C.S. site is $69 million, of which $24 million has been paid by deminimus settling parties, with the Company alleged to be responsible for 4% of the remaining total costs. However, these costs cannot be estimated with any degree of accuracy at this time. Thus, the Company is currently not in a position to estimate the range or amount of potential exposure in this matter with a high degree of certainty. 10 Item 3. Legal Proceedings (continued) Standard T and Wards are also involved at various stages with several other sites where Standard T and Wards have been notified or sued as a PRP. The potential liability related to these sites cannot be estimated at this time. On April 29, 1997, MW Holding, Wards and Lechmere, were served with a complaint, purporting to represent a nationwide class, filed by certain bankrupt credit card holders of Wards and Lechmere credit cards. The complaint alleged that MW Holding, Wards and Lechmere, benefited from the actions taken by Hurley, Lechmere's previous credit card provider, and MWCC and Monogram (both of which are affiliates of GE Capital), Wards' and Lechmere's current credit card providers, in that the recoveries received from the bankrupt credit card holders, allegedly were in violation of the bankruptcy laws dealing with reaffirmations, and ultimately reduced Wards' and Lechmere's loss sharing obligations. Hurley, MWCC and Monogram took all actions related to bankruptcy reaffirmations. Management believes that the indemnification obligations contained in its various agreements with Hurley, MWCC and Monogram will relieve Lechmere, Wards and the Company of any material financial obligations related to the acts alleged in the complaint. All material actions pending against the Company, Wards and Lechmere in the litigation, have been stayed. In 1997, a suit entitled "Trent v. Montgomery Ward," was initiated by Karen Trent and four other plaintiffs alleging, on behalf of themselves and a class of other commissioned sales employees, fraud and breach of contract in the calculation of their sales commissions. This class action currently is being heard in the Federal District Court for the District of Wyoming. The suit claims that from 1992 to the present, Wards devised a commission sales plan that was designed to underpay commissions promised to employees and that Wards in fact paid employees less than the commissions they were supposed to have earned. Plaintiffs seek certification of the class and actual and punitive damages. Wards has denied the allegations and intends to aggressively defend this matter. The case currently is in the early stage of class discovery, and damage exposure cannot be determined at this time. A limited lifting of the bankruptcy automatic stay has been granted so that the class certification issue can be resolved. Item 4. Submission of Matters to a Vote of Security Holders. None. EXECUTIVE OFFICERS OF THE REGISTRANT Listed below are the names and ages of the executive officers of the Company as of March 16, 1998, and the positions each has held during the past five years: Roger V. Goddu, 47, has been a director of the Company and Chairman and Chief Executive Officer of Wards since January 6, 1997. Prior thereto, he was with Toys "R" Us, where from 1996 until 1997, he was President-U.S. Merchandising, and from 1989 to 1995, he was Executive Vice President/General Merchandise Manager. Prior to 1989, Mr. Goddu was a Senior Vice President and General Merchandise Manager of Target, a division of Dayton Hudson Corporation. Thomas J. Austin, 50, has been Executive Vice President - Men's and Children's Apparel and Shoes of Wards since May 19, 1997. Prior thereto, Mr. Austin was Senior Vice President - Divisional Merchandise Manager of Kohl's Corporation, where he spent 15 years in various merchandising positions of increasing responsibility. 11 EXECUTIVE OFFICERS OF THE REGISTRANT (continued) Louis J. Caporale, 44, has been Executive Vice President - Women's Apparel and Fine Jewelry of Wards since May 27, 1997. Prior to joining Wards, Mr. Caporale was Senior Vice President - Divisional Merchandise Manager of Kohl's Corporation. From 1993 through 1997, he was Vice President - Divisional Merchandise Manager of Kohl's. Prior to joining Kohl's, Mr. Caporale held various merchandising positions with Federated Department Stores for 16 years. Don Civgin, 36, has been Vice President and Treasurer of the Company and Senior Vice President - Finance of Wards since May 8, 1997. Prior thereto, he was Vice President - Treasurer of Alliant Foodservice, Inc. from 1995 to 1997. From 1986 through 1995, Mr. Civgin held various financial management positions with Itel Corporation. Alan E. DiGangi, 51, has been Executive Vice President - Appliances, Electronics and Automotive of Wards since November 1996. Prior thereto, he was Executive Vice President Marketing of Wards from March 1996 through November 1996. Mr. DiGangi was Executive Vice President, Electric Ave., Rooms & More/Soft Home of Wards from January 1996 through March 1996. Prior thereto, he was Senior Vice President, Electric Ave. & More from April, 1995 to January, 1996. From 1993 though 1995, Mr. DiGangi was Vice President of Wards, with responsibilities in Store Management, Field Operations, Marketing and Sales Promotion. Kevin Freeman, 47, has been Executive Vice President - Store Operations of Wards since May 1, 1997. Prior thereto, he was Executive Vice President of Store Operations for Caldor from 1994 until 1997. Mr. Freeman was Executive Vice President - Store Operations with Roses Stores from 1991 to 1994. Prior thereto, Mr. Freeman held various positions with Target, a division of Dayton Hudson Corporation, from 1978 to 1991, leaving as Senior Vice President of Store Operations. Thomas G. Grimes, 60, has been Executive Vice President - Home of Wards since November 7, 1997. Mr. Grimes joined the Company on February 24, 1997 as Chief Executive Officer of Lechmere, Inc. and President - Hardlines. Prior thereto, he was Managing Director of Trimingham Bros. Ltd. from January 1996 through February 1997. Prior to joining Trimingham Bros. Ltd., Mr. Grimes was Chairman and Chief Executive Officer of the John Breuner Company, a division of Batus Inc., from 1986. Spencer H. Heine, 55, has been an Executive Vice President, Secretary and General Counsel of the Company since September 30, 1991 and was a director from May 15, 1992 through January 6, 1997. Mr. Heine has been Executive Vice President, Secretary and General Counsel of Wards and President - Montgomery Ward Properties since April 12, 1994. Prior thereto, Mr. Heine served as Executive Vice President - Legal of Wards from September 30, 1991 through April 11, 1994. Mr. Heine was Chairman and Chief Executive Officer of Signature from March 8, 1993 through April 11, 1994 and is currently serving as interim Chief Executive Officer and will continue to do so until April 1, 1998. Mr. Heine is a member of the Board of Directors of First Union Real Estate Investment, a real estate investment trust located in Cleveland, Ohio. Robert A. Kasenter, 51, has been an Executive Vice President of the Company since February 21, 1992. Mr. Kasenter has served as Executive Vice President, Human Resources of Wards since January 27, 1992 and was Senior Vice President- Human Resources and Customer Satisfaction from June 23, 1988 to January 26, 1992. Thomas J. Paup, 49, has been an Executive Vice President and Chief Financial Officer of Wards since September 22, 1997. Prior to joining Wards, Mr. Paup was Senior Vice President, Finance and Distribution of Lord & Taylor, a division of The May Department Stores Company from 1990 to 1997. Karl Taylor, 37, has been Senior Vice President- Strategic & Merchandise Planning of Wards since March 3, 1997. Prior to joining Wards, Mr. Taylor was Vice President of Merchandise Planning and Allocation at Toys "R" Us from 1993. Prior thereto, he was Director of Merchandise Planning and Allocation at Toys "R" Us from 1991 to 1993. Prior to joining Toys "R" Us, Mr. Taylor was with Arthur Andersen. 12 EXECUTIVE OFFICERS OF THE REGISTRANT (continued) John L. Workman, 46, has been Executive Vice President and Assistant Secretary of the Company since January 28, 1994 and served as a director from May 12, 1995 through January 6, 1997. Mr. Workman has been Executive Vice President, Corporate Restructuring of Wards since September 1997. Prior thereto, he was Executive Vice President , Chief Financial Officer and Assistant Secretary of Wards from January 28, 1994. He served as Senior Vice President, Chief Financial Officer and Assistant Secretary from August 31, 1992 through January 27, 1994. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters There is no established public trading market for the Common Stock of the Company. All shares are subject to restrictions on transfers contained in the Stockholders' Agreement dated as of June 17, 1988, as amended ("Stockholders' Agreement"), or the Terms and Conditions ("Terms and Conditions") imposed under the Montgomery Ward & Co., Incorporated Stock Ownership Plan ("Stock Ownership Plan"). Due to the bankruptcy filing and other factors, it is not expected that a market will develop in the near term. Transfers of shares of Class A Common Stock are restricted for a period of three years from certain applicable dates under the Stockholders' Agreement and the Terms and Conditions. Transfers of Class A shares purchased other than pursuant to the Stock Ownership Plan are restricted for a period of three years from the holder's first acquisition of any such shares, while transfers of shares received under the Stock Ownership Plan are restricted for a period of three years after the award of such shares, exercise of purchase rights for such shares or grant of options with respect to such shares, as applicable. After the applicable three-year periods, limited transfers of such shares which have become vested in accordance with the Stockholders' Agreement or the Terms and Conditions, as applicable, are permitted, subject to certain rights of first refusal. All of the Class B shares and virtually all of the outstanding Class A shares are eligible for transfer. Wards declared $6 million and paid $6 million in preferred stock dividends to the Company in 1997, which declared $8 million and paid $3 million of preferred stock dividends in 1997. Dividends declared of $2 million were automatically deemed added to the liquidation value of the preferred stock because the dividends were not paid. Additionally, dividends declared of $3 million on June 30, 1997, have not been paid. The redemption provisions of the preferred stock have been stayed by the Chapter 11 proceedings. No further dividends will be declared or paid on the preferred stock prior to the approval of a plan of reorganization. Future payments of dividends, if any, are dependent upon the approval of a plan of reorganization. As of March 16, 1998, there were three holders of record of Class A Common Stock, Series 1, one such holder of Class A, Common Stock, Series 2, and one such holder of Class B Common Stock. No shares of Class A Common Stock, Series 3, were outstanding as of that date. As of March 16, 1998, there were 89 holders of record of Voting Trust Certificates representing beneficial ownership in shares of Class A Common Stock, Series 1, of which 651,467 shares are pledged as collateral for notes issued to effect the repurchase of shares. Due to the Chapter 11 filing, no payments may be made to satisfy the payment requirements for these notes. A noteholder can foreclose on the pledge of shares repurchased if note payments are not made within one year of becoming due; provided, however, that any such remedy has been stayed pursuant to the Chapter 11 filing. See Note 15 to the Consolidated Financial Statements. There were 193 holders of record of Voting Trust Certificates representing beneficial ownership in shares of Class A Common Stock, Series 2. The applicable voting trust will expire by its terms on June 21, 1998, and, absent further action, the holders of Voting Trust Certificates will become holders of Class A Common Stock at such time. 13 Item 6. Selected Financial Data The following summary of certain financial information for each of the five fiscal years in the period ended January 3, 1998 has been derived from the Consolidated Financial Statements of MW Holding. Such information for each fiscal year should be read in conjunction with the Consolidated Financial Statements and notes thereto and the report of independent public accountants beginning on page 19.
As Of and For The ------------------------------------------------------------------------------------------- 53-Week Period 52-Week Period Ended Ended ----------------------------------------------------------------------- -------------- (Dollars in millions, except Jan. 1, Dec. 31, Dec. 30, Dec. 28, Jan. 3, per share amounts) 1994 1994 1995 1996 1998 ------------- -------------- ------------- ------------- -------------- Total Revenues $6,023 $7,029 $7,085 $6,620 $ 5,386 Net Income (Loss) 101 109 (9) (237) (1,152) Net Income (Loss) Applicable to Common Shareholders 101 107 (13) (249) (1,160) Net Income (Loss) per Class A Common Share 2.29 2.48 (.33) (6.33) (31.67) Total Assets 3,835 4,537 4,884 4,879 4,572 Long-Term Debt 213 228 423 87 122 Obligations Under Capital Leases (a) 89 81 66 60 - Total Shareholders' Equity (Deficit) 607 679 700 433 (716) Redeemable Preferred Stock - 75 175 175 177 Cash Dividends per Common Share .50 .50 - - -
(a) Excludes $51 million of Obligations under capital leases included in Liabilities subject to compromise as of January 3, 1998. 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 1997 to 1996, as well as 1996 to 1995. Wards is on a 52- or 53-week fiscal year basis, with 1997 being a 53-week year and 1996 and 1995 each being 52-week years. 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 approximately one-third of sales occurring in the fourth quarter. 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations: 1997 Compared with 1996 Due to Wards' inability to reach an out-of-court settlement with its lenders, petitions for reorganization under Chapter 11 of the Bankruptcy Code were filed at the close of business on July 7, 1997. The Company's performance reflected difficult competitive conditions and financial pressures, as well as the negative impact of the aggressive markdowns and promotional advertising to liquidate inventory in the first half of 1997. Consolidated total revenues (net sales and direct response marketing revenues, including insurance) were $5,386, compared with $6,620 in 1996, a decrease of $1,234 or 19%. The $1,234 total revenue decrease consisted of a $1,345 decrease in net sales (a 23% decrease) and a $111 increase (a 15% increase) in direct marketing revenues. After adjusting for the noncomparable impact of sales that occurred in the 53rd week, sales on a comparable store basis, which reflect only the stores in operation for all of 1997 and 1996, decreased 16%. $534 of the sales decrease reflects the closings of 101 retail stores and liquidation and outlet centers, including the exit of the Lechmere and Electric Avenue & More formats. 1997 sales results also reflect the Company's decision to exit certain product offerings, including personal computers. 1996 third and fourth quarter sales for the affected product lines were $84. Additionally, the Company's management believes that merchandise shipment interruptions as a result of the bankruptcy filing and the decline in promotional offers to Wards' credit cardholders in the second half of 1997 (4 in 1997 versus 19 in 1996), contributed to the sales decline. The increase in direct response marketing revenues was primarily due to increased clubs' memberships. Gross margin (net sales less cost of goods sold) dollars were $580, a decrease of $431, or 43%, from 1996. This decrease was due to the gross margin impact of the decreased sales of $298 and a decrease in the margin rate on sales of $167, offset by decreased occupancy costs of $34, primarily related to closed stores. The liquidation of slow moving and discontinued inventory, as well as the Chapter 11 filing, negatively impacted margin rates. As certain of the Company's vendors halted shipments for portions of the third quarter, a higher mix of third quarter sales represented sales of lower margin clearance merchandise. Gross margins showed substantial improvement in the fourth quarter of 1997. Despite a $579 decrease in 1997 fourth quarter sales, gross margin dollars increased by $4 and fourth quarter 1997 margin rates improved by 5 percentage points over fourth quarter 1996 rates. Operating, selling, general and administrative expenses increased $295, or 15%, from the prior year. The increase was due to increased amortization and other direct-marketing related costs of Signature of $150; increased bad debt expense of $29; write-downs of investments and other unrealizable assets of $57 and decreased product service income of $66, offset by all other decreased expenses of $7. Net interest expense decreased $16, or 13%, from the prior year. The net decrease reflects a $39 increase in interest expense for the first and second quarters of 1997 offset by a $55 decrease in interest expense for the third and fourth quarters of 1997. The first half increase reflects increased borrowings (including borrowings under vendor financing programs) and an increase in the weighted-average borrowing rate. The Company has stopped accruing interest on its short-term debt in connection with the Chapter 11 filing. Second-half 1997 borrowings under the DIP Facility were substantially below second-half 1996 borrowing levels. Reorganization costs of $553 were related to the Company's exit of its non- core strategies, certain dispositions of assets and various other expenses. See Note 4 to the Consolidated Financial Statements for the components of these costs. The income tax benefit was $375 as compared to a benefit of $138 for 1996. See Note 10 to the Consolidated Financial Statements for a discussion of management's determination of the benefit recorded and the related valuation allowance provided during 1997. 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations: 1996 Compared with 1995 Management's identification of slow-moving inventory resulted in inventory liquidation efforts which negatively impacted 1996 results. From September through December, the Company accelerated efforts to reduce and redeploy inventory to allow for a shift in focus to items the Company believed would provide higher inventory turnover and improved merchandise assortments in the future. As of the beginning of fourth quarter 1996, over $300 in inventory was identified in items which would not be re-ordered and which was competitively disadvantaging the Company. Aggressive markdowns and promotional advertising to liquidate this inventory were initiated in the fourth quarter of 1996. At December 28, 1996, the remaining amount of this inventory was $130 before any additional markdowns. In December, the Company provided $54 for the loss on liquidation of this remaining inventory and also identified $55 of other inventory that would be sold at a loss and provided $19 for the loss on liquidation for this inventory as well. The Company believed that the liquidation of this inventory would position it with balanced inventory assortments to execute its strategic plan in future periods. The Company's performance reflected the impact of the change in inventory assortment and difficult competitive conditions discussed above with the consolidated net loss increasing $228 from the prior year's net loss of $9. The consolidated net loss applicable to common shareholders for 1996 was $249 versus $13 in 1995. Consolidated total revenues (net sales and direct response marketing revenues, including insurance) were $6,620 compared with $7,085 in 1995, decreasing by $465 or 7%. The $465 total revenue decrease consisted of a $652 decrease in net sales and a $187 increase in direct marketing revenues. The change in total net sales represented a 10% decline. Specifically, Apparel sales declined 10%, Jewelry sales declined 11%, Home and Furniture sales declined 9%, Electronics declined 10%, Appliances declined 8% and Automotive sales declined 6%. Sales on a comparable store basis, which reflect only the stores in operation for both 1996 and 1995, decreased 11%. The Company believes that the decline in net sales in 1996 reflected a decline in market share compared to competitors. The increase in direct response marketing revenues was primarily due to increased clubs' membership driven by the acquisition of the Amoco Motor Club business and increased insurance policy holder levels. Gross margin (net sales less cost of goods sold) dollars were $1,011, a decrease of $309, or 23%, from 1995. This decrease was due to the gross margin impact of the decreased sales of $163, a decrease in the margin rate on sales of $142, and increased occupancy costs of $7 related to increased depreciation on capital investments in new and existing stores, partially offset by decreased buying and other expenses of $3. The liquidation of slow moving and discontinued inventory and the continued competitive pressures also had a significant impact on margin rates. Operating, selling, general and administrative expenses increased $194, or 11%, from the prior year. The increase includes the impact of new store openings of $16, increased provision for bad debt expense under the Account Purchase Agreements of $21, increased advertising and other promotional costs of $74, increased amortization of direct response and insurance acquisition cost of $61 and increased operating and administrative expenses of $7, and decreased income generated from the sale of product service contracts of $10. 1995 included a provision for severance costs and relocation of certain administrative functions of both Wards and Lechmere of $25. 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations: 1996 Compared with 1995 (continued) Net interest expense increased $36, or 40%, from the prior year. The increase is due to increased borrowings resulting from a combination of higher average working capital levels and reduced cash flow resulting from slower than anticipated sales, partially offset by reduced capital expenditures for new and existing stores. Income tax benefit was $138 for 1996 as compared to an income tax benefit of $14 for 1995. See Note 10 to the Consolidated Financial Statements. Discussion of Financial Condition Due to the inability of Wards to negotiate an out-of-court settlement with its lenders, MW Holding and certain of its subsidiaries have filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result of the Chapter 11 filing, the Company and those subsidiaries have ceased making certain debt, interest, trade payable and other liability payments that arose prior to the Chapter 11 filing. Payments related to these liabilities are deferred, in most cases, until a plan for reorganization is confirmed by the Bankruptcy Court. Net cash used in the Company's operating activities totaled $192 for 1997 compared to $356 for 1996, a decrease of $164. The lower cash usage is summarized as follows: Cash impact of larger net loss $(610) Net cash received from facility closings 155 Increased cash provided by inventory and accounts payable 397 Lower expenditures for direct response and insurance acquisition costs 85 All other cash from operations 137 ----- $ 164 =====
As shown above, cash required for inventory was significantly reduced in 1997. This was primarily due to the sales decrease, an inventory reduction program and better receipts management. Cash required for accounts payable was also reduced significantly, primarily as a result of the Chapter 11 filing. Net cash used in the Company's investing activities totaled $93 in 1997, compared to net cash used of $148 in 1996. The net cash used in 1996 included Signature's acquisition of the Amoco Motor Club. 1997 cash used reflects the increase in investments of insurance operations. Net cash provided by financing activities totaled $442 for 1997, compared to $499 for 1996. The Company had borrowed to the full extent of its financing facilities prior to the Chapter 11 filing, with the exception of the Seasonal Credit Agreement. Net borrowings in the post-petition period under the DIP Facility were $50. Wards is the only subsidiary of the Company and, therefore, Wards and its subsidiaries are the Company's sole source of funds. Wards entered into the DIP Facility on July 8, 1997, which was approved by the Bankruptcy Court on July 31, 1997. Under the DIP Facility, the lenders have agreed to provide a revolving credit and letter of credit facility, the maximum amount of which is based on the book value of eligible inventory (as defined in the DIP Facility), the fair market value of eligible real property (as defined in the DIP Facility) and the earnings of Signature. 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Discussion of Financial Condition (continued) In no case may borrowings exceed $1,000. Total borrowings outstanding were $50 and letters of credit outstanding were $52 at January 3, 1998. Under the DIP Facility, Wards may select among several interest rate options, all of which are based on market rates plus a margin. A commitment fee is payable based on the unused amount of the facility. The facility expires on July 7, 1999, or earlier in the case of an event of default. The DIP facility imposes various restrictions on Wards, including limitations on capital expenditures. The DIP facility also requires the satisfaction of certain financial tests, including the achievement of specified earnings levels as defined in the DIP Agreement. As of January 3, 1998, the Company had met all such financial tests. The Company is currently in default of the terms of each of the Long-Term Credit Agreement, the Short-Term Credit Agreement and the Note Purchase Agreements and no future amounts may be drawn thereunder. The Company was in default of the Seasonal Credit Agreement, which was terminated as a result of the Chapter 11 filings. There were no borrowings outstanding under this agreement. Signature borrowed $102 under a Credit Agreement (Signature Credit Agreement) dated as of September 27, 1996 as amended and restated October 21, 1996 and amended December 23, 1996 between Signature and various lenders. The proceeds were used to repay the intercompany loan from Wards to Signature arising from Signature's acquisition of the Amoco Motor Club. During 1997, the maturity date was extended to January 31, 1998 and has not been repaid. In 1998, the lenders agreed that they will extend the maturity date to the earlier of May 29, 1998 or the funding of a replacement loan facility, provided that Signature provide the lenders with certain security and other terms and conditions the new lenders may deem appropriate. In March 1998, Signature received a commitment from a new lender which would enable Signature to repay the amounts borrowed under the Signature Credit Agreement. Management expects to borrow the amounts required and repay the amounts due by May 29, 1998. If the new lender's commitment were to be terminated, the aforementioned extension agreement would also terminate. In 1997, Wards had facilities available under vendor financing programs (which are reflected in Liabilities subject to compromise) which totaled $725. At June 28, 1997, these facilities were principally drawn. These facilities are no longer available due to the Chapter 11 filing. The Company intends to improve its financial condition and reduce its dependence on borrowing by improving sales and gross margins and reducing expenses. Management has reevaluated the Company's merchandising, marketing, store operations and real estate strategies, and is in the early stages toward implementing the new strategy. See "Business - Performance Initiatives" for a discussion of the new strategies to be employed. On August 14, 1997, the Bankruptcy Court approved a motion filed by Wards to exit its non-core specialty retail store businesses - Lechmere, Home Image by Lechmere and Electric Avenue & More. The exit involved the closing of 44 stores. On November 7, 1997, the Bankruptcy Court approved a motion to close 45 underperforming retail stores and two outlet and liquidation centers. The closings generated positive cash flows and are expected to reduce future operating losses. The Company recorded a pre-tax charge of $484 associated with the exit of these businesses, which included losses and costs associated with liquidation of assets, rejection of leases, severance payments and other related costs. Future cash is also expected to continue to be provided by ongoing operations, receipt of payment for credit sales under the agreements with Montgomery Ward Credit Companies and borrowings under the DIP Facility. 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Discussion of Financial Condition (continued) As discussed in Note 2 to the Consolidated Financial Statements, the accompanying financial statements have been prepared on a going concern basis. The appropriateness of using the going concern basis is dependent upon, among other things, confirmation of a plan of reorganization, future profitable operations, the ability to comply with the terms of the DIP Facility and the ability to generate sufficient cash from operations and financing arrangements to meet obligations. As a result of the Chapter 11 filings, the interest rate exchange agreements with various banks were canceled. In connection with the cancellation, Wards incurred a liability of $3 which is included in Liabilities subject to compromise. Capital expenditures during 1997 of $66 were primarily related to the opening of a new distribution center, systems development, merchandise fixture and presentation programs, and retail facility improvements.
1997 1996 1995 ----------------- --------------- --------------- Total capital expenditures $ 66 $ 75 $ 122 Capital appropriations authorized during the year 76 86 152 Cancellations of prior year's appropriations (66) (34) (75) Unexpended capital appropriations at year-end 57 113 $ 136
Wards is not contractually committed to spend all of the capital appropriations unexpended at January 3, 1998, but generally expects to do so. The DIP Agreement restricts the amount of capital expenditures Wards may make during the term of the Agreement. Capital expenditures for 1998 may not exceed $144. The Company's subsidiaries utilize software and related technologies that will be affected by the date change in the year 2000. The Company has completed its planning to address the changes and has assessed the level of effort required in order to affect these changes. The Company's plans include modifications to existing programs and purchase and installation of new software. Modification to existing programs began in 1996, and certain of the new software was purchased in 1997. Based on the Company's plans and amounts already expended, the total future cost to address the date change issue is not expected to materially impact future cash flows. Item 8. Financial Statements
Page -------------------- Report of Independent Public Accountants 20 For the 53-Week Period Ended January 3, 1998 and the 52-Week Periods Ended December 28, 1996 and December 30, 1995 Consolidated Statements of Income 21 Consolidated Statements of Shareholders' Equity 23 Consolidated Statements of Cash Flows 26 Consolidated Balance Sheets at January 3, 1998 and December 28, 1996 22 Notes to Consolidated Financial Statements 28
19 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Board of Directors and Shareholders of Montgomery Ward Holding Corp.: We have audited the accompanying consolidated balance sheets of MONTGOMERY WARD HOLDING CORP. (a Delaware Corporation) AND SUBSIDIARIES (of which Montgomery Ward Holding Corp. and certain of its U.S. subsidiaries filed petitions for reorganization on July 7, 1997 under Chapter 11 of the United States Bankruptcy Code), as of January 3, 1998 and December 28, 1996, and the related consolidated statements of income, shareholders' equity and cash flows for the fiscal years ended January 3, 1998, December 28, 1996 and December 30, 1995. 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 Subsidiaries as of January 3, 1998 and December 28, 1996 and the results of their operations and their cash flows for the fiscal years ended January 3, 1998, December 28, 1996 and December 30, 1995, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, on July 7, 1997, the Company filed a voluntary petition seeking to reorganize under Chapter 11 of the United States Bankruptcy Code. The Chapter 11 filing was the result of violation of certain debt covenants, recurring operating losses, deterioration of vendor support, and cash flow deficiencies. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Although the Company is currently operating as a Debtor-In-Possession under the jurisdiction of the Bankruptcy Court, the continuation of the business as a going concern is contingent upon, among other things, the ability to formulate a plan of reorganization which will gain approval of the creditors and shareholders and confirmation by the Bankruptcy Court, success of future operations, and the ability to recover the carrying amount of assets and/or the amount and classification of liabilities. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Arthur Andersen LLP Chicago, Illinois February 23, 1998 20 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENTS OF INCOME
53-Week 52-Week Period Period Ended Ended ------- ---------------------------- Jan. 3, Dec. 28, Dec. 30, (In millions, except per share amounts) 1998 1996 1995 ------- -------- -------- Revenues Net sales, including leased and licensed department sales $ 4,534 $5,879 $6,531 Direct response marketing revenues, including insurance 852 741 554 ------- ------ ------ Total Revenues 5,386 6,620 7,085 ------- ------ ------ Costs and Expenses Cost of goods sold, including net occupancy and buying expense 3,954 4,868 5,211 Operating, selling, general and administrative expenses, including benefits and losses of direct response operations (Notes 17 and 20) 2,295 2,000 1,806 Interest expense, net (Note 18) 111 127 91 ------- ------ ------ Total Costs and Expenses 6,360 6,995 7,108 ------- ------ ------ Loss before Reorganization Costs and Income Taxes (974) (375) (23) Reorganization Costs (Note 4) 553 - - ------- ------ ------ Loss before Income Taxes (1,527) (375) (23) Income Tax Benefit (Note 10) (375) (138) (14) ------- ------ ------ Net Loss (1,152) (237) (9) Preferred Stock Dividend Requirements (Note 14) 8 12 4 ------- ------ ------ Net Loss Applicable to Common Shareholders $(1,160) $ (249) $ (13) ======= ====== ====== Net Loss per Common Share (Note 15) Class A $(31.67) $(6.33) $ (.33) Class B (23.17) (5.22) (.27)
See notes to consolidated financial statements. 21 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED BALANCE SHEETS
Jan. 3, Dec. 28, (In millions) 1998 1996 ------- -------- Assets Cash and cash equivalents (Note 1) $ 189 $ 32 Short-term investments 1 3 Investments of insurance operations (Note 6) 358 317 ------- -------- Total Cash and Investments 548 352 Trade and other accounts receivable 234 213 Accounts and notes receivable from affiliates 6 13 ------- -------- Total Receivables 240 226 Merchandise inventories 1,120 1,545 Prepaid pension cost (Note 8) 366 347 Properties, plants and equipment, net of accumulated depreciation and amortization (Note 9) 1,067 1,308 Direct response and insurance acquisition costs 559 603 Other assets (Notes 9 and 11) 373 498 Deferred income taxes (Note 10) 299 - ------- -------- Total Assets $ 4,572 $ 4,879 ======= ======== Liabilities Short-term debt (Note 12) $ 102 $ 1,028 Trade accounts payable 442 1,585 Federal income taxes payable (Note 10) - 4 Accrued liabilities and other obligations (Note 7) 736 1,228 Insurance policy claim reserves (Note 11) 241 227 Long-term debt (Note 12) 122 87 Obligations under capital leases (Note 13) - 60 Deferred income taxes (Note 10) - 52 Liabilities subject to compromise (Notes 3, 8, 12 and 13) 3,468 - ------- -------- Total Liabilities 5,111 4,271 Commitments and Contingent Liabilities (Notes 12 and 19) Redeemable Preferred Stock (Note 14) 177 175 Shareholders' Equity (Deficit) Common stock (Note 15) 1 1 Capital in excess of par value 64 53 Retained earnings (deficit) (651) 509 Unrealized gain on marketable equity securities 9 9 Less: Treasury stock, at cost (139) (139) ------- -------- Total Shareholders' Equity (Deficit) (716) 433 ------- -------- Total Liabilities and Shareholders' Equity $ 4,572 $ 4,879 ======= ========
See notes to consolidated financial statements. 22 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in millions, except per share amounts)
Class A Class B Common Common Capital Stock Stock in Treasury Total $.01 $.01 Excess Un- Stock Share- Par Par Common of Par Retained realized at Holders' Value Value Stock Value Earnings Gains Cost Equity ------- ------- ------ ------ -------- -------- -------- -------- (In thousands) Balance Jan. 1, 1995 19,280 25,000 $ - $ 23 $ 771 $ 2 $ (89) $ 707 Net loss - - - - (9) - - (9) Cash dividends paid - - - - (4) - - (4) Compensation expense on stock option grants/ repurchases - - - 5 - - - 5 Changes in un- realized gain on marketable securities - - - - - 8 - 8 Shares repur- chased as Treasury stock (1,052) - - - - - (25) (25) Shares issued upon exercise of options 980 - 1 17 - - - 18 Shares issued upon exercise of conversion rights 2 - - - - - - - ------- ------- ------ ------ -------- -------- -------- -------- Balance, Dec. 30, 1995 19,210 25,000 $ 1 $ 45 $ 758 $ 10 $ (114) $ 700 ======= ======= ======= ======= ======== ======== ======== ========
See notes to consolidated financial statements. 23 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in millions, except per share amounts)
Class A Class B Capital Common Common in Stock Stock Excess Treasury Total $.01 $.01 of Un- Stock Share- Par Par Common Par Retained realized at Holders' Value Value Stock Value Earnings Gains Cost Equity ------- -------- ------ ------- -------- -------- -------- -------- (In thousands) Balance Dec. 31, 1995 19,210 25,000 $ 1 $ 45 $ 758 $ 10 $ (114) $ 700 Net loss - - - - (237) - - (237) Cash dividends declared and paid - - - - (9) - - (9) Cash dividends declared - - - - (3) - - (3) Compensation expense on stock option exercises and other share exchanges - - - 5 - - - 5 Changes in un- realized gain on marketable securities - - - - - (1) - (1) Shares repur- chased as Treasury stock (1,242) - - - - - (25) (25) Shares issued upon exercise of options 352 - - 3 - - - 3 Shares issued upon exercise of conversion rights 2 - - - - - - - ------- -------- ------ ------- -------- -------- -------- -------- Balance, Dec. 28, 1996 18,322 25,000 $ 1 $ 53 $ 509 $ 9 $ (139) $ 433 ======= ======== ====== ======= ======== ======== ======== ========
See notes to consolidated financial statements. 24 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in millions, except per share amounts)
Class A Class B Capital Common Common in Stock Stock Excess Treasury Total $.01 $.01 of Retained Un- Stock Share- Par Par Common Par Earnings realized at Holders' Value Value Stock Value (Deficit) Gains Cost (Deficit) ------- ------- ------ ------- --------- -------- -------- --------- (In thousands) Balance Dec. 28, 1996 18,322 25,000 $ 1 $ 53 $ 509 $ 9 $ (139) $ 433 Net loss - - - - (1,152) - - (1,152) Cash dividends declared and paid - - - - (3) - - (3) Cash dividends declared - - - - (5) - - (5) Grants of restricted stock and stock options by majority share- holder (Note 20) - - - 11 - - - 11 ------- ------- ------ ------- --------- -------- -------- --------- Balance, Jan. 3, 1998 18,322 25,000 $ 1 $ 64 $ (651) $ 9 $ (139) $ (716) ======= ======= ====== ======= ========= ======== ======== =========
See notes to consolidated financial statements. 25 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS
53-Week Period Ended 52-Week Period Ended ------ -------------------- Jan. 3, Dec. 28, Dec. 30, (In millions) 1998 1996 1995 ------- -------- -------- Cash flows used for operating activities: Net loss $(1,152) $(237) $ (9) Adjustments to reconcile net loss to net cash used for operating activities: Provision for disposition of assets of Lechmere, Inc. 280 -- -- Provision for closing of Wards and Electric Avenue & More stores 204 -- -- Net receipts of cash relating to disposition of assets of Lechmere, Inc. and closing of Wards and Electric Avenue & More stores 155 -- -- Depreciation and goodwill amortization 135 130 119 Amortization of direct response and insurance acquisition costs 250 209 148 Deferred income taxes (375) (110) (20) Other 40 -- (23) Changes in operating assets and liabilities: Trade and other accounts receivable (28) (32) (54) Accounts and notes receivable from affiliates 7 9 (16) Merchandise inventories 191 225 (112) Prepaid pension cost (19) (13) (11) Direct response and insurance acquisition costs (206) (291) (220) Other assets 34 31 (5) Trade accounts payable 209 (222) 85 Liabilities subject to compromise (12) -- -- Federal income taxes payable, net (4) (2) (9) Accrued liabilities and other obligations 85 (44) (55) Insurance policy claim reserves 14 (9) -- ------- ----- ----- Net cash used for operating activities $ (192) $(356) $(182) ------- ----- -----
See notes to consolidated financial statements. 26 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS
53-Week 52-Week Period Period Ended Ended ------- --------------------- Jan. 3, Dec. 28, Dec. 30, (In millions) 1998 1996 1995 ------- -------- -------- Cash flows used in investing activities: Purchase of short-term investments $ (85) $ (2) $ (60) Purchase of investments of insurance operations (939) (756) (791) Sale of short-term investments 87 - 62 Sale of investments of insurance operations 898 778 775 Capital expenditures (66) (75) (122) Disposition of properties, plants and equipment, net 12 19 39 Investments - (12) (12) Acquisition of Amoco Enterprises, net of cash and cash equivalents - (100) - ------- -------- -------- Net cash used in investing activities (93) (148) (109) ------- -------- -------- Cash flows provided by financing activities: Proceeds from issuance of short-term debt, net 409 588 16 Borrowings under Post-Petition Loan and Guaranty Agreement 321 - - Proceeds from issuance of long-term debt - - 205 Payments under Post-Petition Loan and Guaranty Agreement (271) - - Payments of long-term debt (5) (56) (10) Payments of obligations under capital leases (9) (7) (7) Cash dividends paid (3) (9) (4) Proceeds from issuance of common stock - 3 18 Proceeds from issuance of preferred stock - - 175 Payments to redeem preferred stock - - (75) Purchase of treasury stock, at cost - (20) (23) ------- -------- -------- Net cash provided by financing activities 442 499 295 ------- -------- -------- Increase (decrease) in cash and cash equivalents 157 (5) 4 Cash and cash equivalents at beginning of period 32 37 33 ------- -------- -------- Cash and cash equivalents at end of period $ 189 $ 32 $ 37 ======= ======== ========
See notes to consolidated financial statements. 27 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Major Accounting Policies Business Segments Montgomery Ward Holding Corp. ("the Company" or "MW Holding") and its wholly owned subsidiary, Montgomery Ward & Co., Incorporated ("Wards"), are engaged in retail merchandising and direct response marketing (including insurance) in the United States. As of January 3, 1998, retail merchandising operations are conducted through Wards. The assets of Wards' wholly-owned subsidiary, Lechmere, Inc. ("Lechmere") were disposed of in fiscal 1997 (see Note 4) and Lechmere's retail merchandising operations closed. Direct response marketing operations are conducted primarily through Signature Financial/Marketing, Inc. ("Signature"), a wholly-owned subsidiary of Wards. Signature markets consumer club products and insurance products through its subsidiaries. See Note 21 for information regarding these segments. Principles of Consolidation; Use of Estimates The consolidated financial statements include the Company and all subsidiaries. Investments in 20 percent to 50 percent owned affiliates, where significant influence exists, are accounted for using the equity method. All significant intercompany accounts and transactions are eliminated in consolidation. 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, liabilities, the 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. Fiscal Year The Company operates on a 52- or 53- week fiscal year basis. The Company's fiscal year ends on the Saturday closest to December 31. The fiscal year ended January 3, 1998 included 53 weeks. The fiscal years ended December 28, 1996 and December 30, 1995 included 52 weeks. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, time deposits and highly liquid debt instruments with an original maturity of three months or less. The carrying amount reported in the financial statements for cash and cash equivalents approximates the fair value of these assets. Cash and cash equivalents includes $110 million of restricted cash generated from the disposition of the assets of Lechmere. The proceeds may be used to pay Lechmere's post-petition obligations, or may be used for other purposes only pursuant to order of the Bankruptcy Court. In addition, the Company has approximately $32 million of cash held in segregated accounts by various banks who were lenders to the Company under the Long- term and Short-term Credit Agreements. This cash is being held subject to potential offset, pursuant to the order of the Bankruptcy Court. 28 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Major Accounting Policies (continued) Cash and Cash Equivalents (continued) Following is a summary of cash payments for interest and income taxes and non-cash financing and investing activities:
53-Week 52-Week Period Period Ended Ended ----------------- -------------------------- Jan. 3, Dec. 28, Dec. 30, (In millions) 1998 1996 1995 ----------------- ------------ ------------ Cash paid (refunded) for: Income taxes $ 2 $ (22) $ 24 Interest 83 119 82 Non-cash financing activities: Notes issued for purchase of treasury stock - 5 2 Non-cash investing activities: Grants of restricted stock and stock options by majority shareholder 11 - - Increase in liquidation value of preferred stock 2 - - Changes in unrealized gain on marketable securities - (1) 8 Gain on stock distribution - - 16
Investments of Insurance Operations The Company accounts for investments under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments In Debt and Equity Securities". Under SFAS No. 115, all debt and equity securities are classified by management as "available-for-sale" and are stated at fair market value with all changes in unrealized gains or losses, net of applicable income taxes, included in Shareholders' Equity. Merchandise Inventories Merchandise inventories consist primarily of products held for resale and are valued at the lower of the cost or market using the retail, first-in, first-out ("FIFO") method. Properties, Plants and Equipment Depreciation is computed on a straight-line basis over the estimated useful life of the asset, 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. Depreciation expense includes amortization of assets under capital leases. 29 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Major Accounting Policies (continued) Properties, Plants and Equipment (continued) 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. Unamortized software costs included in Other assets were $21 million and $30 million at January 3, 1998 and December 28, 1996 and the amortization of these costs were $9 million, $7 million and $5 million for the periods ended January 3, 1998, December 28, 1996 and December 30, 1995, respectively. Intangible Assets Excess of cost over fair market value of net identifiable assets of acquired companies (goodwill) and other intangible assets are amortized on a straight-line basis over the estimated life. Intangible assets of $90 million and $225 million at January 3, 1998 and December 28, 1996, respectively, are included in Other assets. The decrease in intangible assets from December 28, 1996 to January 3, 1998, relates primarily to the write-off of the Lechmere goodwill in connection with the disposition of the assets of Lechmere in 1997. Amortization of intangible assets was $11 million, $8 million and $6 million for the periods ended January 3, 1998, December 28, 1996 and December 30, 1995, respectively. Impairment of Long-lived Assets In the event facts and circumstances indicate the cost of any long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the assets would be compared to the carrying amount of the assets to determine if a write-down to market value or discounted cash flow value is required. 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 $108 million and $119 million at January 3, 1998 and December 28, 1996, respectively, are included in Accrued liabilities and other obligations. 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. 30 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Major Accounting Policies (continued) Direct Response and Insurance Acquisition Costs Costs of acquiring new club memberships and insurance business (primarily marketing expenditures) are deferred when considered recoverable. Such costs are amortized in proportion to the anticipated revenue to be recognized from club memberships (over a period not to exceed 10 years) and from insurance policies (over the life of the policy, which is generally 10 years). The time period over which deferred policy and membership acquisition costs are being amortized and the recoverability of such costs could differ from estimates due to changing market conditions. Amortization periods and related amounts of deferred policy and membership acquisition costs are continually reviewed for potential impairment and as adjustments become necessary they are reflected in current operations. Present value of future profits represents costs allocated to the insurance and club memberships acquired and is being amortized in proportion to the anticipated revenue to be recognized from club memberships and from insurance policies. The initial amortization periods range from 5 to 20 years. Amortization expense is categorized as follows:
53-Week 52-Week Period Period Ended Ended ----------- ----------- Jan. 3, Dec. 28, (In millions) 1998 1996 ----------- ----------- Deferred acquisition costs $ 226 $ 180 Present value of future profits 24 29 ---------- ---------- Total $ 250 $ 209 ========== ==========
Insurance Policy Claim Reserves Liabilities for future policy benefits have been determined principally by the net level premium method. These amounts have been computed 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, 1965-1970, and 1975- 1980 Basic Mortality Tables and the 1969-1971 and 1979-1981 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. 31 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Major Accounting Policies (continued) Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences by applying enacted statutory tax rates to differences between the financial statement carrying amounts and tax bases of existing assets and liabilities. In addition, the amount of any future tax benefits is reduced by a valuation allowance to the extent such benefits are not expected to be realized on a more likely than not basis. 2. Reorganization At the close of business on July 7, 1997 (the "Petition Date"), MW Holding and certain of its U.S. subsidiaries filed petitions for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. These related proceedings are being jointly administered under the caption "In re Montgomery Ward Holding Corp., a Delaware corporation, et. al.", Case No. 97-1409 (PJW). The following U.S. subsidiaries were not included in the bankruptcy filings: Signature and its direct and indirect subsidiaries; Marinco Insurance U.S.A., Inc. ("Marinco"); and Montgomery Ward Foundation. After a long period of negotiation, Wards was unable to reach an out-of- court settlement with its lenders. Accordingly, bankruptcy petitions were filed in order to obtain an opportunity to reorganize and begin implementing the Company's strategies while working to restructure its indebtedness. Pursuant to the Post-Petition Loan and Guaranty Agreement dated July 8, 1997, among Wards and Lechmere, as borrowers; MW Holding and other debtor subsidiaries of MW Holding, as guarantors; General Electric Capital Corporation ("GE Capital"), as agent and lender; and various lenders, as amended (the "DIP Facility"), the lenders have agreed to provide up to $1 billion in post-petition financing to Wards. The Company expects to reorganize its affairs under the protection of Chapter 11 and to propose a Chapter 11 plan of reorganization for itself and the other filing subsidiaries, including Wards. The Bankruptcy Court has granted the Company's request to extend its exclusive right to file a plan of reorganization through May 1, 1998. Although management expects to file a plan of reorganization in 1998, which would contemplate emergence in 1999, there can be no assurance at this time that a plan of reorganization will be proposed by the Company or approved or confirmed by the Bankruptcy Court, or that such plan will be consummated. After the expiration of the exclusivity period, creditors of the Company have the right to propose alternative plans of reorganization. Any plan of reorganization, among other things, is likely to result in material dilution or elimination of the equity of existing shareholders, as a result of the issuance of equity to creditors or new investors. As a result of the Chapter 11 filings, absent approval of the Bankruptcy Court, the Company is prohibited from paying, and creditors are prohibited from attempting to collect, claims or debts arising pre-petition. The consummation of a plan of reorganization is the principal objective of the Company's Chapter 11 case. A plan of reorganization sets forth the means for satisfying claims and interests in the Company and its debtor subsidiaries, including the Liabilities subject to compromise. The consummation of a plan of reorganization for the Company and its debtor subsidiaries will require the requisite vote of impaired creditors and stockholders under the Bankruptcy Code and confirmation of the plan by the Bankruptcy Court. 32 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Reorganization (continued) The accompanying financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Chapter 11 filing and circumstances relating to this event, including the Company's leveraged financial structure and losses from operations, such realization of assets and liquidation of liabilities is subject to significant uncertainty. While under the protection of Chapter 11, the Company may sell or otherwise dispose of assets, and liquidate or settle liabilities, for amounts other than those reflected in the financial statements. Further, a plan of reorganization could materially change the amounts reported in the financial statements, which do not give effect to all adjustments of the carrying value of assets or liabilities that might be necessary as a consequence of a plan of reorganization. The appropriateness of using the going concern basis is dependent upon, among other things, confirmation of a plan of reorganization, future profitable operations, the ability to comply with the terms of the DIP Facility and the ability to generate sufficient cash from operations and financing arrangements to meet obligations. 3. Liabilities Subject to Compromise The principal categories of claims classified as liabilities subject to compromise under reorganization proceedings are identified below. All amounts below may be subject to future adjustment depending on Bankruptcy Court action, further developments with respect to disputed claims, determination as to the value of any collateral securing claims, or other events. Additional claims may arise resulting from rejection of additional executory contracts or unexpired leases by the Company.
