-----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, T5PEsohHOW886SI6Jn5NUoe1TB40cnhFM2w8+Zztvx35XeUnctIN8yUXXUfrjxX/ fxpnIP8M5z8GbjQia1EQEw== 0000950131-99-003126.txt : 19990517 0000950131-99-003126.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950131-99-003126 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990403 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONTGOMERY WARD HOLDING CORP CENTRAL INDEX KEY: 0000836974 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 363571585 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-23403 FILM NUMBER: 99622877 BUSINESS ADDRESS: STREET 1: ONE MONTGOMERY WARD PLZ CITY: CHICAGO STATE: IL ZIP: 60671 BUSINESS PHONE: 3124672000 10-Q 1 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 ____________ FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF - THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 3, 1999 OR __TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-17540 MONTGOMERY WARD HOLDING CORP. (Exact name of registrant as specified in its charter) DELAWARE 36-3571585 (State of incorporation) (I.R.S. Employer Identification No.) MONTGOMERY WARD PLAZA, CHICAGO, ILLINOIS 60671 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 312/467-2000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ --- As of May 14, 1999 the Registrant had 18,322,152 shares of Class A Common Stock and 25,000,000 shares of Class B Common Stock outstanding. ================================================================================ MONTGOMERY WARD HOLDING CORP. For the Quarter Ended April 3, 1999 Index to Quarterly Report on Form 10-Q
Page Part I - Financial Information. Item 1. Financial Statements (Unaudited). Consolidated Statements of Income. 3 Consolidated Balance Sheets. 4 Consolidated Statements of Cash Flows. 5 Notes to Consolidated Financial Statements. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 12 Part II - Other Information. 18
2 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENTS OF INCOME
For the 13-Week Periods Ended ------------------------------------- April 3, April 4, (In millions, except per share amounts) 1999 1998 ---------------- ---------------- Net sales, including leased and licensed department sales $ 729 $ 772 Costs and Expenses Cost of goods sold, including net occupancy and buying expense 596 625 Operating, selling, general and administrative expenses 218 241 Interest expense, net 15 12 --------------- --------------- Total Costs and Expenses 829 878 --------------- --------------- Loss from Continuing Operations before Reorganization Costs and Income Taxes (100) (106) Reorganization Costs (Note 5) 10 16 --------------- --------------- Loss before Income Taxes and Discontinued Operations (110) (122) Income Tax Expense - - --------------- --------------- Loss before Discontinued Operations (110) (122) Income (Loss) from Discontinued Operations (Note 3) 4 (19) --------------- --------------- Net Loss $ (106) $ (141) =============== =============== Net Income (Loss) per Common Share (Note 6) Class A Before Discontinued Operations $(2.98) $(3.32) Discontinued Operations .11 (.53) --------------- --------------- $(2.87) $(3.85) =============== =============== Class B Before Discontinued Operations $(2.23) $(2.43) Discontinued Operations .08 (.39) --------------- --------------- $(2.15) $(2.82) =============== ===============
See notes to consolidated financial statements. 3 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED BALANCE SHEETS
April 3, Jan. 2, (In millions) 1999 1999 ---------------- -------------- (Unaudited) Assets Cash and cash equivalents $ 80 $ 58 Investments of insurance operations 3 3 --------------- ------------- Total Cash and Investments 83 61 Trade and other accounts receivable 207 187 Accounts and notes receivable from affiliates 113 123 --------------- ------------- Total Receivables 320 310 Merchandise inventories 896 953 Prepaid pension cost 404 402 Properties, plants and equipment, net of accumulated depreciation and amortization 966 963 Net assets of discontinued operations (Note 3) 668 666 Other assets 110 137 --------------- ------------- Total Assets $3,447 $3,492 =============== ============= Liabilities Short-term debt $ 534 $ 328 Trade accounts payable 414 444 Accrued liabilities and other obligations 628 738 Long-term debt 44 46 Liabilities subject to compromise (Note 4) 3,447 3,447 --------------- -------------- Total Liabilities 5,067 5,003 Commitments and Contingent Liabilities (Note 7) Redeemable Preferred Stock 177 177 Shareholders' Deficit Common stock 1 1 Capital in excess of par value 65 65 Accumulated deficit (1,728) (1,622) Accumulated other comprehensive income 4 7 Less: Treasury stock, at cost (139) (139) --------------- ------------- Total Shareholders' Deficit (1,797) (1,688) --------------- ------------- Total Liabilities and Shareholders' Deficit $ 3,447 $ 3,492 =============== =============
See notes to consolidated financial statements. 4 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the 13-Week Periods Ended ------------------------------------ April 3, April 4, (In millions) 1999 1998 -------------- ------------- Cash flows used for operating activities: Net loss $(106) $(141) Adjustments to reconcile net loss to net cash used for operating activities: (Income) loss from discontinued operations (4) 19 Provision for reorganization costs 5 - Net receipts/(disbursements) of cash relating to reorganization activities (23) 41 Depreciation and goodwill amortization 23 24 Changes in operating assets and liabilities: Trade and other accounts receivable (20) (29) Accounts and notes receivable from affiliates 10 3 Merchandise inventories 46 (60) Prepaid pension cost (2) (8) Other assets 6 4 Trade accounts payable (26) 6 Liabilities subject to compromise - (13) Accrued liabilities and other obligations (62) (38) ------------ ----------- Net cash used for continuing operations (153) (192) Net cash provided by (used for) discontinued operations 27 (6) Net cash used for operating activities (126) (198) ----------- ---------- Cash flows used in investing activities: Capital expenditures (26) (10) ------------ ----------- Net cash used in investing activities of continuing operations (26) (10) Net cash provided by (used in) investing activities of discontinued operations (28) 6 ------------ ----------- Net cash used in investing activities (54) (4) ------------ ----------- Cash flows provided by financing activities: Borrowings under Post-Petition Loan and Guaranty Agreement, net 206 234 Payments of long-term debt (2) (1) Payments of obligations under capital leases (2) (4) -------------- ----------- Net cash provided by financing activities of continuing operations 202 229 -------------- ----------- Increase in cash and cash equivalents 22 27 Cash and cash equivalents at beginning of period 58 164 -------------- ----------- Cash and cash equivalents at end of period $ 80 $191 ============== ===========
See notes to consolidated financial statements. 5 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements are unaudited. The consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto filed with the Securities and Exchange Commission in the 1