January 3, (In millions) 1998 ---------------- Accounts payable $ 1,340 Long-term Credit Agreement 603 Short-term Credit Agreement 456 Note Purchase Agreements 276 Other long-term debt 9 Obligations under capital leases 51 Lease and other contract rejection claims 104 Other liabilities 629 ----------- $ 3,468 ===========
The Company has $83 million of liabilities due Signature and Marinco which have been eliminated in consolidation but are subject to compromise (see Note 22). As a result of the bankruptcy filing, no principal or interest payments will be made on any pre-petition debt without Bankruptcy Court approval or until a reorganization plan defining the repayment terms has been approved. Contractual interest expense not recorded on certain pre-petition debt totaled $61 million for the period from July 8, 1997 through January 3, 1998. 33 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Liabilities Subject to Compromise (continued) Prior to the bankruptcy filing, the Company's debt consisted primarily of borrowings under the Long-term Credit Agreement, the Short-term Credit Agreement and Note Purchase Agreements. The Company was in default of the terms of each applicable loan agreement. Each of these agreements had a maturity date of August 29, 1997 and were to bear interest at varying rates. The Company was also in default of the terms of the Seasonal Credit Agreement, which was terminated as a result of the Chapter 11 filing. There were no borrowings outstanding under this agreement. The caption "Accounts payable," included in Liabilities subject to compromise, includes facilities Wards had available under vendor financing programs which totaled $725 million. At June 28, 1997, these facilities were principally drawn. These facilities are no longer available due to the Chapter 11 filing. The Company had 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 Credit Agreements. The aggregate notional principal amounts under the interest rate exchange agreements was $175 million. The interest rate exchange agreements were terminated upon the Company's bankruptcy filing. Pursuant to the early termination, the Company incurred a pre-petition liability of $3 million which has been included in Liabilities subject to compromise. The cap agreements, which all expired during fiscal 1997, were not terminated early. As part of the Chapter 11 reorganization process, the Company has attempted to notify all known or potential creditors of the Chapter 11 filing for the purpose of identifying all pre-petition claims against the Company. Generally, creditors whose claims arose prior to the Petition Date had until March 2, 1998 ("Bar Date") to file claims or be barred from asserting claims in the future. Claims arising from rejection of executory contracts by the Company, and claims related to certain other items were permitted to be filed by other dates set by the Bankruptcy Court. Differences between amounts shown by the debtors and claims filed by creditors are being investigated and will either be amicably resolved or adjudicated. The ultimate amount of and settlement terms for such liabilities are subject to the plan of the reorganization when confirmed, and accordingly are not presently determinable. 4. Reorganization Costs Reorganization costs recorded in fiscal 1997 consisted of the following (in millions): Loss on disposition of assets of Lechmere $ 280 Wards and Electric Avenue & More store closings 204 Other 61 Professional fees 10 Interest income (2) --------- $ 553 =========
In August 1997, the Bankruptcy Court approved a motion filed by Wards to exit its non-core specialty retail store businesses - Lechmere, Home Image by Lechmere and Electric Avenue & More. The exit involved the closing of 44 stores. The closings are expected to generate positive cash flows and reduce future operating losses. The Company recorded a pre-tax charge of $280 million associated with the closing of Lechmere and $50 million associated with the exit of Electric Avenue & More, which included losses and costs associated with liquidation of assets, rejection of leases, severance payments and other related costs. 34 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Reorganization Costs (continued) In November 1997, Bankruptcy Court approved a motion to close 45 underperforming retail stores and two outlet and liquidation centers. The closings are expected to generate positive cash flows and reduce future operating losses. The Company recorded a pre-tax charge of $154 million associated with the closing of these stores, which includes losses and costs associated with the liquidation of assets, lease rejection claims, severance payments and other related costs. The net receipts of cash relating to the disposition of the assets of Lechmere and closing of Wards and Electric Avenue and More stores consist of proceeds from the liquidation of inventory of $175 million and proceeds from the sale of properties, plants and equipment of $36 million, net of other related costs and expenses of $56 million. Other reorganization costs represent expenses and losses associated with the restructuring of the Company's agreement with ValueVision International, Inc. (see Note 20), the exit of certain product lines, rejection of certain contracts, retention bonuses, and other expenses incurred as a result of the Chapter 11 filing. Professional fees incurred consisted of consulting and legal fees for bankruptcy activity and restructuring efforts on behalf of the Company and Creditors' Committee. 5. Acquisition of Amoco Enterprises, Inc. On December 31, 1995, Wards 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 million. The acquisition was financed through the use of the majority of the proceeds generated from the issuance of the Montgomery Ward Holding Corp. Senior Preferred Stock. On January 2, 1996, Wards' wholly-owned subsidiary, Signature, purchased Enterprises from Wards for $100 million, net of cash and cash equivalents. The allocation of the purchase price is summarized as follows (in millions): Cash and cash equivalents $ 63 Present value of future profits 126 Goodwill 67 Other assets 22 Trade accounts payable (3) Accrued liabilities and other obligations (67) Deferred income taxes (45) ----- $ 163 =====
35 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Investments of Insurance Operations Following is a summary of investments of insurance operations other than related party investments. The market values for marketable debt and equity securities are based on quoted market prices.
(In millions) January 3, 1998 ----------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Type of Investment Cost Gains Losses Value - ------------------------------- ---------- ---------- ---------- ------ Fixed maturities: Bonds: United States Government and government agencies and authorities $ 57 $ 1 $ - $ 58 Public utilities 48 3 - 51 All other corporate bonds 47 2 - 49 Mortgage-backed securities 91 2 - 93 ---------- ---------- ---------- ------ Total fixed maturities 243 8 - 251 ---------- ---------- ---------- ------ Equity securities: Common stock 19 7 - 26 ---------- ---------- ---------- ------ Policy loans 7 - - 7 Limited partnership 5 - - 5 Short-term investments 69 - - 69 ---------- ---------- ---------- ------ Total investments $ 343 $ 15 $ - $ 358 ========== ========== ========== ======
36 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Investments of Insurance Operations (continued)
(In millions) December 28, 1996 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Type of Investment Cost Gains Losses Value - ---------------------------------------- --------- ---------- ---------- ------ Fixed maturities: Bonds United States Government and government agencies and authorities $ 52 $ - $ - $ 52 Public utilities 60 5 - 65 All other corporate bonds 9 1 - 10 Mortgage-backed securities 108 2 (1) 109 --------- ---------- ---------- ------ Total fixed maturities 229 8 (1) 236 --------- ---------- ---------- ------ Equity securities: Common stock 17 4 - 21 --------- ---------- ---------- ------ Policy loans 7 - - 7 Limited partnership 2 - - 2 Short-term investments 51 - - 51 --------- ---------- ---------- ------ Total investments $ 306 $ 12 $ (1) $ 317 ========= ========== ========== ======
Proceeds from sales of investments in debt securities were $30 million, $26 million and $13 million for the periods ended January 3, 1998, December 28, 1996 and December 30, 1995, respectively. Proceeds from sales of equity securities were $41 million, $9 million and $9 million for the periods ended January 3, 1998, December 28, 1996 and December 30, 1995, respectively. The fixed investment maturities as of January 3, 1998 are as follows:
Amortized Market (In millions) Cost Value --------- ------ Due in 1997 $ 29 $ 30 Due in 1998 through 2002 71 75 Due in 2003 through 2007 33 34 Due in 2008 and beyond 19 19 Mortgage-backed securities 91 93 --------- ------ $ 243 $ 251 ========= ======
37 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Investments of Insurance Operations (continued) Consolidated realized gains on sales of investments before income taxes and changes in unrealized gains (losses) after income taxes on fixed maturities, mortgage loans and equity securities, including those investments held by non-insurance related subsidiaries, are as follows:
Fixed Maturities and Mortgage Equity (In millions) Loans Securities ------------ ---------- 53-week period ended January 3, 1998 Realized $ 1 $ 2 Unrealized - - 52-week period ended December 28, 1996 Realized $ - $ 4 Unrealized (4) 3 52-week period ended December 30, 1995 Realized $ 1 $ 5 Unrealized 10 (2)
7. Accounts and Notes Receivable from Affiliates Wards entered into a Bank Credit Card Program Agreement ("Card Agreement") effective April 1, 1996 with Monogram Credit Card Bank of Georgia ("Monogram"), and an Account-Related Agreement ("Account Related Agreement") effective April 1, 1996 with Montgomery Ward Credit Corporation ("Montgomery Ward Credit") (collectively referred to as the "Agreements") pursuant to which Monogram and Montgomery Ward Credit (collectively referred to as the "Montgomery Ward Credit Companies" or "MWCC"), both of which are affiliates of General Electric Capital Corporation provide services to Wards, and MWCC makes payments to Wards as to their receivables generated by sales to customers of Wards, its affiliates and licensees who utilize the Wards private label credit card. Under the Agreements, Monogram has the exclusive right to operate the Wards' private label credit card system and the obligation to pay to Wards the face amount of Monogram's receivables generated by the Wards private label credit card system, up to $7 billion outstanding at any time. Sales of receivables to Montgomery Ward Credit under the prior arrangements, and payments in respect of receivables under the current Agreements, were $2.6 billion, $3.6 billion and $3.9 billion for the periods ended January 3, 1998, December 28, 1996 and December 30, 1995, respectively. At January 3, 1998 and December 28, 1996, there were $4.2 billion and $5.2 billion, respectively, of Wards credit card receivables owned by Montgomery Ward Credit Companies. Amounts receivable from Monogram in connection with such receivables are included in Accounts and notes receivable from affiliates. Wards is exposed to both market risk and credit risk under the Agreements. Under the Agreements, Wards is required to pay Monogram the excess interest costs on a monthly basis if a blended interest rate applicable to funding costs with respect to the receivables exceeds 10% per annum. Since 1988, the blended interest rate has been less than 10%. 38 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Accounts and Notes Receivable from Affiliates (continued) Should Montgomery Ward Credit Companies, or their guarantor General Electric Capital Corporation, fail to perform their obligations under the Agreements, Wards would suffer an accounting loss up to the amount of Wards' share of finance charges and late fees (as described below), net of applicable reserves carried by Montgomery Ward Credit. Wards estimates that any accounting loss would be immaterial at January 3, 1998. Montgomery Ward Credit Companies' obligations under the Agreements are not collateralized. Wards generally bears a portion of the risk of credit losses due to non- payment by cardholders up to a maximum of 2.6% of average outstanding receivables, subject to offsets relating to Wards' share of certain incremental increases in finance charges and late fees payable by cardholders. Wards is also responsible for losses on certain higher risk starter card accounts to the extent the loss percentage as to those accounts exceeds the loss percentage experience of the rest of the portfolio. Wards' net unpaid liability for credit losses for 1991 through 1997 are to be payable to Montgomery Ward Credit pursuant to a note ("Continuation Note") due in early 2003, provided that the outstanding balance of such note cannot exceed $300 million. A remaining note in the amount of $15 million, consisting of losses incurred after July 7, 1997, is to be executed which provides for monthly principal payments in the amount of 5% of the scheduled monthly principal payments for the Continuation Note. Starter card losses are payable currently. Interest on Wards' unpaid liability for credit losses is to be payable at a rate equal to rates on comparable borrowings of Wards. Interest on notes outstanding as of July 7, 1997, has been stayed by the Chapter 11 proceeding. In exchange for Wards' agreement to allow MWCC to increase finance charge rates and late fees in selected states, Wards receives a share of incremental finance charges and late fees resulting from such increases. Such amount is available for offset against Wards' unpaid liability for its share of credit losses, and to the extent not currently paid or offset earns interest at the same rate as amounts owned by Wards to Montgomery Ward Credit. In the event that, due to the increase in finance charge rates and late fees, refunds are required to be made, Wards and MWCC have agreed in certain cases to share the financial risk. Wards has executed notes for its unpaid share of credit losses which totaled $412 million with respect to credit losses through 1997. The incremental finance charges and late fee assessments earned by Wards at the end of 1997 were $112 million for a net obligation of $300 million. As Wards' net unpaid liability for credit losses for 1991 through 1997 exceeded the $300 million threshold, a payment of $28 million with respect to the excess was made in early 1998. At January 3, 1998, $288 million of the net obligation is included in Liabilities subject to compromise, and $40 million of the obligation is included in Accrued liabilities and other obligations. As the $300 million threshold has been reached, it is expected that future payments may be required depending upon the level of credit card losses. 39 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Accounts and Notes Receivable from Affiliates (continued) The Agreements are scheduled to expire on December 31, 2011, provided the terms shall continue thereafter from year to year unless either party gives ten years prior notice of its election to terminate. Except upon the occurrence of certain events of default, the Agreements may generally not be terminated by either party prior to December 31, 2011. Wards has not yet assumed these agreements and the Montgomery Ward Credit Companies have not exercised the provision in the Agreements allowing the Montgomery Ward Credit Companies to terminate the Agreements in the event of Wards' bankruptcy. Wards has agreed to pay Montgomery Ward Credit $2.5 million per month for the months of January 1998 through June 1998. Wards expects to execute an interim amendment to the Account Purchase Agreement ("Interim Agreement") which will provide the Company with the ability to utilize the private label credit card during the pendancy of the Bankruptcy case. It is likely that the Interim Agreement will require monthly payments similar to those required for the first six months of 1998. GE Capital has guaranteed Montgomery Ward Credit Companies' obligations under the Agreements. 8. Retirement Plans Retirement plans cover a majority of full-time associates of Wards and its subsidiaries. Retirement benefits are provided through a defined benefit pension plan as well as through a savings and profit sharing plan. The components of the net pension credit were as follows:
53-Week 52-Week Period Period Ended Ended ------- --------------------- Jan. 3, Dec. 28, Dec. 30, (In millions) 1998 1996 1995 ------- -------- -------- Service cost-benefits earned during the period $ (11) $ (12) $ (10) Interest cost on projected benefit obligation (48) (48) (51) Actual return on assets 190 112 185 Deferral of unanticipated investment performance (110) (34) (110) Amortization of unrecognized prior service cost 1 1 - Amortization of unrecognized net loss (3) (6) (3) ------- -------- -------- Net pension credit $ 19 $ 13 $ 11 ======= ======== ======== Assumptions: Discount rate 7.7% 7.5% 8.5% Increase in future compensation 3.0% 6.0% 6.0% Rate of return on plan assets 9.5% 9.5% 9.5%
40 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Retirement Plans (continued) The funded status of the defined benefit pension plan was as follows: Jan. 3, Dec. 28, (In millions) 1998 1996 -------- -------- Acturial present value of accumulated benefit obligation: Vested $ (683) $ (655) Nonvested (1) (2) -------- -------- Accumulated benefit obligation (684) (657) Additional amounts related to projected increases in compensation levels (7) (20) -------- -------- Projected benefit obligation $ (691) (677) Plan assets at fair value, primarily in equity and fixed income securities 1,071 946 -------- -------- Plan assets in excess of projected benefit obligation $ 380 $ 269 -------- -------- Unrecognized net loss since initial application of FAS 87 (1) 71 Unrecognized prior service cost since initial application of FAS 87 (13) 7 -------- -------- $ 366 $ 347 ======== ========
The projected benefit obligation was determined using an assumed discount rate of 7.0% at January 3, 1998 and 7.7% at December 28, 1996 and an assumed rate of increase in future compensation levels of 3% for 1997 and 6% for 1996. Excess unrecognized net gains and losses and prior service costs are amortized over the average future service period. The Company provides a 401(K) defined contribution plan to eligible employees. Company matching contributions for employees under the plan amounted to $4 million for the period ended January 3, 1998 and $6 million for the periods ended December 28, 1996 and December 30, 1995. Substantially all associates who retire after participation in the retirement plan for ten years and who were members of the health care plan for the year prior to retirement are eligible for certain post-retirement health care benefits, the cost of which is shared with the retirees. Certain associates who retired before January 1, 1996 are eligible for postretirement life insurance benefits. The postretirement healthcare benefits cease at age 65 for associates who retire on or after January 1, 1996 and who do not meet certain age and service requirements. 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. The Company continues to evaluate ways in which it can better manage retiree benefits and control 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. 41 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Retirement Plans (continued) The Company accounts for postretirement benefits under the provisions of SFAS No. 106, "Employers Accounting for Postretirement Benefits other than Pensions." The components of the net periodic postretirement benefit cost were as follows:
53-Week 52-Week Period Period Ended Ended ------- --------------- (In millions) 1997 1996 1995 ------- ---- ----- Service cost $ 1 $ 1 $ 2 Interest cost on accumulated post-retirement benefit obligation 8 9 10 Curtailment gain on life insurance benefit termination - - (3) Amortization of prior service cost (2) (1) - ------- ----- ----- Net periodic post-retirement benefit cost $ 7 $ 9 $ 9 ======= ===== =====
The status of the Company's liability for postretirement benefits at January 3, 1998, which is included in Liabilities subject to compromise, and December 28, 1996, which are included in Accrued liabilities and other obligations, is as follows:
(In millions) 1997 1996 ----- ---- Accumulated post-retirement obligation: Retirees $ 72 82 Fully eligible active associates 16 16 Other active associates 21 22 ----- ----- Total accumulated post-retirement benefit obligation 109 120 Unrecognized prior service cost 15 15 Unrecognized net gain 14 5 ----- ----- Accumulated post-retirement benefit obligation $ 138 $ 140 ===== =====
The weighted average discount rate used in measuring the accumulated postretirement benefit obligation was 7% at January 3, 1998 and 7.7% at December 28, 1996. 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. 42 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Properties, Plants and Equipment The details of the properties, plants and equipment accounts are shown below at cost:
Jan. 3, Dec. 28, (In millions) 1998 1996 -------------- -------------- Land $ 164 $ 193 Buildings 795 886 Leasehold improvements 290 353 Fixtures and equipment 522 585 Assets under capital leases 92 96 Less accumulated depreciation and amortization (796) (805) -------------- -------------- Properties, plants and equipment, net $ 1,067 $ 1,308 ============== ==============
Depreciation expense for properties, plants and equipment was $117 million, $122 million and $115 million for 1997, 1996 and 1995, respectively. Assets held for disposition, representing primarily closed retail and warehouse facilities, of $76 million and $17 million at January 3, 1998 and December 28, 1996, respectively, are included in Other assets. Losses of $16 million, which are included in Reorganization Costs, were recognized in 1997 in connection with the write-down of these properties to their net realizable values. 10. Income Taxes As of January 3, 1998, the Company has a tax benefit of $733 million attributable to net operating loss ("NOL") carryforwards available, which expire beginning in 2010, targeted jobs tax credit ("TJTC") carryforwards of $8 million, which begin expire beginning in 2009 and alternative minimum tax ("AMT") credits of $3 million available to offset future federal income tax liabilities. The Company increased the valuation reserve relating to the realizeability of the NOL carryforwards in 1997. Management believes that the NOL carryforwards, net of the applicable valuation reserve, could be realized by selling appreciated non-operating assets, if necessary, to avoid allowing the carryforwards to expire without being used. Management has obtained third party valuations to establish the probable proceeds from such sales. 43 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Income Taxes (continued) The approximate tax effects of temporary differences and carryforwards that give rise to the net deferred tax asset (liability) are as follows:
Jan. 3, Dec. 28, (In millions) 1998 1996 --------------- --------------- Accrued liabilities $ 133 $ 112 Post-retirement benefits 48 55 Insurance reserves 66 71 Other deferred tax assets 15 4 --------------- --------------- Total deferred tax assets 262 242 Prepaid pension contribution (131) (141) Direct response and insurance acquisition costs (199) (238) Properties, plants and equipment (121) (159) Other deferred tax liabilities (51) (51) --------------- --------------- Total deferred tax liabilities (502) (589) NOL, TJTC and AMT credit carryforwards 744 327 Valuation allowance (205) (32) --------------- --------------- Net deferred tax asset (liability) $ 299 $ (52) =============== ================
Income tax expense (benefit) consists of:
53-Week 52-Week Period Period Ended Ended -------------- --------------------------------- Jan. 3, Dec. 28, Dec. 30, (In millions) 1998 1996 1995 -------------- --------------- -------------- Federal Current $ 2 $ 2 $ 7 Deferred (361) (134) (20) State, local and foreign (16) (6) (1) -------------- --------------- -------------- Total income tax benefit $ (375) $ (138) $ (14) ============== =============== ==============
44 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Income Taxes (continued) A reconciliation of the statutory to effective federal income tax rate is as follows:
53-Week 52-Week Period Period Ended Ended --------------- -------------------------------------- Jan. 3, Dec. 28, Dec. 30, 1998 1996 1995 --------------- ---------------- ----------------- Federal income tax rate (35)% (35)% (35)% State taxes, net of reduction of federal tax and NOL benefit (1) (1) (7) Tax credits - (2) (31) Deferred rate differential, net of adjustments - - (2) Permanent differences - 1 14 Valuation allowance 11 - - --------------- ---------------- ----------------- Effective income tax rate (25)% (37)% (61)% =============== ================ =================
11. Reinsurance 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. 45 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Reinsurance (continued) Premium revenues, which are included in Direct response marketing revenues, are as follows:
Assumed Percentage Ceded From of Amount Gross to Other Other Net Assumed (In millions) Amount Companies Companies Amount To Net ------ --------- --------- ------ ---------- 53-Week Period ended January 3, 1998: Life Insurance in force $4,693 $ (256) $ 923 $5,360 17.2% ====== ========= ========= ====== ========== Premiums Life Insurance 49 (1) 11 59 18.6% Accident and health insurance 75 (3) 59 131 45.0% Property and liability insurance 30 (9) 30 51 58.8% Other - - 6 6 100.0% ------ --------- --------- ------ ---------- Total $ 154 $ (13) $ 106 $ 247 42.9% ====== ========= ========= ====== ========== 52-Week Period ended December 28, 1996: Life Insurance in force $5,764 $ (104) $ 176 $5,836 3.0% ====== ========= ========= ====== ========== Premiums Life Insurance 59 (1) 7 65 10.8% Accident and health insurance 94 (5) 11 100 11.0 Property and liability insurance 76 (15) - 61 0.0 ------ --------- --------- ------ ---------- Total $ 229 $ (21) $ 18 $ 226 8.0% ====== ========= ========= ====== ========== 52-Week Period ended December 30, 1995: Life Insurance in force $5,730 $ (84) $ 156 $5,802 2.7% ====== ========= ========= ====== ========== Premiums Life Insurance 53 (1) 2 54 3.7% Accident and health insurance 91 (5) 15 101 14.9% Property and liability insurance 73 (12) - 61 0.0% ------ --------- --------- ------ ---------- Total $ 217 $ (18) $ 17 $ 216 7.9% ====== ========= ========= ====== ==========
46 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. Short-Term and Long-Term Debt The long-term debt of Wards and its subsidiaries is as follows:
Jan. 3, Dec. 28, (In millions) 1998 1996 ----------- ------------- Wards Post-Petition Loan and Guaranty Agreement $ 50 $ - Commercial Development Revenue Bonds, due in 2013 at 4.5% interest rate, adjusted at three-year intervals - 5 Other - 2 Wards' Real Estate Subsidiaries 11.50% Secured Note, due serially to September 1, 2001 11 12 7.50% Secured Note, due serially to November 30, 2002 5 5 9.45% Secured Notes, due serially to November 30, 2003 14 15 7.75% Secured Notes, due serially to August 31, 2004 16 17 7.875% Secured Notes, due serially to December 15, 2005 7 7 9.00% Secured Notes, due serially to January 1, 2006 11 12 Other 8 8 Lechmere Other - 4 ----------- ------------- Total long-term debt $ 122 $ 87 =========== =============
Maturities of long-term debt for the five years succeeding January 3, 1998 are as follows: 1998--$14 million, 1999--$61 million, 2000--$11 million, 2001--$10 million, 2002--$9 million, and thereafter --$17 million. Wards entered into the Post-Petition Loan and Guaranty Agreement ("DIP Facility") on July 8, 1997, which was approved by the Bankruptcy Court on July 31, 1997. Under the DIP Facility, the lenders have agreed to provide a revolving credit and letter of credit facility, the maximum amount of which is based on the book value of eligible inventory (as defined in the DIP Facility), the fair market value of eligible real property (as defined in the DIP Facility) and the earnings of Signature. In no case may borrowings exceed $1 billion. Total letters of credit outstanding were $52 million at January 3, 1998. The Company had $811 million of borrowing availability under the DIP Facility at January 3, 1998. Under the DIP Facility, Wards may select among several interest rate options, all of which are based on market rates plus a margin. A commitment fee is payable based on the unused amount of the facility. The facility expires on July 7, 1999, or earlier in the case of an event of default. The Company is currently in default of the terms of each of the Long-Term Credit Agreement, the Short-Term Credit Agreement and the Note Purchase Agreements and no future amounts may be drawn thereunder. The Company was also in default of the Seasonal Credit Agreement, which was terminated as a result of the Chapter 11 filings. There were no borrowings outstanding under this agreement. 47 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. Short-Term and Long-Term Debt (continued) Signature borrowed $102 under a Credit Agreement (Signature Credit Agreement) dated as of September 27, 1996 as amended and restated October 21, 1996 and amended December 23, 1996 between Signature and various lenders. The proceeds were used to repay the intercompany loan from Wards to Signature arising from Signature's acquisition of the Amoco Motor Club. During 1997, the maturity date was extended to January 31, 1998 and has not been repaid. In 1998, the lenders agreed that they will extend the maturity date to the earlier of May 29, 1998 or the funding of a replacement loan facility, provided that Signature provide the lenders with certain security and other terms and conditions the new lenders may deem appropriate. In March 1998, Signature received a commitment from a new lender which would enable Signature to repay the amounts borrowed under the Signature Credit Agreement. Management expects to borrow the amounts required and repay the amounts due by May 29, 1998. If the new lender's commitment were to be terminated, the aforementioned extension agreement would also terminate. The Secured Notes of the real estate subsidiaries 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 Wards. As the Secured Notes of the real estate subsidiaries are adequately collateralized by the respective properties, these obligations are not considered subject to compromise. The obligation relating to the Commercial Development Revenue Bonds of $5 million is included in Liabilities subject to compromise at January 3, 1998. 13. 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 January 3, 1998, the minimum lease payments under all noncancelable operating leases with an initial term of more than one year, not including $29 million of future sublease rentals, and under capital leases are as follows:
Capital Operating (In millions) Leases Leases ------- --------- 1998 $ 11 $ 100 1999 11 84 2000 10 71 2001 10 61 2002 9 55 Thereafter 19 407 ------- --------- Total Minimum Lease Payments $ 70 $ 778 ========= Less: Executory costs, principally real estate taxes to be paid by the lessor (2) Less: Imputed interest (17) ------- Present value of net minimum capital lease payments including portion due within one year of $7 $ 51 =======
48 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Leases (continued) The obligations under capital leases have been included in Liabilities subject to compromise at January 3, 1998. Net rent expense charged to earnings was $136 million, $149 million and $140 million for the periods ended January 3, 1998, December 28, 1996 and December 30, 1995, respectively, after deducting rentals from subleases of $9 million, $10 million and $9 million for the periods ended January 3, 1998, December 28, 1996 and December 30, 1995, respectively. Rent expense includes contingent lease rentals for capital and operating leases of $7 million, $10 million, and $12 million for the periods ended January 3, 1998, December 28, 1996 and December 30, 1995, respectively. 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. 14. Redeemable Preferred Stock On December 29, 1995, Wards issued 1,750 shares of a new series of senior preferred stock ("MW Senior Preferred Stock"), par value of $1.00 per share, to GE Capital in exchange for $175 million in cash. Subsequent to year end 1995, Wards used a portion of the proceeds to finance the purchase of the Amoco Motor Club by its wholly-owned subsidiary, Signature. The subscription agreement for the MW Senior Preferred Stock contained an exchange option which gave GE Capital the option to exchange the MW Senior Preferred Stock for senior preferred stock of the Company with substantially the same terms. On January 31, 1996, GE Capital exercised this exchange option. On March 29, 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. On March 4, 1997, GE Capital, Wards and Lechmere amended the Program Agreement under which GE Capital provided funds to Wards and Lechmere to pay manufacturers and distributors of goods purchased by Wards and Lechmere. In exchange for a $150 million increase in the maximum amount of funds GE Capital agreed to provide, MW Holding agreed to issue shares of a new series of Preferred Stock having a liquidation value of $21 million. On April 1, 1997, GE Capital further increased its funding under the Program Agreement by $100 million and the Board of Directors of MW Holding agreed to issue additional shares of the new series of Preferred Stock. At its Annual Meeting held on May 29, 1997, the stockholders of MW Holding approved an amendment to its Certificate of Incorporation authorizing the issuance of up to 25,000 shares of preferred stock. The amendment allows future issuances of preferred stock by action of the Board of Directors without the need for further action by the stockholders. The Board of Directors designated 1,000 shares of the newly authorized preferred stock to be Series C Preferred Stock and MW Holding issued 352 shares of the Series C Preferred Stock to GE Capital in full payment of the obligations described above. 49 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. Redeemable Preferred Stock (continued) All of the Series C Preferred Stock is required to be redeemed on September 30, 2002 at a redemption price of $100,000 per share (the "Liquidation Value") plus unpaid accrued dividends. Dividends are payable quarterly at a rate per annum equal to 15%, with the first payment based on the number of days from and including March 4, 1997. If for any reason the full dividend on any payment date is not paid in cash on such date, the unpaid amount thereof will automatically, without further action, be deemed added to the Liquidation Value. MW Holding did not pay the dividend due June 30, 1997 of $2 million and such amount has been added to the liquidation value of the Series C Preferred Stock. MW Holding also did not pay dividends due on June 30, 1997 on its New Senior Preferred Stock. The redemption provisions of the Series C and New Senior Preferred Stock have been stayed by the Chapter 11 proceedings. No further dividends will be declared or paid on the Series C or New Senior Preferred Stock prior to the approval of a plan of reorganization. 15. Common Stock As of January 3, 1998, the Company has the following authorized classes of common stock: Class A Common Stock, Series 1; $.01 par value; 25,000,000 shares authorized; 18,222,706 shares issued and outstanding, net of 6,777,294 shares held in treasury. Class A Common Stock, Series 2; $.01 par value; 5,412,000 shares authorized; 99,541 shares issued and outstanding, net of 2,118,090 shares held in treasury. Class A Common Stock, Series 3; $.01 par value; 12,400,000 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 5,982,897 shares held by certain former officers of the Company, Wards and Signature and their permitted transferees by making cash payments and issuing installment notes in the aggregate of approximately $54 million. As of January 3, 1998, the outstanding balance of these notes was $7 million. 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. These notes are classified as Liabilities subject to compromise. The Company does not have the capacity under its borrowing agreements to satisfy the payments for these notes. A noteholder may foreclose on the pledge of shares repurchased if note payments are not made within one year of becoming due; provided, however that the foreclosure remedy has been stayed by the Chapter 11 filing. 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. 50 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. Common Stock (continued) In 1997, the Company adopted Statement of Financial Accounting Standards Number 128, "Earnings per Share" ("FAS 128"). FAS 128 requires the presentation of "basic" earnings per share (income applicable to common shareholders divided by the weighted-average number of common shares outstanding during the period) and "diluted" earnings per share (which gives effect to all dilutive potential common shares that were outstanding during the period). All prior-period earnings per share data have been restated to conform to FAS 128. Basic and diluted earnings per share are the same for the periods ended January 3, 1998, December 28, 1996 and December 30, 1995, as all common stock equivalents are antidilutive, due to the net loss incurred during these periods.
For the 53-Week For the 52-Week For the 52-Week (In millions, Period Ended Period Ended Period Ended except share January 3, 1998 December 28, 1996 December 30, 1995 and per share -------------------------- --------------------------- -------------------------- amounts) Class A Class B Class A Class B Class A Class B ----------- ----------- ----------- ------------ ----------- ----------- Net loss applicable to common shareholders $ 580 $ 580 $ 118 $ 131 $ 6 $ 7 Weighted average number of common shares outstanding 18,322,247 25,000,000 18,710,601 25,000,000 19,511,238 25,000,000 Net loss per common share $ (31.67) $ (23.17) $ (6.33) $ (5.22) $ (.33) $ (.27)
16. 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 12,400,000 shares of Class A Common Stock, Series 3, have been reserved for issuance under the plan. Key associates of Wards and its subsidiaries are eligible to participate and may receive awards, purchase rights and options. Awards are grants of shares for no consideration. The Stock Ownership Plan expires on July 19, 1998 and no additional stock options may be granted after such date. 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 Wards via conversion rights in Series 1 or Series 2 shares. In 1997, 1996 and 1995, 706, 2,421 and 2,476 Series 1 shares were issued from treasury stock as payment for directors fees, respectively. 51 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. Stock Ownership Plan (continued) Following is a summary of activity under the plans:
January 3, December 28, December 30, 1998 1996 1995 ---------------------- ----------------------- ----------------------- Wtd. Wtd. Wtd. Shares Avg. Shares Avg. Shares Avg. (000) Ex. Price (000) Ex. Price (000) Ex. Price ---------- ---------- -------- ---------- -------- ---------- Outstanding, beg. of year 4,338 $17.87 5,165 $17.61 6,163 $17.76 Granted 4,721 7.32 340 23.95 673 24.90 Exercised - - (352) 9.52 (980) 19.29 Forfeited (970) 18.61 (458) 21.14 (72) 19.22 Canceled (1,328) 11.54 (357) 23.86 (619) 24.15 ---------- ---------- -------- ---------- -------- ---------- Outstanding, end of year 6,761 $11.64 4,338 $17.87 5,165 $17.61 ========== ========== ======== ========== ======== ========== Exercisable, end of year 3,688 $15.23 3,981 $16.39 3,980 $15.92 ========== ========== ======== ========== ======== ==========
5.3 million of the 6.8 million options outstanding at January 3, 1998 have exercise prices between $.20 and $18.75, with a weighted average exercise price of $8.38 and a weighted average remaining contractual life of 7.5 years. 2.2 million of these options are exercisable. The remaining 1.5 million options have exercise prices between $22.50 and $26.50, with a weighted average exercise price of $23.36 and a weighted average remaining contractual life of 6.02 years. All of these options are exercisable. In 1996, the Company adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," requiring pro-forma net loss and net loss per common share be determined as though stock-based compensation expense had been recognized using an option pricing model. However, due to the Company's bankruptcy filing and the significant losses incurred in fiscal 1997, the Company does not believe the pro-forma net loss and net loss per common share would be materially different from the reported amounts. 17. Operating, Selling, General and Administrative Expenses Operating, selling, general and administrative expenses include insurance benefits, claims and losses related to direct response marketing operations of $150 million, $144 million and $100 million for the periods ended January 3, 1998, December 28, 1996 and December 30, 1995, respectively. The Company expenses production costs of print, radio and television advertisements on the date the advertising first takes place. Advertising expenses included in operating, selling, general and administrative expenses were $363 million, $392 million and $335 million for the periods ended January 3, 1998, December 28, 1996 and December 30, 1995, respectively. 52 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. Interest Expense, Net of Investment Income Net interest expense is as follows:
53-Week 52-Week Period Period Ended Ended -------- ---------------------- Jan. 3, Dec. 28, Dec. 30, (In millions) 1998 1996 1995 -------- ---------- -------- Interest on short-term borrowings $ 63 $ 53 $47 Interest on long-term debt and obligations under capital leases 14 44 32 Miscellaneous interest, net 36 32 15 Investment income (2) (2) (3) -------- ---------- --------- Total interest expense, net of investment income $111 $127 $91 ======== ========== =========
19. Litigation and Other Proceedings MW Holding, Wards 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. 20. Related Party Transactions Bernard F. Brennan Substantially all shares of Class A Common Stock, except those held by Bernard F. Brennan, former Chairman and Chief Executive Officer, 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. As Voting Trustee, Bernard F. Brennan 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. In conjunction with a Relationship Agreement entered into between Mr. Brennan and the Company in December 1996, the Company provided a loan to Mr. Brennan of $12.5 million. Class A common stock of the Company owned by Mr. Brennan and his permitted transferees is pledged as collateral for this loan. The loan does not bear interest. In addition, Mr. Brennan is to be paid $1.5 million annually (for a five-year period) for consulting services he provides to the Company. The Company ceased payment for such consulting services upon the bankruptcy filing. 53 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20. Related Party Transactions (continued) GE Capital Corporation Certain key executives in 1997 were granted restricted stock and stock options of General Electric Company ("GE"). Roger Goddu, Chairman and Chief Executive Officer, was granted 120,000 shares of GE restricted stock which had a fair market value of $6.1 million at the date of grant. The shares vest equally over a five-year period on each December 31, beginning on December 31, 1997, subject to continuing employment. Mr. Goddu and seven other key executives were granted GE stock options with a fair market value of $5.4 million at the grant date. The shares vest over periods ranging from four to six years, subject to continuing employment. The exercise price equaled in each case the fair market value of the common stock at the grant date. Upon the resignation of one executive, options which were granted to the executive were canceled. As a result of the above transactions, the Company recorded the grants of GE restricted stock and stock options of $11.5 million as a capital contribution and established an asset, unearned compensation expense. Total expense recorded related to the amortization of the unearned compensation was $2.2 million for the fiscal year ended January 3, 1998. The Company engages in various other transactions with GE Capital as described in Notes 2, 7, 14 and 15. ValueVision International, Inc. On August 8, 1995, Wards purchased 1.28 million unregistered shares of common stock of ValueVision International, Inc. ("ValueVision") at $6.25 per share, which represented approximately 4.4% of the issued and outstanding shares of common stock of ValueVision. Wards also received 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. In July of 1996, the Company and ValueVision entered into an agreement whereby ValueVision acquired the assets and assumed certain liabilities of a joint venture of which the Company was a partner. Also, in July of 1996, ValueVision and Wards entered into an agreement for the expansion and restructuring of their ongoing marketing agreement. ValueVision issued to Wards vested warrants (Class P Warrants) to purchase 2.97 million shares of ValueVision common stock at an exercise price of $0.01 per share. The new warrants replaced 18 million unvested warrants (Class C-O Warrants) from an earlier grant. Concurrent with this agreement, ValueVision issued to Merchant Partners Limited Partnership ("Merchant Partners") vested Class P warrants to purchase 199,100 shares of ValueVision common stock at an exercise price of $0.01 per share. Wards recognized a pre-tax gain of $8 million from these transactions, which is included in Operating, selling, general and administrative expense. 54 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20. Related Party Transactions (continued) ValueVision International, Inc. (continued) In September 1996, Wards and ValueVision exchanged warrants to purchase ValueVision common stock. Wards exchanged 6 million vested warrants (Class A-B Warrants) from the earlier grant of 25 million warrants which were exercisable at prices ranging from $6.50 to $6.75, in return for vested warrants (Class P Warrants) to purchase 2.2 million shares of ValueVision common stock at an exercise price of $0.01 per share. Wards recognized a pre-tax gain of $7 from this transaction which is included in Operating, selling, general and administrative expense and deferred revenue recognition on the exchange of warrants discussed above of $16 million, which was included in Accrued liabilities and other obligations. The earlier ValueVision warrants had been subject to certain vesting conditions and termination rights which did not apply to the replacement grant. A portion of the warrants were pledged as security for the performance of Wards' obligations under the ongoing marketing agreements. On December 30, 1997, the Bankruptcy Court approved a restructuring of the operating agreement between Wards and ValueVision. ValueVision agreed to cede exclusive use of the Wards' name for catalog and mail order catalog "syndicates" back to Wards in exchange for Wards' return to ValueVision of warrants covering the purchase of approximately 3.8 million shares of ValueVision common stock. In addition, ValueVision agreed to repurchase 1.28 million shares of its stock owned by Wards, at a price of $3.80 per share. Under the new operating agreement, Wards' commitment to support ValueVision's television spot advertising purchases will be $2 million annually, for a period of three years. The transaction was consummated on January 15, 1998. In connection with this transaction, Wards recorded a loss on the sale of its investment in ValueVision of approximately $25 million, which is included in Reorganization Costs. Merchant Partners In July 1994, Wards became a limited partner in Merchant Partners. Wards made capital contributions to the partnership of $17 million in 1996, $4 million in 1995 and $1 million in 1994. In December 1995, Merchant Partners made a partnership distribution of $22 million to Wards, resulting in a gain of $16 million. On December 31, 1996, Wards entered into an agreement under which Wards assigned, transferred and set over unto, the general partner of Merchant Partners Wards' entire right, title and interest in and to its limited partnership interest. The general partner assumed the performance of all of the covenants and obligations associated with the interest under the Limited Partnership Agreement. The agreement eliminated Wards' future obligations with respect to its interest in Merchant Partners. Wards recognized a charge to earnings of $7.8 million and $10 million for the periods ended January 3, 1998 and December 28, 1996, respectively, which is included in Operating, selling, general and administrative expense. 55 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. Business Segments Wards 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.
53-Week 52-Week Period Period Ended Ended ------- -------------------------- Jan. 3, Dec. 28, Dec. 30, (In millions) 1998 1996 1995 ------- -------- -------- Total revenues Retail merchandising $ 4,534 $ 5,879 $ 6,531 Direct response marketing 852 741 554 ------- -------- -------- Total 5,386 6,620 7,085 ======= ======== ======== Operating earnings (losses) Retail merchandising $ (845) $ (320) $ 31 Direct response marketing 31 71 70 Corporate and other (160) (126) (124) Reorganization costs (553) - - ------- -------- -------- Total $(1,527) $ (375) $ (23) ======= ======== ======== Identifiable assets Retail merchandising $ 2,655 $ 3,207 $ 3,504 Direct response marketing 1,212 1,203 920 Corporate and other 705 469 460 ------- -------- -------- Total $ 4,572 $ 4,879 $ 4,884 ======= ======== ======== Depreciation and amortization Retail merchandising $ 116 $ 119 $ 118 Direct response marketing 269 220 149 ------- -------- -------- Total $ 385 $ 339 $ 267 ======= ======== ======== Capital expenditures Retail merchandising $ 47 $ 58 $ 109 Direct response marketing 19 17 13 ------- -------- -------- Total $ 66 $ 75 $ 122 ======= ======== ========
56 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. Business Segments (continued) 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 Wards and its affiliates. Under these laws, the restricted subsidiaries, which had aggregate retained earnings of $210 million, and aggregate total shareholders' equity of $267 million, can pay dividends of $30 million during 1998 as determined on a statutory basis, subject to the ability of certain subsidiaries to generate earned surplus. Dividends received by Signature from insurance subsidiaries were $38 million, $44 million and $40 million for the periods ended January 3, 1998, December 28, 1996 and December 30, 1995, respectively. 22. Condensed Combined Financial Statements The condensed combined financial statements as of January 3, 1998, of the Company and its subsidiaries who have filed for reorganization under Chapter 11 are presented below: CONDENSED COMBINED STATEMENT OF INCOME (Unaudited)
53-Week Period Ended ---------- January 3, (In millions) 1998 ---------- Net sales, including leased and licensed department sales $ 4,534 Total costs and expenses 5,536 ---------- Loss before reorganization costs and income taxes (1,002) Reorganization costs 553 ---------- Loss before income taxes (1,555) Income tax benefit (386) ---------- Net loss (1,169) Preferred stock dividend requirements (8) ---------- Net loss applicable to common shareholders $ (1,177) ========== Net loss per common share Class A $ (32.15) Class B (23.53)
57 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22. Condensed Combined Financial Statements (continued) CONDENSED COMBINED BALANCE SHEET (Unaudited)
Jan. 3, (In millions) 1998 ------- Assets Cash and cash equivalents $ 164 Receivables 165 Intercompany receivables 7 Investment in subsidiaries 528 Merchandise inventories 1,120 Prepaid pension cost 366 Properties, plant and equipment, net of accumulated depreciation and amortization 1,030 Other assets 196 Deferred income taxes 520 ------- Total Assets $ 4,096 ======= Liabilities Trade accounts payable $ 442 Accrued liabilities and other obligations 642 Liabilities subject to compromise 3,551 ------- Total Liabilities 4,635 Redeemable Preferred Stock 177 Shareholders' Deficit Common stock 1 Capital in excess of par value 64 Accumulated deficit (651) Unrealized gain on marketable equity securities 9 Less: Treasury stock, at cost (139) ------- Total Shareholders' Deficit (716) ------- Total Liabilities and Shareholders' Equity $ 4,096 =======
Liabilities subject to compromise includes intercompany payables to Signature and Marinco totaling $83 million. 58 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22. Condensed Combined Financial Statements (continued) CONDENSED COMBINED STATEMENT OF CASH FLOWS (Unaudited)
53-Week Period Ended ------- Jan. 3, (In millions) 1998 ------- Cash flows from operating activities: Net loss $(1,169) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and goodwill amortization 116 Deferred income taxes (379) Reorganization items 679 Changes in operating assets and liabilities, net 453 ------- Net cash used for operating activities (300) Cash flows from investing activities: Sale of short-term investments, net 2 Capital expenditures (47) Disposition of properties, plants and equipment, net 12 ------- Net cash used in investing activities (33) ------- Cash flows from financing activities: Proceeds from issuance of short-term debt, net 409 Borrowings under Post-Petition Loan and Guaranty Agreement 321 Payments under Post-Petition Loan and Guaranty Agreement (271) Payments of long-term debt (5) Payments of obligations under capital leases (13) Cash dividends received from Signature 15 Cash dividends paid (3) ------- Net cash provided by financing activities 453 ------- Increase in cash and cash equivalents 120 Cash and cash equivalents at beginning of period 44 ------- Cash and cash equivalents at end of period $ 164 =======
59 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23. Parent Company Financial Information Following are the MW Holding balance sheets as of January 3, 1998 and December 28, 1996 and the statements of income and cash flows for the 53- week period ended January 3, 1998, and the 52-week periods ended December 28, 1996 and December 30, 1995. BALANCE SHEETS
Jan. 3, Dec. 28, (In millions) 1998 1996 ------- -------- Assets Deferred income taxes $ 2 $ 4 Investment in Wards (623) 534 Redeemable preferred stock of Wards 175 175 Other assets 9 1 ------- -------- Total Assets $ (437) $ 714 ======= ======== Liabilities Accounts payable to Wards $ 91 $ 98 Accrued liabilities - 8 Liabilities subject to compromise 11 - ------- -------- Total Liabilities 102 106 Redeemable Preferred Stock 177 175 Shareholders' Equity (Deficit) Common stock 1 1 Capital in excess of par value 64 53 Retained earnings (deficit) (651) 509 Unrealized gain on marketable equity securities 9 9 Less: Treasury stock, at cost (139) (139) Total Shareholders' Equity (Deficit) (716) 433 ------- -------- Total Liabilities and Shareholders' Equity (Deficit) $ (437) $ 714 ======= ========
60 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23. Parent Company Financial Information (continued) STATEMENTS OF INCOME
Jan. 3, Dec. 28, Dec. 30, (In millions) 1998 1996 1995 ----------- ----------- ------------ Miscellaneous expenses $ (1) $ (2) $ (1) ----------- ----------- ------------ Total costs and expenses (1) (2) (1) ----------- ----------- ------------ Net loss before earnings of Wards (1) (2) (1) Equity in net loss of Wards (1,151) (235) (8) ----------- ----------- ------------ Net loss (1,152) (237) (9) Preferred stock dividend requirements 8 12 4 ----------- ----------- ------------ Net loss available for common shareholders $ (1,160) $ (249) $ (13) =========== =========== ============
STATEMENTS OF CASH FLOWS
53-Week 52-Week Period Period Ended Ended ---------- -------------------------- Jan. 3, Dec. 28, Dec. 30, (In millions) 1998 1996 1995 ---------- ---------- ---------- Net loss $ (1,152) $ (237) $ (9) Adjustments to reconcile net loss to net cash provided by operations: Change in undistributed earnings of subsidiary 1,157 235 12 Compensation expense on stock option grants/ repurchases - 5 4 Change in operating assets and liabilities: Other assets - - (1) Accounts payable to Wards (2) 36 16 Accrued liabilities and liabilities subject to compromise - (13) (13) ---------- ---------- ---------- Net cash provided by operating activities $ 3 $ 26 $ 9 ---------- ---------- ----------
61 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23. Parent Company Financial Information (continued) STATEMENTS OF CASH FLOWS
Jan. 3, Dec. 28, Dec. 30, (In millions) 1998 1996 1995 --------- -------- --------- Cash flows from financing activities: Proceeds from issuance of common stock $ - $ 3 $ 18 Proceeds from redemption of Wards preferred stock - - 75 Proceeds from issuance of preferred stock - 175 - Purchase of Wards preferred stock - (175) - Cash dividends paid (3) (9) (4) Payments to redeem preferred stock - - (75) Purchase of treasury stock, at cost - (20) (23) --------- -------- --------- Net cash used for financing activities (3) (26) (9) --------- -------- --------- Cash at end of period $ - $ - $ - ========= ======== ========= Non-cash investing activities: Grants of restricted stock and stock options by majority shareholder $ 11 $ - $ - Increase in liquidation value of preferred stock 2 - - Change in unrealized gain on marketable securities - (1) 8 Non-cash financing activities: Notes issued for purchase of treasury stock $ - $ 5 $ 2
62 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24. Quarterly Financial Data (unaudited) The quarterly operations of MW Holding are summarized as:
Quarter ------------------------------------------------------------------------------------- (In millions) First Second Third Fourth Year ------------ ------------ -------------- ------------ ------------ 53-week period ended January 3, 1998 Net sales $1,119 $1,151 $ 947 $1,317 $ 4,534 Cost of goods sold 997 1,070 805 1,082 3,954 Net loss (141) (216) (615) (180) (1,152) Net loss per Class A common share (3.71) (6.10) (16.97) (4.91) (31.67) Net loss per Class B common share (3.05) (4.36) (12.14) (3.60) (23.17) 52-week period ended December 28, 1996 Net sales $1,253 $1,354 $ 1,376 $1,896 $ 5,879 Cost of goods sold 1,038 1,080 1,105 1,645 4,868 Net income (loss) (48) 22 (29) (182) (237) Net income (loss) per Class A common share (1.31) .49 (.84) (4.67) (6.33) Net income (loss) per Class B common share (1.06) .40 (.69) (3.86) (5.22)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 63 PART III Item 10. Directors and Executive Officers of the Registrant Board of Directors The following persons currently serve as directors of the Company: Roger V. Goddu, Bernard F. Brennan, Tommy T. Cato, Silas S. Cathcart, James A. Parke, Denis J. Nayden, Gary C. Wendt and Edward D. Stewart. Under that certain Stockholders' Agreement dated as of June 17, 1988, as amended to date (the "Stockholders' Agreement"), the By-laws of the Company shall provide (and the By-laws of the Company do so provide), and the parties to the Stockholders' Agreement agree to vote, for the election of a Board of Directors consisting of ten members, three to be designated by Mr. Brennan (which three shall include Mr. Brennan), five to be designated by GE Capital and two to be designated by the Chief Executive Officer of Wards (which two shall include such Chief Executive Officer). Of the nominees listed below, Mr. Brennan has designated himself and Mr. Cato, GE Capital has designated Messrs. Cathcart, Parke, Nayden, Wendt and Stewart, and Mr. Goddu, who is the Chief Executive Officer of Wards, has designated himself as a director of the Company. Myron Lieberman, a director designated by Mr. Brennan, resigned on July 18, 1997. Mr. Brennan then designated Edwin G. Pohlmann to fill the vacant directorship. Due to the resignations of Mr. Pohlmann and Burnett W. Donoho, a directorship to be designated by Mr. Brennan and a directorship to be desginated by Mr. Goddu are each vacant. Pursuant to the Stockholders' Agreement, if GE Capital and its affiliates cease to own more than 50% of the number of shares of Common Stock purchased by them in June 1988, the number of directors which Mr. Brennan 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 Wards and Montgomery Ward Credit relating to the purchase by Montgomery Ward Credit of customer receivables of Wards 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. Also pursuant to the Stockholders' Agreement, if Mr. Brennan and his permitted transferees cease to own more than 50% of the number of shares of Common Stock held by them on December 1, 1996, the number of directors which GE Capital is permitted to designate will be increased by two and the number of directors which Mr. Brennan may designate shall be reduced by two. If Mr. Brennan and his permitted transferees cease to own 20% or more of such shares of Common Stock, Mr. Brennan shall no longer have the right to designate any directors and the directors that Mr. Brennan would have been entitled to designate (after taking into account the application of the preceding sentence) shall be designated by the Chief Executive Officer of Wards. The holder of the Senior Preferred Stock (currently GE Capital) has 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. Information with respect to ages of the directors is as of March 16, 1997 and information as to their ownership of shares of the Company as of that date is provided under Item 12 below. 64 Item 10. Directors and Executive Officers of the Registrant (continued) Board of Directors (continued) Roger V. Goddu, 47, has been a director of the Company and Chairman and Chief Executive Officer of Wards since January 6, 1997. Prior thereto, he was with Toys "R" Us, where from 1996 until 1997, he was President-U.S. Merchandising, and from 1989 to 1995, he was Executive Vice President/General Merchandise Manager. Prior to 1989, Mr. Goddu was a Senior Vice President and General Merchandise Manager of Target, a division of Dayton Hudson Corporation. Bernard F. Brennan, age 59, has been a director of the Company since February 9, 1988, has been Chairman of the Company since June 17, 1988, was Chief Executive Officer of the Company from February 9, 1988 through December 10, 1996, and was President of the Company from February 9, 1988 through September 10, 1992. Mr. Brennan served as Chief Executive Officer of Wards from May 13, 1985 through December 10, 1996. He served as President of Wards from May 13, 1985 through September 10, 1992. Mr. Brennan has been a director of Itel Corporation since 1988. Tommy T. Cato, age 56, has been a director of the Company since August 20, 1997. Mr. Cato served as Executive Vice President of the Company from May 15, 1992, until February 4, 1994. Mr. Cato was Executive Vice President - Logistics and Product Service of Montgomery Ward from November 8, 1990 through February 3, 1994. Silas S. Cathcart, age 71, has been a director of the Company since June 25, 1988. Mr. Cathcart is retired Chairman of Illinois Tool Works, Inc. and Kidder, Peabody Group, Inc. He is a director of Quaker Oats Company, Allegiance Corporation and General Electric Company. Denis J. Nayden, age 43, has been a director of the Company since June 25, 1988. Mr. Nayden has been President and Chief Operating Officer of GE Capital since January 1, 1995. Mr. Nayden served as President and Chief Operating Officer of Kidder, Peabody Group, Inc. from June 1994 through December 1994. Prior thereto, Mr. Nayden was an Executive Vice President of GE Capital from February 1989 to June 1994. Mr. Nayden is a director of General Electric Capital Services, Inc. and GE Capital. James A. Parke, age 52, has been a director of the Company since March 31, 1997 and previously was a director from April 27, 1990 through December 17, 1996. He has been Senior Vice President - Finance of General Electric Financial Services since November 1989. Mr. Parke is a director of GE Capital, FGIC Corporation, Polaris Holding Co., and Financial Guaranty Insurance Co. Gary C. Wendt, age 56, has been a director of the Company since December 17, 1996. Mr. Wendt has been Chairman and Chief Executive Officer of GE Capital since 1991. Mr. Wendt is a director of GE Capital, General Electric Capital Services, Inc. and FGIC Corporation. Edward D. Stewart, age 55, has been a director of the Company since December 10, 1996. Mr. Stewart has been an Executive Vice President of GE Capital since January 1, 1992. Mr. Stewart serves on the board of directors of GE Capital. Executive Officers Information with respect to the executive officers of the Company is included in Part I of this Form 10-K. 65 Item 10. Directors and Executive Officers of the Registrant (continued) Section 16(a) Reporting Section 16(a) of the Securities Exchange Act of 1934, and the rules promulgated thereunder, requires the Company's executive officers, directors and holders of 10% or more of the Common Stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. GE Capital did not timely file with the SEC Forms 4, Statement of Changes in Beneficial Ownership, with respect to the purchase by GE Capital of Series C preferred stock of the Company on May 29, 1997. The Form 4 with respect to such transaction was due no later than June 10, 1997. In addition, Mr. Pohlmann did not timely file with the SEC such a Form 4 with respect to his agreement to serve as trustee of the Family Trust, and consequent acquisition of beneficial ownership of the shares of Common Stock held in the Family Trust, on or about July 18, 1997. The Form 4 with respect to such transaction was due no later than August 10, 1997. In addition, neither Mr. Parke nor Mr. Cato timely filed with the SEC a Form 3, Initial Statement of Beneficial Ownership of Securities, with respect to their appointments to the Board of Directors of the Company in May 1997 and August 1997, respectively. Such Forms 3 with respect to the appointments of Messrs. Parke and Cato were due no later than June 10, 1997 and September 10, 1997, respectively. Item 11. Executive Compensation The Company (Montgomery Ward Holding Corp.) had no employees and paid no compensation in 1997. The following information details compensation accrued by Wards and its subsidiaries to executive officers of the Company. 66 Item 11. Executive Compensation (continued) Summary Compensation Table The following table sets forth summary compensation information for (i) Mr. Goddu, who was the only person to serve as Chief Executive Officer during the Company's 1997 fiscal year, (ii) the four most highly compensated other executive officers who were serving as executive officers at the end of the Company's 1997 fiscal year and (iii) Burnett W. Donoho, who would have been among such four most highly compensated other executive officers but for the termination of his employment in December 1997 (collectively, the "Named Executive Officers").
Annual Compensation Long-Term Compensation --------------------------------------------------- ------------------------------------- Other Securities All Annual Underlying LTIP Other Name and Salary Bonus Compensation Options Payout Compensation Principal Position Year ($) ($) ($)/1/ (#) ($) ($)/2/ - ------------------ ---- ------- ------- ------------ ---------- ------ ------------ Roger V. Goddu 1997 985,215 350,000 10,296 2,596,219 - 2,849,330 Chairman and Chief Executive Officer/3/ Thomas G. Grimes 1997 417,262 200,000 6,181 500,000 - 84,396 Executive Vice President - Home/3/ Alan E. DiGangi 1997 425,000 125,000 18,673 - - 2,352 Executive Vice 1996 390,697 - 3,345 - - 424,371 President - Electric 1995 244,859 50,000 3,589 15,000 - 2,594 Avenue and Auto Express Thomas J. Austin 1997 247,312 300,000 3,543 - - 109,749 Executive Vice President - Mens and Childrens Apparel and Shoes/3/ Louis J. Caporale 1997 238,710 300,000 1,168 - - 108,808 Executive Vice President - Women's Apparel and Fine Jewelry/3/ Burnett W. Donoho 1997 718,750 - 3,811 1,000,000 - 2,438,727 Vice Chairman/4/
/1/ No named executive officer received perquisites exceeding $50,000 or 10% of salary and bonus. /2/ Represents company matching contributions to the Savings and Profit Sharing Plan and company payments of premiums on group term life insurance policies. Hiring bonuses of $50,000 were separately paid to Messrs. Grimes, Austin, and Caporale in 1997. Relocation costs for Messrs. Goddu, Grimes, Austin, Caporale and Donoho for 1997 were paid in the amounts of $533,782, $34,396, $59,749, $58,808 and $98,085, respectively. Mr. Goddu was paid $2,221,948 as compensation for benefits accrued with Mr. Goddu's prior employer which were lost by Mr. Goddu in connection with the termination of his employment with such former employer and $93,600 representing an amount equivalent to dividends on non-vested GE restricted stock shares. For 1996, amounts paid to Mr. DiGangi include $281,250 under a retention plan and $140,025 under a security plan due to the triggering of a change of control event. See "Certain Arrangements." Mr. Donoho was paid $2,340,192 in connection with his termination of employment with Wards. $1,909,910 of these amounts were paid by GE Capital. See "Certain Arrangements." /3/ Messrs. Goddu and Grimes joined Wards in January 1997. Messrs. Austin and Caporale joined Wards in May 1997. /4/ Mr. Donoho joined Wards in January 1997 and his employment with Wards terminated in December 1997. 67 Item 11. Executive Compensation (continued) Option Grants and Exercises The following tables set forth summaries of the terms of stock options granted to Messrs. Goddu, Grimes, and Donoho during the Company's 1997 fiscal year and the value of unexercised options held by Messrs. Goddu, Grimes, and DiGangi as of January 3, 1998, using assumed annual rates of stock price appreciation (without taking into account any impact on the value per share of Common Stock of events or conditions since the applicable date of grant, including the bankruptcy filing). None of the Named Executive Officers exercised any stock options during the 1997 fiscal year. No stock appreciation rights were granted to or exercised by any of the Named Executive Officers during the 1997 fiscal year. Option Grants in Last Fiscal Year
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term ------------------------------------------------------ --------------------------- Percentage No. of of Total Securities Options Underlying Granted to Exercise Options Associates or Base Granted in Fiscal Price Expiration Name (#) Year ($/Sh) Date 5% ($) 10% ($) - ----------------- ---------- ---------- -------- ---------- ---------- ---------- Roger V. Goddu 2,596,219 55.0% $7.32 12/20/06 11,951,717 30,287,997 Thomas G. Grimes 500,000 10.6% $7.32 1/28/07 2,301,754 5,833,097 Burnett W. Donoho 1,000,000 21.2% $7.32 1/31/07 N/A/1/ N/A/1/
/1/ Amounts were not computed as Mr. Donoho's employment with Wards terminated in December 1997. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options at FY-End (#) at FY-End/1/ ------------------------------ ------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---------------- ----------- ------------- ----------- ------------- Roger V. Goddu 649,055 1,947,164 $0 $0 Thomas G. Grimes - 500,000 $0 $0 Alan E. DiGangi 29,300 - $0 $0
/1/ The stock was deemed to have value below the exercise price as the Company has filed for reorganization under Chapter 11 of the Bankruptcy Code. 68 Item 11. Executive Compensation (continued) Long-Term Incentive Plan Awards Prior to the bankruptcy filing, senior executives of Wards, generally Senior Vice Presidents and above, were eligible to participate in the Executive Long-Term Incentive Plan. The Executive Long-Term Incentive Plan generally consisted of three-year cycles that could be initiated annually. If specific objectives for the pre-tax earnings and return on equity for the Company and its subsidiaries established by the Incentive Compensation Committee were achieved for any designated cycle, cash was awarded based upon a target Executive Long-Term Incentive Plan payout, which was a percentage (determined by the Incentive Compensation Committee) of the base salary of each participant, but in no event would the target Executive Long-Term Incentive Plan payout for any participant exceed $2,000,000 for any cycle. The plan has not been operational subsequent to the bankruptcy filing and no future benefits for outstanding cycles will be paid. Executive Emergence Bonus Plan Certain senior executives of Wards participate in the Montgomery Ward Special Emergence Bonus Plan ("Emergence Bonus Plan"). The Emergence Bonus Plan provides for a lump sum bonus payment within 30 days of court approval of a plan of reorganization. To be eligible for the full bonus, the executive must be actively employed on the date of the court approval of the plan of reorganization or the executive must have separated from employment after a Change of Control (as defined in the Severance Plan described below) but within six months of approval of the plan of reorganization. If the plan of reorganization is approved as of April 1, 1999, the bonus amount for Messrs. Goddu, Grimes, DiGangi, Austin and Caporale would be $1,250,000, $562,500, $531,250, $500,000 and $500,000, respectively. If the plan of reorganization is approved after April 1, 1999, but prior to or as of October 1, 1999, the bonus amount for Messrs. Goddu, Grimes, DiGangi, Austin and Caporale would be $1,000,000, $450,000, $425,000, $400,000 and $400,000, respectively. If the plan of reorganization is approved after October 1, 1999, the bonus amount for Messrs. Goddu, Grimes, DiGangi, Austin and Caporale would be $500,000, $225,500, $212,500, $200,000 and $200,000, respectively. Pension Plan Executive officers of Wards, in addition to many other associates, participate in a pension plan (the "Pension Plan"), which provides benefits defined by formulae based primarily on a participant's compensation, offset, with respect to periods prior to July 1, 1997, as provided by benefits provided by the participant's accounts in the Savings Plan ("Savings Plan"), in which executive officers of Wards, in addition to many other associates, participate. From 1989 through 1993, no more than $200,000, as adjusted annually under Section 401(a)(17) of the Internal Revenue Code of 1986, as amended (the "Code"), of any participant's compensation was considered for any purpose, including for purposes of the formulae, under the Pension Plan. Beginning in 1994, no more than $150,000, as adjusted, ($160,000 in 1997) of any participant's compensation is considered for any purpose, including for purposes of the formulae, under the Pension Plan. The monthly pension benefit to which current associates are entitled under the Pension Plan at the normal retirement age of 65 is generally based on different benefit formulae that are applicable to different years of service. The formula for service on and after July 1, 1997 is a credit of $.70 to $1.35 (depending on age) for each $1 contributed as a basic contribution (3% of compensation) to the Savings Plan. Such Pension Plan accounts will be credited with interest at a rate based on the 30-year rate earned by government securities. The formula for service after 1988 and before July 1, 1997 applies to credited service, as defined in the Pension Plan, earned during such period while making contributions to the Savings Plan and is based on "career earnings". 69 Item 11. Executive Compensation (continued) Pension Plan (continued) A participant's annual benefit under such 1988 - 1997 formula is 1.5% of the participant's eligible pay for each year of credited service after 1988 and before July 1, 1997. A participant's benefit determined under the Pension Plan based on the formulae through June 30, 1997 is reduced by an amount equivalent to an annuity which could be purchased with the participant's Basic Contribution and Transferred Contribution accounts in the Savings Plan as of June 30, 1997. The Pension Plan formulae benefit is determined by adding the benefit under the formula in effect commencing July 1, 1997 to the participant's accrued benefit under the Pension Plan as of June 30, 1997, as determined under the formulae in effect prior to July 1, 1997. The following table sets forth the estimated annual benefits (calculated on a straight life annuity basis) upon retirement at age 65 (for executives who have not retired or resigned) under the Pension Plan, which is the only defined benefit plan under which associates of Wards can currently accrue benefits, to the Named Executive Officers (calculated on the basis of estimated years of service at retirement age; levels of compensation paid in calendar year 1997 assuming 6% annual increases for executives who have not retired or resigned and the Named Executive Officers make basic contributions (3% of compensation) to the Savings Plan; but with regard to Code limitations on compensation and benefits and without regard to any reduction for benefits under the Savings Plan):
Estimated Annual Pension at Name of Participant Retirement - ------------------------------------------ ---------- Roger V. Goddu $23,578 Thomas G. Grimes 4,917 Alan E. DiGangi 50,353 Thomas J. Austin 19,527 Louis J. Caporale 33,640 Burnett W. Donoho N/A /1/
1 Mr. Donoho has resigned as an officer of Wards and will receive no payments under the Pension Plan. Certain Arrangements In the course of recruiting new executives, promoting existing associates to executive positions, increasing the responsibilities of existing executives and retaining executives, Wards frequently enters into employment agreements which set forth the general terms of the compensation arrangements for such executive. Such agreements have, in the past, typically set forth, among other things, a recipient's base salary, the target annual bonus under the Senior Executive Performance Management Program ("PMP"), the maximum percentage of the target bonus under the PMP that can be earned, bonus guarantees, if any, relocation payments and the number of stock options, if any, that are expected to be initially granted to the executive in his or her new position. Of the executive officers named in the Summary Compensation Table, Messrs. Grimes, DiGangi, Austin and Caporale have agreements of this type, each of which were entered into in connection with the commencement of the executive's employment with Wards (other than the agreement with Mr. DiGangi, which was entered into connection with his retention as an executive officer of Wards). 70 Item 11. Executive Compensation (continued) Certain Arrangements (continued) The agreements with Messrs. Grimes, DiGangi, Austin and Caporale provide for, respectively, (i) annual base salary of $450,000, $425,000, $400,000 and $400,000; and (ii) PMP target bonuses of $200,000, $125,000, $150,000 and $150,000, in each case guaranteed at 100% for 1997 (the target bonuses for Messrs. Austin and Caporale were also guaranteed at 100% for 1998 and 1999 and were prepaid for 1997 and 1998) and in each case with opportunities to earn up to 150% of such target bonuses. The agreement with Mr. Grimes states that he would receive options to purchase 500,000 Class A Shares at $7.32 per share, with such options vesting 40% on February 1, 1998 and 30% on each of February 1, 1999 and 2000. On June 3, 1997, Mr. Grimes was granted all of such options. The agreements with Messrs. Grimes, Austin and Caporale provided for hiring bonuses of $50,000 each, which were paid in 1997. The agreements provide that Messrs. Austin and Caporale will also participate in a special bonus plan to offset an equity loss relating to their previous employer and each will receive a bonus with maximum payment of $500,000, which will vest as follows: $200,000 on May 1, 1998 and $150,000 on each of May 1, 1999 and 2000. This bonus is to be paid on May 1, 2000. If the executive's employment is terminated prior to May 1, 2000, only the vested portion of the bonus will be paid. The Company agreed to reimburse Messrs. Grimes, Austin and Caporale for certain relocation costs in connection with their moves. The Company also agreed that Messrs. Austin and Caporale would each be recommended for a stock option of 300,000 shares of Montgomery Ward Holding Stock vesting in equal installments on May 1, 1998, 1999 and 2000. No stock options were issued to Messrs. Austin or Caporale pursuant to such provision due to the bankruptcy filing. In the case of a separation of employment initiated by the Company for a reason other than "Cause," the agreements provide that Mr. Grimes will receive his base salary for twenty- four months if terminated prior to February 1, 2000, and the continuation of the vesting of stock and stock options through February 1, 2000; and Messrs. Austin and Caporale will receive their base salaries through May 1, 2000 (however, not less than twelve months) and the continuation of the vesting of stock and stock options through May 1, 2000. In addition, Mr. Grimes has the right to elect to leave Wards upon 30 days notice within 30 days of a change of control where the Company is sold to a third party. Mr. Grimes in such situation would receive one years base salary in a lump sum. In February 1997, GE granted options to Messrs. Grimes and Donoho to purchase 20,000 and 30,000 shares, respectively, of GE common stock, with an exercise price of $105, which options vest 50% on September 7, 1999 and 50% on September 7, 2001. Mr. Donoho's employment with Wards terminated in December 1997 and therefore no portion of the option ever became exercisable. On April 28, 1997, after the date of the option grants, the shares of GE common stock split 2-for-1. In June 1997, GE also granted options to each of Messrs. Austin and Caporale to purchase 40,000 shares, respectively, of GE common stock with an exercise price of $65.3125, which options vest 50% on September 27, 1999 and 50% on September 27, 2001. GE Capital has agreed to pay Messrs. Grimes, Austin and Caporale their base salary for the first three years of their 1997 employment agreements described above and the guaranteed bonus under such agreements if Wards fails to pay such amounts for any reason other than the executives' termination of employment either voluntarily by the executives or for cause by Wards. Under the same situation, GE also agreed to pay amounts to Messrs. Austin and Caporale under the special bonus plan designed to offset an equity loss relating to a prior employer. 71 Item 11. Executive Compensation (continued) Certain Arrangements (continued) Mr. Goddu joined the Company as Chief Executive Officer and as Chairman and Chief Executive Officer of Wards effective January 6, 1997. In connection with his employment with Wards, Mr. Goddu, the Company and Wards entered into an Employment Agreement dated as of December 20, 1996 (the "Goddu Agreement"). The Goddu Agreement expires on December 31, 2001. During the term of the Goddu Agreement (unless his employment is earlier terminated), Mr. Goddu is to serve as Chairman of the Board and Chief Executive Officer of Wards and as Chief Executive Officer of the Company. Pursuant to the Goddu Agreement, Mr. Goddu is to receive a base salary of $1,000,000 per annum, increasing at a rate of $50,000 per year or such larger increase as the Board of Directors may determine. Mr. Goddu waived his annual increase for 1998 and has elected not to accept contractual annual increases until the Company successfully emerges from Chapter 11. In addition, the Goddu Agreement provides that Mr. Goddu is eligible to receive an annual cash bonus of up to 50% of his base salary, based on performance targets to be established from time to time by the Board of Directors or a committee thereof. For each of 1997, 1998 and 1999, Mr. Goddu's bonus is guaranteed to be at least $350,000 without regard to such targets. The bonus may be increased by up to an additional 50% of base salary based on the achievement of exceptional performance against the targets. The Goddu Agreement also provides that Mr. Goddu will be provided with a supplemental pension benefit on the same terms as his arrangement with his prior employer with an actuarial present value at age 60 of $3.9 million. The Company also agreed to pay Mr. Goddu $2,221,948 as compensation for benefits accrued with Mr. Goddu's prior employer which were lost by Mr. Goddu in connection with the termination of his employment with such former employer. In the Goddu Agreement, the Company agreed that, subject to stockholder approvals which were obtained in May 1997, Mr. Goddu would be granted an option to purchase Series 3 Shares representing 5% of the outstanding shares of Common Stock (on a fully-diluted basis). For purposes of this calculation, the number of Series 3 Shares underlying such options is to be adjusted upwards from time to time until the last day of the Company's 1998 fiscal year to give effect to grants of stock options after December 20, 1996 to management employees of Wards covering up to 10% of the outstanding shares of Common Stock on a fully-diluted basis. Pursuant to the Goddu Agreement, Mr. Goddu's options are to have an exercise price of $7.32 per share and become exercisable on the basis of cumulative installments of 25% of the underlying Series 3 Shares on the last day of each of the Company's 1997, 1998, 1999 and 2000 fiscal years, provided that no portion of the option shall become exercisable unless, at the applicable date of determination, Mr. Goddu is, and has been at all times since the grant of the option, employed by Wards. The exercisable portion of the option shall remain exercisable until the earliest of (i) three (3) months following the date of cessation of Mr. Goddu's employment with Wards, which occurs due to his voluntary termination or the termination of his employment by Wards for cause; (ii) the third anniversary of the date of cessation of Mr. Goddu's employment with Wards for any other reason; or (iii) the tenth anniversary of the date of grant of the option. Mr. Goddu's option was initially granted in May 1997 with respect to 2,596,219 Series 3 Shares, subject to upward adjustment as described above. The Goddu Agreement also provides that, subject to certain limitations, the Company has certain rights to purchase the shares received by Mr. Goddu upon exercise of his options and that, subject to certain limitations, Mr. Goddu has certain rights to require the Company to purchase up to an aggregate amount of $75 million purchase price of such shares from and after December 31, 1997. The Goddu Agreement also provides that Wards would provide Mr. Goddu a loan in the principal amount of $2,000,000, payable in five years, and bearing interest at LIBOR plus 25 basis points payable in arrears on each January 8 during the loan term. The Company provided such loan to Mr. Goddu on January 8, 1997, and Mr. Goddu executed a Promissory Note (the "Goddu Note") with respect thereto on that date. As of March 7, 1998, the outstanding balance of the loan including interest accrued thereon was $2,019,807. 72 Item 11. Executive Compensation (continued) Certain Arrangements (continued) The Goddu Agreement provides that in the event his employment is terminated due to his death or disability, he (or his estate, as applicable) would be entitled to unpaid base salary through the month in which his death or disability occurs, an amount equal to 50% of his base salary in effect on the date of his death or disability (in lieu of any bonus), and a restatement of the Goddu Note to provide a maturity date of the third anniversary of Mr. Goddu's death or disability. In the event his employment is terminated by Wards for cause (as defined in the Goddu Agreement), he would be entitled to unpaid base salary through the month in which the termination of his employment occurs, and amounts outstanding under the Goddu Note will become immediately due and payable 90 days after such termination. In the event that his employment is terminated without cause or through a constructive termination, as provided in the Goddu Agreement, he would be entitled to a prorated bonus through the date of termination of employment, continuation of his then-current base salary for a period of 24 months and, in lieu of further bonus, an amount equal to $700,000 (which salary continuation and amount may be paid in a lump sum) and cancellation of Mr. Goddu's obligations under the Goddu Note. In the event his employment is terminated by the expiration of the Goddu Agreement, Mr. Goddu would be entitled to continuation of his then-current base salary for a period of 24 months and, in lieu of further bonus, an amount equal to $700,000 (which salary continuation and amount may be paid in a lump sum). Also in connection with Mr. Goddu's employment with Wards, Mr. Goddu and GE Capital entered into a letter agreement dated as of December 20, 1996 (the "Goddu Letter Agreement"). The Goddu Letter Agreement provides that on or before January 6, 1997, General Electric Company ("GE"), the indirect parent of GE Capital, would grant to Mr. Goddu 60,000 shares of common stock of GE, with restrictions lapsing on 12,000 of such shares on each December 31, beginning on December 31, 1997, and would grant to Mr. Goddu options to purchase 60,000 shares of common stock of GE with an exercise price equal to the NYSE closing price of such shares on the date of grant (which was $102.25 per share), which options will vest in cumulative annual installments of 20,000 underlying shares on January 6, 1999, January 6, 2001 and January 6, 2003. Such shares and options were granted to Mr. Goddu on December 20, 1996. The Goddu Letter Agreement also provides that on an annual basis beginning in 1997, GE will grant to Mr. Goddu, at such time as similar grants are made to its employees, options to purchase up to 25,000 shares of common stock of GE, up to an aggregate of 125,000 such shares, with exercise prices equal to the NYSE closing price of such shares on the applicable date of grant, and which options will vest 50% three years from the date of grant and 50% five years from the date of grant. In accordance with the terms of his letter agreement, options were granted to Mr. Goddu on September 12,1997. Such options will vest 50% on September 12, 2000 and 50% on September 12, 2002. On April 28, 1997, after the date of the Goddu Letter Agreement, the shares of GE Common Stock split 2-for-1. In addition, in the Goddu Letter Agreement, GE Capital granted to Mr. Goddu an option to purchase from GE Capital that number of shares of Common Stock which equals 5% of the issued and outstanding shares of Common Stock on a fully-diluted basis. For purposes of this calculation, the number of shares of Common Stock underlying such options is to be adjusted upwards from time to time until the last day of the Company's 1998 fiscal year to give effect to the future grant of stock options to management employees of Wards covering up to 10% of the outstanding shares of Common Stock on a fully- diluted basis. Pursuant to the Goddu Letter Agreement, such options are to have an exercise price of $7.32 per share (the Fair Market Value per Share of a Class A Share, as determined pursuant to the Stockholders' Agreement) and become exercisable on the basis of cumulative installments of 25% of the underlying shares on December 31 of each year, beginning on December 31, 1997, provided that no portion of the option shall become exercisable unless, at the applicable date of determination, Mr. Goddu is, and has been at all times since the grant of the option, employed by Wards. 73 Item 11. Executive Compensation (continued) Certain Arrangements (continued) The Goddu Letter Agreement also provides that none of such options shall be exercisable unless the fair market value of the consolidated common equity of the Company (determined pursuant to the Stockholders' Agreement) is greater than $1 billion at any time during the period of Mr. Goddu's employment and for a period of twelve months thereafter. The exercisable portion of the option shall remain exercisable until the last day of the third month following the date of termination of Mr. Goddu's employment with Montgomery Ward. The Goddu Letter Agreement also provides that, subject to certain limitations, GE Capital has certain rights to purchase the shares received by Mr. Goddu upon exercise of such options and that, subject to certain limitations, Mr. Goddu has certain rights to require GE Capital to purchase up to an aggregate amount of $75 million purchase price of such shares from and after December 31, 1997. The Goddu Letter Agreement also provides that, to the extent that the Company cannot purchase the shares received by Mr. Goddu upon exercise of his options granted by the Company pursuant to limitations set forth in the Stockholders' Agreement, GE Capital would purchase such shares, up to an aggregate amount of $75 million purchase price of such shares. Mr. Donoho joined the Company as Chief Operating Officer and as Vice Chairman and Chief Operating Officer of Wards effective January 31, 1997. In connection with his employment, Mr. Donoho, the Company and Wards entered into an Employment Agreement dated as of January 31, 1997 ("Donoho Agreement"). The term of the Donoho Agreement was to expire on January 31, 2001. Pursuant to the Donoho Agreement, Mr. Donoho was to receive a base salary of $750,000 per annum and be eligible to receive an annual cash bonus of up to 40% of his base salary. For each of 1997 and 1998, Mr. Donoho's bonus was guaranteed to be at least $250,000. In addition, the Donoho Agreement provided Mr. Donoho with a retention payment of $100,000 for every full six months of active employment up to a maximum of $500,000 total, all or any earned part of which would be paid on December 31, 1999. Under the Donoho Agreement, if Mr. Donoho was terminated without cause or in the event of a constructive termination, Mr. Donoho would be entitled to, among other things, 24 months of base salary and the greater of two years bonus or $500,000 (such payments to be discounted if paid in a lump sum) as well as earned benefits and for two years, outplacement services, reimbursement of COBRA health care premiums and personal, financial and legal counseling services up to $10,000. The Donoho Agreement provided, in part, that the Company would grant to Mr. Donoho an option to purchase 1,000,000 Series 3 Shares. Such options had an exercise price of $7.32 per share and were exercisable based on the following schedule -- 400,000 Series 3 Shares on February 1, 1998; 300,000 Series 3 Shares on February 1, 1999; and 300,000 Series 3 Shares on February 1, 2000, provided that no portion of the option would become exercisable unless Mr. Donoho is, on the applicable date of determination, and has been at all times since the grant of the option, employed by Wards. Mr. Donoho was granted such options in May 1997. Mr. Donoho's employment with Wards terminated in December 1997 and therefore no portion of the option ever became exercisable. In connection with his termination of employment with Wards and in exchange for a general release and waiver of the Company, Wards and its affiliates (including with respect to his employment agreement) as well as noncompete and nonsolicitation provision effective through January 31, 2000, Mr. Donoho received a lump sum payment of $1,562,500 representing base salary through January 31, 2000, a lump sum payment of $500,000 representing guaranteed bonuses for 1997 and 1998, a payment of $200,000 representing the retention plan payment through January 31, 1998, continuation of executive health care coverage at the associate rate through January 31, 2000, earned vacation in the amount of $57,692 and $20,000 in lieu of outplacement services. $1,909,910 of these amounts were paid by GE Capital. 74 Item 11. Executive Compensation (continued) Certain Arrangements (continued) The Wards Executive Committee Severance Plan ("Severance Plan") provides that if the employment of certain senior executives is terminated other than for Cause (as defined in the Severance Plan), the executive will receive a lump sum payment equal to the greater of the executive's base salary for the remainder of the executive's employment agreement or the executive's base salary for 24 months. In addition, the executive will receive executive outplacement services and continue to participate in executive benefit plans. If such termination occurs within three years of a Change of Control (as defined in the Severance Plan), the lump sum payment is increased to three years base salary plus three times the executives' target bonus. Amounts otherwise payable under the Severance Plan are reduced dollar for dollar for any additional amounts representing base salary or bonus payable under the executive's employment contract or other severance plan. Certain senior executives of Wards were participants in each of a retention plan and a security plan. The retention plan provided that each participant would receive a retention award if such participant remained employed by Wards through March 1, 1997 or was terminated for any reason other than voluntary resignation or cause. In addition, in the event of a change of control of Wards prior to such date, the retention award would be payable at such time. The security plan, provided that in the event of a sale or change of control of Wards, each participant who was, at such time, actively employed by Wards or who was terminated for reasons other than voluntary resignation or cause within one year of such date would receive: (i) a bonus payable at the time of such date or change of control; (ii) an award supplement, at the discretion of the Board of Directors based on the recommendation of the Chief Executive Officer, with respect to the participant's contribution and cooperation in the transaction; (iii) enhanced severance of an additional twelve months base salary above the amount to which the participant would have been entitled under the severance plan described above if, during the first two years following the sale or change of control, the participant is either (x) terminated for any reason other than voluntary termination or cause or (y) demoted without the participant's prior written approval; (iv) continuation of benefits for the entire severance payment period; (v) out placement services; and (vi) certain tax preparation and financial planning services. The bonuses payable upon a change of control under the retention plan and the security plan were paid by Wards in January 1997 in connection with certain amendments to the Stockholders' Agreement which changed the makeup of the Board of Directors of the Company. The participants in the retention plan and the security plan consisted of eight (8) senior officers of the Company, including Mr. DiGangi, whose award under the retention plan was $281,250 and whose bonus under the security plan was $140,625. Director Compensation Arrangements Prior to the filing by the Company and a number of its direct and indirect subsidiaries (including Wards) of petitions under Chapter 11 of the U.S. Bankruptcy Code in July 1997 (the "Bankruptcy Filing"), Messrs. Cathcart and Myron Lieberman, a former director, were paid director fees of $6,000 per fiscal quarter, plus $1,500 for each meeting such director attended of the Board of Directors of the Company and Wards, plus $1,500 for each meeting such director attended of a committee of the Company and Wards of which such director was a member, provided that for meetings of the Board of Directors of the Company held jointly with or immediately prior to or following meetings of the Board of Directors of Wards, the aggregate fees for such meetings were $1,500, and provided further that for meetings of committees of the Company held jointly with or immediately prior to or following meetings of committees of Wards the aggregate fees for such meetings were $1,500. Such directors fees were converted into Series 1 Shares pursuant to the Directors Fee Plan described below. 75 Item 11. Executive Compensation (continued) Director Compensation Arrangements (continued) The Directors Plan (the "Directors Fee Plan") permits directors (as designated by the Directors Fee Plan Committee, as defined below) to receive Series 1 and Series 2 Shares. The plan provides for the establishment of a committee (the "Directors Fee Plan Committee") to (i) administer the Directors Fee Plan, (ii) estimate director fees payable to directors for the fiscal year and (iii) permit directors to elect to receive Class A Shares with a value determined by the Directors Fee Plan Committee not to exceed the estimated fees. Under the Directors Fee Plan, participating directors are automatically granted rights ("Conversion Rights") after the end of each fiscal quarter of the Company in a number determined by dividing the director fees for the fiscal quarter by the fair market value per share of the Company's Common Stock. The number of Class A Shares acquired pursuant to accelerated Conversion Rights (as described below) reduces the number of automatically granted Conversion Rights. The acquisition of Class A Shares by directors pursuant to Conversion Rights does not require any direct payment by a director, but the director fees which otherwise would be payable to the director are reduced by such fair market value of the Class A Shares acquired. If directors acquire Class A Shares pursuant to Conversion Rights, the Company will pay the directors an amount sufficient to pay all applicable federal and state taxes payable by the directors with respect to the Class A Shares acquired pursuant to Conversion Rights and the amount attributable to this payment. The Directors Fee Plan Committee decides based on the past service of the director whether there should be an acceleration of the grant of Conversion Rights based on an estimate of director fees for the fiscal year. If the grant of Conversion Rights is accelerated by the Directors Fee Plan Committee, the Directors Fee Plan Committee determines the number of Class A Shares to which the Conversion Rights relate, the value of the Class A Shares, the duration of the Conversion Rights and the limitations on the Class A Shares acquired pursuant to the Conversion Rights. It is currently anticipated that any Class A Shares acquired pursuant to accelerated Conversion Rights would be forfeited to the extent a director does not earn the anticipated director fees for the fiscal year. Directors of the Company or Wards other than members of the Directors Fee Plan Committee are eligible to participate in the Directors Fee Plan if designated by the Directors Fee Plan Committee. The Directors Fee Plan Committee is comprised of not fewer than two directors who are appointed by the Board of Directors and who serve at the pleasure of the Board of Directors. The current members of the Directors Fee Plan Committee are Messrs. Brennan and Stewart. Of the seven eligible directors, the Directors Fee Plan Committee has designated only Mr. Cathcart as a participant in the Directors Fee Plan. Pursuant to an irrevocable election made in 1992, Mr. Cathcart elected to receive all of the fees earned for service as a director of the Company and of Wards in Series 1 Shares. Through the date of the bankruptcy filing, Mr. Cathcart had acquired 8,987 Series 1 Shares and Mr. Lieberman, a former director, had acquired 10,235 Series 1 Shares, pursuant to Conversion Rights under the Directors Fee Plan. No shares have been distributed under the Directors Fee Plan since the bankruptcy filing. The Board of Directors may amend or terminate the Directors Fee Plan, except that no such action by the Board of Directors may change the terms and conditions of any Conversion Rights previously granted in a manner adverse to the holder of the Conversion Right without the consent of such holder. The Directors Fee Plan Committee has the right to make adjustments with respect to Conversion Rights if Wards or the Company dissolves or is liquidated or upon the occurrence of a public offering of shares of the Company. 76 Item 11. Executive Compensation (continued) Director Compensation Arrangements (continued) In connection with the termination of the employment of Bernard F. Brennan as Chief Executive Officer of the Company and as Chairman and Chief Executive Officer of Wards, Mr. Brennan, the Company, Montgomery Ward and GE Capital entered into a Relationship Agreement dated as of December 10, 1996 (the "Relationship Agreement"). The Relationship Agreement provided the terms of Mr. Brennan's separation from the Company and Wards, including with respect to his continued participation as Chairman of the Company and a director of each of the Company and Wards. Pursuant to the Relationship Agreement, the Company loaned to Mr. Brennan $12.5 million in cash, without interest, for which the Company's sole recourse is the shares of Common Stock owned by Mr. Brennan and his permitted transferees. In the Relationship Agreement, Mr. Brennan agreed that within five business days after he or any permitted transferee sells any such shares or receives any proceeds with respect to any such shares (other than as a result of certain charity loans), such proceeds would be applied toward any outstanding balance of such loan, provided that if proceeds are received pursuant to the "put" provisions of the Stockholders' Agreement, only 75% of such proceeds need be so applied. The Relationship Agreement also provides that amounts outstanding under the loan, if not paid sooner, shall be due and payable on the last to occur of the deaths of Mr. Brennan, his wife and his children. The Relationship Agreement provides that Mr. Brennan is engaged as a consultant to the Company and Wards for the lesser of five years or until the date on which he and his permitted transferees no longer own any shares of Common Stock. The Company and Wards agreed to make annual cash consulting payments totaling $1.5 million to Mr. Brennan in installments not less frequently than semi-monthly throughout the consulting period. During the Company's 1997 fiscal year, the Company and Wards paid $794,057 to Mr. Brennan in such consulting fees. Wards ceased payment of the consulting fees as of the Bankruptcy date. Also in the Relationship Agreement, the Company and Wards agreed to provide to Mr. Brennan certain other benefits. During the Company's 1997 fiscal year, the Company and Wards paid $9,424 in such benefits. Mr. Brennan was also paid director fees of $12,935. Also in connection with his resignation, Mr. Brennan, the Company and GE Capital entered into an Amendment Agreement dated as of December 10, 1996 with respect to certain amendments to the Stockholders' Agreement and the Company's By-laws (the "Amendment Agreement"). Pursuant to the Amendment Agreement, Mr. Brennan's right to require the Company to purchase his shares of Common Stock will become effective on January 1, 1999. The Amendment Agreement also amended the Stockholders' Agreement to provide the director designation rights described herein and the supermajority requirements described herein. See Item 10. Finally, the Amendment Agreement provides Mr. Brennan and his affiliates with certain rights to participate in transfers of shares of Common Stock by GE Capital, provides for Mr. Brennan's and his affiliates' participation in certain sales of the stock or assets of the Company, and provides GE Capital, Mr. Brennan and their respective affiliates with a right of first refusal on new securities issued by the Company. Compensation Committee Interlocks And Insider Participation Mr. Brennan, Chairman of the Company and a former executive officer of the Company, serves as a member of the Compensation Committee of Wards' Board of Directors. Robert A. Kasenter, Executive Vice President of the Company and Executive Vice President, Human Resources of Wards, serves as Secretary of the Compensation Committee of Wards' Board of Directors, although Mr. Kasenter is not a director of the Company or of Wards. 77 Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth the beneficial ownership, as of March 16, 1998, 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 of the Named Executive Officers (none of whom except the individuals identified beneficially owns any shares of the Company's equity securities), (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) 16,122,247 88.0% Edwin G. Pohlmann (b) 2,892,500 15.8% Tommy T. Cato (c) 227,875 1.2% Silas S. Cathcart (c) 18,987 0.1% Roger V. Goddu (d) 649,055 3.4% Thomas G. Grimes (e) 200,000 1.1% Alan E. DiGangi (c) (f) 36,550 0.2% Tamara Brennan (g) 2,200,000 12.0% All directors and executive officers as a group (20 persons) (h) 15,109,817 77.1%
(a) Comprised of 13,025,750 Class A Shares (71.1% of the Class A Shares and 30.1% of the Company's common stock ("Common Stock") outstanding as of March 16, 1998) owned of record by Mr. Brennan and with respect to which Mr. Brennan has sole investment and voting power, and 3,096,497 Class A Shares (16.9% of the Class A Shares and 7.1% of the Common Stock outstanding as of March 16, 1998) 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 (12.0% of the Class A Shares and 5.1% of the Common Stock outstanding as of March 16, 1998) which are owned by Edwin G. Pohlmann, 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 (g) below. Mr. Brennan disclaims beneficial ownership of such 2,200,000 Class A Shares. Mr. Brennan's business address is 5000 Sawgrass Village Circle, Suite Five, Ponte Vedra, FL 32082. (b) Does not include 200,000 Class A Shares held by trusts for the benefit of members of Mr. Pohlmann's family, with respect to which Mr. Pohlmann has no voting or investment power. Includes 2,200,000 Class A Shares with respect to which Mr. Pohlmann has sole voting and investment power as trustee of the Family Trust. Such 2,200,000 Class A Shares are not deposited in the 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. Pohlmann has beneficial ownership are represented by Voting Trust Certificates and such shares are held in a voting trust (the "Voting Trust") as to which Mr. Brennan, as voting trustee, has sole voting power. Such voting trust will expire by its terms on June 21, 1998. Mr. Pohlmann's business address is 9300 Sante Fe Springs Road, Sante Fe Springs, CA 90670. (c) Represents ownership of Voting Trust Certificates with respect to shares held in the Voting Trust as to which Mr. Brennan, as voting trustee, has sole voting power and the persons indicated have sole investment power. Such voting trust will expire by its terms on June 21, 1998. 78 Item 12. Security Ownership of Certain Beneficial Owners and Management (continued) (d) Includes 649,055 Class A Shares which may be acquired by Mr. Goddu pursuant to options exercisable on March 16, 1998. Does not include 649,055 Class B Shares which may be acquired by Mr. Goddu from GE Capital pursuant to options exercisable on December 31, 1997, as described herein. See Item 11 above. Mr. Goddu's business address is Montgomery Ward Plaza, Chicago, IL 60671. (e) Represents 200,000 Class A Shares which may be acquired by Mr. Grimes pursuant to options currently exercisable. (f) Includes 29,300 Class A Shares which may be acquired by Mr. DiGangi pursuant to exercisable options. (g) 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. (h) Represents all Class A Shares with respect to which executive officers and directors have investment power, which is in each case sole investment power. Does not include 4,483,085 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 executive officer or director of the Company has investment power. Includes 1,270,655 Class A Shares which may be acquired by executive officers or directors at purchase prices ranging from $0.20 to $24.50 per share pursuant to options exercisable on March 16, 1998 or on April 1, 1998 (date within 60 days after March 16, 1998). GE Capital owns 100% of the 25,000,000 Class B Shares currently outstanding. Such shares represented 57.7% of the outstanding Common Stock as of March 16, 1998. GE Capital has granted to Mr. Goddu an option, 25% of which is exercisable as of March 16, 1998, to purchase from GE Capital that number of shares of Common Stock which equals 5% of the issued and outstanding shares of Common Stock of the Company on a fully-diluted basis. For purposes of this calculation, the number of shares of Common Stock underlying such options is to be adjusted upwards from time to time until the last day of the Company's 1998 fiscal year to give effect to the grant of stock options after December 20, 1996 to management employees of Wards covering up to 10% of the outstanding shares of Common Stock on a fully-diluted basis. As of March 16, 1998, pursuant to the foregoing, such option is exercisable with respect to 649,055 Class B Shares (2.6% of the outstanding Class B Shares and 1.5% of the outstanding Common Stock). GE Capital's address is 260 Long Ridge Road, Stamford, Connecticut 06927. GE Capital owns 100% of the 1,750 shares of Senior Preferred Stock of the Company, having a liquidation value of $100,000 per share (the "Senior Preferred Stock") outstanding as of the date hereof, and 100.0% of the 352 shares of Series C Preferred Stock of the Company, having a liquidation value of $100,000 per share (the "Series C Preferred Stock") outstanding as of the date hereof. Item 13. Certain Relationships and Related Transactions In 1996, Wards and the Northern Trust Company (the "Bank"), arranged a line of credit which was available to certain executive officers of the Company (the "Line of Credit Program"). A committee of the Board of Directors of the Company determined which associates were eligible to borrow money under the Line of Credit program and the maximum amounts which each, respectively, could borrow. The bank held as collateral a number of Class A Shares of vested stock of the Company held by the individual, the fair market value of which was to be equal to twice the amount the individual borrowed. All loans are payable on June 21, 1998, and interest is payable monthly. Any loan may be prepaid without penalty. Interest accrues at the Bank's prime rate. 79 Item 13. Certain Relationships and Related Transactions (continued) The Company has agreed with the Bank that, in the event any individual should default upon his or her repayment obligations, the Company will purchase the note from the Bank or purchase the pledged stock from the Bank at the fair market value with the entire amount defaulted upon to be paid by the Company if, and to the extent, the defaulted amount exceeds the amount of the payment for the Class A Shares. This default remedy has been stayed by the Chapter 11 filing. As of March 30, 1998, one loan is outstanding under the Line of Credit Program: Robert A. Kasenter, Executive Vice President of the Company, for $148,250. Wards entered into a Bank Credit Card Program Agreement ("Card Agreement") effective April 1, 1996 with Monogram Credit Card Bank of Georgia ("Monogram"), and an Account-Related Agreement ("Account Related Agreement") effective April 1, 1996 with Montgomery Ward Credit Corporation ("Montgomery Ward Credit") (collectively referred to as the "Agreements") pursuant to which Monogram and Montgomery Ward Credit (collectively referred to as the "Montgomery Ward Credit Companies"), both of which are affiliates of GE Capital, make payments to Wards as to their receivables generated by sales to customers of Wards, its affiliates and licensees who utilize the Wards' private label credit card, and provide services to Wards, all of which are guaranteed by GE Capital. Set forth below is a description of various transactions entered into in connection with the Agreements. Unless otherwise specified, information given is for aggregate transactions under both the Card Agreement and the Account Related Agreement. As of January 3, 1998, there were $4.2 billion of Wards' private label credit card receivables owned by the Montgomery Ward Credit Companies. During the 1997, 1996 and 1995 fiscal years, the Credit Companies paid to Wards, pursuant to the Agreements and predecessor agreements, approximately $2.6 billion, $3.6 billion and $3.9 billion, respectively, in respect of such receivables. As of March 16, 1998, the Credit Companies have paid approximately $360 million to Wards in respect of such receivables during the current fiscal year. Wards generally bears the risk of credit losses due to non-payment by cardholders to the extent of (i) the amount of credit losses that are between 3.9% and 5.0% of average outstanding receivables, plus (ii) 50% of credit losses that are between 5.0% and 8.0% of average outstanding receivables, subject to offsets described below relating to Wards' share of certain incremental increases in finance charges and late fees payable by cardholders. Wards' net unpaid liability for credit losses for 1991 through 1997 are to be payable to Montgomery Ward Credit pursuant to a note ("Continuation Note") due in early 2003, provided that the outstanding balance of such note cannot exceed $300 million. A remaining note in the amount of $15,123,200, consisting of losses unused after July 7, 1997, is to be executed which provides for monthly principal payments in the amount of 5% of the scheduled monthly principal payments for the Continuation Note. Starter card losses are payable currently. Interest on Wards' unpaid liability for credit losses is to be payable at a rate equal to rates on comparable borrowings of Wards. Interest on notes outstanding as of July 7, 1997, has been stayed by the Chapter 11 proceeding. Wards has executed notes for its unpaid share of credit losses which totaled $412 million with respect to credit losses through 1997. The incremental finance charges and late fee assessments earned by Wards at the end of 1997 were $112 million for a net obligation of $300 million. As Wards' net unpaid liability for credit losses for 1991 through 1997 exceeded the $300 million threshold, a payment of $28 million with respect to the excess was made in early 1998. At January 3, 1998, $288 million of the net obligation is included in Liabilities subject to compromise, and $40 million of the obligation is included in Accrued liabilities and other obligations. As the $300 million threshold has been reached, it is expected that future payments may be required depending upon the level of credit card losses. In exchange for Wards' agreement to allow the Montgomery Ward Credit Companies to increase finance charge rates and late fees in selected states, Wards receives a share of incremental finance charges and late fees resulting from such increases. Such amount is available for offset against Wards' unpaid liability for its share of credit losses. To the extent not currently paid or offset, such amounts earn interest at the same rate as amounts owned by Wards to Montgomery Ward Credit. The Montgomery Ward Credit Companies also provide administrative services in connection with Signature products. 80 Item 13. Certain Relationships and Related Transactions (continued) Fees paid by Signature to the Montgomery Ward Credit Companies were approximately $5 million, $6 million and $6 million for Wards' 1997, 1996 and 1995 fiscal years, respectively. Lechmere Inc., a wholly-owned subsidiary of Wards ("Lechmere"), entered into an Interim Consumer Credit Card Program Agreement (the "Lechmere Agreement") effective as of March 13, 1996 with Monogram pursuant to which Monogram (among other things) made payments to Lechmere in respect of Monogram's receivables generated by sales to customers of Lechmere who utilized the Lechmere private label credit card issued by Monogram pursuant to the Lechmere Agreement. Such payments were equal to the face amount of such receivables. The Lechmere Agreement, as executed, was scheduled to expire on the earlier of August 31, 1996 or the execution by the parties thereto of a long-term agreement. The long- term agreement never was executed and the Lechmere Agreement was extended by numerous letter agreements between the parties. Pursuant to an order of the Bankruptcy Court overseeing Lechmere's bankruptcy (which, like the bankruptcy Filing, was filed on July 7, 1997), Lechmere and Monogram continued to perform under the Lechmere Agreement as though such agreement had been assumed by Lechmere. On or around August 1, 1997 (before any assumption or rejection of the Lechmere Agreement), Lechmere announced that its assets would be sold and liquidated. Shortly thereafter, Monogram, Lechmere and Wards entered into a stipulation and order for adequate protection defining the parties' respective rights during the wind-down of the Lechmere credit card program and the liquidation of receivables that arose in connection therewith. Pursuant to that stipulation and order, purchases made using Lechmere cards ceased on or around August 8, 1997. Lechmere, to date, has neither assumed or rejected the Lechmere Agreement. Wards and Lechmere also entered into an agreement on April 3, 1996 for the sale of certain commercial customer receivables to Montgomery Ward Credit. During 1997, Montgomery Ward Credit paid $4.8 million to Wards and Lechmere pursuant to this agreement and, as of March 16, 1998, Montgomery Ward Credit has paid $485,000 to Wards in respect of such receivables during the current fiscal year. Wards and Lechmere have entered into a Program Agreement dated October 12, 1989, as amended on March 6, 1997, with GE Capital, under which GE Capital pays certain manufacturers and distributors a discounted invoice price of products acquired by Wards and Lechmere and whereby Wards and Lechmere reimburse GE Capital for such payments according to an agreed-upon schedule. The aggregate amount of outstanding payments and other amounts payable under the Program Agreement is not to exceed $650 million at any one time. During the Company's 1997 fiscal year, Wards and Lechmere reimbursed approximately $147 million to GE Capital under the Program Agreement and the largest amount payable at any time during such fiscal year was approximately $650 million. Wards entered into the Post-Petition Loan and Guaranty Agreement ("DIP Facility") with GE Capital as agent and lender; and various other lenders, on July 8, 1997, which was approved by the Bankruptcy Court on July 31, 1997. Under the DIP Facility, the lenders have agreed to provide a revolving credit and letter of credit facility, the maximum amount of which is based on the book value of eligible inventory (as defined in the DIP Facility), the fair market value of eligible real property (as defined in the DIP Facility) and the earnings of Signature. In no case may borrowings exceed $1 billion. Total letters of credit outstanding were $52 million at January 3, 1998. The Company had $811 million of borrowing availability under the DIP Facility at January 3, 1998. Under the DIP Facility, Wards may select among several interest rate options, all of which are based on market rates plus a margin. A commitment fee is payable based on the unused amount of the facility. The facility expires on July 7, 1999, or earlier in the case of an event of default. GE Capital's portion of the commitment under the DIP Facility is $300 million. GE, the indirect parent of GE Capital, is, in the ordinary course of its business, a major supplier of consumer goods to Wards for sale at Wards' stores in the ordinary course of its business. As more fully described above, Mr. Goddu is indebted to the Company under the Goddu Note in the initial principal amount of $2,000,000 and Mr. Brennan is indebted to the Company in connection with the loan provided him pursuant to the Relationship Agreement in the initial principal amount of $12,500,000. See Item 11 above. In July 1997, Messrs. Austin and Caporale received loans at a 8-1/2% interest rate from Wards aggregating $654,000 and $656,425, respectively. Messrs. Austin and Caporale repaid within ninety days of such loans principal of $279,000 and $222,300, respectively, and interest thereon. The remaining balances of such loans is due July 11, 1999. The outstanding balance as of March 7, 1998 of the loans to Messrs. Austin and Caporale is $394,288.63 and $457,074.16, respectively. 81 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements
Page ------ Report of Independent Public Accountants 20 For the 53-Week Periods Ended January 3, 1998, and the 52-Week Periods Ended December 28, 1996 and December 30, 1995 Consolidated Statements of Income 21 Consolidated Statements of Shareholders' Equity 23 Consolidated Statements of Cash Flows 26 Consolidated Balance Sheets at January 3, 1998 and December 28, 1996 22 Notes to Consolidated Financial Statements 28
2. Financial Statement Schedules Schedules have been omitted because they are not applicable, not required, not material, or the required information is given in the financial statements or notes thereto or combined with the information presented in other schedules or exhibits. 82 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued) 3. Exhibits 3.1 Third Restated Certificate of Incorporation of the Company, filed June 28, 1994, incorporated by reference to Exhibit 3.2 (ii) of the Company's Registration Statement on Form S-1 (Registration No. 33-33252). 3.1 (i) Certificate of Amendment to Certificate of Incorporation of Montgomery Ward Holding Corp. dated October 25, 1994, incorporated by reference to Exhibit 3.2 (iv) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended October 1, 1994. 3.1 (ii) Certificate of Amendment to Certificate of Incorporation of Montgomery Ward Holding Corp. dated March 29, 1996, incorporated by reference to Exhibit 3.1 (ii) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 3.1 (iii) Certificate of Amendment to Certificate of Incorporation of Montgomery Ward Holding Corp. dated May 29, 1997, incorporated by reference to Exhibit 3.1 (iii) of the Company's Quarterly Report on Form 10-Q for the fiscal quarter quarterly period ended June 28, 1997. 3.1 (iv) Certificated of Stock Designation of Montgomery Ward Holding Corp. dated May 29, 1997, incorporated by reference to Exhibit 3.1 (iv) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended June 28, 1997. 3.3 Amended and Restated By-laws of the Company, dated as of December 29, 1994, incorporated by reference to Exhibit 3.3 of the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1995. 3.3 (i) Amendment to By-laws of Montgomery Ward Holding Corp., dated as of December 10, 1996, incorporated by reference to Exhibit 3.3 (i) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 9. Voting Trust Agreement dated as of June 21, 1988, incorporated by reference to Exhibit 3(a) of the Company's Registration Statement on Form S-1 (Registration No. 33- 23403). 9. (i) Voting Trust Agreement dated as of October 21, 1994, incorporated by reference to Exhibit 9. (i) of the Company's quarterly report on Form 10-Q for the fiscal quarterly period ended October 1, 1994. 10. (i)(A)(1) Stockholders' Agreement dated as of June 17, 1988, as amended and restated as of December 29, 1994, incorporated by reference to Exhibit 4. (e) to the Company's Registration Statement on Form S-8 (Registration No. 33-57075). 10. (i)(A)(2) Amendment Agreement dated as of December 10, 1996, incorporated by reference to Exhibit 1 of the Company's Current Report on Form 8-K for an event occurring January 6, 1997. 10. (i)(A)(3) Montgomery Ward & Co., Incorporated Stock Ownership Plan Terms and Conditions, as amended and restated, as of December 29, 1994, incorporated by reference to Exhibit 4. (f) of the Company's Registration Statement on Form S-1 (Registration No. 33-57075). 83 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued) 3. Exhibits (continued) 10. (i) (A) (4) Amendment No. 17 to Stockholders' Agreement, dated as of March 31, 1997, incorporated by reference to Exhibit 10. (i) (A) (3) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 19, 1997. 10. (i) (B) Stock Purchase Agreement dated March 6, 1988 between Mobil Corporation, Marcor Inc. and BFB Acquisition Corp. incorporated by reference to Exhibit 10. (i) (B) of the Company's Registration Statement on Form S-1 (Registration No. 33-23403). 10. (i) (C) Subscription Agreement dated as of December 29, 1995 between General Electric Capital Corporation, Montgomery Ward & Co., Montgomery Ward Holding Corp., and Bernard F. Brennan, incorporated by reference to Exhibit 10. (i) (C) of the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1995. 10. (i) (F) Note Purchase Agreements dated March 1, 1993 between Montgomery Ward & Co., Incorporated and various lenders, incorporated by reference to Exhibit 10. (i) (F) of the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1993. 10. (i) (F) (1) Amendment dated June 30, 1995 to Note Purchase Agreements dated March 1, 1993 between Montgomery Ward & Co., Incorporated and various lenders, incorporated by reference to Exhibit 10. (i) (F) (1) of the Company's quarterly report on Form 10-Q for the fiscal quarterly period ended July 1, 1995. 10. (i) (F) (2) Limited waiver and First Amendment to Note Purchase Agreements dated as of March 29, 1997 among Montgomery Ward & Co., Incorporated and various lenders, incorporated by reference to Exhibit 10. (i) (F) (2) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 29, 1997. 10. (i) (G) U.S. $1,000,000,000 Post-Petition Loan and Guaranty Agreement dated as of July 8, 1997, among Montgomery Ward & Co., Incorporated and Lechmere, Inc. as borrowers and various guarantors and General Electric Capital Corporation as agent and lender and various lenders, incorporated by reference to Exhibit 10. (i) (G) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended June 28, 1997. 10. (i) (G) (1) Waiver and First Amendment to Post-Petition Loan and Guaranty Agreement dated as of July 30, 1997, incorporated by reference to Exhibit and 10. (i) (G) (1) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended June 28, 1997. 10. (i) (G) (2) Waiver to Post-Petition Loan and Guaranty Agreement among Montgomery Ward & Co., as borrower; Montgomery Ward Holding Corp. and other debtor subsidiaries of Montgomery Ward Holding Corp., as guarantors; General Electric Capital Corporation, as agent and lender; and various lenders dated as of August 12, 1997, incorporated by reference to Exhibit 10. (i) (G) (2) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended September 27, 1997. 10. (i) (G) (3) Waiver to Post-Petition Loan and Guaranty Agreement among Montgomery Ward & Co., as borrower; Montgomery Ward Holding Corp. and other debtor subsidiaries of Montgomery Ward Holding Corp., as guarantors; General Electric Capital Corporation, as agent and lender; and various lenders dated as of September 24, 1997, incorporated by reference to Exhibit 10. (i) (G) (3) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended September 27, 1997. 84 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued) 3. Exhibits (continued) 10. (i)(G)(4) Waiver to Post-Petition Loan and Guaranty Agreement among Montgomery Ward & Co., as borrower; Montgomery Ward Holding Corp. and other debtor subsidiaries of Montgomery Ward Holding Corp., as guarantors; General Electric Capital Corporation, as agent and lender; and various lenders dated as of November 7, 1997. 10. (i)(H) Long Term Credit Agreement dated as of September 15, 1994 among Montgomery Ward & Co., Incorporated, various banks, The First National Bank of Chicago, as Documentary Agent, The Bank of Nova Scotia, as Administrative Agent, The Bank of New York, as Negotiated Loan Agent and Bank of America National Trust and Savings Association, as Advisory Agent, incorporated by reference to Exhibit 10. (i) (G) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended October 1, 1994. 10. (i)(H)(1) Amended Schedule 1 to the Long Term Credit Agreement dated as of September 15, 1994 among Montgomery Ward & Co., Incorporated, various banks, The First National Bank of Chicago, as Documentary Agent, The Bank of Nova Scotia, as Administrative Agent, The Bank of New York, as Negotiated Loan Agent and Bank of America National Trust and Savings Association, as Advisory Agent incorporated by reference to Exhibit 10. (i) (H) (1) of the Company's Quarterly Report on Form 10-Q, for the fiscal quarterly period ended September 30, 1995. 10. (i)(H)(2) Amendment dated March 19, 1996 to the Long Term Credit Agreement dated as of September 15, 1994 among Montgomery Ward & Co., Incorporated, various banks, The First National Bank of Chicago, as Documentary Agent, The Bank of Nova Scotia, as Administrative Agent, The Bank of New York, as Negotiated Loan Agent and Bank of America National Trust and Savings Association, as Advisory Agent, incorporated by reference to Exhibit 10. (i) (H) (2) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 30, 1996. 10. (i)(H)(3) Amendment to Long Term Credit Agreement dated as of September 15, 1994 among Montgomery Ward & Co., Incorporated, various banks, The First National Bank of Chicago, as Documentary Agent, The Bank of Nova Scotia, as Administrative Agent, The Bank of New York, as Negotiated Loan Agent and Bank of America National Trust and Savings Association, as Advisory Agent, which became effective September 6, 1996, incorporated by reference to Exhibit 10. (i) (H) (3) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended September 28, 1996. 10. (i)(H)(4) Amendment to Long Term Credit Agreement dated as of December 23, 1996 among Montgomery Ward & Co., Incorporated, various banks, The First National Bank of Chicago, as Documentary Agent, The Bank of Nova Scotia, as Administrative Agent, The Bank of New York, as Negotiated Loan Agent and Bank of America National Trust and Savings Association, as Advisory Agent, incorporated by reference to Exhibit 10. (i) (H) (5) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (i)(H)(5) Waiver and Fourth Amendment to Long Term Credit Agreement dated as of March 29, 1997 among Montgomery Ward & Co., Incorporated and various banks, incorporated by reference to Exhibit 10. (i) (H) (5) of the Company's Annual Report on Form 10-Q for the fiscal quarterly period ended March 29, 1997. 85 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued) 3. Exhibits (continued) 10. (i)(I) Short Term Credit Agreement dated as of September 15, 1994 among Montgomery Ward & Co., Incorporated, various banks, The First National Bank of Chicago, as Documentary Agent, The Bank of Nova Scotia, as Administrative Agent, The Bank of New York, as Negotiated Loan Agent and Bank of America National Trust and Savings Association, as Advisory Agent, incorporated by reference to Exhibit 10. (i) (H) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended October 1, 1994. 10. (i)(I)(1) Amended Schedule 1 to the Short Term Credit Agreement dated as of September 15, 1994 among Montgomery Ward & Co., Incorporated, various banks, The First National Bank of Chicago, as Documentary Agent, The Bank of Nova Scotia, as Administrative Agent, the Bank of New York, as Negotiated Loan Agent and Bank of America National Trust and Savings Association, as Advisory Agent, incorporated by reference to Exhibit 10. (i) (I) (1) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended September 30, 1995. 10. (i)(I)(2) Amendment dated March 19, 1996 to the Short Term Credit Agreement dated as of September 15, 1994 among Montgomery Ward & Co., Incorporated, various banks, The First National Bank of Chicago, as Documentary Agent, The Bank of Nova Scotia, as Administrative Agent, The Bank of New York, as Negotiated Loan Agent and Bank of America National Trust and Savings Association, as Advisory Agent, incorporated by reference to Exhibit 10. (i) (I) (2) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 30, 1996. 10. (i)(I)(3) Amendment dated September 6, 1996 to the Short Term Credit Agreement dated as of September 15, 1994 among Montgomery Ward & Co., Incorporated, various banks, The First National Bank of Chicago, as Documentary Agent, The Bank of Nova Scotia, as Administrative Agent, The Bank of New York, as Negotiated Loan Agent and Bank of America National Trust and Savings Association, as Advisory Agent, incorporated by reference to Exhibit 10. (i) (I) (3) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended September 28, 1996. 10. (i)(I)(4) Confirmation of New Bank executed by The Industrial Bank of Japan, Limited, Chicago Branch and The Bank of Nova Scotia, as Administrative Agent, pursuant to Section 2.6(c) of the Short Term Credit Agreement dated as of September 15, 1994 among Montgomery Ward & Co., Incorporated, various banks, The First National Bank of Chicago, as Documentary Agent, The Bank of Nova Scotia, as Administrative Agent, The Bank of New York, as Negotiated Loan Agent and Bank of America National Trust and Savings Association, as Advisory Agent, as amended and extended, and (b) a letter dated October 24, 1996 from The Bank of Nova Scotia, as Administrative Agent, to the Banks and other Agents who are parties to said Short Term Credit Agreement transmitting an attached revised Schedule 1 to such Agreement, incorporated by reference to Exhibit 10. (i) (I) (4) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended September 28, 1996. 86 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued) 3. Exhibits (continued) 10. (i)(I)(5) Amendment dated December 23, 1996 to the Short Term Credit Agreement dated as of September 15, 1994 among Montgomery Ward & Co., Incorporated, various banks, The First National Bank of Chicago, as Documentary Agent, The Bank of Nova Scotia, as Administrative Agent, The Bank of New York, as Negotiated Loan Agent and Bank of America National Trust and Savings Association, as Advisory Agent, incorporated by reference to Exhibit 10. (i) (I) (5) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (i)(I)(6) Waiver and Fourth Amendment to Short Term Credit Agreement dated as of March 29, 1997 among Montgomery Ward & Co., Incorporated and various banks, incorporated by reference to Exhibit 10. (I) (I) (6) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 29, 1997. 10. (i)(J) Note Purchase Agreement dated July 11, 1995 between Montgomery Ward & Co., Incorporated and various lenders, incorporated by reference to Exhibit 10. (i) (J) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended July 1, 1995. 10. (i)(J)(1) Limited waiver and First Amendment to Note Purchase Agreements dated as of March 29, 1997 among Montgomery Ward & Co., Incorporated and various lenders, incorporated by reference to Exhibit 10. (i) (F) (2) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 29, 1997. 10. (i)(L) Credit Agreement dated as of September 27, 1996 as amended and restated as of October 21, 1996, among Signature Financial/Marketing, Inc., various lenders, The Bank of New York, as Documentation Agent and The Bank of Nova Scotia, as Administrative Agent, incorporated by reference to Exhibit 10. (i) (L) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (i)(L)(1) Amendment to Credit Agreement dated as of December 23, 1996 among Signature Financial/Marketing, Inc., various lenders, The Bank of New York, as Documentation Agent and The Bank of Nova Scotia, as Administrative Agent, incorporated by reference to Exhibit 10. (i) (L) (1) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (i)(L)(2) Waiver Letter dated as of March 27, 1997 addressed to Signature Financial/Marketing, Inc. from the Bank of New York and The Bank of Nova Scotia, incorporated by reference to Exhibit 10. (i) (L) (2) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 29, 1997. 10. (i)(L)(3) Correction Letter Agreement dated as of March 27, 1997 among Signature Financial/Marketing, Inc., The Bank of New York and The Bank of Nova Scotia, incorporated by reference to Exhibit 10. (i) (L) (3) of the Company's Quarterly Report on Form 10- Q for the fiscal quarterly period ended March 29, 1997. 10. (i)(L)(4) Waivers and Recision of Acceleration dated July 15, 1997, among The Bank of New York, The Bank of Nova Scotia and Signature Financial/Marketing, Inc., incorporated by reference to Exhibit 10. (i) (L) (4) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended June 28, 1997. 87 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued) 3. Exhibits (continued) 10. (i)(L)(5) Waiver, Amendment and Extension Agreement dated as of August 29, 1997, among Signature Financial Marketing, Inc., various lenders, The Bank of New York, as Documentation Agent and The Bank of Nova Scotia, as Administrative Agent. 10. (i)(M) Credit Agreement dated October 4, 1996 among Montgomery Ward & Co., Incorporated, various lenders, The Bank of Nova Scotia, as Administrative Agent, and The Bank of New York, as Documentation Agent, incorporated by reference to Exhibit 10. (i) (M) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended September 28, 1996. 10. (i)(M)(1) Amendment to Credit Agreement dated as of December 23, 1996 among Montgomery Ward & Co., Incorporated, various lenders, The Bank of Nova Scotia, as Administrative Agent, and The Bank of New York, as Documentation Agent, incorporated by reference to Exhibit 10. (i) (M) (1) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (i)(M)(2) Second Amendment to Credit Agreement dated as of December 23, 1996 among Montgomery Ward & Co., Incorporated, various lenders, The Bank of Nova Scotia, as Administrative Agent, and The Bank of New York, as Documentation Agent, incorporated by reference to Exhibit 10. (i) (M) (2) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (i)(M)(3) Waiver and Third Amendment to Credit Agreement dated as of March 29, 1997 among Montgomery Ward & CO., Incorporated and various lenders, incorporated by reference to Exhibit 10. (i) (M) (3) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 29, 1997. 10. (i)(N) Asset Purchase, License & Agency Agreement for the Purchase of Certain Assets of Lechmere, Inc. and Montgomery Ward & Co., Incorporated, by Schottenstein Bernstein Capital Group LLC dated August 14, 1997, incorporated by reference to Exhibit 10. (i) (N) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended September 27, 1997. 10. (i)(O) Agency Agreement between Schottenstein Bernstein Capital Group LLC and Montgomery Ward & Co., Incorporated, as of August 14, 1997, incorporated by reference to Exhibit 10. (i) (O) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended September 27, 1997. 10. (i)(P) Agency Agreement dated as of October 31, 1997 between the joint venture composed of Gordon Brothers Partners, Inc., Hilco Trading, Inc./Garcel, Inc. D/B/A Great American Asset Management and Alco Capital Group, Inc., as agent and Montgomery Ward & Co., Incorporated. 88 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued) 3. Exhibits (continued) 10. (ii)(A)* Interim Consumer Credit Card Program dated as of April 1, 1996, as amended, restated and renamed the Bank Credit Card Program Agreement dated as of April 1, 1996 by and between Monogram Credit Card Bank of Georgia and Montgomery Ward & Co., Incorporated, incorporated by reference to Exhibit 10. (ii) (A) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (ii)(B)* Account Purchase Agreement dated as of June 24, 1988, as amended, restated and renamed the Account-Related Agreement and dated as of April 1, 1996 by and between Montgomery Ward Credit Corporation and Montgomery Ward & Co., Incorporated, incorporated by reference to Exhibit 10. (ii) (B) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (ii)(C)(1) Letter Agreement dated as of April 1, 1996 between Signature Financial/Marketing, Inc., Monogram Credit Card Bank of Georgia, Montgomery Ward Credit Corporation, and Montgomery Ward & Co., Incorporated, incorporated by reference to Exhibit 10. (ii) (C) (1) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (ii)(C)(2) Letter Agreement dated as of April 1, 1996 between Signature Financial/Marketing, Inc. and Montgomery Ward Credit Corporation, incorporated by reference to Exhibit 10. (ii) (C) (2) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (ii)(C)(3) Letter Agreement dated September 17, 1996 between Montgomery Ward & Co., Incorporated, Monogram Credit Card Bank of Georgia and Montgomery Ward Credit Corporation, incorporated by reference to Exhibit 10. (ii) (C) (3) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (ii)(C)(4)* Letter Agreement dated as of August 2, 1995 between Monogram Retailer Credit Services, Inc. and Montgomery Ward & Co., Incorporated, incorporated by reference to Exhibit 10. (ii) (C) (4) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (ii)(D)* Interim Consumer Credit Card Program Agreement dated as of March 13, 1996 between Monogram Credit Card Bank of Georgia and Lechmere, Inc., incorporated by reference to Exhibit 10. (ii) (D) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (ii)(D)(1)* Letter Agreement dated January 23, 1996 between Montgomery Ward & Co., Incorporated, Montgomery Ward Credit and General Electric Capital Corporation, incorporated by reference to Exhibit 10. (ii) (D) (1) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (ii)(D)(2) Letter Agreement dated March 13, 1996 between Montgomery Ward & Co., Incorporated, Lechmere, Inc., General Electric Capital Corporation and Montgomery Ward Credit Corporation, incorporated by reference to Exhibit 10. (ii) (D) (2) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. * Confidential treatment has been requested from the Secretary of the Commission, with respect to portions of this document. 89 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued) 3. Exhibits (continued) 10. (ii)(E)* MWCC Program Agreement dated as of April 3, 1996 between Montgomery Ward Credit Corporation, Montgomery Ward & Co., Incorporated and Lechmere, Inc., incorporated by reference to Exhibit 10. (ii) (E) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (ii)(F) Letter Agreement dated July 7, 1997, among Montgomery Ward & Co., Incorporated, Monogram Credit Card Bank of Georgia, Montgomery Ward Credit Corporation and Lechmere, Inc., incorporated by reference to Exhibit 10. (ii) (F) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended June 28, 1997. 10. (iii)(A) Program Agreement dated October 12, 1989 between Montgomery Ward & Co., Incorporated and General Electric Capital Corporation, incorporated by reference to Exhibit 10. (iii) (A) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (iii)(B) Amendment to Program Agreement dated March 4, 1997 between General Electric Corporation, Montgomery Ward & Co., Incorporated and Lechmere, Inc., incorporated by reference to Exhibit 10. (iii) (B) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (iii)(C) Waiver letter of General Electric Capital Corporation dated March 27, 1997, incorporated by reference to Exhibit 10. (iii) (C) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 27, 1997. 10. (iii)(D) Letter Agreement dated June 25, 1997 among General Electric Capital Corporation, Montgomery Ward Holding Corp., Montgomery Ward & Co., Incorporated and Lechmere, Inc., incorporated by reference to Exhibit 10. (iii) (D) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended June 28, 1997. 10. (iv)(A) Montgomery Ward & Co., Incorporated Stock Ownership Plan, amended and restated as of May 20, 1994, incorporated by reference to Exhibit 10. (iv) (A) (ii) (A) of the Company's Registration Statement on Form S-1 (No. 33-33252). 10. (iv)(A)(1) Amendment No. 1 to the Amended and Restated Montgomery Ward & Co. Stock Ownership Plan dated October 20, 1994, incorporated by reference to Exhibit 10. (iv) (A) (iii) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended October 1, 1994. 10. (iv)(A)(2) Amendment No. 2 to the Amended and Restated Montgomery Ward & Co., Incorporated Stock Ownership Plan, dated as of May 29, 1997, incorporated by reference to Exhibit 10. (iv) (A) (2) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended June 28, 1997. * Confidential treatment has been requested from the Secretary of the Commission, with respect to portions of this document. 90 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued) 3. Exhibits (continued) 10. (iv)(B) Montgomery Ward & Co., Incorporated Long-Term Incentive Plan, incorporated by reference to Exhibit 10. (iv) (B) of the Company's Registration Statement on Form S-1 (Registration No. 33-23403). 10. (iv)(B)(i) Montgomery Ward & Co., Incorporated Executive Long-Term Incentive Plan, incorporated by reference to Exhibit 10. (iv) (B) (1) of the Company's Registration Statement on Form S-1 (No. 33-33252). 10. (iv)(C) Montgomery Ward & Co., Incorporated Performance Management Program, incorporated by reference to Exhibit 10. (iv) (C) of the Company's Registration Statement on Form S-1 (Registration No. 33-23403). 10. (iv)(C)(i) Montgomery Ward & Co., Incorporated Senior Executive Performance Management Program, incorporated by reference to Exhibit 10. (iv) (C) (i) of the Company's Registration Statement on Form S-1 (No. 33-33252). 10. (iv)(D) Montgomery Ward & Co., Incorporated Retirement Security Plan (as amended and restated effective as of January 1, 1994), incorporated by reference to Exhibit 10. (iv) (D) of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10. (iv)(D)(1) First Amendment to the Montgomery Ward & Co., Incorporated Retirement Security Plan dated October 9, 1995, incorporated by reference to Exhibit 10. (iv) (D) (1) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (iv)(D)(2) Second Amendment to the Montgomery Ward & Co., Incorporated Retirement Security Plan dated October 31, 1996, incorporated by reference to Exhibit 10. (iv) (D) (2) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (iv)(D)(3) Third Amendment to the Montgomery Ward & Co., Incorporated Retirement Security Plan, incorporated by reference to Exhibit 10. (iv) (D) (3) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 27, 1997. 10. (iv)(D)(4) Fourth amendment to the Montgomery Ward & Co., Incorporated Retirement Security Plan, incorporated by reference to Exhibit 10. (iv) (D) (4) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended June 28, 1997. 10. (iv)(D)(5) Fifth amendment to the Montgomery Ward & Co., Incorporated Retirement Security Plan effective September 17, 1997. 10. (iv)(E) Montgomery Ward & Co., Incorporated Supplemental Retirement Plan, incorporated by reference to Exhibit 10. (iv) (E) of the Company's Registration Statement on Form S-1 (Registration No. 33-23403). 10. (iv)(F) Montgomery Ward Holding Corp. Directors Fee and Stock Ownership Plan, incorporated by reference to Exhibit 10. (iv) (F) of the Company's Registration Statement on Form S-1 (Registration No. 33-41161). 91 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued) 3. Exhibits (continued) 10. (iv)(G) Montgomery Ward Holding Corp. Senior Officer Severance Plan, incorporated by reference to Exhibit 10. (iv) (G) of the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1993. 10. (iv)(G)(1) Montgomery Ward & Co., Incorporated Executive Committee Severance Plan. 10. (iv)(H) Montgomery Ward & Co., Incorporated Savings and Profit Sharing Plan (as amended and restated as of January 1, 1994), incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10. (iv)(H)(1) First Amendment to the Montgomery Ward & Co., Incorporated Savings and Profit Sharing Plan dated as of October 31, 1996, incorporated by reference to Exhibit 10. (iv) (H) (1) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (iv)(H)(2) Second Amendment to the Montgomery Ward & Co., Incorporated Savings and Profit Sharing Plan, incorporated by reference to Exhibit 10. (iv) (H) (2) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended June 28, 1997. 10. (iv)(I) Montgomery Ward & Co., Incorporated Success Plan, incorporated by reference to Exhibit 10. (iv) (I) of the Company's Registration Statement on Form S-1 (No.33-33252). 10. (iv)(J) Form of Montgomery Ward Special Retention Plan document entered into with the following persons: Alan E. DiGangi, Spencer H. Heine, Carol J. Harms, Robert A. Kasenter, Frederick E. Meiser, Edwin G. Pohlmann, Robert J. Stevenish and John Workman, incorporated by reference to Exhibit 10. (iv) (J) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 30, 1996. 10. (iv)(L) Form of Montgomery Ward Change of Control Security Plan document entered into with the following persons: Alan E. DiGangi, Spencer H. Heine, Carol J. Harms, Robert A. Kasenter, Frederick E. Meiser, Edwin G. Pohlmann, Robert J. Stevenish and John Workman, incorporated by reference to Exhibit 10. (iv) (L) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 30, 1996. 10. (v) Relationship Agreement effective December 10, 1996 between Bernard F. Brennan, Montgomery Ward Holding Corp., Montgomery Ward & Co., Incorporated and General Electric Capital Corporation, incorporated by reference to Exhibit 10. (v) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (vi)(A) Employment Agreement effective December 20, 1996 between Montgomery Ward & Co., Incorporated, Montgomery Ward Holding Corp., and Roger V. Goddu, incorporated by reference to Exhibit 10. (vi) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (vi)(B) Letter Agreement dated December 20, 1996 between General Electric Capital Corporation and Roger V. Goddu. 92 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued) 3. Exhibits (continued) 10. (vi)(C) Letter Agreement dated November 3, 1997 between Montgomery Ward & Co., Incorporated and Roger V. Goddu, regarding Court Approval of Executive Compensation Plan for Executive Committee Members and Montgomery Ward & Co., Incorporated Special Emergence Bonus Plan. 10. (vii)(A) Employment Agreement effective January 31, 1997 between Montgomery Ward & Co., Incorporated, Montgomery Ward Holding Corp., and Burnett Donoho, incorporated by reference to Exhibit 10. (vii) of the Company's Annual Report on Form 10- K for the fiscal year ended December 28, 1996. 10. (vii)(B) General Release and Agreement Not to Sue dated January 23, 1998 between Montgomery Ward & Co., Incorporated and Burnett Donoho. 10. (viii) Line of Credit Agreement effective December 19, 1996 between Montgomery Ward & Co., Incorporated and The Northern Trust Company, incorporated by reference to Exhibit 10. (viii) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 10. (ix)(A) Employment Agreement effective November 3, 1997, between Montgomery Ward & Co., Incorporated and Alan E. DiGangi. 10. (ix)(B) Letter agreement dated November 3, 1997, between Montgomery Ward & Co., Incorporated and Alan E. DiGangi, regarding court approval of Executive Compensation Plan for Executive Committee members and Montgomery Ward & Co., Incorporated Special Emergence Bonus Plan. 10. (x)(A) Employment Agreement effective January 28, 1997, between Montgomery Ward & Co., Incorporated and Thomas Grimes, incorporated by reference to Exhibit 10. (x) of the Company's Annual Report of Form 10-K for the fiscal year ended December 28, 1996. 10. (x)(B) Letter Agreement dated February 18, 1997 between General Electric Capital Corporation and Thomas Grimes. 10. (x)(C) Letter Agreement dated November 3, 1997, between Montgomery Ward & Co., Incorporated and Thomas Grimes, regarding court approval of Executive Compensation Plan for Executive Committee members and Montgomery Ward & Co., Incorporated Special Emergence Bonus Plan. 10. (xi)(A) Employment Agreement effective April 15, 1997, between Montgomery Ward & Co., Incorporated and Thomas J. Austin. 10. (xi)(B) Letter Agreement dated April 30, 1997 between General Electric Capital Corporation and Thomas J. Austin. 10. (xi)(C) Letter Agreement dated November 3, 1997, between Montgomery Ward & Co., Incorporated and Thomas J. Austin, regarding court approval of Executive Compensation Plan for Executive Committee members and Montgomery Ward & Co., Incorporated Special Emergence Bonus Plan. 93 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued) 3. Exhibits (continued) 10. (xii) (A) Employment Agreement effective April 15, 1997, between Montgomery Ward & Co., Incorporated and Louis J. Caporale. 10. (xii) (B) Letter Agreement dated April 30, 1997 between General Electric Capital Corporation and Louis. J. Caporale. 10. (xii) (C) Letter agreement dated November 3, 1997, between Montgomery Ward & Co., Incorporated and Louis J. Caporale, regarding court approval of Executive Compensation Plan for Executive Committee members and Montgomery Ward & Co., Incorporated Special Emergence Bonus Plan. 10. (xiv) Employment Agreement dated April 11, 1997 between Montgomery Ward & Co., Incorporated and Spencer H. Heine, incorporated by reference to Exhibit 10. (xiv) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 29, 1997. 10. (xv) Employment Agreement dated March 6, 1998 between Montgomery Ward & Co., Incorporated and Worthington Linen. 11. Not applicable. 12. Not applicable. 13. Not applicable. 16. Not applicable. 18. Not applicable. 19. Not applicable. 21. Subsidiaries of the Registrant, incorporated by reference to Exhibit 21 of the Company's Registration Statement on Form S-1 (Registration No. 33-33252). 22. Not applicable. 23. Consent of independent public accountants. 24. Not applicable. 27. Financial data schedule. 28. Not applicable. (b) Reports on Form 8-K. None during the fiscal quarter ended January 3, 1998. 94 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant, Montgomery Ward Holding Corp., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGISTRANT MONTGOMERY WARD HOLDING CORP. BY /s/ Thomas J. Paup ------------------------------------------------------------- NAME AND TITLE Thomas J. Paup, Executive Vice President, Chief Financial Officer DATE April 2, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. BY /s/ Roger V. Goddu ------------------------------------------------------------- NAME AND TITLE Roger V. Goddu, Director and Chief Executive Officer DATE April 2, 1998 BY /s/ Thomas J. Paup ------------------------------------------------------------- NAME AND TITLE Thomas J. Paup, Executive Vice President, Chief Financial Officer DATE April 2, 1998 BY ------------------------------------------------------------- NAME AND TITLE Bernard F. Brennan, Director DATE _____, 1998 BY /s/ Thomas J. Paup ------------------------------------------------------------- NAME AND TITLE Silas S. Cathcart*, Director DATE April 2, 1998 BY ------------------------------------------------------------- NAME AND TITLE Tommy T. Cato, Director DATE _____, 1998 BY /s/ Thomas J. Paup ------------------------------------------------------------- NAME AND TITLE Denis J. Nayden*, Director DATE April 2, 1998 * By power of attorney. 95 SIGNATURES (continued) BY /s/ Thomas J. Paup ------------------------------------------------------------- NAME AND TITLE James A. Parke*, Director DATE April 2, 1998 BY /s/ Thomas J. Paup ------------------------------------------------------------- NAME AND TITLE Edward D. Stewart*, Director DATE April 2, 1998 BY /s/ Thomas J. Paup ------------------------------------------------------------- NAME AND TITLE Gary C. Wendt*, Director DATE April 2, 1998 * By power of attorney. 96 EXHIBIT INDEX ------------- 10. (i) (G) (4) Waiver to Post-Petition Loan and Guaranty Agreement among Montgomery Ward & Co., as borrower; Montgomery Ward Holding Corp. and other debtor subsidiaries of Montgomery Ward Holding Corp., as guarantors; General Electric Capital Corporation, as agent and lender; and various lenders dated as of November 7, 1997. 10. (i) (L) (5) Waiver, Amendment and Extension Agreement dated as of August 29, 1997, among Signature Financial Marketing, Inc., various lenders, The Bank of New York, as Documentation Agent and The Bank of Nova Scotia, as Administrative Agent. 10. (i) (P) Agency Agreement dated as of October 31, 1997 between the joint venture composed of Gordon Brothers Partners, Inc., Hilco Trading, Inc./Garcel, Inc. D/B/A Great American Asset Management and Alco Capital Group, Inc., as agent and Montgomery Ward & Co., Incorporated. 10. (iv) (D) (5) Fifth Amendment to the Montgomery Ward & Co., Incorporated Retirement Security Plan effective September 17, 1997. 10. (iv) (G) (1) Montgomery Ward & Co., Incorporated Executive Committee Severance Plan. 10. (vi) (B) Letter Agreement dated December 20, 1996 between General Electric Capital Corporation and Roger V. Goddu. 10. (vi) (C) Letter Agreement dated November 3, 1997 between Montgomery Ward & Co., Incorporated and Roger V. Goddu, regarding Court Approval of Executive Compensation Plan for Executive Committee Members and Montgomery Ward & Co., Incorporated Special Emergence Bonus Plan. 10. (vii) (B) General Release and Agreement Not to Sue dated January 23, 1998 between Montgomery Ward & Co., Incorporated and Burnett Donoho. 10. (ix) (A) Employment Agreement effective November 3, 1997, between Montgomery Ward & Co., Incorporated and Alan E. DiGangi. 10. (ix) (B) Letter Agreement dated November 3, 1997 between Montgomery Ward & Co., Incorporated and Alan E. DiGangi, regarding Court Approval of Executive Compensation Plan for Executive Committee Members and Montgomery Ward & Co., Incorporated Special Emergence Bonus Plan. 10. (x) (B) Letter Agreement dated February 18, 1997 between General Electric Corporation and Thomas Grimes. 10. (x) (C) Letter Agreement dated November 3, 1997 between Montgomery Ward & Co., Incorporated and Thomas Grimes, regarding Court Approval of Executive Compensation Plan for Executive Committee Members and Montgomery Ward & Co., Incorporated Special Emergence Bonus Plan. 10. (xi) (A) Employment Agreement effective April 15, 1997 between Montgomery Ward & Co., Incorporated and Thomas J. Austin. 10. (xi) (B) Letter Agreement dated April 30, 1997 between General Electric Corporation and Thomas J. Austin. 10. (xi) (C) Letter Agreement dated November 3, 1997 between Montgomery Ward & Co., Incorporated and Thomas J. Austin, regarding Court Approval of Executive Compensation Plan for Executive Committee Members and Montgomery Ward & Co., Incorporated Special Emergence Bonus Plan. 10. (xii) (A) Employment Agreement effective April 15, 1997 between Montgomery Ward & Co., Incorporated and Louis J. Caporale. 10. (xii) (B) Letter Agreement dated April 30, 1997 between General Electric Corporation and Louis J. Caporale. 10. (xii) (C) Letter Agreement dated November 3, 1997 between Montgomery Ward & Co., Incorporated and Louis J. Caporale, regarding Court Approval of Executive Compensation Plan for Executive Committee Members and Montgomery Ward & Co., Incorporated Special Emergence Bonus Plan. 10. (xv) Employment Agreement effective March 6, 1998 between Montgomery Ward & Co., Incorporated and Worthington W. Linen. 23. Consent of Independent Public Accountants. 27. Financial Data Schedule. EX-10.(I)(G)(4) 2 WAIVER TO POST-PETITION LOAN AND GUARANTY AGRMNT 10.(i)(G)(4) WAIVER TO POST-PETITION LOAN AND GUARANTY AGREEMENT WAIVER TO POST-PETITION LOAN AND GUARANTY AGREEMENT, dated November 7, 1997 (this "Waiver"), among MONTGOMERY WARD & CO., INCORPORATED, an Illinois ------ corporation and a debtor and debtor in possession ("Borrower Representative"), ----------------------- MONTGOMERY WARD HOLDING CORP., a Delaware corporation and a debtor and debtor in possession ("Parent" or "Guarantor"), as Guarantor, the other Guarantors --------- signatory hereto (together with Parent and the Borrower Representative, the "Credit Parties"), GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation - --------------- (in its individual capacity, "GE Capital"), for itself, as Lender, and as Agent ---------- (the "Agent") for Lenders, and the other Lenders signatory hereto. ----- RECITALS -------- WHEREAS, the Borrower Representative, the Guarantors, the Lenders and the Agent are parties to that certain Post-Petition Loan and Guaranty Agreement, dated as of July 8, 1997 (as amended by the terms of the Waiver and First Amendment to Post-Petition Loan and Guaranty Agreement dated July 30, 1997 and as further amended, supplemented or modified, the "Loan Agreement"). The -------------- Borrower Representative and the Guarantors have requested that the Lenders agree to waive, for the limited purposes set forth herein, certain provisions of the Loan Agreement. The Borrower Representative, the Guarantors, the Lenders and the Agent have agreed, upon the terms and conditions specified herein, to waive such provisions as hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties hereto agree as follows: SECTION 1. Defined Terms and Interpretation. -------------------------------- (a) The capitalized terms used herein which are defined in the Loan Agreement, shall have the respective meanings assigned to them in the Loan Agreement except as otherwise provided herein or unless the context otherwise requires. (b) Section headings in this Waiver are included herein for convenience of reference only and shall not constitute a part of this Waiver for any other purpose. (c) No provision in this Waiver shall be interpreted or construed against any Person because that Person or its legal representative drafted such provision SECTION 2. Waiver. ------ 1 (a) As of the effective date of this Waiver, Lenders hereby waive the provisions of Section 6.3 of the Loan Agreement, for the limited purpose of permitting the Borrower Representative to grant one or more Liens in favor of any Person acting as a liquidation agent (the "Liquidation Agent") in connection with the liquidation and sale of certain of the assets of the Borrower Representative (the "Store Liquidations") pursuant to the terms of a valid and enforceable order of the Bankruptcy Court entered in respect of that certain Motion of Debtors and Debtors In Possession for an Order Authorizing Montgomery Ward & Co., Incorporated to (a) Close Certain Stores, (b) Conduct Store Closing Sales and (c) Enter Into an Agency Agreement with a Liquidation Agent, dated October 17, 1997 (the "Motion"); provided, however, that (i) any such Lien shall -------- ------- only extend to the Inventory that is located at one of the stores or service centers set forth on the list attached as Exhibit A to the Motion (the "Closed Locations") on the date the physical inventory is conducted in connection with the liquidation sale contemplated by the Motion and shall only secure the fees and obligations owed to the Liquidation Agent by the Borrower Representative pursuant to the Motion and (ii) the Borrower Representative acknowledges and agrees that it is prohibited from, and shall not transfer Inventory to the Closed Locations from any facility owned or operated by any Credit Party or otherwise cause other Inventory to be located or stored at any of the Closed Locations which has an aggregate book value in excess of $100,000. (b) The Lenders agree that the Inventory sold pursuant to the Store Liquidations shall not be included in calculating the amount of assets permitted to be sold by the Borrower Representatives and its Subsidiaries pursuant to Section 6.4 of the Loan Agreement during any fiscal year. SECTION 3. Representations and Warranties True; No Default or Event of ----------------------------------------------------------- Default. The Credit Parties represent and warrant to the Agent and the Lenders - ------- that on the date of and after giving effect to the execution and delivery of this Waiver (a) the representations and warranties set forth in the Loan Agreement are true and correct in all material respects on the date hereof as though made on and as of such date (unless any such representation or warranty expressly relates to an earlier date); and (b) neither any Default nor Event of Default has occurred and is continuing as of the date hereof. SECTION 4. Reference to this Waiver and Effect on Loan Documents. ----------------------------------------------------- (a) From and after the date hereof, each reference in the Loan Agreement (including in any Exhibit thereto) to "this Agreement," "hereunder," "herein" or words of like import shall mean and be a reference to the Loan Agreement, as affected hereby. (b) From and after the date of this Waiver, each reference in the Loan Documents to the Loan Agreement shall mean and be a reference to the Loan Agreement, as affected hereby. (c) The Loan Agreement, the Notes and the other Loan Documents, as affected hereby, shall remain in full force and effect and the Loan Documents are hereby ratified and confirmed in all respects. 2 (d) The effectiveness of the waiver evidenced by Section 2 hereof, shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Lenders or the Agent under the Loan Agreement, or constitute a waiver of any other provision of the Loan Agreement or any other Loan Document. SECTION 5. Effectiveness. This Waiver shall become effective upon ------------- receipt by the Agent of executed counterparts of this Waiver from the requisite number of Lenders that comprise the Requisite Lenders. SECTION 6. Governing Law; Binding Effect. In all respects, including all ----------------------------- matters of construction, validity and performance, this Waiver shall be governed by, and construed and enforced in accordance with, the internal laws of the State of New York (without regard to conflict of law provisions) and any applicable laws of the United States of America, and shall be binding upon the parties hereto and their respective successors and permitted assigns. SECTION 7. Execution in Counterparts. This Waiver may be executed in any ------------------------- number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. SECTION 8. Consent of Guarantors. By their execution and delivery of this --------------------- Waiver, each Guarantor hereby consents to all of the terms and provisions of this Waiver and ratifies and confirms that each of the Loan Documents to which it is a party remains in full force and effect and enforceable in accordance with their respective terms. 3 IN WITNESS WHEREOF, this Waiver has been duly executed as of the date first written above. BORROWER: MONTGOMERY WARD & CO., INCORPORATED By: /s/ Douglas V. Gathany ------------------------------------- Name: Douglas V. Gathany Title: Vice President and Treasurer GUARANTORS: LECHMERE, INC. By: /s/ Douglas V. Gathany ------------------------------------ Name: Douglas V. Gathany Title: Assistant Treasurer AMERICAN DELIVERY SERVICE COMPANY By: /s/ Philip D. Delk ------------------------------------ Name: Philip D. Delk Title: Vice President, Secretary and Assistant Treasurer CONTINENTAL TRANSPORTATION, INC. By: /s/ Philip D. Delk ------------------------------------ Name: Philip D. Delk Title: Vice President and Assistant Treasurer S-1 JRI DISTRIBUTING, INC. STANDARD T CHEMICAL COMPANY, INC. WFL REALTY, INC. By: /s/ Philip D. Delk ------------------------------------ Name: Philip D. Delk Title: Vice President and Secretary M-W PRESTRESS, INC. MW DIRECT GENERAL, INC. MW DIRECT LIMITED, INC. By: /s/ Philip D. Delk ------------------------------------ Name: Philip D. Delk Title: Secretary MONTGOMERY WARD INTERNATIONAL, INC. MPI, INC. By: /s/ Philip D. Delk ------------------------------------ Name: Philip D. Delk Title: Assistant Secretary S-2 BARRETWARD PROPERTIES CO., INC. BRANDYWINE DC, INC. BRANDYWINE PROPERTIES, INC. BRETTWARD PROPERTIES CO., INC. FIRST MONT CORPORATION FOURTH WYCOMBE PROPERTIES, INC. GABEWARD PROPERTIES CORPORATION GARDEN GROVE DEVELOPMENT CORPORATION HUGA REALTY INC. JOSHWARD PROPERTIES CORPORATION LECHMERE DEVELOPMENT CORPORATION M-W FAIRFAX PROPERTIES, INC. M-W PROPERTIES CORPORATION M-W RESTAURANTS REALTY CORPORATION MARCOR HOUSING SYSTEMS, INC. MARYWARD PROPERTIES CORPORATION MF NEVADA INVESTMENTS, INC. MICHAELWARD PROPERTIES CO., INC. MONTGOMERY WARD DEVELOPMENT CORPORATION MONTGOMERY WARD LAND CORPORATION MONTGOMERY WARD PROPERTIES CORPORATION MONTGOMERY WARD REALTY CORPORATION MW LAND CORPORATION NATIONAL HOMEFINDING SERVICE, INC. 998 MONROE CORPORATION PAULWARD PROPERTIES CO., INC. ROBERTWARD PROPERTIES CORPORATION SACWARD PROPERTIES, INC. SECOND MONT CORPORATION 7TH & CARROLL CORPORATION SEVENTH MONT CORPORATION 618 CORPORATION 619 CORPORATION THE 535 CORPORATION THIRD WYCOMBE PROPERTIES, INC. 2825 DEVELOPMENT CORPORATION 2825 REALTY CORPORATION UNIVERSITY AVENUE MARKETPLACE, INC. WFL DEVELOPMENT CORPORATION WYCOMBE PROPERTIES, INC. S-3 By: /s/ G. Tad Morgan ------------------------------------ Name: G. Tad Morgan Title: Vice President and Secretary GOODE FURNITURE COMPANIES, INC. MONTGOMERY WARD SECURITIES, INC. R M P DEVELOPMENT CORPORATION By: /s/ G. Tad Morgan ------------------------------------ Name: G. Tad Morgan Title: Secretary MONTGOMERY WARD HOLDING CORP. By: /s/ G. Tad Morgan ------------------------------------ Name: G. Tad Morgan Title: Assistant Secretary JEFFERSON STORES, INC. By: /s/ G. Tad Morgan ------------------------------------ Name: G. Tad Morgan Title: Vice President and Treasurer S-4 AGENT AND AS LENDER: GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ James C. Ungari ----------------------------------- Name: James C. Ungari Title: Its Authorized Signatory LENDERS: THE CHASE MANHATTAN BANK By: /s/ William P. Rindfuss ----------------------------------- Name: William P. Rindfuss Title: Vice President BANK OF SCOTLAND By: /s/ Annie Chin Tat ----------------------------------- Name: Annie Chin Tat Title: Vice President BANKAMERICA BUSINESS CREDIT, INC. By: /s/ Thomas G. Sullivan ----------------------------------- Name: Thomas G. Sullivan Title: Vice President BANKBOSTON RETAIL FINANCE INC. (f/k/a GBFC, INC.) By: /s/ Michael L. Pizette ----------------------------------- Name: Michael L. Pizette Title: Director S-5 BANQUE PARIBAS By: /s/ Mary T. Finnegan --------------------------------------- Name: Mary T. Finnegan Title: Director By: /s/ Duane Helkowski --------------------------------------- Name: Duane Helkowski Title: Vice President CREDIT AGRICOLE INDOSUEZ By: /s/ David Bouhl --------------------------------------- Name: David Bouhl Title: Executive Vice President By: /s/ Dean Balice --------------------------------------- Name: Dean Balice Title: Senior Vice President THE CIT GROUP/BUSINESS CREDIT, INC. By: /s/ Nicole Cangelos --------------------------------------- Name: Nicole Cangelos Title: Assistant Secretary CITIBANK, N.A. By: /s/ John W. Podkowsky, M.D. --------------------------------------- Name: John W. Podkowsky, M.D. Title: Structured Finance Division, 0208389 CITICORP USA, INC. By: /s/ John W. Podkowsky, M.D. --------------------------------------- Name: John W. Podkowsky, M.D. Title: Structured Finance Division, 0208389 FLEET CAPITAL CORPORATION By: /s/ Thomas E. Joyce --------------------------------------- Name: Thomas E. Joyce Title: Vice President & Portfolio Manager S-6 GOLDMAN SACHS CREDIT PARTNERS L.P. By: /s/ John Urban ------------------------------------ Name: John Urban Title: Vice President GREENTREE FINANCIAL SERVICING CORPORATION By: /s/ Christopher A. Gouskos ------------------------------------ Name: Christopher A. Gouskos Title: Vice President HELLER FINANCIAL, INC. By: /s/ John Buff ------------------------------------ Name: John Buff Title: Vice President IBJ SCHRODER BUSINESS CREDIT CORP. By: /s/ Alfred J. Scoyni ------------------------------------ Name: Alfred J. Scoyni Title: Vice President JACKSON NATIONAL LIFE INSURANCE COMPANY By: PPM FINANCE, INC. Its Attorney-in-fact By:_____________________________________ Name: Title: LEHMAN COMMERCIAL PAPER, INC. By: /s/ Michele Swanson ------------------------------------ Name: Michele Swanson Title: Authorized Signatory S-7 NATIONAL CITY COMMERCIAL FINANCE, INC. By: /s/ Mark Hanak -------------------------------------- Name: Mark Hanak Title: Account Officer S-8 EX-10.(I)(L)(5) 3 WAIVER, AMENDMENT AND EXTENSION AGREEMENT 10.(i)(L)(5) WAIVER, AMENDMENT AND EXTENSION AGREEMENT THIS WAIVER, AMENDMENT AND EXTENSION AGREEMENT ("Agreement") dated as of August 29, 1997, is made and entered into among SIGNATURE FINANCIAL/MARKETING, INC. (the "Borrower") and the banks listed on the signature pages hereof (herein, together with their respective successors and assigns, collectively called the "Banks" and individually called a "Bank"). WHEREAS the Banks are parties to that certain Credit Agreement dated as of September 27, 1996, as amended and restated as of October 21, 1996 and as further amended or modified as of December 23, 1996, March 27, 1997 and July 15, 1997 (as heretofore amended or modified, the "Credit Agreement"), among Signature Financial/Marketing, Inc., various Banks, The Bank of New York as Documentation Agent, and The Bank of Nova Scotia, as Administrative Agent; and WHEREAS the Borrower desires to extend the Maturity Date of the Credit Agreement from August 29, 1997 to January 31, 1998; NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I WAIVER, AMENDMENT AND EXTENSION 1.1 The Banks hereby waive an Event of Default (the "Specified Default") arising solely by reason of the failure of the Borrower on August 29, 1997 through the effective date of this Agreement to pay in full all Notes and other Obligations. 1.2 Section 1.1 of the Credit Agreement is hereby amended by adding the following definitions thereto: "Account-Related Agreements" means, collectively, (i) the Bank -------------------------- Credit Card Program Agreement, dated as of April 1, 1996 by and between Monogram Credit Card Bank of Georgia ("Monogram") and Montgomery Ward & Co., Incorporated ("MW"), and (ii) the Account-Related Agreement, dated as of April 1, 1996, by and between Montgomery Ward Credit Corporation ("MWCC") and MW, in each case as heretofore or, with Bankruptcy Court approval, hereafter amended. "Alternative Credit Program" means an agreement or agreements -------------------------- which are intended to replace in whole or in substantial part the Account- Related Agreements and provide MW with private label credit and charge cards on terms and conditions not less favorable to MW than those set forth in the Account Related Agreements. 1 "Credit Card Program" means (i) the private label credit and ------------------- charge card program as evidenced by the Account Related Agreements or (ii) the Alternative Credit Program 1.3 The Maturity Date is hereby extended by substituting "January 31, 1998" for "August 29, 1997" in the definition of Maturity Date as set forth in Section 1.1 of the Credit Agreement. 1.4 Article II is hereby amended by adding the following Section 2.12 thereto: 2.12 Extension Fee. (a) Concurrent with the execution by each Bank of ------------- the Waiver, Amendment and Extension Agreement dated as of August 29, 1997 ("Extension Agreement") among the Banks and the Borrower, the Borrower agrees to pay directly to each Bank in immediately available funds a fee equal to 1/4% of the aggregate outstanding principal amount of the Loans then outstanding from each Bank (it being understood that such fee shall be retained by such Bank regardless of whether the Extension Agreement becomes effective). (b) The Borrower agrees to pay to the Administrative Agent in immediately available funds, for the prorata account of each Bank, a fee of $2,000 per day for each day the Loans (or any principal amount thereof) remain outstanding during the month of January 1998. Such fee shall be payable on the earlier of the day all the Loans are repaid in full or January 31, 1998. 1.5 Section 8.1 of the Credit Agreement is amended by adding thereto Sections 8.1(q), (r) and (s) as follows: (q) MW Dip Financing. Any Event of Default shall occur and be ---------------- continuing under the Post Petition Loan and Guaranty dated as of July 8, 1997, as amended or modified as of July 30, 1997 (as the same may be amended, supplemented or otherwise modified from time to time) by and among MW and various debtor affiliates of MW, General Electric Capital Corporation, as Agent and Lender, and the other Lenders named therein, as approved by order dated August 1, 1997 of the United States Bankruptcy Court for the District of Delaware, In Re Montgomery Ward Holding Corp., a Delaware Corporation, et al., Case No. 97-1049 (PJW) or any subsequent -- -- order of the such court. (r) Citicorp Commitment Letter. (i) Any party to that certain -------------------------- Commitment Letter, dated as of October 23, 1997, between Citicorp USA, Inc. and the Borrower (the "Commitment Letter") revokes, withdraws, or terminates the Commitment Letter, or (ii) any amendment, modification or waiver is made to the Commitment Letter which is not acceptable to the Banks, or (iii) the Commitment Letter shall cease to be in full force and effect. 2 (s) Credit Card Program. (i) An amendment shall be made to the Credit ------------------- Card Program which is not approved by the Bankruptcy Court, or (ii) the Credit Card Program shall fail to remain in full force and effect, or (iii) any default by MW under the Credit Card Program (after the expiration of any applicable grace period) shall occur and be continuing which has not been waived and which provides any party thereunder with the right to terminate obligations of such party to extend credit to the customers of MW pursuant thereto or to purchase customer receivables thereunder from MW, as the case may be, or (iv) a court of competent jurisdiction shall enter an order terminating all or a substantial part of such Credit Card Program, or (v) a court of competent jurisdiction shall enter an order rejecting any Account Related Agreement as an executory contract pursuant to Section 365 of the Bankruptcy Code unless an Alternate Credit Program shall be in full force and effect as of the date of such rejection. 1.6 Schedules 5.5, 5.7, 5.11, 5.12, 5.16, and 5.17 are each hereby ------------- --- ---- ---- ---- ---- amended by adding thereto the items set forth in the applicable section of Schedule I attached hereto. 1.7 The waiver, amendment and extension contained herein are limited precisely to their terms and shall not constitute a waiver, amendment or other modification generally or for any other purpose. ARTICLE II REPRESENTATIONS AND WARRANTIES ------------------------------ The Borrower hereby represents and warrants to the Agents and the Banks as follows: II.1 No Default. No Default or Event of Default has occurred and is ---------- continuing, other than the Specified Default, or will exist after giving effect to this Agreement. II.2 Due Execution. The execution, delivery and performance of this ------------- Agreement, (i) are within the Borrower's corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) do not require any governmental approval which has not been previously obtained (and each such governmental approval that has been previously obtained remains effective), (iv) do not and will not contravene or conflict with any provision of law, or of any judgment, decree or order, or of the Borrower's charter or by-laws, and (v) do not and will not contravene or conflict with, or cause any Lien to arise under, any provision of any agreement binding upon the Borrower, any Subsidiary or any of their respective properties. II.3 Validity. The Credit Agreement as extended by this Agreement -------- constitutes the legal, valid and binding obligations of the Borrower, enforceable against it in accordance with its respective terms, without defense, counterclaim or offset. II.4 Credit Agreement. All representations and warranties of the ---------------- Borrower contained in Article 5 (except Section 5.11(b)) of the Credit Agreement are true and correct as of the date hereof with the same effect as though made on the date hereof. Since December 31, 1995, there has not occurred any event which (i) materially impairs the ability of the Borrower to perform its obligations under any Loan Document or to avoid, after the effective date hereof, any Event of Default, or (ii) materially adversely effects the legality, validity, binding effect or enforceability against the Borrower of any Loan Document. 3 ARTICLE III GENERAL ------- III.1 Expenses. The Borrower agrees to pay all fees and expenses of -------- each of the Agents and the Banks (including all legal fees and related expenses of separate counsel for each of the Banks and the Agents) in connection with the preparation, execution and delivery of this Agreement. III.2 Effectiveness. This Agreement shall become effective on the ------------- date on which, the Documentary Agent shall have received each of the following: (a) Agreement. Counterparts of this Agreement whether on the same --------- or different counterparts, executed by the Borrower and the Required Banks (or in the case of any Bank as to which an executed counterpart shall not have been so received, telegraphic, telefax, telex or other written confirmation of execution of a counterpart hereof by such Bank); (b) Agreement Fee. Evidence of payment from the Borrower to each ------------- Bank of the fee provided for in Section 2.12(a) of the Credit Agreement as herein amended; and (c) MW Court Order. The entry of an order by the United States -------------- Bankruptcy Court, District of Delaware, In Re Montgomery Ward Holding Corp., a Delaware Corporation, et. al., Case No. 97-1409(PJW) substantially -- -- in the form attached to the Waiver and Rescission of Acceleration dated as of July 15, 1997 (but modified so as to conform to this Agreement). III.3 Definitions. Except as otherwise herein specifically defined, ----------- all the capitalized terms contained herein shall have the meaning ascribed to such terms in the Credit Agreement. III.4 Reaffirmation. Except as hereinabove expressly provided, all ------------- the terms and provisions of the Credit Agreement shall remain in full force and effect and all references therein and in any related documents to the Credit Agreement shall henceforth refer to the Credit Agreement as extended by this Agreement. This Agreement shall be deemed incorporated into, and a part of, the Credit Agreement. III.5 Successors. This Agreement shall be binding upon and inure to ---------- the benefit of the parties hereto and their respective successors and assigns. III.6 Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of Illinois. III.7 Counterparts. This Agreement may be executed in any number of ------------ counterparts and by the different parties on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same agreement. 4 Dated at Chicago, Illinois as of the day, month and year first above written but executed and delivered on or after November 10, 1997. SIGNATURE FINANCIAL/MARKETING, INC. By: /s/ John B. Euwema ----------------------------- Name: John B. Euwema ACCEPTED AND APPROVED: THE BANK OF NEW YORK, in its individual capacity and in its capacity as Documentation Agent By: /s/ Julie B. Follosco -------------------------- Name: Julie B. Follosco THE BANK OF NOVA SCOTIA, in its individual capacity and in its capacity as Administrative Agent By: /s/ D. N. Gillespie -------------------------- Name: D. N. Gillespie Assistant General Manager 5 REAFFIRMATION OF GUARANTY: Each Guarantor hereby confirms and agrees that (i) its Guaranty dated as of September 27, 1996, as heretofore reaffirmed from time to time, is, and shall continue to be in full force and effect and is hereby ratified and confirmed in all respects, as applied to the Credit Agreement as modified above; (ii) to the extent the liability of any Guarantor under its Guaranty is limited by applicable law, such Guarantor shall be nonetheless liable under its Guaranty to the maximum extent permitted by applicable law, and (iii) to the extent that a Guarantor shall have paid more than its proportionate share of any payment made under its Guaranty, such Guarantor shall be entitled to seek and receive contribution from and against any other Guarantor which has not paid its proportionate share of such payment (it being understood that (a) such Guarantor's right of contribution shall be subordinated to the obligations of such Guarantor to the Banks and shall not be paid until all of the Obligations under the Credit Agreement have been indefeasibly paid in full, and (b) the provisions of this clause (iii) shall in no respect limit the obligations and liabilities of any Guarantor to the Banks, and each Guarantor shall remain liable to the Banks for the full amount guaranteed by such Guarantor under its Guaranty). CREDIT CARD SENTINEL, INC ISS AGENCY, INC. MONTGOMERY WARD CLUBS, INC. MONTGOMERY WARD ENTERPRISES, INC. SIGNATURECARD, INC. MONTGOMERY WARD FINANCIAL CENTER, INC. MONTGOMERY WARD AGENCY, INC. NATIONAL DENTAL SERVICE, INC. SIGNATURE DIRECT, INC. SIGNATURE INVESTMENT ADVISORS, INC. AMOCO MOTOR CLUB, INC. By: /s/ John B. Euwema ------------------------ Name: John B. Euwema 6 SCHEDULE I Schedule 5.5 (Litigation) is hereby amended by adding thereto the following: Schedule 5.7 (ERISA) is hereby amended by adding thereto the following: Schedule 5.11 (Permitted Liabilities) is hereby amended by adding thereto the following: Schedule 5.12 (Environmental Matters) is hereby amended by adding thereto the following: Schedule 5.16 (Subsidiaries and Minority Interests) is hereby amended by adding thereto the following: Schedule 5.17 (Insurance Matters) is hereby amended by adding thereto the following: 7 EX-10.(I)(P) 4 AGENCY AGREEMENT 10. (i) (P) AGENCY AGREEMENT DATED AS OF OCTOBER 31, 1997 BETWEEN THE JOINT VENTURE COMPOSED OF GORDON BROTHERS PARTNERS, INC., HILCO TRADING., INC./GARCEL, INC. D/B/A GREAT AMERICAN ASSET MANAGEMENT AND ALCO CAPITAL GROUP, INC., AS AGENT AND MONTGOMERY WARD & CO., INCORPORATED, FOR ITSELF AND ITS AFFILIATED DEBTORS IN POSSESSION, AS MERCHANT TABLE OF CONTENTS Section 1. Defined Terms.............................................. 1 Section 2. Appointment of Agent: Bankruptcy Court Approval............ 3 Section 3. Consideration to Merchant and Agent........................ 4 3.1. Payment[s] to Merchant..................................... 4 3.2. Compensation to Agent...................................... 5 3.3. Time of Payments........................................... 6 Section 4. Expenses of the Sale....................................... 6 4.1. Expenses................................................... 6 4.2. Payment of Expenses........................................ 8 Section 5. Inventory Valuation Merchandise............................ 8 5.1. Inventory Taking........................................... 8 5.2. Merchandise Subject to this Agreement...................... 9 5.3. Valuation..................................................11 5.4. Excluded Goods.............................................11 5.5. Post-Closing Payment.......................................12 Section 6. Sale Term..................................................12 6.1. Term.......................................................12 6.2. Vacating the Stores........................................12 Section 7. Sale Proceeds..............................................13 7.1. Proceeds...................................................13 7.2. Deposit of Proceeds........................................13 7.3. Credit Card Proceeds.......................................13 Section 8. Conduct of the Sale........................................14 8.1. Rights of Agent............................................14 8.2. Terms of Sales to Customers................................15 8.3. Sales Taxes................................................15 8.4. Supplies...................................................15 8.5. Returns of Merchandise.....................................16 8.6. Layaway, Repair and Special Order Merchandise..............17 8.7. Sale Reconciliation........................................17 8.8. Force Majeure..............................................17 8.9. Merchant Services..........................................17
Section 9. Employee Matters...........................................17 9.1. Merchant's Employees.......................................17 9.2. Termination of Employees...................................18 9.3. Payroll Matters............................................18 9.4. Employee Retention Bonuses.................................18 Section 10. Conditions Precedent.......................................18 Section 11. Representations, Warranties and Covenants..................19 11.1 Merchant Representations, Warranties and Covenants.........19 11.2 Agent Representations and Warranties.......................23 Section 12. Insurance..................................................24 12.1 Merchant's Liability Insurance.............................24 12.2 Merchant's Casualty Insurance..............................24 12.3 Agent's Insurance..........................................25 12.4 Worker's Compensation Insurance............................25 12.5 Risk of Loss...............................................25 Section 13. Indemnification............................................26 13.1. Merchant Indemnification...................................26 13.2 Agent Indemnification......................................27 Section 14. Defaults...................................................27 Section 15. FF&E.......................................................28 15.1. Sale for Commission........................................28 15.2. Guaranteed Return..........................................28 Section 16. Purchase of Automotive Parts...............................28 Section 17. Bid Procedures; Breakup Fee................................28 Section 18. Security Interest..........................................29 Section 19. Leased/Licensed Departments................................29
Section 20. Miscellaneous..............................................29 20.1 Notices....................................................29 20.2. Governing Law..............................................30 20.3. Termination................................................30 20.4. Entire Agreement...........................................30 20.5. Amendment..................................................30 20.6. No Waiver..................................................30 20.7. Successors and Assigns.....................................30 20.8. Execution in Counterparts..................................31 20.9. Section Headings...........................................31 20.10. Survival...................................................31
AGENCY AGREEMENT ---------------- This Agency Agreement is made as of this 31st day of October, 1997, by and between the joint venture composed of Gordon Brothers Partners, Inc., Hilco Trading Co., Inc./Garcel, Inc. d/b/a Great American Asset Management and ALCO Capital Group, Inc. (the "Agent"), and Montgomery Ward & Co., Incorporated, an ----- Illinois corporation and debtor in possession in a case pending in the United States Bankruptcy Court for the District of Delaware, for itself and its affiliated debtors in possession (the "Merchant"). R E C I T A L S - - - - - - - - WHEREAS, the Merchant is a debtor and debtor in possession under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. sections 101-1330 (as amended, the "Bankruptcy Code") in cases pending before the United States Bankruptcy --------------- Court for the District of Delaware (the "Bankruptcy Court"); and WHEREAS, the Merchant desires that the Agent act as the Merchant's exclusive agent for the limited purpose of selling all of the Merchandise (as hereinafter defined) located in Merchant's 48 retail store locations listed on Exhibit 1 attached hereto (each individually a "Store," and collectively the - --------- ----- "Stores"), by means of a promotional, store closing, "going out of business" or similar sale (as further described below, each a "Sale" and collectively, the ---- "Sales"). ----- NOW THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Agent and the Merchant hereby agree as follows: Section 1. Defined Terms. The terms set forth below are defined in the --------- ------------- referenced sections of this Agreement: Defined Term Section Reference ------------ ----------------- Agency Accounts Section 7.2 Agency Documents Section 11.1(b) Agent Preamble Agent Claim Section 12.5 Agent Indemnified Parties Section 13.1 Agent's Fee Section 3.2 Agent's Recovery Amount Section 3.1(b) Approval Order Section 2 Auction Section 17.1 Bankruptcy Code Recitals Bankruptcy Court Recitals Base Retail Price Section 5.3 Benefits Cap Section 4.1 1 Defined Term Section Reference ------------ ----------------- Central Service Expenses Section 4.1 Clearance Center Merchandise Section 5.2(b) Defective Merchandise Section 5.2(b) Display Merchandise Section 5.2(b) Excluded Benefits Section 4.1(b) Break-Up Fee Section 17.2 Closing Merchandise Inventory Section 5.5 Expense Recovery Section 3.1 Expenses Section 4.1 FF&E Section 5.2(a) Guaranteed Amount Section 3.1 (a) Inventory Date Section 5.1 Inventory Taking Section 5.1 Layaway Pick-up Date Section 8.6 Merchandise Section 5.2(a) Merchandise Ceiling Section 3.1(b) Merchandise Threshold Section 3.1 (b) Merchant Preamble Merchant's Recovery Amount Section 3.1 (a) Near Date Merchandise Section 5.2(b) Notice of Disagreement Section 5.5 Occupancy Expenses Section 4.1 Out of Date Merchandise Section 5.2(b) Out of Season Merchandise Section 5.2(b) Point of Sale Merchandise Section 5.2(b) Post-Closing Payment Section 5.5 Procedures Order Section 10(a) Proceeds Section 7.1 Remaining Stores Section 8.4 Repaired Merchandise Section 2 Retail Price Section 5.3 Retained Employee Section 9.1 Retained Merchandise Section 3.2 Retention Bonus Section 9.4 Returned Merchandise Section 8.5 ROR Merchandise Section 5.2(b) Sale Recitals Sale Commencement Date Section 6.1 Sale Guidelines Section 2 2 Defined Term Section Reference ------------ ----------------- Sale Term Section 6.1 Sale Termination Date Section 6.1 Sales Taxes Section 8.3 Sale Term Section 6.1 Sale Termination Date Section 6.1 Sales Taxes Section 8.3 Security Agreement Section 10(g) Services Cap Section 4.1(m) Settlement Date Section 5.5 Store(s) Recitals Supplies Section 8.4 Vendor Charge Back Merchandise Section 5.2(b) Warehouse Section 5.2(b) WARN Act Section 9.1 Section 2. Appointment of Agent: Bankruptcy Court Approval. The Merchant --------- ----------------------------------------------- hereby appoints the Agent, and the Agent hereby agrees to serve, as the Merchant's exclusive agent for the limited purpose of conducting the Sales in accordance with the terms and conditions of this Agreement. Merchant's and Agent's obligations hereunder are subject to approval of the Bankruptcy Court and shall be of no force and effect (other than the provisions of Section 17 upon entry of the Procedures Order) in the event that it is not so approved. As soon as practicable after Merchant's execution of this Agreement, Merchant shall apply to the Bankruptcy Court for an order approving this Agreement in its entirety in a form satisfactory to the Agent (the "Approval Order"). The Approval Order shall provide, among other things, that: (i) this Agreement is in the best interests of Merchant, Merchant's estate, creditors and other parties in interest; (ii) this Agreement (and each of the transactions contemplated hereby) is approved in its entirety; (iii) Merchant and Agent shall be authorized to take any and all actions as may be necessary or desirable to implement this Agreement and each of the transactions contemplated hereby; (iv) Agent shall be entitled to sell all Merchandise hereunder free and clear of all liens, claims, encumbrances or interests thereon ("Liens"); upon payment of the Guaranteed Amount to Merchant, Agent shall have a first priority Lien and security interest in the Merchandise and all Proceeds thereof, with any presently existing Liens encumbering all or any portion of the Merchandise or the Proceeds attaching only to the Guaranteed Amount, the Merchant's Recovery Amount, if any, and amounts reimbursed to Merchant on account of Expenses; (v) Agent shall have the right to use the Stores and all related Store services, furniture, fixtures, equipment and other assets of Merchant as designated hereunder for the purpose of conducting the Sale, free of any interference from any entity or person; (vi) subject to the terms of Section 8 hereof, Agent, as agent for Merchant, is authorized to conduct, advertise, post signs and otherwise promote the Sales as "store closing," "going out of business" or similar type sales without further consent of any person notwithstanding the terms of any lease that purport to restrict the conduct of the Sales; (vii) Agent shall be granted a limited license and right to use until the Sale Termination Date the trade names and logos relating to and used in connection with the operation of the Stores, solely for the purpose of advertising the Sales in accordance 3 with the terms of this Agreement; (viii) each and every federal, state or local agency, department or governmental authority with regulatory authority over the Sale and all newspapers and other advertising media in which the Sales are advertised shall be directed to accept the Approval Order as binding and to allow Merchant and Agent to consummate the transactions provided for in this Agreement, including, without limitation, the conducting and advertising of the Sales in the manner contemplated by this Agreement, and no further approval, license or permit of any governmental authority shall be required; (ix) all utilities, landlords, creditors and all persons acting for or on their behalf shall not interfere with or otherwise impede the conduct of the Sales, institute any action in any court (other than in the Bankruptcy Court) or before any administrative body which in any way directly or indirectly interferes with or obstructs or impedes the conduct of the Sales; (x) the Bankruptcy Court shall retain jurisdiction over the parties to enforce this Agreement; (xi) Agent shall not be liable for any claims against the Merchant other than as expressly provided for in this Agreement, and Agent shall have no successorship liabilities whatsoever; and (xii) Agent shall be entitled to the protections of section 363(m) of the Bankruptcy Code in the event that the Approval Order is reversed or modified on appeal. Merchant shall have the right, upon written notice to Agent on or before November 5, 1997, to amend Exhibit 1 attached hereto to add up to two additional stores of Merchant or to remove two Stores therefrom; provided that in the event of any such amendment to Exhibit 1, Merchant and Agent shall negotiate in good faith to determine the appropriate adjustment to the Merchandise Threshold and Merchandise Ceiling to reflect such amendment. In the event of any such amendment to Exhibit 1, the merchandise located at the Stores (x) added to Exhibit 1 shall constitute Merchandise in accordance with the terms of this Agreement and (y) removed from Exhibit 1 shall be excluded from the definition of Merchandise. Section 3. Consideration to Merchant and Agent. --------- ----------------------------------- 3.1. Payment[s] to Merchant --------------------- (a) (i) As a guaranty of Agent's performance hereunder, Merchant shall receive from Agent 43% of the aggregate Retail Price of the Merchandise, except for On Order Merchandise, Returned Merchandise, ROR Merchandise, Layaway, Repair and Special Order Merchandise received at the Stores on and after the Sale Commencement Date, for which Merchant shall receive the product of 43% of the Retail Price of the Merchandise times the complement of the then prevailing Sale discount at the time of the receipt of such Merchandise at the Stores (the "Guaranteed Amount"). ----------------- (ii) To the extent that Proceeds exceed the sum of the Guaranteed Amount, plus all Expenses, plus the Agent's Fee, plus Sales Taxes, Merchant shall receive from Agent 66-2/3% of such excess Proceeds (the "Merchant's Recovery Amount") and Agent shall retain 33-1/3% of such -------------------------- excess Proceeds (the "Agent's Recovery Amount"); provided, however, that ----------------------- for purposes of calculating the Merchant's Recovery Amount, Expenses shall not exceed 13.5% of the aggregate Retail Price of the Merchandise. 4 (iii) Agent shall pay to Merchant the Guaranteed Amount and the Merchant's Recovery Amount, if any, in the manner and at the time[s] specified in Section 3.3 below. The Guaranteed Amount and the Merchant's Recovery Amount will be calculated based upon (A) the final certified report of the inventory taking service after verification and reconciliation thereof by Agent and Merchant, and (B) reconciliation by Merchant and Agent of On Order Merchandise received at the Stores in the manner provided herein. (b) The Guaranteed Amount and Merchant's Recovery Amount have been calculated and agreed upon based upon Merchant's representation that the aggregate Retail Price of the Merchandise as of the Sale Commencement Date will not be less than $150 million (the "Merchandise Threshold") or more than $182 --------------------- million (the "Merchandise Ceiling"), that all such Merchandise will conform to ------------------- Merchant's representations and warranties contained herein, and that no representations, warranties or covenants of Merchant hereunder have been breached. Merchant and Agent agree that in the event that the aggregate Retail Price of Merchandise is less than the Merchandise Threshold or greater than the Merchandise Ceiling, then the percentage on which the Guaranteed Amount is based shall be reduced by .12% for each $1 million that such Retail Price is either less than the Merchandise Threshold or greater than the Merchandise Ceiling. The parties agree that the reduction in the percentage on which the Guaranteed Amount is based is Agent's sole remedy for the failure of the aggregate Retail Price of the Merchandise as of the Sale Commencement Date to be at least $150 million but less than $182 million in accordance with this Section 3.1(b). 3.2. Compensation to Agent. Agent shall receive as its compensation --------------------- for services rendered to Merchant from all remaining Proceeds of the Sales, after payment of the Guaranteed Amount, all Expenses and all Sales Taxes, an amount equal to up to 2 % of the aggregate Retail Price of the Merchandise (the "Agent's Fee"). In addition, to the extent that Proceeds exceed the sum of the ----------- Guaranteed Amount, plus all Expenses (provided, however, that for purposes of calculating the Merchant's Recovery Amount, Expenses shall not exceed 13.5% of the aggregate Retail Price of the Merchandise), plus the Agent's Fee, plus Sales Taxes, Agent shall receive from all remaining Proceeds of the Sales the Agent's Recovery Amount and Merchant shall receive from Agent the Merchant's Recovery Amount. Provided that no Event of Default has occurred and continues to exist on the part of the Agent, as additional consideration hereunder, all Merchandise remaining at the conclusion of the Sale shall become the property of Agent, free and clear of all Liens of any kind or nature; provided, however, that any net proceeds received from the disposition of any Merchandise which becomes the property of Agent pursuant to this paragraph at the conclusion of the Sale (the "Retained Merchandise") shall be deemed Proceeds under this Agreement for -------------------- purposes of calculating the Agent's Recovery Amount and the Merchant's Recovery Amount. Agent covenants to use its best efforts to maximize the value of the Merchandise, including the Retained Merchandise. 5 3.3. Time of Payments. ---------------- (a) The Agent shall pay to Merchant 75% of the estimated Guaranteed Amount attributable to Merchandise in the Stores as of the Sale Commencement Date within two business days after entry by the Bankruptcy Court Clerk of the Approval Order, which amount shall be calculated based upon Merchant's good faith estimate of the value of such Merchandise as of such date as set forth in Merchant's books and records; such estimate to be based on Merchant's HW fourth week (October 25, 1997) report, rolled forward to include projected sales and receipts of goods through such date and adjusted to reflect anticipated writedowns in accordance with Section 5.3 hereof. Thereafter, within two (2) business days after the Settlement Date, (i) Agent shall pay to Merchant any portion remaining due on account of the Guaranteed Amount (the "Post-Closing ------------ Payment"). Agent shall pay to Merchant any disputed portions of the Post-Closing - ------- Payment as soon as practicable after resolution of such dispute in accordance with Section 5.5 below; or (ii) to the extent that Agent's payment on account of the estimated Guaranteed Amount exceeds the actual Guaranteed Amount, Merchant shall immediately reimburse such excess to Agent. (b) The Agent shall make payments of the portion of the Guaranteed Amount attributable to On Order Merchandise, Returned Merchandise and Repair Merchandise received at the Stores after the Inventory Date on a weekly basis for all such items received during the prior week (i.e., Sunday through Saturday). Any such payment shall be made immediately following the weekly Sale reconciliation by Merchant and Agent pursuant to Section 8.7 below. (c) Within two (2) days after completion by Merchant and Agent of the final Sale reconciliation pursuant to Section 8.7 below, Agent shall pay to Merchant the Merchant's Recovery Amount due hereunder, if any. (d) All payments by Merchant or Agent hereunder shall be by wire transfer of immediately available funds. Section 4. Expenses of the Sale. --------- -------------------- 4.1. Expenses. Agent shall be responsible for all Expenses incurred -------- in conducting the Sales. As used herein, "Expenses" shall mean the following -------- direct Store-level expenses incurred in connection with the Sales at the Stores which arise during the Sale Term at the Stores: (a) base payroll (including commissions) actually accruing during the Sale Term for Retained Employees for actual days/hours worked in the conduct of the Sales; (b) amounts actually accruing during the Sale Term in respect of FICA, unemployment taxes, worker's compensation and benefits for Retained Employees, in an amount not to exceed 14% of base payroll for each Retained Employee (the "Benefits Cap"); ------------ 6 (c) Agent's Sale supervisors' fees, bonuses and expenses (including travel costs), for which Agent shall provide reasonable documentation; (d) advertising, promotional and in-Store signage expenses (at Merchant's contract rates, if available); (e) telephone expenses, armored car expenses, delivery charges and housekeeping expenses; (f) credit card (other than Merchant's private label charge cards) and bank card fees and discounts (at Merchant's customary rates) and chargebacks; (g) a pro-rata portion (based upon the length of the Sale Term) of each of Merchant's casualty insurance premiums attributable to the Merchandise and Merchant's general liability insurance premiums with respect to the Stores and the Merchandise; (h) Agent's cost of capital and other costs associated with the transaction (including Agent's reasonable attorneys' fees and expenses), for which Agent shall provide reasonable documentation; (i) expenses relating to transfers of Merchandise between Stores (other than as otherwise set forth herein); (k) expenses relating to the assembly of "ready to assemble" Merchandise; (l) Retention Bonuses as described in Section 9.4 below; and (m) Occupancy Expenses, limited on a per diem per Store basis and limited to those amounts and categories as described in Exhibit 4.1(m) -------------- attached hereto. Merchant agrees to provide Agent information management services, administrative services, payroll processing and similar services included in the services necessary for the Agent to conduct the Sales, including, without limitation POS administration, sales audit, cash reconciliation, payroll processing and other similar services. Agent agrees to pay Merchant for such services in an amount equal to $20,000 per week for all such costs and expenses for such services (the "Services Cap"). ------------ Notwithstanding anything to the contrary contained in this Section 4.1, "Expenses" shall include Agent's Sale supervisors' fees, bonuses and expenses (including travel costs) for which Agent shall provide reasonable documentation, incurred during the Inventory Taking and 50% of the fees and costs of the inventory taking service to conduct the Inventory Taking and "Expenses" shall not include: (i) Excluded Benefits; (ii) Central Service Expenses; and (iii) any other costs, expenses or liabilities payable by Merchant, all of which shall be paid by Merchant promptly when due for and during the Sale Term. 7 As used herein, the following terms have the following respective meanings: "Central Service Expenses" means costs and expenses for Merchant's ------------------------ central administrative services necessary for the Sale, including, but not limited to, MIS services, POS administration, payroll processing, sales audit, cash reconciliation and data processing and reporting, to the extent in excess of the Services Cap. "Excluded Benefits" means vacation days or vacation pay, sick days or ----------------- sick leave, maternity benefits or other leaves of absence, termination or severance pay, WARN Act benefits, union dues, pension benefits, ERISA coverage and similar contributions, and payroll taxes, worker's compensation and health insurance benefits in excess of the Benefits Cap. "Occupancy Expenses" means actual base rent, percentage rent, HVAC, ------------------ utilities, CAM, real estate taxes, merchant's association dues and charges, POS terminal leasing, trash removal, and building insurance relating to the Stores. 4.2. Payment of Expenses. All Expenses incurred during each week of ------------------- the Sale (i.e. Sunday through Saturday) shall be paid by Agent to or on behalf of Merchant, or offset from Proceeds held by Merchant, immediately following the weekly Sales reconciliation by Merchant and Agent pursuant to Section 8.7 below, based upon invoices and other documentation reasonably satisfactory to Agent. Section 5. Inventory Valuation Merchandise --------- ------------------------------- 5.1. Inventory Taking. If Agent is the successful bidder at the ---------------- Auction, Merchant shall close each Store at the end of normal business hours for such Store on November 5, 1997. Such Stores shall remain closed until the Sale Commencement Date. Merchant and Agent shall cause to be taken (i) a Retail Price physical inventory, and (ii) an "SKU" inventory of the Merchandise (the "Inventory Taking") commencing after the close of business at each of the Stores ---------------- on November 5, 1997 and ending prior to the commencement of business on November 8, 1997 (each such date of the Inventory Taking for each Store, as applicable, being the "Inventory Date"). Merchant and Agent shall jointly employ WIS or -------------- another mutually acceptable inventory taking service to conduct the Inventory Taking. Agent shall be responsible for 50% of the costs and fees of the inventory taking service as an Expense hereunder, and the balance of such costs and fees shall be paid by Merchant. Except as provided in the immediately preceding sentence, Merchant and Agent shall bear their respective costs and expenses relative to the Inventory Taking. Merchant and Agent shall each have representatives present during the Inventory Taking, and shall each have the right to review and verify the listing and tabulation of the inventory taking service. Merchant agrees that during the conduct of the Inventory Taking at each Store such Store shall be closed to the public and no sales or other transactions shall be conducted. The procedures to be used in the conduct of the Inventory Taking and its verifications are set forth on Exhibit 5.1 attached ----------- hereto. To facilitate the Inventory Taking, Merchant agrees to make its SKU data files and related computer hardware and software available to Agent and the inventory taking service commencing on the date of this Agreement. 8 5.2. Merchandise Subject to this Agreement. ------------------------------------- (a) For purposes of this Agreement, "Merchandise" shall mean: (i) all ----------- saleable finished goods inventory that is owned by Merchant and located at the Stores as of the Sale Commencement Date, including, without limitation, (A) Defective Merchandise, Near Date Merchandise and Out of Date Merchandise, (B) Display Merchandise, (C) Out of Season Merchandise, (D) Point of Sale Merchandise, (E) Clearance Center Merchandise; (ii) ROR Merchandise; and (iii) Vendor Charge Back Merchandise. Notwithstanding the foregoing, "Merchandise" ----------- shall not include: (1) goods which belong to sublessees, licensees or concessionaires of Merchant; (2) finished goods that are hard automotive parts that ordinarily require installation to sell in the ordinary course of business (which goods are addressed by Section 16 hereof); (3) goods held by Merchant on memo, on consignment, or as bailee; (4) defective goods, near date merchandise and out of date merchandise for which Merchant and Agent cannot agree upon a Retail Price; (5) furnishings, trade fixtures, equipment and improvements to real property which are located in the Stores (collectively, "FF&E"); (6) ---- display and floor sample merchandise that is not in working order; (7) goods delivered by Bose to Merchant that remain in sealed boxes on the Inventory Date applicable to each Store; (8) credit premiums offered by Merchant in the form of tangible assets ordinarily provided to customers as gifts; and (9) jewelry that was transferred into the Stores on or after October 7, 1997 and is identified on Exhibit 5.2(a) attached hereto. - -------------- (b) As used in this Agreement the following terms have the respective meanings set forth below: "Clearance Center Merchandise" means merchandise located at the Stores ---------------------------- identified as liquidation or clearance centers on Exhibit 1 hereto. --------- "Defective Merchandise" means any item of merchandise not included in --------------------- any of the other categories of Merchandise in this Section 5.2 and agreed upon and identified by Agent and Merchant during the Inventory Taking as defective or otherwise not salable in the ordinary course because it is dented, worn, scratched, broken, faded, soiled, stained, incomplete, shopworn, chipped, tom, mismatched or affected by other similar defects rendering it not first quality, and as to which Agent and Merchant mutually agree on its value to define its Retail Price. "Display Merchandise" means any item of Merchandise which is removed ------------------- from its packaging, or installed, affixed or otherwise on display for the purpose of viewing or demonstrating its function or design that is in working order and on a Store selling floor in the departments set forth in Exhibit ------- 5.2(b)(1). - --------- 9 "Layaway, Repair, and Special Order Merchandise" means all items of ---------------------------------------------- Merchandise held at the Stores on layaway or for repair, or customer-specific special orders for goods, in each case pursuant to binding agreements, invoices or other legal documentation, where (A) the documentation is clear as to the name, address, telephone number, date of last payment and balance due from the customer, and (B) the goods subject to layaway, repair or special order are properly identified, segregated, and in a condition as described in the documentation. "Near Date Merchandise" means any item of Merchandise with an --------------------- expiration date 30 days or less after the Sale Commencement Date which does not constitute Outdated Merchandise, and as to which Agent and Merchant mutually agree on its value to define its Retail Price. "On Order Merchandise" means first-quality, current in season or next -------------------- season goods (A) to be received at the Stores in the ordinary course from Merchant's vendors on or before November 24, 1997, (B) which are consistent as to type, quality and mix as Merchandise presently located at the Stores, (C) which are ticketed at Merchant's expense and in accordance with Merchant's historic ticketing practices upon delivery to the Stores, (D) having an aggregate Retail Price not in excess of $10,000,000, and (E) all of which is described in Exhibit 5.2(b)(2) attached hereto. ----------------- "Out of Date Merchandise" means Merchandise having an expiration date ----------------------- on or before the Sale Commencement Date and as to which Agent and Merchant mutually agree on its value to define its Retail Price. "Out of Season Merchandise," means all items of Merchandise which (a) ------------------------- relate to holidays falling outside of the Sale Term, including (in each case) items which are packed away for sale on a future date or (b) air conditioners that had not been returned to vendors or Warehouses as of the Inventory Date (the "Air Conditioners"), except Out of Season Merchandise does not include ---------------- Christmas or New Year Merchandise. "ROR Merchandise" means all items of Merchandise designated at the --------------- Stores as repaired or goods returned from retail customers that is in working order. "Point of Sale Merchandise" means Merchandise that has been priced on ------------------------- a point of sale basis below full retail prices for a period of at least six consecutive weeks commencing after August 17, 1997. "Vendor Charge Back Merchandise" means Merchandise that is awaiting ------------------------------ disposition or processing back to vendors in the Vendor Charge Back Rooms or other areas of the Stores. 10 5.3. Valuation. For purposes of this Agreement, "Retail Price" shall --------- ------------ mean, with respect to each item of Merchandise, the lower of (a) the lowest ticketed, lowest marked, or lowest selling price (including, without limitation, "red tags" and "yellow tags") of such item after September 1, 1997 but excluding temporary promotional activity, or (b) the SKU "FPLU" price of such item on October 26, 1997 (the "Base Retail Price"), except for: ----------------- (i) items of Out of Season Merchandise, where "Retail Price" shall mean (A) with respect to Air Conditioners, the lower of (x) seventy five percent (75%) of the Base Retail Price of each such item, or (y) the lowest price offered to the public for such item from September 1, 1997, as indicated in the Promotional Look Up File; and (B) with respect to all other items of Out of Season Merchandise, the lower of (x) fifty percent (50%) of the Base Retail Price of each such item, or (y) the lowest price offered to the public for such item from September 1, 1997, as indicated in the Promotional Look Up File; (ii) Defective Merchandise Near Date Merchandise, and Out of Date Merchandise where "Retail Price" shall mean such value as to which Agent and Merchant shall mutually agree; (iii) Point of Sale Merchandise where "Retail Price" shall mean the average offered retail price for such item by any and all means over the applicable six-week (or greater) period such goods were sold below ticketed or marked prices; (iv) Display Merchandise, where "Retail Price shall mean 80% of the Base Retail Price; (v) Clearance Center Merchandise and ROR Merchandise, where "Retail Price" shall mean the lower of the ticketed price and the "signed" price; and (vi) Vendor Charge Back Merchandise, where "Retail Price" shall mean 20% of the Base Retail Price. The Retail Price of any item of Merchandise shall exclude all Sales Taxes, and Merchant represents that (i) the ticketed prices of all items of Merchandise do not and shall not include any Sales Taxes, and (ii) all registers located at the Stores are programmed to correctly compute all Sales Taxes required to be paid by the customer under applicable law. If an item of Merchandise has more than one ticketed price, or if multiple items of the same SKU of like kind and quality are marked at different prices, the lowest ticketed price on any such item shall prevail for such item or for all such items within the same SKU, as the case may be, unless it is clear that the lowest ticket price was mismarked. 5.4. Excluded Goods. Merchant shall retain all responsibility for -------------- any goods not included as "Merchandise" hereunder. 11 5.5. Post-Closing Payment. Within 20 days after WIS delivers the -------------------- final inventory report to Merchant and Agent, Merchant and Agent shall jointly reconcile such report and use their respective good faith efforts to agree upon the aggregate Retail Price of all Merchandise included in the Inventory Taking determined in accordance with Sections 5.1, 5.2 and 5.3 (the "Closing ------- Merchandise Inventory"), together with an agreed upon determination of the Post- - --------------------- Closing Payment. The Closing Merchandise Inventory and the determination of the Post-Closing Payment shall become final and binding upon the parties on the earliest of (i) the date the parties hereto agree in writing with respect thereto or (ii) the date all matters in dispute are finally resolved in writing by the Bankruptcy Court. If Agent and Merchant and unable to agree upon the Closing Merchandise Inventory within such 20-day period or such additional periods to which the parties may agree, Agent and the Merchant shall submit to the Bankruptcy Court for review and resolution all matters which are dispute, and the Bankruptcy Court shall make a final determination of Closing Merchandise Inventory and the Post-Closing Payment in accordance with the guidelines and procedures set forth in this Agreement. The Closing Merchandise Inventory and the Post-Closing Payment as determined in accordance with this Section 5.5 shall become final and binding on the parties on the date the Bankruptcy Court delivers its final resolution to the parties. Agent and Merchant shall each bear their own fees and expenses in connection with the Bankruptcy Court's resolution. The "Settlement Date" shall be as applicable (a) the date the --------------- parties agree in writing to the Closing Merchandise Inventory and the Post- Closing Payment or (b) the date the matters in dispute are finally resolved by the Bankruptcy Court. Section 6. Sale Term. --------- --------- 6.1. Term. Subject to satisfaction of the conditions precedent set ---- forth in Section 13 hereof, the Sale shall commence at each Store on November 8, 1997 or on such other date on which Merchant and Agent shall agree (such date with respect to each Store being the "Sale Commencement Date"). The Agent shall complete the Sale at each Store no later than January 12, 1998, unless the Sale is extended by mutual written agreement of Agent and Merchant (the "Sale ---- Termination Date;" the period from the Sale Commencement Date to the Sale - ---------------- Termination Date as to each Store being the "Sale Term"). The Agent may, in its --------- discretion, terminate the Sale at any Store at any time within the Sale Term. 6.2. Vacating the Stores. At the end of the Sale Term at each Store, ------------------- Agent agrees to leave the Stores in "broom clean" condition and shall repair damage to the premises caused by removal, if any, of the FF&E by Agent or action or Agent, ordinary wear and tear excepted, subject to any right granted to Agent to sell or dispose of the FF&E pursuant to Section 15 below, and at which time Agent shall surrender and deliver the Store premises and Store keys to Merchant. Subject to any right granted to Agent to sell or dispose of the FF&E pursuant to Section 15 below, all assets of Merchant used by Agent in the conduct of the Sale (e.g. FF&E, Supplies, etc.) shall be returned by Agent to Merchant at the end of the Sale Term to the extent the same have not been consumed in the conduct of the Sale or have not been otherwise disposed of through no fault of the Agent. At Merchant's request on or before November 17, 1997, Agent shall use its reasonable efforts to vacate the Englewood Store on or about December 1, 1997. Merchant shall be responsible for all costs and expenses of transferring inventory from such 12 Store to one or more of the other Stores in its efforts to so vacate. Section 7. Sale Proceeds. --------- ------------- 7.1. Proceeds. For purposes of this Agreement, "Proceeds" shall -------- -------- mean the aggregate of. (a) the total amount (in dollars) of all sales of Merchandise made under this Agreement, exclusive of (i) Sales Taxes and (ii) returns, allowances and customer credits; (b) all proceeds of Merchant's or Agent's insurance for loss or damage to Merchandise or loss of cash arising from events occurring during the Sale Term; and (c) net proceeds of Retained Merchandise. 7.2. Deposit of Proceeds. All cash Proceeds shall be deposited by ------------------- Agent in agency accounts established by Agent (the "Agency Accounts"). Agent may, in its discretion, designate new or existing accounts of Agent or Merchant as the Agency Accounts, provided that such accounts are dedicated solely to the deposit of Proceeds and the disbursement of amounts payable by Agent hereunder. Agent shall exercise sole signatory authority and control with respect to the Agency Accounts. Merchant shall promptly upon Agent's request execute and deliver all necessary documents to open and maintain the Agency Accounts. To the extent that Agent shall elect to use existing accounts of Merchant as the Agency Accounts, (i) commencing on the first business day following the Sale Commencement Date, and on each business day thereafter, Merchant shall pay to Agent by wire funds transfer all collected funds constituting Proceeds deposited in such accounts and (ii) upon request, Merchant shall deliver to Agent copies of all bank statements and other information relating to such accounts. Merchant shall not be responsible for and Agent shall pay as an Expense hereunder, all bank fee and charges, including wire transfer charges, related to the Agency Accounts, whether received during or after the Sale Term. 7.3. Credit Card Proceeds. Agent shall have the right (but not the -------------------- obligation) to use Merchant's credit card facilities (including Merchant's credit card terminals and processor(s), credit card processor coding, merchant identification number(s) and existing bank accounts, but excluding the Montgomery Ward in-house charge card facility with General Electric) for credit card Proceeds. In the event that Agent elects so to use Merchant's credit card facilities, Merchant shall process credit card transactions on behalf of Agent and for Agent's account, applying customary practices and procedures. Without limiting the foregoing, Merchant shall cooperate with Agent to down-load data from all credit card terminals each day during the Sale Term and to effect settlement with Merchant's credit card processor(s), and shall take such other actions necessary to process credit card transactions on behalf of Agent under Merchant's merchant identification number(s). All credit card Proceeds will constitute the property of the Agent and shall be held by Merchant in trust for Agent. Merchant shall deposit all credit card Proceeds into a designated account and shall transfer such Proceeds to Agent daily (on the date received by Merchant if received prior to 12:00 noon, or otherwise within one business day) by wire transfer of immediately available funds. At Agent's request, Merchant shall cooperate with Agent to establish merchant identification numbers under Agent's name to enable Agent to process all credit card Proceeds for Agent's account. 13 Merchant shall not be responsible for and Agent shall pay as an Expense hereunder, all credit card fees, charges, and chargebacks related to the Sale, whether received during or after the Sale Term. Notwithstanding anything to the contrary in this Section 7.3, Agent shall not have the right to use Merchant's private label charge cards unless General Electric agrees in writing to an arrangement acceptable to Agent with respect thereto. Section 8. Conduct of the Sale. --------- ------------------- 8.1. Rights of Agent. Subject to the terms of the Store closing --------------- guidelines attached hereto is Exhibit 8.1, the Agent shall be permitted to ----------- conduct the Sales as "store closing" sales for the Stores identified on Exhibit ------- 8.1(a) attached hereto and as "going out of business" sales for the Stores - ------ identified on Exhibit 8.1(b) attached hereto or similar sale throughout the Sale -------------- Term. The Agent shall conduct the Sales in the name of and on behalf of the Merchant in a commercially reasonable manner and in compliance with the terms of this Agreement and the Approval Order. In addition to any other rights granted to Agent hereunder and subject to entry of the Approval Order, in conducting the Sales, the Agent, in the exercise of its sole discretion, shall have the right: (a) to establish and implement advertising, signage, and promotion programs consistent with the "store closing" theme as to Stores identified on Exhibit 8.1(a) or "going out of business" theme as to Stores -------------- identified on Exhibit 8.1(b) (including, without, limitation, by means of media -------------- advertising, banners, A-frame, and similar interior and exterior signs), provided, however, that Agent shall not advertise the Sales via television - -------- ------- broadcasting in the Dallas, Texas, Chicago, Illinois, Phoenix, Arizona, Los Angeles, California, Denver, Colorado, Detroit, Michigan and Tampa, Florida markets; provided further that the content of any radio and television -------- advertising shall be provided to Merchant and Merchant shall have the right within 48 hours of such delivery to approve such content (which approval shall not be unreasonably withheld or delayed). The failure of Merchant to object to the content of the advertising within such 48-hour period shall be deemed to constitute approval thereof by Merchant; (b) to establish Sale prices and Store hours; (c) to use without charge during the Sale Term all FF&E, advertising materials, bank accounts, computer hardware and software, Supplies, intangible assets (including Merchant's name, logo and tax identification numbers), Store keys, case keys, security codes, and safe and lock combinations required to gain access to and operate the Stores, and any other assets of Merchant located at the Stores (whether owned, leased, or licensed); (d) to transfer Merchandise between Stores and/or between the Stores; and 14 (e) to use (i) Merchant's central office facilities, central and administrative services and personnel to process payroll, perform MIS services and cash reconciliation, and provide other central office services necessary for the Sales, and (ii) one office located at Merchant's central office facility as necessary for the Sales and as currently provided. 8.2. Terms of Sales to Customers. All sales of Merchandise will be --------------------------- "final sales" and "as is," and all advertisements and sales receipts will reflect the same. Agent shall not warrant the Merchandise in any manner, but will, to the extent legally permissible, pass on all manufacturer's warranties to customers. All sales will be made only for cash, and by bank credit cards currently accepted by Merchant, but excluding Merchant's private label charge account. Agent shall, at Merchant's request, accept gift certificates, store credits and due bills and rain checks, discount cards and other promotional items providing the customer with an additional discount or credit which have been issued by Merchant prior to the Sale Commencement Date, provided that Merchant agrees to reimburse Agent in cash for the face amount of any such items (other than "Yes Club" and associate discounts) within five (5)days after Agent's request therefor. Agent will accept, in its sole discretion, "Yes Club" and associate discounts during the Sale Term, provided, however, that Agent shall accept associate discounts through November 16, 1997. 8.3. Sales Taxes. During the Sale Term, all sales, excise, gross ----------- receipts and other taxes attributable to sales of Merchandise (other than taxes on income) payable to any taxing authority having jurisdiction (collectively, "Sales Taxes") shall be added to the sales price of Merchandise and collected by ----------- Agent at the time of sale. The Agent shall draw checks on the Agency Accounts payable to the applicable taxing authorities in the amount so collected, which shall be delivered together with accompanying schedules to Merchant on a timely basis for payment of taxes when due. Merchant shall promptly pay all Sales Taxes and file all applicable reports and documents required by the applicable taxing authorities. Merchant will be given access to the computation of gross receipts and any and all other relevant information for verification of all such tax collections. 8.4. Supplies. Agent shall have the right to use, without charge, -------- all existing supplies located at the Stores, including, without limitation, boxes, bags, paper, twine and similar sales materials (collectively, "Supplies"). In the event that additional Supplies are required in any of the -------- Stores during the Sale, Merchant agrees to promptly provide the same to, Agent, if available, for which Agent shall reimburse Merchant at Merchant's cost therefor. Merchant does not warrant that the existing Supplies in the Stores as of the Sale Commencement Date are adequate for the purposes of the Sale. Supplies have not been since September 1, 1997, and shall not be prior to the Sale Commencement Date, transferred by Merchant between or among the Stores, Merchant's other locations not subject to the Sale (the "Remaining Stores") ---------------- and/or the merchandise storage facilities of Merchant (the "Warehouses"), so as to alter the mix or quantity of Supplies at the Stores from that existing on such date, other than in the ordinary course of business. 15 8.5. Returns of Merchandise. During the Sale Term the Agent shall ---------------------- accept returns of goods sold by Merchant from the Stores prior to the Sale Commencement Date only in accordance with Merchant's current custom and practice ("Returned Merchandise"), provided such goods are accompanied by the original -------------------- Store receipt and such return is otherwise in accordance with the applicable return policy for such Store in effect prior to the Sale Commencement Date. Merchant shall reimburse Agent in cash for the amount of any store credit or refund given to any customer in respect of Returned Merchandise. To the extent that Returned Merchandise is salable as first quality merchandise, it shall be included in Merchandise and for purposes of calculation of the Guaranteed Amount, shall be valued at the Retail Price applicable to such item multiplied by the compliment of the prevailing Sale discount at the time of the return. If the Returned Merchandise constitutes Defective Merchandise, Display Merchandise or Near Date Merchandise, it shall be included in Merchandise and assigned a Retail Price in accordance with the applicable provisions of Section 5.3 above multiplied by the compliment of the prevailing Sale discount. Subject to Merchant's reimbursement to Agent of the amount of any store credit or refund granted for any Returned Merchandise, the aggregate Retail Price of the Merchandise shall be increased by the Retail Price of any Returned Merchandise included in Merchandise (determined in accordance with this Section 8.5), and the Guaranteed Amount shall be adjusted accordingly. Any Returned Merchandise which is not included in Merchandise shall be disposed of by Agent in accordance with instructions received from Merchant or, in the absence of such instructions, returned to Merchant at the end of the Sale Term. Any increases in the Guaranteed Amount and any reimbursements due to Agent as result of Returned Merchandise shall be accounted for and paid by Agent and/or Merchant, as applicable, immediately following the weekly Sale reconciliation pursuant to Section 8.7 hereof. Upon Merchant's written request, and at Merchant's sole cost and expense, Agent shall mark Merchandise in the manner reasonably requested by Merchant to permit Merchant to identify such Merchandise at Merchant's stores (other than the Stores) upon return thereof. 8.6. Layaway, Repair and Special Order Merchandise. Promptly after --------------------------------------------- the execution of this Agreement, Merchant shall notify each customer for which Merchant holds Layaway, Repair and Special Order Merchandise of the Sale and request such customers to pick up and pay for the applicable item(s) by within seven (7) days of the Sale Commencement Date (the "Layaway Pick-up Date"). Any -------------------- amounts paid for Layaway, Repair and Special Order Merchandise on or before the close of business on the Layaway Pick-up Date shall be for the sole account of Merchant. Subject to applicable law, any Layaway, Repair and Special Order Merchandise unclaimed by customers by the Layaway Pick-up Date shall be included in Merchandise and the Guaranteed Amount shall be adjusted to account for such items in the manner prescribed for Returned Merchandise in Section 8.5 above. Prior to the Layaway Pick-up Date, Agent shall, administer all Layaway, Repair and Special Order Merchandise in accordance with the document and agreements relating thereto, provisions of applicable law, and Merchant's historic policies provided to Agent in writing. In the event that Agent is required to issue refunds to customers in respect of Layaway, Repair and Special Order Merchandise, Merchant shall reimburse Agent in cash for all such amounts. At the end of the Sale Term, Agent shall transfer responsibility for any remaining items of Layaway, Repair and Special Order Merchandise back to Merchant after appropriate and legally required communications to customers and reconciliation between Agent and Merchant. 16 All payments by Agent and Merchant required under this Section 8.6 shall be made immediately following the weekly Sale reconciliation by Agent and Merchant pursuant to Section 8.7 hereof. 8.7. Sale Reconciliation. On each weekday agreed upon by the ------------------- parties during the Sale Term, commencing on the second such weekday after the Sale Commencement Date, Agent and Merchant shall cooperate to reconcile Expenses, receipts of Returned Merchandise at the Stores (including quantities and Retail Price thereof, and such other Sale-related items as either party shall reasonably request, in each case for the prior week or partial week (i.e. Sunday through Saturday), all pursuant to procedures agreed upon by Merchant and Agent. Within forty five (45) days after the end of the Sale Term, Agent and Merchant shall complete a final reconciliation of the Sale, the written results of which shall be certified by representations of each of Merchant and Agent as a final settlement of accounts between Merchant and Agent. 8.8. Force Majeure. If any casualty or act of God prevents or ------------- substantially inhibits the conduct of business in the ordinary course at any Store, such Store and the Merchandise located at such Store shall, in Agent's discretion, be eliminated from the Sale and considered to be deleted from this Agreement as of the date of such event, and Agent and Merchant shall have no further rights or obligations hereunder with respect thereto; provided, however, -------- ------- that (i) the proceeds of any insurance attributable to such Merchandise shall constitute Proceeds hereunder, and (ii) the Guaranteed Amount shall be reduced to account for any Merchandise eliminated from the Sale which is not the subject of insurance proceeds, and Merchant shall reimburse Agent for the amount the Guaranteed Amount is so reduced prior to the end of the Sale Term. 8.9. Merchant Services. Throughout Sale Term, Merchant shall ----------------- provide to Agent such central administrative services as are necessary for the Sales, including, without limitation, MIS services, POS administration, payroll processing, sales audit, cash reconciliation and data processing and reporting. Section 9. Employee Matters. --------- ---------------- 9.1. Merchant's Employees. Agent may use Merchant's employees in the -------------------- conduct of the Sale to the extent Agent in its sole discretion deems expedient, and Agent may select and schedule the number and type of Merchant's employees required for the Sale. Agent shall identify any such employees to be used in connection with the Sale (each such employee, a "Retained Employee") prior to ----------------- the Sale Commencement Date. Retained Employees shall at all times remain employees of Merchant, and shall not be considered or deemed to be employees of Agent. Merchant shall have the right, with the prior written consent of Agent, to transfer Retained Employees to stores of Merchant (other than the Stores). 17 Merchant and Agent agree that except to the extent that wages and benefits of Retained Employees constitute Expenses hereunder, nothing contained in this Agreement and none of Agent's actions taken in respect of the Sale shall be deemed to constitute an assumption by Agent of any of Merchant's obligations relating to any of Merchant's employees including, without limitation, Excluded Benefits, Worker Adjustment Retraining Notification Act ("WARN Act') claims and other termination type claims and obligations, or any other amounts required to be paid by statute or law; nor shall Agent become liable under any collective bargaining or employment agreement or be deemed a joint or successor employer with respect to such employees. Notwithstanding anything to the contrary set forth in this Agreement, Agent shall be responsible for actions taken by Retained Employees at Agent's express direction. Merchant shall not, without prior written consent of Agent, raise the salary or wages or increase the benefits for, or pay any bonuses or make any other extraordinary payments to, any of its employees prior to the Sale Termination Date. Agent shall comply in the conduct of the Sale with all of Merchant's employee rules, regulations, guidelines and policies which have been provided to Agent in writing prior to the date of this Agreement. 9.2. Termination of Employees. Agent may in its discretion stop ------------------------ using any Retained Employee at any time during the Sale. In the event of termination of any Retained Employee, Agent will use all reasonable efforts to notify Merchant at least five (5) days prior thereto, except for termination "for cause" (such as dishonesty, fraud or breach of employee duties), in which event no prior notice to Merchant shall be required, provided Agent shall notify Merchant as soon as practicable after such termination. From and after the date of this Agreement and until the Sale Termination Date, Merchant shall not transfer or dismiss employees of the Stores except "for cause" without Agent's prior consent. 9.3. Payroll Matters. During the Sale Term Merchant shall process --------------- the base payroll for all Retained Employees. Each weekday agreed upon by the parties during the Sale Term the Agent shall transfer from the Agency Accounts to Merchant's payroll accounts an amount equal to the base payroll (including commissions) for Retained Employees plus related payroll taxes, worker's compensation and benefits for such week which constitute Expenses hereunder. Merchant has provided to Agent a true and accurate description of Merchant's base payroll, related payroll taxes, worker's compensation and employee benefits, and Merchant represents that such description is true and accurate in all material respects as of the date hereof. 9.4. Employee Retention Bonuses. In Agent's sole discretion Proceeds -------------------------- may be used to pay, as an Expense, retention bonuses ("Retention Bonuses") ----------------- (which bonuses shall be inclusive of payroll taxes but as to which no benefits shall be payable) to Retained Employees who do not voluntarily leave employment and are not terminated "for cause." Such Retention Bonuses shall be payable within thirty (30) days after the Sale Termination Date, and shall be processed through Merchant's payroll system. Section 10. Conditions Precedent. The willingness of Agent and Merchant ---------- -------------------- to enter into the transactions contemplated under this Agreement are directly conditioned upon the satisfaction of the following conditions at the time or during the time periods indicated, unless specifically waived in writing by the applicable party: 18 (a) The Order attached hereto as Exhibit 10(a) (the ------------- "Procedures Order") shall not have been stayed nor shall an application for a ---------------- stay of such order be pending. (b) Merchant shall have obtained the Approval Order by November 7, 1997, and the Approval Order shall not have been stayed nor shall an application for a stay of the Approval Order be pending. (c) All representations and warranties of Merchant and Agent hereunder shall be true and correct in all material respects and no event of Default shall have occurred at and as of the date thereof and as of the Sale Commencement Date. (d) Merchant shall have provided Agent reasonable access to all pricing files and, solely with respect to automotive parts referenced in Section 16, cost files, computer hardware, software and data files, inter-Store transfer logs, markdown schedules, invoices, style runs and all other documents relative to the price, mix and quantities of inventory located at the Stores. Section 11. Representations, Warranties and Covenants ---------- ----------------------------------------- 11.1 Merchant Representations, Warranties and Covenants. Merchant -------------------------------------------------- hereby represents, warrants and covenants in favor of Agent as follows: (a) Merchant: (i) is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation; (ii) has all requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as presently conducted; and (iii) is and during the Sale Term will continue to be, duly authorized and qualified as a foreign corporation to do business and in good standing in each jurisdiction where the nature of its business or properties requires such qualification, including all jurisdictions in which the Stores are located, except where the failure to be in good standing would not impair or impede the ability of Agent to conduct Sales at any Store located in a state for which Merchant is not in good standing. Merchant shall have furnished to Agent a certificate as to the good standing of Merchant in its jurisdiction of incorporation certified by the Secretary of State of such jurisdiction. (b) Subject to the issuance of the Approval Order: (i) the Merchant has the right, power and authority to execute and deliver this Agreement and each other document and agreement contemplated hereby (collectively, together with this Agreement, the "Agency Documents") and to ---------------- perform fully its obligations thereunder; (ii) except for any consent of the Merchant's post-petition lenders required under Merchant's current debtor-in- possession financing facility documents (the "DIP Lender Consent"), and the ------------------ Bankruptcy Court order approving such documents. 19 Subject to entry of the Approval Order, Merchant has taken all necessary actions required to authorize the execution, delivery and performance of the Agency Documents, and no further consent or approval is required for Merchant to enter into and deliver the Agency Documents, to perform its obligations thereunder, and to consummate the Sale; (iii) each of the Agency Documents has been duly executed and delivered by Merchant and constitutes the legal, valid and binding obligation of Merchant enforceable in accordance with its terms; (iv) no court order or decree of any federal, state or local governmental authority or regulatory body is in effect that would prevent or impair, or is required for the Merchant's consummation of, the transactions contemplated by this Agreement, and, except for any required DIP Lender Consent, no consent of any third party which has not been obtained is required therefor; and (v) no contract or other agreement to which the Merchant is a party or by which the Merchant is otherwise bound will prevent or impair the consummation of the Sale and the other transactions contemplated by this Agreement. (c) Merchant has continued to replenish the Stores with new Merchandise in a manner consistent with historic practices through October 12, 1997, and (iii) all goods in Merchant's pipeline shall continue to be delivered to the Stores in the ordinary course of business, without diversion, through October 24, 1997. (d) Merchant owns and will own at all times during the Sale Term, good and marketable title to all of the Merchandise free and clear of all Liens of any nature except for Liens which, in accordance with the Approval Order, shall attach only to the Guaranteed Amount, the Merchant's Recovery Amount, if any and amounts reimbursed to Merchant on account of Expenses and any and all other amounts paid by Agent to Merchant hereunder. (e) Except as set forth on Exhibit 11.1(e) attached hereto, --------------- since September 1, 1997 through and including October 15, 1997, all normal course permanent markdowns on inventory located at the Stores have been taken on a basis consistent with Merchant's historical practices and policies. (f) Except as set forth on Exhibit 11.1(f) attached hereto, --------------- from September 1, 1997 through and including October 15, 1997, Merchant has not marked up or raised the price of any items of Merchandise and Merchant has not since such date removed or altered any tickets or any indicia of clearance merchandise, except in the ordinary course of business. (g) Since September 1, 1997 and through the Sale Commencement Date, Merchant shall have ticketed or marked all items of inventory received at the Stores prior to the Sale Commencement Date in a manner consistent with similar Merchandise located at the Stores and in accordance with Merchant's customary practices and policies relative to pricing and marking inventory. 20 (h) Other than with respect to the jewelry addressed in Section 11.1(u) below, Merchant has not since September 1, 1997 and shall not up to the Sale Commencement Date purchase or transfer to or from the Stores any inventory or FF&E (including COM TEC machines and POS scanners) outside the ordinary course of business, including, without limitation, transfers in anticipation of the Sales or the Inventory Taking. Merchant has not, since September 1, 1997, and shall not hereafter move inventory or Merchandise to or from the Stores so as to alter the inventory mix, quantities or categories, except in the ordinary courses. (i) As of the Sale Commencement Date, Merchandise writedowns from Base Retail Price to Retail Price pursuant to the evaluation exceptions set forth in clauses (i) through (vi), inclusive, of Section 5.3 above shall be at least $10 million. (j) As of the date of this Agreement, and from the date hereof through the Sale Commencement Date, Merchant has not and shall not place or transfer merchandise to the Vendor Charge Back Rooms except in the ordinary course of business and consistent with past custom and practice. (k) To the knowledge of Merchant, no suit, action or other proceedings, or injunction or final judgment relating thereto, shall be threatened or pending before any court or governmental or regulatory official, body or authority in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with the transactions contemplated hereby or materially adversely affect the right of Agent under this Agreement, and no investigation that would result in any such suit, action or proceedings shall be pending or threatened. (l) Subject to the Inventory Taking, Merchant covenants to continue to operate the Stores in the ordinary course of business from the date of this Agreement to the Sale Commencement Date, in each case (i) selling inventory during such period at customary prices, (ii) not promoting or advertising any sales or in-store promotions (including POS promotions) to the public (except for Merchant's historic and customary promotions for all of its locations, (iii) not returning inventory to vendors and not transferring inventory or supplies between or among Stores and the Warehouses, except as permitted under Section 8.4 above, and (iv) not making any management personnel moves or changes at the Stores without Agent's prior written consent (which consent will not be unreasonably withheld). (m) During the Sale Term, Merchant shall not markdown or engage in promotions at its stores (other than the Stores) in markets where the Stores are located, except in the ordinary course of business consistent with historic practices. (n) To the best of Merchant's knowledge, all Merchandise is in compliance with all applicable federal, state or local product safety laws, rules and standards. Merchant shall provide Agent with its historic policies and practices regarding product recalls prior to the taking of the inventory at the Stores. 21 (o) Throughout the Sale Term, the Agent shall have the right to the peaceful use and occupancy of and quiet possession of, each of the Stores, the assets currently located at the Stores, and the utilities and other services provided in the ordinary course of business at the Stores. Merchant shall throughout the Sale Term maintain in good working order, condition and repair, at its sole expense, all cash registers, heating systems, air conditioning systems, elevators, escalators, Store alarm systems, and all other mechanical devices used in the ordinary course of operation of the Stores. (p) Merchant has paid and will continue to pay throughout the Sale Term, all post-petition (i) obligations in respect of self-insured or Merchant funded employee benefit programs for employees, including health and medical benefits and insurance and all proper claims made or to be made in accordance with such programs, (ii) all casualty, liability, worker's compensation and other insurance premiums, (iii) all utilities provided to the stores, and (iv) all applicable taxes. Merchant has provided Agent with a true and accurate description in all material respects of Merchant's severance benefits for which Retained Employees will be eligible at the conclusion of the Sale. Following the conclusion of the Sale, Merchant shall pay all such severance benefits to applicable Retained Employees in the ordinary course. (q) Merchant has not and shall not throughout the Sale Term take any actions the result of which is to materially increase the cost of operating the Sale, including, without limitation, increasing salaries or other amounts payable to employees. (r) As of the date of this Agreement, Merchant is current in the payment of all post-petition telephone, utilities, taxes, insurance and advertising liabilities. Merchant agrees that in the event that Agent receives notice that any such post-petition liability is overdue or unpaid, or Agent is unable to advertise the Sale with any newspapers, magazines, radio or television stations or other media providers which target or serve the market areas of the Stores or is unable to obtain Merchant's contract rate with any such provider solely as a result of the Merchant's failure to pay its outstanding postpetition balances with such providers, Merchant shall immediately pay such applicable balances in full. (s) Upon Agent's written request during the Sale Term, Merchant will make available to Agent all on-order files, style runs, open-to-buy reports, plan-to-sell reports, inventory transfer logs, sales reports, purchase journals, markdown calendars, POS calendars, pricing files, advertising schedules, promotion circulars up to the Sale Commencement Dale. (t) Except as set forth in Exhibit 11.1(t) attached hereto, from --------------- October 15, 1997 through the Sale Commencement Date, Merchant shall in no way raise, markdown or otherwise change the price of any item of Merchandise, other than point-of-sale activity in the ordinary course of business. (u) Merchant shall remove from the Stores all jewelry that was transferred into the Stores on or after October 7, 1997 and is identified in Exhibit 5.2(a) attached hereto and shall pay for all costs and expenses - -------------- associated with such removal. 22 11.2 Representations and Warranties. Each company comprising ------------------------------------ the Agent hereby represents, warrants and covenants (as to itself) in favor of the Merchant as follows: (a) It: (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of its incorporation; (ii) has all requisite corporate power and authority to consummate the transactions contemplated hereby; and (iii) is and during the Sale Term will continue to be, duly authorized and qualified as a foreign corporation to do business and in good standing in each jurisdiction where the nature of its business or properties requires such qualification. (b) It has the right, power and authority to execute and deliver each of the Agency Documents to which it is a party and to perform fully its obligations thereunder. It has taken all necessary actions required to authorize the execution, delivery, and performance of the Agency Documents, and no further consent or approval is required on its part for it to enter into and deliver the Agency Documents and to perform its obligations thereunder. Each of the Agency Documents has been duly executed and delivered by it and constitutes the legal, valid and binding obligation of it enforceable in accordance with its terms. No court order or decree of any federal, state or local governmental authority or regulatory body is in effect that would prevent or impair or is required for its consummation of the transactions contemplated by this Agreement, and no consent of any third party which has not been obtained is required therefor. No contract or other agreement to which it is a party or by which it is otherwise bound will prevent or impair the consummation of the transactions contemplated by this Agreement. (c) No action, arbitration, suit, notice, or legal, administrative or other proceeding before any court or governmental body has been instituted by or against it, or has been settled or resolved, or to its knowledge, has been threatened against or affects it, which questions the validity of this Agreement or any action taken or to be taken by it in connection with this Agreement, or which if adversely determined, would have a material adverse effect upon its ability to perform its obligations under this Agreement. (d) In connection with the Sales, Agent shall provide for the Sale Term not less than the full-time equivalent of forty five (45) supervisors and not less than ten (10) start-up supervisors for a lesser period. (e) Agent shall provide Merchant with at least ten (10) days' prior written notice of the anticipated Sale Termination Date with respect to any Store. (f) Agent agrees not to transfer Merchandise other than between or among Stores during the Sale Term. 23 (g) Agent shall provide Merchant (and any agent of Merchant retained to dispose of the FF&E) with access to the Stores upon reasonable notice to Agent so as to permit Merchant (or such agent) to market the FF&E at a Store during the last thirty (30) days of the Sale at such Store; provided that such access does not unreasonably disrupt Agent in the conduct of the Sales and does not require any time or effort by Agent or employees of the Stores. Neither Agent nor any of Agent's employees or the Retained Employees shall have any obligation to participate in this marketing of the FF&E. (h) Each of the joint venturers referred to in the preamble to this Agreement hereby acknowledges and agrees that it shall be jointly and severally liable for the obligations of Agent hereunder. Section 12. Insurance. ---------- --------- 12.1 Merchant's Liability Insurance. Merchant shall continue, at ------------------------------ Agent's cost as an Expense hereunder, until the Sale Termination Date, in such amounts as it currently has in effect, all of its liability insurance policies including, but not limited to, products liability, comprehensive public liability, auto liability and umbrella liability insurance, covering injuries to persons and property in, or in connection with Merchant's operation of the Stores, and shall cause Agent to be named an additional named insured with respect to all such policies. Merchant has provided Agent with true and accurate copies of all such policies. Prior to the Sale Commencement Date, Merchant shall deliver to Agent certificates evidencing such insurance setting forth the duration thereof and naming Agent as an additional named insured, in form reasonably satisfactory to Agent. All such policies shall require at least thirty (30) days prior notice to Agent of cancellation, non-renewal or material change. In the event of a claim under any such policies Merchant shall be responsible for the payment of all deductibles, retentions or self-insured amounts thereunder, unless it is determined that liability arose by reason of the wrongful acts or omissions or negligence of Agent, or Agent's employees, independent contractors or agents (other than Merchant's employees). 12.2 Merchant's Casualty Insurance. Merchant will provide throughout ----------------------------- the Sale Term, at Agent's cost as an Expense hereunder, fire, flood, theft and extended coverage casualty insurance covering the Merchandise in a total amount equal to no less than the cost value thereof. Merchant has provided Agent with true and accurate copies of all such policies. From and after the date of this Agreement until the Sale Termination Date, all such policies will name Agent as loss payee. In the event of a loss to the Merchandise on or after the date of this Agreement, the proceeds of such insurance attributable to the Merchandise plus any self insurance amounts and the amount of any deductible (which amounts shall be paid by Merchant), shall constitute Proceeds hereunder and shall be paid to Agent. In the event of such a loss Agent shall have the sole right to adjust the loss with the insurer. Prior to the Sale Commencement Date, Merchant shall deliver to Agent certificates evidencing such insurance setting forth the duration thereof and naming the Agent as loss payee, in form and substance reasonably satisfactory to Agent. All such policies shall require at least thirty (30) days prior notice to the Agent of cancellation, non-renewal or material change. 24 Merchant shall not make any change in the amount of any deductibles or self insurance amounts prior to the Sale Termination Date without Agent's prior written consent. 12.3 Agent's Insurance. Agent shall maintain at Agent's cost and ----------------- expense throughout the Sale Term, in such amounts as it currently has in effect, comprehensive public liability and automobile liability insurance policies covering injuries to persons and property in or in connection with Agent's agency at the Stores, and shall cause Merchant to be named an additional insured with respect to such policies. Agent shall provide Merchant, c/o Rob Thoma, with true and accurate copies of all such policies. Prior to the Sale Commencement Date, Agent shall deliver to Merchant certificates evidencing such insurance policies setting forth the duration thereof and naming Merchant as an additional insured, in form and substance reasonably satisfactory to Merchant. In the event of a claim under any such policies, Agent shall be responsible for the payment of all deductibles, retentions or self-insured amounts thereunder, unless it is determined that liability arose by reason of the wrongful acts or omissions or negligence of Merchant or Merchant's employees, independent contractors or agents (other than Agent or Agent's employees, agents or independent contractors). 12.4 Worker's Compensation Insurance. Merchant shall at all times ------------------------------- during the Sale Term maintain in full force and effect worker's compensation insurance (including employer liability insurance) covering all Retained Employees in compliance with all statutory requirements. Prior to the Sale Commencement Date, Merchant shall deliver to Agent a certificate of Merchant's insurance broker or carrier evidencing such insurance. 12.5 Risk of Loss. Without limiting any other provision of this ------------ Agreement, Merchant acknowledges that Agent is conducting the Sale on behalf of Merchant solely in the capacity of an agent, and that in such capacity (i) Agent shall not be deemed to be in possession or control of the Stores or the assets located therein or associated therewith, or of Merchant's employees located at the Stores, and (ii) except as expressly provided in this Agreement, Agent does not assume any of Merchant's obligations or liabilities with respect to any of the foregoing. Merchant and Agent agree that Merchant shall bear all responsibility for liability claims of customers, employees and other persons arising from events occurring at the Stores during and after the Sale Term, except to the extent any such claim arises directly from the acts or omissions of Agent, or its supervisors or employees located at the Stores or actions taken by Retained Employees at Agent's express direction (an "Agent Claim"). In the event of any such liability claim other than an Agent Claim, Merchant shall administer such claim and shall present such claim to Merchant's liability insurance carrier in accordance with Merchant's historic policies and procedures, and shall provide a copy of the initial documentation relating to such claim to: Agent: Gordon Brothers Companies 500 North Michigan Avenue Suite 1460 Chicago, IL 60611 Attn: Cory Lipoff 25 Hilco Great American Group 5 Revere Drive, Ste. 206 Northbrook, IL 60062 Attn: Benjamin L. Nortman AND ALCO Capital Group, Inc. 745 Fifth Avenue, Suite 1506 New York, NY 10151 Attn: Alan Cohen Merchant: Montgomery Ward & Co., Incorporated Montgomery Ward Corporate Offices Montgomery Ward Place Chicago, IL 60671 Attn: Spencer H. Heine, Esq. To the extent that Merchant and Agent agree that a claim constitutes an Agent Claim, Agent shall administer such claim and shall present such claim to its liability insurance carrier, and shall provide a copy of the initial documentation relating to such claim to Merchant at Montgomery Ward & Co., Incorporated, Montgomery Ward Corporate Offices, Montgomery Ward Place, Chicago, IL 60671, Attn: Phil Delk, Esq. In the event that Merchant and Agent cannot agree whether a claim constitutes an Agent Claim, each party shall present the claim to its own liability insurance carrier, and a copy of the initial claim documentation shall be delivered to the other party to the foregoing address. Section 13. Indemnification. ---------- --------------- 13.1. Merchant Indemnification. Merchant shall indemnify and hold ------------------------ Agent and its officers, directors, employees, agents and independent contractors (collectively, "Agent Indemnified Parties") harmless from and against all claims, demands, penalties, losses, liability or damage, including, without limitation, reasonable attorneys' fees and expenses, directly or indirectly asserted against, resulting from, or related to: (i) Merchant's material breach of or failure to comply with any of its agreements, covenants, representations or warranties contained in any Agency Document; (ii) any failure of Merchant to pay to its employees any wages, salaries or benefits due to such employees during the Sale Term; 26 (iii) subject to Agent's compliance with its obligations under Section 8.3 hereof, any failure by Merchant to pay any Sales Taxes to the proper taxing authorities or to properly file with any taxing authorities any reports or documents required by applicable law to be filed in respect thereof, (iv) any consumer warranty or products liability claims relating to Merchandise; (v) any liability or other claims asserted by customers, any of Merchant's employees, or any other person against any Agent Indemnified Party (including, without limitation, claims by employees arising under collective bargaining agreements, worker's compensation or under the WARN Act), except for Agent Claims; and (vi) the gross negligence or willful misconduct of Merchant or any of its officers, directors, employees, agents or representatives. 13.2 Agent Indemnification. Agent shall indemnify and hold Merchant --------------------- and its officers, directors, employees, agents, representatives and independent contractors harmless from and against all claims, demands, penalties, losses, liability or damage, including, without limitation, reasonable attorneys' fees and expenses, directly or indirectly asserted against, resulting from, or related to: (i) Agent's material breach of or failure to comply with any of its agreements, covenants, representations or warranties contained in any Agency Document; (ii) any harassment or any other unlawful, tortious or otherwise actionable treatment of any employees or agents of Merchant by Agent or any of its representatives; (iii) any claims by any party engaged by Agent; (iv) any Agent Claims; and (v) the gross negligence or willful misconduct of Agent or any of its officer, directors, employees agents or representatives. Section 14. Defaults. The following shall constitute "Events of Default" ---------- -------- hereunder: (a) Merchant's or Agent's failure to perform any of their respective material obligations hereunder, which failure shall continue uncured seven (7) days after written notice thereof to the defaulting party; or 27 (b) Any representation or warranty made by Merchant or Agent proves untrue in any material respect as of the date made; or (c) The Sale is terminated at a Store for any reason other than (i) an Event of Default by Agent, or (ii) any other breach or action by Agent not authorized hereunder, or (iii) an event administered pursuant to Section 8.8 above. In the event of an Event of Default, any party's damages or entitlement to equitable relief shall be determined by the Bankruptcy Court. Section 15. FF&E ---------- ---- 15.1. Sale for Commission. If requested in writing by Merchant after ------------------- entry of the Approval Order, Agent shall advertise in the context of advertising for the Sale that items of FF&E at the Stores are for sale, and shall contact and solicit known purchasers and dealers of furniture and fixtures. Merchant shall notify Agent in writing if any such FF & E are to be excluded from sale and/or items and conditions of sale are to be set or restricted in any manner. In consideration of providing such services, Agent shall retain the percentages of receipts set forth on Exhibit 15.1 attached hereto from all sales or other ------------ dispositions of FF&E. In addition, Merchant shall reimburse Agent for Agent's reasonable out of pocket expenses incurred in connection with the liquidation of FF&E from the receipts. Agent shall have no liability for its failure to sell any and all FF&E and shall have the right, to the extent necessary, to abandon the FF&E not so sold, but otherwise shall leave the stores in broom clean condition. 15.2. Guaranteed Return. In the event that the Merchant does not ----------------- elect the option set forth in Section 15.1 above, but does provide Agent with a written request by November 10, 1997, following Agent's full inspection of the FF&E (whether located in the Stores, stockrooms, Warehouses, or offices or otherwise), Agent will provide Merchant with a written offer to sell the FF&E with a guaranteed return to Merchant. Section 16. Purchase of Automotive Parts. If requested in writing by ---------- ---------------------------- Merchant, Agent shall purchase all hard automotive parts of Merchant located in the Stores that ordinarily require Merchant installation, including, without limitation, department number 61, lines B, C, D, N, U and X (which shall not include tires and batteries) for an aggregate amount equal to 22% of the Cost Value thereof. Any and all amounts received by Agent from the resale of such automotive parts shall not constitute Proceeds hereunder and Agent shall be entitled to retain all such amounts. "Cost Value" shall mean the lowest costs for such SKUs as referenced on Merchant's books and records, but Cost Value shall not exceed 50% of the Base Retail Price. The parties shall work in good faith to further clarify the definition of "Cost Value." Section 17. Bid Procedures; Breakup Fee. Merchant shall require competing ---------- --------------------------- bids to be submitted in accordance with all of the terms of the Procedures Order. In the event that Merchant has so received one or more competing bids in accordance therewith, then on Tuesday, November 4, 1997, Merchant shall conduct an auction with respect to the rights granted hereunder (the "Auction") in accordance with the Procedures Order. 28 In addition to the break-up fee (the "Break-Up Fee"), Merchant shall reimburse ------------ Agent for all costs and expenses incurred by or on behalf of Agent in connection with the Inventory Taking and the costs of signage and other advertising as required pursuant to the Procedures Order. Merchant shall consider the economic impact of the Merchant's obligation to pay the Break-Up Fee in determining whether a competitive bid is higher and better for Merchant and its estate than any bid submitted by Agent. Section 18. Security Interest. In consideration of the Agent's payment of ---------- ----------------- the Guaranteed Amount, Expenses and the provision of services hereunder to Merchant, the Merchant hereby grants to Agent a first priority security interest in and lien upon the Merchandise and the Proceeds to secure all obligations of Merchant to Agent hereunder. Merchant shall execute all such documents and take all such other actions as are reasonably required to perfect and maintain such security interest as a valid and perfected first priority security interest. Section 19. Leased/Licensed Departments. Agent shall receive 50% of any --------------------------- net proceeds to which Merchant is entitled on account of leased or licensed departments. Section 20. Miscellaneous. ---------- ------------- 20.1 Notices. All notices and communications provided for pursuant ------- to this Agreement shall be in writing, and sent by hand, by facsimile, or by Federal Express or other recognized overnight delivery service, as follows: If to the Agent: Gordon Brothers Companies 500 North Michigan Avenue Suite 1460 Chicago, IL 60611 Attn: Cory Lipoff Telecopy No.: (312) 321-1323 Hilco Great American Group 5 Revenue Drive, Suite 206 Northbrook, IL 60602 Attn: Benjamin L. Nortman Telecopy: (847) 509-1150 ALCO Capital Group, Inc. 745 Fifth Avenue, Suite 1506 New York, NY Attn: Alan Cohen Telecopy No.: (212) 371-2768 29 with a copy to: Kirkland & Ellis 200 E. Randolph Drive Chicago, IL 60601 Attn: James H. M Sprayregen Telecopy No.: (312) 861-2200 If to the Merchant: Montgomery Ward & Co., Incorporated Montgomery Ward Corporate Offices Montgomery Ward Plaza Chicago, IL 60671 Attn: Spencer H. Heine, Esq. Telecopy No.: 312/467-3064 with a copy to: Jones, Day, Reavis & Pogue 77 West Wacker Drive, Suite 3500 Chicago, IL 60601-1692 Attn: David S. Kurtz, Esq. Telecopy No.: 312/782-8585 20.2. Governing Law. This Agreement shall be governed and construed ------------- in accordance with the laws of the State of Illinois without regard to conflicts of laws principles thereof, except where governed by the Bankruptcy Code. 20.3. Termination. Agent may terminate this Agreement prior to the ----------- Approval Order becoming a final and non-appealable order by providing Merchant with written notice from Agent that any of the conditions specified in Section 10 hereof have not been satisfied. by November 8, 1997. Notwithstanding the foregoing, the representations and warranties of Merchant and Agent contained herein and the provisions of Section 13 and 17 (with respect to fees, costs and expenses) above shall survive the termination of this Agreement pursuant to this Section 20.3. 20.4. Entire Agreement. This Agreement contains the entire agreement ---------------- between the parties hereto with respect to the transactions contemplated hereby and supersedes and cancels all prior agreements, including, but not limited to, all proposals, letters of intent or representations, written or oral, with respect thereto. 20.5. Amendment. This Agreement may not be modified except in a --------- written instrument executed by each of the parties hereto. 20.6. No Waiver. No consent or waiver by any party, express or --------- implied, to or of any breach or default by the other in the performance of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance by such other party of the same or any other obligation of such party. 30 Failure on the part of any party to complain of any act or failure to act by the other party or to declare the other party in default, irrespective of how long such failure continues, shall not constitute a waiver by such party of its rights hereunder. 20.7. Successors and Assigns. This Agreement shall inure to the ---------------------- benefit of and be binding upon Agent and Merchant, and their respective successors and assigns; provided, however, that this Agreement may not be assigned by Merchant or Agent to any party without the prior written consent of the other, except that ALCO Capital Group may assign up to 50% of its interest hereunder to the NASSI Group. 20.8. Execution in Counterparts. This Agreement may be executed in ------------------------- two or more counterparts, each of which shall be deemed an original but all of which together shall constitute but one agreement. This Agreement may be executed by facsimile, and such facsimile signature shall be treated as an original signature hereunder. 20.9. Section Headings. The headings of sections of this Agreement ---------------- are inserted for convenience only and shall not be considered for the purpose of determining the meaning or legal effect of any provisions hereof. 20.10. Survival. All representations, warranties, covenants and -------- agreements made by the parties hereto shall be considered to have been relied upon by the parties and shall survive the execution, delivery and performance of this Agreement. IN WITNESS WHEREOF, the Agent and Merchant hereby execute this Agreement by their duly authorized representatives as a sealed instrument as of the day and year first written above. A JOINT VENTURE COMPOSED OF GORDON BROTHERS PARTNERS, INC. AND HILCO TRADING COMPANY/GARCEL, INC. D/B/A GREAT AMERICAN ASSET MANAGEMENT AND ALCO CAPITAL GROUP, INC. GORDON BROTHERS PARTNERS, INC. By: /s/ Cory Lipoff ---------------------------- Name: Cory Lipoff Title: Managing Director 31 HILCO TRADING COMPANY By: /s/ Benjamin L. Nortman --------------------------------- Name: Benjamin L. Nortman Title: Vice President & General Counsel GARCEL, INC. By: /s/ Gary Mintz --------------------------------- Name: Gary Mintz Title: President ALCO CAPITAL GROUP, INC. By: /s/ Jack Rapp -------------------------------- Name: Jack Rapp Title: Authorized Signature MONTGOMERY WARD & CO., INCORPORATED, FOR ITSELF AND ITS AFFILIATED DEBTORS By: /s/ Spencer H. Heine --------------------------------- Name: Spencer H. Heine Title: Executive Vice President 32 LIST OF EXHIBITS ---------------- EXHIBIT DESCRIPTION - ------- ----------- Exhibit 1 The Stores Exhibit 4.1(m) Occupancy Expenses Exhibit 5.1 Inventory Taking Procedures Exhibit 5.2(a) Transferred Jewelry Exhibit 5.2(b)(1) Display Merchandise Exhibit 5.2(b)(2) On-Order Merchandise Exhibit 8.1 Store Closing Guidelines Exhibit 8.1(a) Store Closing Sales Exhibit 8.1(b) Going Out of Business Sales Exhibit 10 (a) Bid Procedures Order Exhibit 11.1(e) Disclosure of Markdowns Exhibit 11.1(f) Disclosure of Markdowns Exhibit 11.1(t) Disclosure of Price Changes Exhibit 15.1 Receipts 33 EX-10.(IV)(D)(5) 5 INCORPORATED RETIREMENT SECURITY PLAN 10.(iv)(D)(5) MONTGOMERY WARD & CO., INCORPORATED Fifth Amendment to the Montgomery Ward & Co., Incorporated Retirement Security Plan WHEREAS, Montgomery Ward & Co., Incorporated, an Illinois corporation ("Ward"), maintains the Montgomery Ward & Co., Incorporated Retirement Security Plan ("Plan"); and WHEREAS, pursuant to Section 17.1 Power to Amend, the Benefit Plans -------------- Committee of Ward ("Committee") has reserved the power to amend the Plan; and WHEREAS, the Committee desires to amend the Plan. NOW, THEREFORE, the Plan is amended effective September 17, 1997 in the following manner: 1. ARTICLE II, Definitions, is hereby amended by adding the following new ----------- definitions: "2.5A 'Average Weekly Hours' means the most recent twelve (12) months actual hours paid divided by fifty-two (52) weeks, or, if the Eligible Location Shutdown Participant has less than one (1) year of Continuous Service, the Eligible Location Shutdown Participant's actual hours paid since the start of the period of Continuous Service divided by the number of weeks paid. 2.13A 'Daily Pay Rate' means the Weekly Pay Rate divided by five (5). 2.18A 'Eligible Location Shutdown Participant' means each Associate (other than each part-time or temporary Associate who is neither eligible to participate in the Plan nor has two (2) years of Continuous Service) who (a) was not employed by Signature Financial/Marketing, Inc.; (b) was not covered by a collective bargaining agreement; (c) was not bonus eligible (not a grade fifteen (15) or higher); (d) terminated employment with the Company on or after September 17, 1997 as a result of a closure of a facility announced on or after September 1, 1997, as determined by the Committee and (e) entered into any release and waiver agreement as requested by the Company. Notwithstanding anything herein to the contrary, to be an Eligible Location Shutdown Participant an Associate must also remain employed with the Company until the date of the Associate's permanent lay-off by the Company because of the closure of the facility. 1 2.52A 'Weekly Pay Rate' means (a) for management and administrative supervisory Eligible Location Shutdown Participants, the Eligible Location Shutdown Participant's annual base salary on the date of the announcement of the closure of the applicable facility (or for Eligible Location Shutdown Participants who are on an authorized leave of absence as approved by the Committee on the date of the announcement of the closure of the applicable facility, the Eligible Location Shutdown Participant's annual base salary on the date immediately preceding the first day of such leave of absence) divided by fifty-two (52) and (b) for wage Eligible Location Shutdown Participants, the Eligible Location Shutdown Participant's hourly base rate of pay/draw rate on the date of the announcement of the closure of the applicable facility (or for Eligible Location Shutdown Participants who are on an authorized leave of absence as approved by the Committee on the date of the announcement of the closure of the applicable facility, the Eligible Location Shutdown Participant's hourly base rate of pay/draw rate on the date immediately preceding the first day of such leave of absence) multiplied by Average Weekly Hours." 2. The text of Section 2.51 is hereby deleted in its entirety and the following is inserted in lieu thereof: "'Vest', 'Vested' or 'Vesting' means the acquisition by a Participant, an Eligible Location Shutdown Participant or the Participant's or the Eligible Location Shutdown Participant's Beneficiary of a nonforfeitable right to a Retirement Benefit, except in the event of the Participant's death prior to the time prescribed for payment of such Retirement Benefit. For purposes of the Plan, Vesting occurs after five (5) Years of Service (three (3) Years of Service for benefits accrued pursuant to Section 7A.2 Annual Cash Balance Contribution and any interest accrued on such Cash -------------------------------- Balance Contribution under Section 7A.4 Interest Credits, and immediately ---------------- for benefits accrued pursuant to Section 7A.3 Location Shutdown ----------------- Contribution and any interest accrued on such Location Shutdown ------------ Contribution under Section 7A.4 Interest Credits) with the fifth year ---------------- (third year for benefits accrued pursuant to Section 7A.2 Annual Cash ----------- Balance Contribution) being the completion of five (5) months of service or -------------------- upon Normal Retirement Date pursuant to the provisions hereof, whichever occurs first. In determining whether a Participant is Vested, the Years of Service prior to any Break in Service shall be disregarded if he was not then Vested and the number of consecutive years in which he incurred a Break in Service equals or exceeds the greater of five (5) or the aggregate number of the Participant's Years of Service prior to such Break in Service (excluding any Years of Service prior to January 1, 1976 which were disregarded under the break in service rules then in effect under the Retirement Security Plan, and excluding any Years of Service which are disregarded under the Break in Service rules of the Plan, the Prior Plans, the Jefferson Stores Plan or the Lechmere Plan)." 2 3. The Plan is hereby amended by deleting Section 7A.1 in its entirety and inserting the following in lieu thereof: "7A.1 In General. A notional account (hereinafter referred to as the ---------- 'Cash Balance Account') shall be established and maintained for each Associate who is a Participant in the Plan on or after July 1, 1997. Such Participant's Cash Balance Account shall be credited with an Annual Cash Balance Contribution in accordance with Section 7A.2 and Interest Credits in accordance with Section 7A.4. On or after July 1, 1997, a Cash Balance Account shall also be established and maintained for each Eligible Location Shutdown Participant who is not otherwise a Participant in the Plan. An Eligible Location Shutdown Participant's Cash Balance Account may be credited with a one-time Location Shutdown Contribution in accordance with Section 7A.3 and Interest Credits in accordance with Section 7A.4." 4. The Plan is hereby amended by renumbering Sections 7A.3 and 7A.4 as Sections 7A.4 and 7A.5 respectively, and by adding the following as the text of Section 7A.3: "Location Shutdown Contribution. ------------------------------ (a) Each Eligible Location Shutdown Participant shall be credited with a one-time Location Shutdown Contribution in an amount equal to the amount described in Subsection (b) below, but in no event less than the amount described in Subsection (c) below. The one-time Location Shutdown Contribution shall be credited to the Cash Balance Account of each Eligible Location Shutdown Participant in the month in which the individual becomes an Eligible Location Shutdown Participant. Partial years of Continuous Service will not be counted for purposes of this Location Shutdown Contribution and Continuous Service only through the date of the closure of the Eligible Location Shutdown Participant's facility which closure is announced on or after September 1, 1997, as determined by the Committee shall be counted for purposes of Subsection (b). (b) The Cash Balance Account of each Eligible Location Shutdown Participant shall be credited with an amount equal to the Eligible Location Shutdown Participant's Daily Pay Rate multiplied by the number of years of Continuous Service multiplied by the number set forth in the following chart: Type of Associate Applicable Number ----------------- ----------------- Management and Administrative/Supervisory 5.0 Wage 2.5 (c) Notwithstanding anything herein to the contrary, in no event shall any Eligible Location Shutdown Participant be credited with a Location Shutdown Contribution which is less than the Eligible Location Shutdown Participant's Daily Pay Rate multiplied by ten (10)." 5. In all other respects, the Plan, as amended, shall continue in full force and effect. 3 MONTGOMERY WARD & CO., INCORPORATED By: /s/ Robert A. Kasenter -------------------------------------------- Name: Robert A. Kasenter Title: Executive Vice President - Human Resources ATTEST: By: /s/ Philip D. Delk -------------------------------------------- Name: Philip D. Delk Title: Vice President, Deputy General Counsel and Assistant Secretary 4 EX-10.(IV)(G)(1) 6 INCORPORATED EXECUTIVE COMMITTEE SEVERANCE PLAN 10.(iv)(G)(1) WARDS EXECUTIVE COMMITTEE SEVERANCE PLAN PURPOSE - -------------------------------------------------------------------------------- The purpose of the Executive Committee Severance Plan is to provide eligible participants with a greater sense of security in taking the business risks necessary to achieve our objectives. ELIGIBILITY - -------------------------------------------------------------------------------- All Wards Senior Executives who are members of the Montgomery Ward Executive Committee. PROVISIONS OF THE PLAN - -------------------------------------------------------------------------------- SEVERANCE BENEFITS - ------------------ If the participant's employment is terminated by Montgomery Ward for any reason other than "Cause" as defined below or the participant's voluntary resignation, the participant will receive a lump sum payment equal to the greater of the participant's base salary for the remainder of any employment agreement period; or the participant's base salary for a twenty-four month period. In addition, the participant will receive Executive Outplacement Services and will continue to participate in Executive Benefits Plans which includes the Health Care Plan along with the Annual Physical Exam Program, Executive Accident Insurance and Executive Medical Coverage. "Cause" shall mean (i) the participant's willful failure to substantially perform the participant's duties hereunder, (ii) the participant's willful failure to follow a written, lawful order or written directive from the Board of Directors or Chief Executive Officer of the company, or (iii) the participant's conviction of any kind of felony or any misdemeanor involving moral turpitude. For purposes of this paragraph, no act, or failure to act, on the participant's part will be considered "willful" unless such act, or failure to act by the participant was not in good faith and was without reasonable belief that the participant's action or omission was in the best interest of the Company. For purposes of this severance plan, any diminution of the participant's job title, executive committee membership, base salary, target bonus, other compensation or benefits, or a reduction in the participant's job responsibilities, or a relocation of the participant's job location of greater than 50 miles from the present location without the participant's prior written approval will allow the participant to elect the terms of this section as if the participant were terminated without "Cause". However, such election must be done in writing to the Chairman & CEO within sixty (60) days of the triggering event. CHANGE OF CONTROL - ----------------- After a Change of Control Event as defined below, and for a period of three years after such date, if the participant is separated from the Company under the provisions above (including any of the diminutions, reductions or relocation provisions under which the participant may elect to leave the Company), the lump sum severance payment will be three years base salary, plus three times the participant's target bonus amount. In addition, the participant's Executive Benefits will be extended to three years from the participant's separation date. A "Change of Control" shall mean: (i) any sale, lease, license, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the business and/or assets of the Company or Holding (without regard to Signature); (ii) the possession by any person or entity (other than Holding, General Electric Capital Corporation or an affiliate of either of them) of beneficial ownership (as such term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of either (A) a number of securities carrying a greater voting power than General Electric Capital Corporation and its affiliates taken together or (B) over 50% of the then outstanding voting securities of the Company (entitled to vote generally in the election of directors) ("Outstanding Company Voting Securities"); or (iii) merger, consolidation or reorganization ("Business Combination") unless following such Business Combination all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own more than 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the entity resulting from the Business Combination in substantially the same relative proportions as their ownership immediately prior to the Business Combination of the Outstanding Company Voting Securities; provided that a Change of Control shall not be construed to include any transaction that occurs solely as a result of transfer of equity to holders of claims against the Company or Holding or any affiliate on account of such claims in connection with the consummation of a plan of reorganization for the Company or Holding or any affiliate in connection with the proceedings under Chapter 11 of the United States Bankruptcy Code pending at the date of hereof. Except as provided in the following sentence, payments pursuant to this severance plan ("Payments") shall not exceed the largest sum ("Parachute Limitation") which will not result, directly or indirectly, in the treatment of any amount paid or payable by the Company or any successor to the participant (whether or not pursuant to this severance plan, and including the Payments) as an Excess Parachute Payment. Notwithstanding the preceding sentence, the participant shall receive the full amount of the Payments without regard to the Parachute Limitation if the participant would realize a greater aftertax amount receiving the full amount of the Payments without regard to the Parachute Limitation than the participant would realize by receiving the Payments limited to the Parachute Limitation as provided in the preceding sentence. All computations and determinations required by the preceding paragraph shall be made by the participant's accountant, acting in good faith. The computations and determinations made any time by the participant's accountant shall affect only those Payments not yet made pursuant to this severance plan. For purposes of this severance plan, the term "Excess Parachute Payment" shall have the same meaning as the term "excess parachute payment" has under section 280G of the Internal Revenue Code of 1986, as amended and the regulations thereunder. GENERAL - -------------------------------------------------------------------------------- SEVERANCE PAYMENT OFFSET - ------------------------ In the event of the participant's separation from Montgomery Ward for reasons other than "Cause" or voluntary resignation, to the extent that the participant is eligible to receive a guaranteed payment under the participant's employment contract from General Electric Capital Corporation of base salary and/or bonus amounts or to the extent that any Montgomery Ward employment agreement or any other severance plan pays any severance benefits to the participant, the obligation of the Company under this Plan shall be reduced dollar for dollar of any amount representing base salary or bonus payable under the participant's employment contract or other severance plan. NON-COMPETE - ----------- In the event that the participant voluntarily leaves Montgomery Ward, the participant will be bound by a non-compete agreement that provides that the participant will not be directly employed by nor perform work as a director, officer, independent contractor, partner, or consultant for Sears, K-Mart Corporation, WalMart Stores Inc., Dayton Hudson Corporations or J.C. Penney or any of their affiliates for a period of one (1) year following the participant's termination date. I have read the Wards Executive Committee Severance Plan and understand its terms and have voluntarily signed this Agreement thereby agreeing to participate in this Plan and accept its provisions. _________________________________________ Print Executive's Name _________________________________________ Executive's Signature _________________________________________ ____________________________________ Date Approved EX-10.(VI)(B) 7 LETTER AGREEMENT 10. (vi) (B) General Electric Capital Corporation 260 Long Ridge Road Stamford, CT 06927 December 20, 1996 Mr. Roger V. Goddu 930 Olentangy Road Franklin Lakes, New Jersey 07417 Dear Roger: Reference is made to that certain Employment Agreement, dated December 20, 1996, by and among you, Montgomery Ward & Co., Incorporated (the "Company") and Montgomery Ward Holding Corp. ("Holding") (the "Agreement"). Capitalized terms used but not defined herein shall have the meanings set forth in the Agreement. In order to induce you to accept the offer of employment contained in the Agreement, General Electric Capital Corporation ("GECC") agrees with you as follows: 1. Affiliates. By virtue of the equity investment made by GECC in Holding, both the Company and Holding are "affiliates" of the General Electric Company ("GE") and GECC for purposes of the GE 1990 Long Term Incentive Plan (the "GE Plan"). 2. GE Restricted Stock. On or before January 6, 1997 (the "Start Date"), GE will grant you 60,000 shares of GE Common Stock (the "GE Stock") pursuant to the terms and conditions of the GE Plan. Restrictions on 12,000 shares of the GE Stock will lapse on each December 31, beginning on December 31, 1997, provided, that such restrictions will not lapse unless you are, and have been at all times since the Start Date, employed by the Company on such dates. If the Board of Directors of GE does not approve the grant of GE Stock in accordance with this paragraph 2, GECC agrees to take whatever steps may be necessary in the circumstances in order to enable you, as nearly as practicable, to realize substantially the same economic benefits which you could otherwise have realized under the terms of this paragraph 2. 3. GE Options. (a) On or before the Start Date, GE will grant you stock options (the "Options") to purchase up to 60,000 shares of GE Stock pursuant to the terms and conditions of the GE Plan. The exercise price per share of GE Stock 1 purchasable under the Options shall be the closing price of a share of GE Stock on the New York Stock Exchange as of the date of grant by the GE Board of Directors. Subject to the provisions of the GE Plan, the options will become vested in successive cumulative installments of 20,000 of the underlying shares on January 6, 1999, January 6, 2001 and January 6, 2003; provided, however, that no installment shall vest unless you are, and have been at all times since the date of grant through each such date of vesting, employed by the Company. If the Board of Directors of GE does not approve the grant of GE Stock in accordance with this paragraph 3(a), GECC agrees to take whatever steps may be necessary in the circumstances in order to enable you, as nearly as practicable, to realize substantially the same economic benefits which you could otherwise have realized under the terms of this paragraph 3(b). (b) On an annual basis beginning in 1997, GE will grant you, at such time as similar grants are made to its employees, Options to purchase up to 25,000 shares of GE Stock, up to an aggregate of 125,000 shares pursuant to the terms and conditions of the GE plan. The exercise price per share of GE Stock purchasable under the Options shall be the closing price of a share of GE Stock on the New York Stock Exchange as of the date of grant. 50% of such Options will become vested three years from the applicable date of grant and the remaining 50% will become vested five years from the applicable date of grant, provided, however, that no installment shall vest unless you are, and have been at all times since the date of grant through each such date of vesting, employed by the Company. If the Board of Directors of GE does not approve the grant of GE Stock in accordance with this paragraph 3(b), GECC agrees to take whatever steps may be necessary in the circumstances in order to enable you, as nearly as practicable to realize substantially the same economic benefits which you could otherwise have realized under the terms of this paragraph 3(b). 4. Holding Options. (a) On the Effective Date of the Agreement, GECC will grant you options (the "Holding Options") to purchase from GECC that number of shares of Stock which equals 5% of the issued and outstanding shares of Stock on a fully diluted basis after giving effect to the stock options granted to you pursuant to Section 6(a) of the Agreement as of the date of this Agreement. For purposes of this calculation, the number of shares of Stock underlying the Holding Options shall be adjusted upwards from time to time until the last day of the fiscal year of the Company ending on or about December 31, 1998, to give effect to the grant of stock options during such period to management employees of the Company covering up to 10% of the outstanding shares of Stock on a fully diluted basis after giving effect to such grants. The Holding Options will become vested in successive cumulative installments of 25% of the underlying shares on each December 31, beginning on December 31, 1997; provided, however, that no installment shall vest unless at such time you are, and have been at all times since the date of grant, employed by the Company. The exercise price per share of Stock underlying the Holding Options shall be equal to the Fair Market Value Per Share, as of December 29, 1996 (i.e. the first day of the 1997 fiscal year). 2 Notwithstanding anything in this Section 4 to the contrary, none of such vested Holding Options shall be exercisable unless the Appraised Value (as defined below) of the Company is equal to or greater than $1 billion at any time during the period of your employment plus twelve months thereafter (up to a maximum of six years after December 26, 1996). The vested Holding Options will be exercisable at any time and from time to time during your employment with the Company and through the last day of the third month after termination of such employment. Under no circumstances will a Change in Control under the Agreement be deemed to occur solely as a result of your exercise of the Holding Options. No Holding Option is transferable or assignable except that you may transfer all or part of the Holding Options to a family trust of other such trust created for the benefit of you, your spouse and/or your children for estate planning purposes. The term "Appraised Value" shall mean the fair market value of the consolidated common equity of the Company as determined under Section 3.10 of the Stockholders Agreement. (b) Subject to your put rights described in Section 4(c) hereof, GECC shall have the right to repurchase any shares of Stock (the "GE Call Shares") acquired by you pursuant to the exercise by you of your vested Holding Options in accordance with the terms of this Agreement, at any time and from time to time during the period beginning on the date of termination of your employment with the Company and ending on the date that is 90 days after the expiration of all of your rights to exercise your vested Holding Options. The purchase price (the "GE Call Purchase Price") for such GE Call Shares shall be equal to the Fair Market Value per Share as of the first day of the fiscal year in which the Closing Date (as defined below) occurs determined in accordance with Section 3.10 of the Stockholders Agreement, multiplied by the number of GE Call Shares being purchased by GECC. GECC shall exercise its rights hereunder by delivering a written notice to you setting forth the number of GE Call Shares it is purchasing and the expected date of closing, which shall be no later than 10 days after the date of such written notice (the "Closing Date"). On the Closing Date, you shall deliver to GECC stock certificates representing the GE Call Shares being purchased by GECC free and clear of any and all liens, claims or encumbrances of any kind in exchange for the GE Call Purchase Price by check or wire transfer in immediately available funds. (c) You shall have the right, at any time and from time to time during the period beginning on December 31, 1997 and ending on the date that is 90 days after the expiration of all of your rights to exercise your vested Options, to request GECC to repurchase any shares of Stock (the "GE Put Shares") acquired by you pursuant to your exercise of any vested Holding Option in accordance with the terms of this Agreement. The purchase price (the "GE Put Purchase Price") for each such GE Put Share shall be equal to the Fair Market Value Per Share as of the first day of the fiscal year of the Company in which the Executive Notice is given, determined in accordance with Section 3.10 of the Stockholders Agreement, multiplied by the number of GE Put Shares being 3 purchased by GECC. You may exercise your rights hereunder by delivering a written notice (the "Executive Notice") to GECC setting forth (i) the number of GE Put Shares it is requesting Holding to purchase; and (ii) the date ("Put Closing Date") upon which the purchase of such GE Put Shares shall occur, which shall not be less than 30 nor more than 90 days after the Executive Notice. On the Put Closing Date, you shall deliver to GECC stock certificates representing the GE Put Shares being purchased by GECC free and clear of any and all liens, claims or encumbrances of any kind in exchange for the GE Put Purchase Price which shall be payable by check or wire transfer in immediately available cash funds. 5. Liquidity Back-Stop. To the extent that, pursuant to Section 6(f) of the Agreement, Holdings cannot purchase all your Put Shares due to the Limitation of Article IV of the Stockholders' Agreement, you will have the right to require GECC to purchase any such Put Shares for a cash purchase price of up to $15,000,000 (less the amount of any purchases by GECC or Holding of Stock from you under any other provision hereof or the Agreement) during any fiscal year of the Company, beginning with the 1998 fiscal year (and to the extent this provision is utilized to an extent less than $15,000,000 in any such fiscal year, such unutilized portion shall be rolled over to the next fiscal year on a cumulative basis), up to an aggregate amount of $75,000,000 (less the amount of any purchases by GECC or Holding of Stock from you under any other provision hereof or the Agreement), such amounts to be determined on a cashless exercise basis (i.e. the spread of the Fair Market Value Per Share paid over the exercise price for such option shares). You may exercise this right by prior written notice to GECC, which notice shall specify (i) the number of Put Shares with respect to which you desire to exercise this right and (ii) the closing date for such purchase and sale, which shall not be earlier than 30 days nor later than 90 days after such notice. The purchase price for such Put Shares shall be the same as the purchase price applicable to such Put Shares under Section 6(f) of the Agreement, and shall be paid by check or wire transfer in immediately available funds against delivery of such Put Shares in the manner provided in said Section 6(f) of the Agreement. In addition, to the extent that at any such closing date you are holding promissory notes from Holding given to you pursuant to said Section 6(f) of the Agreement, at any such closing you may also put such Holding notes to GECC, free and clear of any encumbrance and duly endorsed for transfer against payment by GECC to you of the aggregate principal amount of such notes, together with any accrued but unpaid interest due thereon, by check or wire transfer in immediately available funds. 6. Limitation on Obligations. The obligation of GECC under Section 4(c) to purchase Put Shares and under Section 5 to provide liquidity shall not exceed a total of $15,000,000 (less the amount of any purchases by GECC or Holding of Stock from you under any other provision hereof or the Agreement) in the aggregate in any fiscal year of the Company, beginning with the 1998 fiscal year (and, to the extent purchases are less than $15,00,000 in any such fiscal year, such unutilized portion shall be rolled over to the 4 next fiscal year on a cumulative basis), up to an aggregate amount of $75,000,000 (less the amount of any purchases by GECC or Holding of Stock from you under any other provision hereof or the Agreement) for all such purchases of Put Shares, such amounts to be determined on a cashless exercise basis (i.e. the spread of the Fair Market Value Per Share paid over the exercise price for such option shares). 7. Resignation and Confidentiality. This letter agreement will become null and void if you do not tender your resignation to Current Employer by the close of business today. You agree not to disclose the contents of this letter to Current Employer or to any other potential employer except as may be legally required. If the foregoing terms are acceptable to you, please so signify by signing your name in the space indicated below. Very truly yours, General Electric Capital Corporation By: /s/ Edward D. Stewart ----------------------------- Name: Edward D. Stewart Agreed and Accepted /s/ Roger V. Goddu ----------------------------- Roger V. Goddu 5 EX-10.(VI)(C) 8 LETTER AGREEMENT 10. (vi) (C) November 3, 1997 Roger V. Goddu Chairman & C.E.O. Montgomery Ward Chicago, IL 60671 Dear Roger: As we discussed, last Friday, October 31, 1997, the court approved our Executive Compensation Plan for Executive Committee members. A copy of the court order is attached. This package includes the pieces of your personal compensation and security plan for your position at Montgomery Ward. Your plan includes: 1.) The assumption of your employment agreement dated December 20, 1996 (attached) that gives specific details on your compensation plan with Wards. 2.) The Wards Executive Committee Severance Plan. 3.) The Montgomery Ward Special Emergence Bonus Plan. Please read your agreements and plan documents very carefully. Payments under these plans are considered "administrative" claims and have a very secure priority in our claims payment. If you have any questions, please contact me and I will provide you with any answers. Once you are comfortable with your participation in your plans, please sign the documents and return them to me. These plans provide us with the incentives and the security we requested so that we can focus on the turnaround of our company. Now it is up to us to make it happen. Sincerely, /s/ Robert A. Kasenter - ----------------------------------------------- Robert A. Kasenter Executive Vice President & Secretary To The Board Compensation Committee Attachment MONTGOMERY WARD SPECIAL EMERGENCE BONUS PLAN Roger Goddu Chairman And CEO Montgomery Ward Dear Roger: You have been selected to participate in a special Emergence Bonus Plan for members of the Montgomery Ward Executive Committee. This Plan will pay you a lump-sum bonus based upon the date we have a court approved Plan of Reorganization (POR). Your bonus potential is as follows:
BONUS AMOUNT POR APPROVAL AS OF ------------ ------------------ $1,250,000 April 1, 1999 $1,000,000 October 1, 1999 $500,000 After October 1, 1999
The bonus amount earned based upon the date of the POR's approval will be paid within thirty (30) days of the approval. This bonus payment will be subject to the following rules: 1. Any award under this plan will be made as a lump sum payment and will be subject to normal tax withholding. 2. In order to receive an award payment under this plan, except for a Change of Control, the participant must be actively employed by the Company upon approval of a POR from the bankruptcy court. 3. In the event of a Change of Control as defined in the Wards Executive Committee Plan, participants who are actively employed as of the date of the change of control and who are no longer employed by the company upon approval from the bankruptcy court of a POR will be eligible for an award under the plan if the separation date is within six months of the approved POR. By copy of this letter, you are offered participation in this Special Emergence Bonus Plan. If you agree to participate and be governed by the rules of this plan, please sign your acceptance below and return this letter to Bob Kasenter. This plan offers us an opportunity to earn a bonus for successfully doing what we want to do.....emerge from bankruptcy quickly. With your help, we will accomplish this goal. Sincerely, /s/ Robert A. Kasenter - ----------------------------------------------- Robert A. Kasenter EVP Human Resources & Corporate Communications I have read the Wards Executive Committee Severance Plan and understand its terms and have voluntarily signed this Agreement thereby agreeing to participate in this Plan and accept its provisions. Roger V. Goddu - ---------------------------------------- Print Executive's Name /s/ Roger V. Goddu - ---------------------------------------- Executive's Signature November 6, 1997 ________________________________________ ___________________________________ Date Approved EX-10.(VII)(B) 9 GENERAL RELEASE AND AGREEMENT 10. (vii) (B) GENERAL RELEASE AND AGREEMENT NOT TO SUE ---------------------------------------- For and in consideration of the receipt of the following: (1) Lump sum payment of $1,562,500.00 representing base salary through January 31, 2000; (2) Lump sum payment of $500,000.00 representing guaranteed bonuses for 1997 and 1998; (3) Payment of $200,000.00 representing the retention plan payment through January 31, 1998; (4) Continuation of executive health care coverage at the associate rate through January 31, 2000; (5) Earned vacation in the amount of $57,692.32; (6) Individual outplacement services with Mulligan & Associates paid by Wards or $20,000 in lieu of such services; (7) Access to an executive office at the Wards Corporate Office for transitional use until January 31, 1998. I hereby fully waive, release, and forever discharge Montgomery Ward & Co., Incorporated and any and all of its officers, directors, agents, employees, shareholders, predecessors, successors, subsidiaries, attorneys and parent company, (hereinafter collectively referred to as "the Company") from any and all claims, demands, promises, or causes of action of any nature whatsoever whether known or unknown, foreseen or unforeseen and whether or not in litigation, which I may have or which could be asserted by another on my behalf based on any action, omission, or event arising out of or in any way relating to my employment and/or separation from employment at Montgomery Ward & Co., Incorporated including, but not limited to, claims for additional compensation or benefits, tortious claims arising out of the employment relationship, including but not limited to claims of defamation, claims of an express or implied contract of employment, claims of any covenant of good faith and fair dealing, causes of action arising under the Illinois Human Rights Act, causes of action arising under the Age Discrimination in Employment Act, causes of action arising under the 1991 Civil Rights Act, causes of action arising under the Americans with Disabilities Act, causes of action arising under the Employee Retirement Income Security Act, or any other claims and/or causes of action arising under federal, state or local law, order or regulation and claims growing out of any legal restrictions on the Company's right to terminate its employees, or arising from common law. Included in this Release are any and all claims for future damages allegedly arising from the alleged continuation of the effects of any past action, omission, or event. I agree to waive any rights I may have to reinstatement with the Company and further agree not to seek reemployment with the Company. 1 I further agree not to sue or to institute any proceedings against the Company based on any matter relating to my employment and/or separation from employment or on any action, omission or event relating to the Company which could be the subject of legal action brought before a court of law or administrative tribunal. I agree that I shall not, during the period December 31, 1997 through January 31, 2000, directly or indirectly own, manage, operate, join, control, be employed by, or participate in the ownership, management, operation or control of or be connected in any manner, including but not limited to holding the positions of officer, director, shareholder, consultant, independent contract, employee, partner, or investor, with any Direct Competitor (as defined below); provided, however, that I may invest in stocks, bonds, or other securities of - -------- ------- any corporation or other entity (but without participating in the business thereof) if such stocks, bonds, or other securities are listed for trading on a national securities exchange or NASDAQ and my investment does not exceed 1% of the issued and outstanding shares of capital stock, or in the case of bonds or other securities, 1% of the aggregate principal amount thereof issued and outstanding. "Director Competitor" for purposes of this release shall mean Sears Roebuck and Co., or J.C. Penney or any Affiliate of them. I further agree that I will not, at any time from December 31, 1997 through January 31, 2000, directly or indirectly solicit or induce any of the employees of the Company, including but not limited to employees of the holding company and subsidiaries, to terminate their employment with the Company, including but not limited to the holding company and subsidiaries. I agree that I will not divulge to any person not employed by Montgomery Ward or use for my own benefit or for the benefit of any person not employed by Montgomery Ward any confidential information obtained while I was employed by Montgomery Ward. Confidential information shall include but not be limited to any information either written or not written which was developed by or for Montgomery Ward by its employees, consultants, agents or any other person directly or indirectly employed by the Company, which information is not publicly known and which would constitute a legally protectable interest under applicable principles of law. I also agree that I will not disparage or otherwise provide negative information about the Company, its policies or procedures, or its past or present Officers, Directors or other associates to anyone. In addition, I agree that the nature and terms of this General Release and Agreement Not to Sue shall not be disclosed at any time to any persons other than my spouse, attorney, tax advisor and state and federal taxing authorities. I further agree that these individuals will be instructed to maintain the confidentiality of the terms of this General Release and Agreement Not to Sue. In the event of any violation of this paragraph of the Company may present this General Release and Agreement Not to Sue to any court of competent jurisdiction for the purposes of injunctive relief or other monetary relief. 2 Similarly, Montgomery Ward & Co., Incorporated agrees not to disclose the nature and terms of this General Release and Agreement Not to Sue except as is necessary to obtain approval of it, inform necessary Montgomery Ward & Co., Incorporated associates and officials with a "need to know," and for proper documentation in its tax, legal, accounting and claims records. The Company further agrees not to disparage or otherwise provide negative information about Donoho to anyone. I agree to cooperate, be available, and testify on the Company's behalf, if the Company requests, without requiring a subpeona in any and all claims and lawsuits arising out of acts, occurrences, or decisions while I was employed of which there is direct knowledge and to which the Company's attorneys believe my testimony is necessary for the prosecution or defense of the claims. This General Release and Agreement Not to Sue sets forth the entire agreement between the Company and myself, and fully supersedes any and all prior agreements of understandings pertaining to any all aspects of my employment with Montgomery Ward & Co., Incorporated. This General Release and Agreement Not to Sue is knowingly and voluntarily executed for the good and valuable consideration set forth above. I acknowledge that I have read this General Release and Agreement Not to Sue and fully understand its provisions. I further acknowledge that pursuant to the Company's advice, I have had full opportunity to consult with legal counsel prior to executing this General Release. I also acknowledge that I have been given twenty-one (21) days to consider the terms of this General Release and Agreement Not to Sue and that I elect to waive the remaining days of that period, if any. I also understand that I have seven (7) days following the date of execution I which to revoke this General Release and Agreement Not to Sue. I understand that this General Release shall not become effective or enforceable until the revocation period has expired. I am satisfied with the terms of this General Release and Agreement Not to Sue and intend to be legally bound by the same. Date: January 23, 1998 /s/ Burnett Donoho --------------------------- --------------------------- Burnett Donoho Date: January 23, 1998 /s/ Robert A. Kasenter --------------------------- --------------------------- Montgomery Ward & Co., Incorporated 3 EX-10.(IX)(A) 10 EMPLOYMENT AGREEMENT 10. (ix)(A) CONFIDENTIAL ------------ November 3, 1997 Alan DiGangi 430G West Armitage Chicago, IL 60614 Dear Al: This letter confirms our offer to you to remain Executive Vice President, Appliances, Electronics and Automotive for Montgomery Ward. You will continue to serve as a member of the Montgomery Ward Executive Committee under this Agreement. Your compensation plan will include the following: 1.) Base salary of $425,000 annually, paid semi-monthly. 2.) Target bonus on the Performance Management Plan of $125,000. Based upon the achievement of superior performance against specific objectives for the year, you have the opportunity to earn up to 150% of your target bonus. For fiscal 1997, your target bonus of $125,000 will be guaranteed. 3.) You will continue to participate in the senior officer perquisites, including; executive medical and annual physical examination. You will also participate in any new benefits, retention, and perquisite plans that are implemented for the Executive Committee members as a group. 4.) You will participate in the Montgomery Ward Special Emergence Bonus Plan. A copy of this plan is attached for your review and signature. 5.) You will participate in the Wards Executive Committee Severance Plan. Please sign and return a copy of the attached documents as acceptance of the terms of this Plan. 1 Alan DiGangi November 3, 1997 Page 2 This agreement has been approved by the Bankruptcy Court on a post-petition basis. Therefore, any claims concerning this agreement are "administrative" claims. I am happy that you are remaining with Montgomery Ward. If you are in agreement with this letter, please sign below and return it to me whereupon it will become our binding agreement. I am certain that your experience and knowledge of the Company will be a valuable asset to us as we move forward and improve Montgomery Ward's performance. I look forward to working together to meet our goals. Sincerely, /s/ Roger V. Goddu - ------------------------------ Roger V. Goddu Chairman & C.E.O. Montgomery Ward /s/ Alan DiGangi - ------------------------------ Alan DiGangi Date: November 6, 1997 - ------------------------------ 2 EX-10.(IX)(B) 11 LETTER AGREEMENT 10. (ix) (B) November 3, 1997 Alan DiGangi Executive Vice President Appliances, Electronics & Automotive Montgomery Ward Chicago, IL 60671 Dear Al: As we discussed, last Friday, October 31, 1997, the court approved our Executive Compensation Plan for Executive Committee members. A copy of the court order is attached. This package includes the pieces of your personal compensation and security plan for your position at Montgomery Ward. Your plan includes: 1.) A new employment agreement providing your position, base salary and incentive arrangements. 2.) The Wards Executive Committee Severance Plan. 3.) The Montgomery Ward Special Emergence Bonus Plan. Please read your agreements and plan documents very carefully. Payments under these plans are considered "administrative" claims and have a very secure priority in our claims payment. If you have any questions, please contact Bob Kasenter and he will provide you with any answers. Once you are comfortable with your participation in your plans, please sign the documents and return them to Bob. These plans provide us with the incentives and the security we requested so that we can focus on the turnaround of our company. Now it is up to us to make it happen. Sincerely, /s/ Roger V. Goddu - ------------------------- Roger V. Goddu Chairman and C.E.O. Attachment MONTGOMERY WARD SPECIAL EMERGENCE BONUS PLAN Alan Di Gangi EVP Appliances, Electronics & Automotive Montgomery Ward Dear Al: You have been selected to participate in a special Emergence Bonus Plan for members of the Montgomery Ward Executive Committee. This Plan will pay you a lump-sum bonus based upon the date we have a court approved Plan of Reorganization (POR). Your bonus potential is as follows:
Bonus Amount POR APPROVAL AS OF -------------- -------------------- $531,250 April 1, 1999 $425,000 October 1, 1999 $212,500 After October 1, 1999
The bonus amount earned based upon the date of the POR's approval will be paid within thirty (30) days of the approval. This bonus payment will be subject to the following rules: 1. Any award under this plan will be made as a lump sum payment and will be subject to normal tax withholding. 2. In order to receive an award payment under this plan, except for a Change of Control, the participant must be actively employed by the Company upon approval of a POR from the bankruptcy court. 3. In the event of a Change of Control as defined in the Wards Executive Committee Plan, participants who are actively employed as of the date of the change of control and who are no longer employed by the company upon approval from the bankruptcy court of a POR will be eligible for an award under the plan if the separation date is within six months of the approved POR. By copy of this letter, you are offered participation in this Special Emergence Bonus Plan. If you agree to participate and be governed by the rules of this plan, please sign your acceptance below and return this letter to Bob Kasenter. This plan offers us an opportunity to earn a bonus for successfully doing what we want to do.....emerge from bankruptcy quickly. With your help, we will accomplish this goal. Sincerely, /s/ Roger V. Goddu - --------------------------------- Roger V. Goddu Chairman & CEO I have read the Wards Executive Committee Severance Plan and understand its terms and have voluntarily signed this Agreement thereby agreeing to participate in this Plan and accept its provisions. Alan DiGangi - --------------------------------- Print Executive's Name /s/ Alan DiGangi - --------------------------------- Executive's Signature November 6, 1997 _________________________________ Date EX-10.(X)(B) 12 LETTER AGREEMENT 10.(x)(B) February 18, 1997 Tom Grimes c/o Tremmingham's 37 Front Street Hamilton, Bermuda Dear Tom: Reference is made to your Compensation Agreement (the "Agreement") dated as of February 3, 1997, with Montgomery Ward & Co., Incorporated (the "Company"). In order to induce you to accept the offer of employment contained in the Agreement, General Electric Capital Corporation ("GE Capital"), as a principal shareholder in the Company, hereby agrees with you that if, for any reason other than termination of your employment, either voluntarily by you or for "cause" by the Company, the Company shall fail to pay to you the base salary for the first three years of such Agreement and the first year guaranteed bonus of such Agreement, then GE Capital shall pay such amounts to you as provided in and subject to the conditions of the Agreement. This obligation on the part of GE Capital shall be triggered by your written notice to GE Capital that the Company has ceased to make such payments as required by such Agreement. Very truly yours, General Electric Capital Corporation By: /s/ Edward D. Stewart -------------------------------- Executive Vice President EX-10.(X)(C) 13 LETTER AGREEMENT 10. (x) (C) November 3, 1997 Tom Grimes Executive Vice President Home Montgomery Ward Chicago, IL 60671 Dear Tom: As we discussed, last Friday, October 31, 1997, the court approved our Executive Compensation Plan for Executive Committee members. A copy of the court order is attached. This package includes the pieces of your personal compensation and security plan for your position at Montgomery Ward. Your plan includes: 1.) Your employment agreement dated January 28, 1997 continues to have guarantees of your base salary and specified bonuses as written in the GECC agreement attached. We fully expect that these payments will be made by Montgomery Ward. But, if they are not paid by Wards, GE will pay them. 2.) The Wards Executive Committee Severance Plan. 3.) The Montgomery Ward Special Emergence Bonus Plan. Please read your severance and emergence plan documents very carefully. Payments under these plans are considered "administrative" claims and have a very secure priority in our claims payment. If you have any questions, please contact Bob Kasenter and he will provide you with any answers. Once you are comfortable with your participation in your plans, please sign the documents and return them to Bob. These plans provide us with the incentives and the security we requested so that we can focus on the turnaround of our company. Now it is up to us to make it happen. Sincerely, /s/ Roger V. Goddu - ------------------------------ Roger V. Goddu Chairman and C.E.O. Attachment MONTGOMERY WARD SPECIAL EMERGENCE BONUS PLAN Thomas Grimes EVP Home Montgomery Ward Dear Tom: You have been selected to participate in a special Emergence Bonus Plan for members of the Montgomery Ward Executive Committee. This Plan will pay you a lump-sum bonus based upon the date we have a court approved Plan of Reorganization (POR). Your bonus potential is as follows: Bonus Amount POR APPROVAL AS OF ---------------- ----------------------- $562,500 April 1, 1999 $450,000 October 1, 1999 $225,000 After October 1, 1999 The bonus amount earned based upon the date of the POR's approval will be paid within thirty (30) days of the approval. This bonus payment will be subject to the following rules: 1. Any award under this plan will be made as a lump sum payment and will be subject to normal tax withholding. 2. In order to receive an award payment under this plan, except for a Change of Control, the participant must be actively employed by the Company upon approval of a POR from the bankruptcy court. 3. In the event of a Change of Control as defined in the Wards Executive Committee Plan, participants who are actively employed as of the date of the change of control and who are no longer employed by the company upon approval from the bankruptcy court of a POR will be eligible for an award under the plan if the separation date is within six months of the approved POR. By copy of this letter, you are offered participation in this Special Emergence Bonus Plan. If you agree to participate and be governed by the rules of this plan, please sign your acceptance below and return this letter to Bob Kasenter. This plan offers us an opportunity to earn a bonus for successfully doing what we want to do.....emerge from bankruptcy quickly. With your help, we will accomplish this goal. Sincerely, /s/ Roger V. Goddu Roger V. Goddu Chairman & CEO I have read the Wards Executive Committee Severance Plan and understand its terms and have voluntarily signed this Agreement thereby agreeing to participate in this Plan and accept its provisions. Thomas Grimes - ------------------------------------ Print Executive's Name /s/ Thomas Grimes - ------------------------------------ Executive's Signature November 6, 1997 ____________________________________ Date EX-10.(XI)(A) 14 EMPLOYMENT AGREEMENT 10. (xi) (A) CONFIDENTIAL ------------ April 15, 1997 Tom Austin 20600 Milton Court Brookfield, Wisconsin 53045 Dear Tom: This letter confirms our offer to you as Executive Vice President and General Merchandise Manager for Montgomery Ward. You will report to Roger Goddu, Chairman and Chief Executive Officer. Your reporting relationship may change in the future, but, you will only report to either Tom Grimes or Roger Goddu. You will be a member of the Montgomery Ward Executive Committee. Your compensation plan will include the following: 1.) Base salary of $400,000 annually, paid semi-monthly. You will be eligible for normal merit increase reviews beginning in 1998. 2.) Target bonus on the Performance Management Plan of $150,000. Based upon the achievement of superior performance against specific objectives for the year, you have the opportunity to earn up to 150% of your target bonus. For fiscal 1997, 1998 and 1999, your target bonus of $150,000 will be guaranteed. Additionally, we will pre-pay your guaranteed bonus targets for 1997 and 1998. 3.) You will receive a hiring bonus of $50,000 within 30 days of employment to handle miscellaneous losses incurred by the move. 4.) The Company will provide you with a special bonus plan to offset your Kohl's equity loss that will provide for a maximum payment of $500,000 which will vest as follows: $200,000 5-1-1998 $150,000 5-1-1999 $150,000 5-1-2000 1 Tom Austin April 15, 1997 Page 2 The payment of monies earned for this bonus award will be made on May 1, 2000. If you leave the company prior to May, 2000, you will receive only the vested amount as of your separation date. 5.) You will participate in the senior officer perquisites, including; financial counselling, tax assistance, executive medical, and annual physical examination. 6.) Montgomery Ward will provide you with a relocation plan, including movement of household goods, househunting trips, home purchase plan at 100% of the appraised value of your home, and payment of your closing costs on your home purchase, plus up to two points on your financing of a new home. Your temporary housing expenses in the Chicago area for the first six months (or until relocation if sooner) will be paid by Montgomery Ward. You will receive a gross up for the taxes you incur as a result of your relocation. 7.) As soon as possible after your start date, you will be recommended for a stock option for 300,000 shares of Montgomery Ward Holding stock at the 1997 fair value. These options will vest as follows: 100,000 - May 1, 1998 100,000 - May 1, 1999 100,000 - May 1, 2000 All stock options in point 6 are subject to the Terms and Conditions of the Stockholders Agreement. (A copy of the current Prospectus is included). If the Montgomery Ward Holding stock is diluted or a new plan is implemented, you will receive additional stock options to retain your ownership opportunity at substantially the same level as the original 300,000 share option grant. 8.) If Montgomery Ward initiates a separation of your employment for any reason other than "Cause" as defined below, you will receive: A) Your base salary through May 1, 2000, however, not less than twelve months. B) The continuation of the vesting of your stock and stock options through May 1, 2000. 2 Tom Austin April 15, 1996 Page 3 "Cause" shall mean (i) your willful failure to substantially perform your duties hereunder, (ii) your willful failure to follow a written, lawful order or written directive from the Board of Directors or Chief Executive Officer of the company, or (iii) your conviction of any kind of felony or any misdemeanor involving moral turpitude. For purposes of this paragraph, no act, failure to act, on your part shall be considered "willful" unless such act, or failure to act by you was not in good faith and was without reasonable belief that your action or omission was in the best interest of the Company. If you voluntarily leave Montgomery Ward, or are separated for "Cause", you will receive no severance payments, nor will your stock continue to vest beyond your separation date. 9.) The non-compete provision of the Stockholder's Agreement is modified for you to provide only a one year non-compete period following any separation from Montgomery Ward; and, such non- competition will apply only to Sears, J.C. Penney, Target and Kohl's. I am happy that you are considering joining Montgomery Ward. If you are in agreement with this letter, please sign below and return it to me whereupon it will become our binding agreement. I am certain that your management ability can help move Montgomery Ward to the premier position in the Industry. Sincerely, /s/ Robert A. Kasenter - -------------------------------- Robert A. Kasenter Executive Vice President Human Resources cc: Roger Goddu /s/ Tom Austin - -------------------------------- Tom Austin April 16, 1997 - -------------------------------- Date 3 EX-10.(XI)(B) 15 LETTER AGREEMENT 10. (xi) (B) April 30, 1997 Mr. Tom Austin 20600 Milton Court Brookfield, Wisconsin 53045 Dear Tom: Reference is made to your Compensation Agreement (the "Agreement") dated as of April 15, 1997, with Montgomery Ward & Co., Incorporated (the "Company"). In order to induce you to accept the offer of employment contained in the Agreement, General Electric Capital Corporation ("GE Capital"), as a principal shareholder in the Company, hereby agrees with you that if, for any reason other than termination of your employment, either voluntarily by you or for "cause" by the Company, the Company shall fail to pay to you the base salary for the first three years of such Agreement and the guaranteed bonuses for each of the first three years of such Agreement and the bonus plan to offset your Kohl's equity loss payable on May 1, 2000, then GE Capital shall pay such amounts to you as provided in and subject to the conditions of the Agreement. This obligation on the part of GE Capital shall be triggered by your written notice to GE Capital that the Company has ceased to make such payments as required by such Agreement. Very truly yours, General Electric Capital Corporation By: /s/ Edward D. Stewart ----------------------------------------- Executive Vice President EX-10.(XI)(C) 16 LETTER AGREEMENT 10. (xi) (C) November 3, 1997 Tom Austin Executive Vice President Mens & Childrens Apparel & Shoes Montgomery Ward Chicago, IL 60671 Dear Tom: As we discussed, last Friday, October 31, 1997, the court approved our Executive Compensation Plan for Executive Committee members. A copy of the court order is attached. This package includes the pieces of your personal compensation and security plan for your position at Montgomery Ward. Your plan includes: 1.) Your employment agreement dated April 15, 1997 continues to have guarantees of your base salary and specified bonuses as written in the GECC agreement attached. We fully expect that these payments will be made by Montgomery Ward. But, if they are not paid by Wards, GE will pay them. 2.) The Wards Executive Committee Severance Plan. 3.) The Montgomery Ward Special Emergence Bonus Plan. Please read your severance and emergence plan documents very carefully. Payments under these plans are considered "administrative" claims and have a very secure priority in our claims payment. If you have any questions, please contact Bob Kasenter and he will provide you with any answers. Once you are comfortable with your participation in your plans, please sign the documents and return them to Bob. These plans provide us with the incentives and the security we requested so that we can focus on the turnaround of our company. Now it is up to us to make it happen. Sincerely, /s/ Roger V. Goddu - ---------------------------------- Roger V. Goddu Chairman and C.E.O. Attachment MONTGOMERY WARD SPECIAL EMERGENCE BONUS PLAN Thomas Austin EVP Mens&Childrens App&Shoes Montgomery Ward Dear Tom: You have been selected to participate in a special Emergence Bonus Plan for members of the Montgomery Ward Executive Committee. This Plan will pay you a lump-sum bonus based upon the date we have a court approved Plan of Reorganization (POR). Your bonus potential is as follows:
BONUS AMOUNT POR APPROVAL AS OF ------------ ------------------ $500,000 April 1, 1999 $400,000 October 1, 1999 $200,000 After October 1, 1999
The bonus amount earned based upon the date of the POR's approval will be paid within thirty (30) days of the approval. This bonus payment will be subject to the following rules: 1. Any award under this plan will be made as a lump sum payment and will be subject to normal tax withholding. 2. In order to receive an award payment under this plan, except for a Change of Control, the participant must be actively employed by the Company upon approval of a POR from the bankruptcy court. 3. In the event of a Change of Control as defined in the Wards Executive Committee Plan, participants who are actively employed as of the date of the change of control and who are no longer employed by the company upon approval from the bankruptcy court of a POR will be eligible for an award under the plan if the separation date is within six months of the approved POR. By copy of this letter, you are offered participation in this Special Emergence Bonus Plan. If you agree to participate and be governed by the rules of this plan, please sign your acceptance below and return this letter to Bob Kasenter. This plan offers us an opportunity to earn a bonus for successfully doing what we want to do.....emerge from bankruptcy quickly. With your help, we will accomplish this goal. Sincerely, /s/ Roger V. Goddu Roger V. Goddu Chairman & CEO I have read the Wards Executive Committee Severance Plan and understand its terms and have voluntarily signed this Agreement thereby agreeing to participate in this Plan and accept its provisions. Tom Austin - ------------------------------------------------- Print Executive's Name /s/ Tom Austin - ------------------------------------------------- Executive's Signature November 6, 1997 - ------------------------------------------------- Date EX-10.(XII)(A) 17 EMPLOYMENT AGREEMENT 10. (xii) (A) CONFIDENTIAL ------------ April 15, 1997 Louis J. Caporale 10524 N. Woodcrest Drive Mequon, Wisconsin 53092 Dear Lou: This letter confirms our offer to you as Executive Vice President and General Merchandise Manager for Montgomery Ward. You will report to Roger Goddu, Chairman and Chief Executive Officer. Your reporting relationship may change in the future, but, you will only report to either Tom Grimes or Roger Goddu. You will be a member of the Montgomery Ward Executive Committee. Your compensation plan will include the following: 1.) Base salary of $400,000 annually, paid semi-monthly. You will be eligible for normal merit increase reviews beginning in 1998. 2.) Target bonus on the Performance Management Plan of $150,000. Based upon the achievement of superior performance against specific objectives for the year, you have the opportunity to earn up to 150% of your target bonus. For fiscal 1997, 1998 and 1999, your target bonus of $150,000 will be guaranteed. Additionally, we will pre-pay your guaranteed bonus targets for 1997 and 1998. 3.) You will receive a hiring bonus of $50,000 within 30 days of employment to handle miscellaneous losses incurred by the move. 4.) The Company will provide you with a special bonus plan to offset your Kohl's equity loss that will provide for a maximum payment of $500,000 which will vest as follows: $200,000 5-1-1998 $150,000 5-1-1999 $150,000 5-1-2000
The payment of monies earned for this bonus award will be made on May 1, 2000. If you leave the company prior to May, 2000, you will receive only the vested amount as of your separation date. 5.) You will participate in the senior officer perquisites, including; financial counselling, tax assistance, executive medical, and annual physical examination. 1 Louis J. Caporale April 15, 1996 Page 2 6.) Montgomery Ward will provide you with a relocation plan, including movement of household goods, househunting trips, home purchase plan at 100% of the appraised value of your home, and payment of your closing costs on your home purchase, plus up to two points on your financing of a new home. Your temporary housing expenses in the Chicago area for the first six months (or until relocation if sooner) will be paid by Montgomery Ward. You will receive a gross up for the taxes you incur as a result of your relocation. 7.) As soon as possible after your start date, you will be recommended for a stock option for 300,000 shares of Montgomery Ward Holding stock at the 1997 fair value. These options will vest as follows: 100,000 - May 1, 1998 100,000 - May 1, 1999 100,000 - May 1, 2000 All stock options in point 6 are subject to the Terms and Conditions of the Stockholders Agreement. (A copy of the current Prospectus is included). If the Montgomery Ward Holding stock is diluted or a new plan is implemented, you will receive additional stock options to retain your ownership opportunity at substantially the same level as the original 300,000 share option grant. 8.) If Montgomery Ward initiates a separation of your employment for any reason other than "Cause" as defined below, you will receive: A) Your base salary through May 1, 2000, however, not less than twelve months. B) The continuation of the vesting of your stock and stock options through May 1, 2000. 2 Louis J. Caporale April 15, 1996 Page 3 "Cause" shall mean (i) your willful failure to substantially perform your duties hereunder, (ii) your willful failure to follow a written, lawful order or written directive from the Board of Directors or Chief Executive Officer of the company, or (iii) your conviction of any kind of felony or any misdemeanor involving moral turpitude. For purposes of this paragraph, no act, failure to act, on your part shall be considered "willful" unless such act, or failure to act by you was not in good faith and was without reasonable belief that your action or omission was in the best interest of the Company. If you voluntarily leave Montgomery Ward, or are separated for "Cause", you will receive no severance payments, nor will your stock continue to vest beyond your separation date. 9.) The non-compete provision of the Stockholder's Agreement is modified for you to provide only a one year non-compete period following any separation from Montgomery Ward; and, such non-competition will apply only to Sears, J.C. Penney, Target and Kohl's. I am happy that you are considering joining Montgomery Ward. If you are in agreement with this letter, please sign below and return it to me whereupon it will become our binding agreement. I am certain that your management ability can help move Montgomery Ward to the premier position in the Industry. Sincerely, /s/ Robert A. Kasenter - ---------------------------------------- Robert A. Kasenter Executive Vice President Human Resources cc: Roger Goddu /s/ Louis Caporale - ---------------------------------------- Louis Caporale May 20, 1997 - --------------------------------------- Date 3 EX-10.(XII)(B) 18 LETTER AGREEMENT 10. (xii) (B) April 30, 1997 Mr. Louis J. Caporale 10524 N. Woodcrest Drive Mequon, Wisconsin 53092 Dear Lou: Reference is made to your Compensation Agreement (the "Agreement") dated as of April 15, 1997, with Montgomery Ward & Co., Incorporated (the "Company"). In order to induce you to accept the offer of employment contained in the Agreement, General Electric Capital Corporation ("GE Capital"), as a principal shareholder in the Company, hereby agrees with you that if, for any reason other than termination of your employment, either voluntarily by you or for "cause" by the Company, the Company shall fail to pay to you the base salary for the first three years of such Agreement and the guaranteed bonuses for each of the first three years of such Agreement and the bonus plan to offset your Kohl's equity loss payable on May 1, 2000, then GE Capital shall pay such amounts to you as provided in and subject to the conditions of the Agreement. This obligation on the part of GE Capital shall be triggered by your written notice to GE Capital that the Company has ceased to make such payments as required by such Agreement. Very truly yours, General Electric Capital Corporation By: /s/ Edward D. Stewart ------------------------------------ Executive Vice President EX-10.(XII)(C) 19 LETTER AGREEMENT 10. (xii) (C) November 3, 1997 Louis J. Caporale Executive Vice President Women's Apparel & Fine Jewelry Montgomery Ward Chicago, IL 60671 Dear Lou: As we discussed, last Friday, October 31, 1997, the court approved our Executive Compensation Plan for Executive Committee members. A copy of the court order is attached. This package includes the pieces of your personal compensation and security plan for your position at Montgomery Ward. Your plan includes: 1.) Your employment agreement dated April 15, 1997 continues to have guarantees of your base salary and specified bonuses as written in the GECC agreement attached. We fully expect that these payments will be made by Montgomery Ward. But, if they are not paid by Wards, GE will pay them. 2.) The Wards Executive Committee Severance Plan. 3.) The Montgomery Ward Special Emergence Bonus Plan. Please read your severance and emergence plan documents very carefully. Payments under these plans are considered "administrative" claims and have a very secure priority in our claims payment. If you have any questions, please contact Bob Kasenter and he will provide you with any answers. Once you are comfortable with your participation in your plans, please sign the documents and return them to Bob. These plans provide us with the incentives and the security we requested so that we can focus on the turnaround of our company. Now it is up to us to make it happen. Sincerely, /s/ Roger V. Goddu Roger V. Goddu Chairman and C.E.O. Attachment MONTGOMERY WARD SPECIAL EMERGENCE BONUS PLAN Louis Caporale EVP Womens App & Fine Jewelry Montgomery Ward Dear Lou: You have been selected to participate in a special Emergence Bonus Plan for members of the Montgomery Ward Executive Committee. This Plan will pay you a lump-sum bonus based upon the date we have a court approved Plan of Reorganization (POR). Your bonus potential is as follows: Bonus Amount POR Approval As Of -------------- ----------------------- $500,000 April 1, 1999 $400,000 October 1, 1999 $200,000 After October 1, 1999 The bonus amount earned based upon the date of the POR's approval will be paid within thirty (30) days of the approval. This bonus payment will be subject to the following rules: 1. Any award under this plan will be made as a lump sum payment and will be subject to normal tax withholding. 2. In order to receive an award payment under this plan, except for a Change of Control, the participant must be actively employed by the Company upon approval of a POR from the bankruptcy court. 3. In the event of a Change of Control as defined in the Wards Executive Committee Plan, participants who are actively employed as of the date of the change of control and who are no longer employed by the company upon approval from the bankruptcy court of a POR will be eligible for an award under the plan if the separation date is within six months of the approved POR. By copy of this letter, you are offered participation in this Special Emergence Bonus Plan. If you agree to participate and be governed by the rules of this plan, please sign your acceptance below and return this letter to Bob Kasenter. This plan offers us an opportunity to earn a bonus for successfully doing what we want to do.....emerge from bankruptcy quickly. With your help, we will accomplish this goal. Sincerely, /s/ Roger V. Goddu - --------------------------------- Roger V. Goddu Chairman & CEO I have read the Wards Executive Committee Severance Plan and understand its terms and have voluntarily signed this Agreement thereby agreeing to participate in this Plan and accept its provisions. Louis J. Caporale - --------------------------------- Print Executive's Name Louis J. Caporale - --------------------------------- Executive's Signature November 10, 1997 _________________________________ Date EX-10.(XV) 20 EMPLOYMENT AGREEMENT 10. (xv) March 6, 1998 Worthington W. Linen 300 Central Park West New York, NY 10024 Dear Worth: This document is the Employment Agreement between you and The Signature Group. The terms of your Employment Agreement are as follows: POSITION - -------- Your job title is Chairman & Chief Executive Officer, The Signature Group. You will report to the Chairman and C.E.O. Montgomery Ward and be a member of the Signature Group Board of Directors and Executive Committee. BASE SALARY - ----------- Your annual base salary is $700,000 and is paid semi-monthly. Any salary adjustments will require approval of the Signature Board of Directors and the Compensation Committee of the Montgomery Ward Board of Directors. However, your compensation (both base and target bonus level) will be reviewed for adjustment annually, and neither your base nor your target bonus will be decreased without your written consent. SHORT TERM BONUS - ---------------- Your short term incentive plan target bonus is $350,000 annually. Based upon the achievement of specific goals conveyed to you in January of each year beginning in 1999 as determined by the Chairman & CEO of Montgomery Ward or his designee, subject to approval by the Compensation Committee of the Montgomery Ward Board of Directors which approval will not be unreasonably withheld, you may earn from zero up to 150% of your annual target bonus amount. Your target bonus award for each year shall be calculated and paid during the first fiscal quarter of the following year. For 1998 your annual target bonus award of $350,000 is guaranteed. EQUITY CONSIDERATION - -------------------- Due to Montgomery Ward's Chapter 11 filing and the Signature Group's relationship with Montgomery Ward, the specifics of long term equity awards to individual participants are not possible to announce at this time. However, upon 1 Montgomery Ward's emergence from bankruptcy or a Signature I.P.O., you will be eligible for participation in any equity or equity-like compensation plan(s) actually implemented, at a level consistent with your position with Signature, provided that you are actively employed by Signature at such time and Signature is still owned by Montgomery Ward. We will work with you to develop any equity plan in a manner that will provide a mutually beneficial tax consequence for all parties if possible. SPECIAL LONG TERM BONUS PLAN - ---------------------------- For the period of fiscal 1998 through fiscal 2001, you will participate in a one-time Special Long Term Bonus Plan as Signature's Chief Executive Officer. This plan will reward you for your ability to increase the Earnings Before Interest and Taxes without Admin. Fee (E.B.I.T.) for the Signature Group. Using year-end 1997 E.B.I.T. for Signature of $90.2 million as your base line, you will receive a bonus award of 1.5% of the E.B.I.T. dollars over $90.2 million for each year of 1998 and 1999 which will be paid in the first quarter of 2000. A second bonus award of 1.5% of the EBIT dollars over $90.2 million for each year of 2000 and 2001 will be paid in the first quarter of 2002. These long term bonus awards will be paid as soon as possible after the final numbers for 1999 and 2001 are finalized. As an example, if you achieve the current forecasts for Signature's E.B.I.T. dollars for each year through 2001, your Long Term Bonus Plan would pay out as follows:
------------------------------------------------------------------------------------------------------ First Two Second Two Year Award Year Award 1998 1999 Total Increase 2000 2001 Total Increase -------- -------- -------------- -------- -------- -------------- Forecast EBIT* $115.2MM $128.1MM $141.2MM $150.7MM 1997 Base Line 90.2MM 90.2MM 90.2MM 90.2MM -------- -------- -------- -------- EBIT Increase 25.0MM 37.9MM $62.9MM 51.0MM 60.5MM $111.5MM x .015 x .015 ------- -------- $.944MM $1.673MM ------------------------------------------------------------------------------------------------------
* Changes in accounting practices/rules will not negatively impact you or the calculation of this bonus award. If such changes occur, your bonus award will be calculated using the current methodology. 2 BENEFITS & PERQUISITES - ---------------------- In addition to all normal company benefit plans, you will participate in the following Executive Benefits Plan: . Annual Physical Examination . Executive Accident Insurance . Executive Medical Coverage . Executive Vacation RELOCATION PLAN - --------------- Signature will provide you with a relocation plan, including movement of household goods, househunting trips, home purchase plan at 100% of the appraised value of your home, and payment of your closing costs, without limitation, on your home purchase, plus up to two points on your financing of a new home. Your temporary housing expenses in the Chicago area for the first six months (or until relocation, if sooner) will be paid by Signature. You will be paid for your airfare to New York City weekly during your temporary living period. You will receive a gross up for the taxes (35% Federal and 3% State) you incur as a result of your relocation expenses. Additionally, you will receive a relocation allowance of $50,000 to handle incidental personal expenses in the move. TERMINATION PLAN - ---------------- The term of this employment agreement is for April 1, 1998 until December 31, 2001. If your employment is terminated by Signature for any reason other than "Cause" as defined below or your voluntary resignation, you will receive within 30 days following your termination (with no mitigation obligation), a lump sum payment equal to your base salary for a twenty-four month period. In addition, you will receive Executive Outplacement Services and continue to participate in Executive Benefits Plans which includes the Health Care Plan along with "Benefits and Perquisites" described above for the twenty- four month period following your separation. In addition, you will receive in the first quarter after the fiscal year end of the year in which you were terminated, the portion of your Special Long Term Bonus Plan for the period that you have worked. The calculation will include any year end earnings for the year in which you are terminated. You will be given six months written notice if this agreement is not going to be renewed at the end of its term. If it is not renewed, you will receive within thirty (30) days following the end of this agreement (with no mitigation obligation) a lump sum payment equal to twenty-four months base salary, as well as the outplacement and Executive Benefits, and any award due under the Special Long Term Bonus Plan. 3 "Cause" shall mean (i) your willful failure for reasons, other than an illness or disability, to substantially perform your duties hereunder, (ii) your willful failure to follow a written, lawful order or written directive for the Board of Directors or Chief Executive Officer of Montgomery Ward, or (iii) your conviction of any kind of felony or any misdemeanor involving moral turpitude. For purposes of this paragraph, no act, or failure to act, on your part will be considered "willful" unless such act, or failure to act by you was not in good faith and was without reasonable belief that your action or omission was in the best interest of the Company. No termination under clause (i) or (ii) above shall be effective unless: (1) within ten (10) business days of any action by you which causes the Board of Directors to conclude that cause exists, the Board provides written notice to you specifying in detail the nature of the claimed cause; and (2) you, without conceding that cause exists, have the opportunity to cure the alleged infraction as soon as practical but no later than thirty (30) days after receipt of the applicable notice (or such longer time as may be reasonably required by the nature of the alleged breach). For purposes of this agreement, any diminution of your job title, executive committee membership, board membership, base salary, target bonus, other compensation or benefits, a reduction in your job responsibilities, or, if Signature remains a subsidiary of Montgomery Ward, a change in your reporting relationship, or, if there is a Change of Control event as defined below, a substantial diminution in your reporting relationship within the new organization, without your prior written approval during the term of this agreement will allow you to elect the terms of this section as if you were terminated without "Cause". However, such election must be done in writing to the Chairman & CEO Montgomery Ward or his successor as your supervisor within sixty (60) days of the triggering event and the Company will have thirty (30) days to cure an action that caused your election to separate under this section. CHANGE OF CONTROL - ----------------- After a Change of Control Event as defined below, and for a period of four years after such date, if you are separated from the Company under provisions in the Termination Plan above (including any of the diminutions provisions under which you may elect to leave the Company), the lump sum severance payment payable within 30 days after your separation (with no mitigation obligation) will be twenty-four months base salary, plus two times your target bonus amount. Your Executive Benefits will continue for two years from your separation date. If the Change of Control Event is completed after December 31, 1998, you will also receive the portion of your Special Long Term Bonus Plan for the period that you were employed including any earnings for the year of your separation or $900,000, whichever is greater. A "Change of Control Event" shall mean any sale, lease, license, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the business and assets of The Signature Group or its Parent Company; a merger or consolidation in which Signature is not the surviving entity; a sale or other transfer where more than fifty percent (50%) of the voting 4 stock of Signature is no longer owned by Montgomery Ward. However, this provision does not apply to an internal reorganization of Signature within Montgomery Ward so long as Signature remains a direct or indirect majority- owned subsidiary of Montgomery Ward. The Signature Group or its successor company will reimburse you for all reasonable attorney fees needed to enforce your rights under this section if the Company is found to be in breach of this Agreement. Except as provided in the following sentence, payments pursuant to this employment agreement ("Payments") shall not exceed the largest sum ("Parachute Limitation") which will not result, directly or indirectly, in the treatment of any amount paid or payable by the Company or any successor to you (whether or not pursuant to this employment agreement, and including the Payments) as an Excess Parachute Payment. Notwithstanding the preceding sentence, you shall receive the full amount of the Payments without regard to the Parachute Limitation if you would realize a greater aftertax amount receiving the full amount of the Payments without regard to the Parachute Limitation than you would realize by receiving the Payments limited to the Parachute Limitation as provided in the preceding sentence. All computations and determinations required by the preceding paragraph shall be made by your accountant, acting in good faith. The computations and determinations made any time by your accountant shall affect only those Payments not yet made pursuant to this employment agreement. For purposes of this employment agreement, the term "Excess Parachute Payment" shall have the same meaning as the term "excess parachute payment" has under section 280G of the Internal Revenue Code of 1986, as amended and the regulations thereunder. NON-COMPETE - ----------- In the event that you voluntarily leave The Signature Group, you will be bound by a non-compete agreement that provides that you will not be directly employed by nor perform work as director, officer, independent contractor, partner, or consultant for Cendant, Sears, Discover, Memberworks nor J. C. Penney or any of their affiliates for a period of one (1) year following your termination date. 5 This Agreement will be subject to the Laws of Illinois where applicable. Each of the individuals signing this Agreement represents to the others that he has the right, capacity, power and authority to sign this Agreement on his behalf, or on behalf of Montgomery Ward and The Signature Group, as the case may be. This Agreement may be signed in counterparts, and facsimile signatures are deemed original signatures for purposes of executing this Agreement. If you are in agreement with this letter, please sign for your acceptance below and return it to me. Agreed to and Accepted for Montgomery Ward and The Signature Group /s/ Roger V. Goddu - ------------------------------------------- Roger V. Goddu Chairman & Chief Executive Officer Montgomery Ward & Co. Incorporated /s/ Worthington Linen - ------------------------------------------- Agreed to and Accepted by 6 EX-23 21 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 23, 1998 included in this Form 10-K, into the Company's previously filed Registration Statement File No. 33-57075. Arthur Andersen LLP Chicago, Illinois March 28, 1998 EX-27 22 FINANCIAL DATA SCHEDULE
5 1,000,000 OTHER JAN-03-1998 DEC-29-1996 JAN-03-1998 189 359 240 0 1,120 0 1,863 (796) 4,572 0 0 177 0 1 (717) 4,572 4,534 5,386 3,954 3,954 2,295 553 111 (1,527) (375) (1,152) 0 0 0 (1,152) (31.67) (31.67)
-----END PRIVACY-ENHANCED MESSAGE-----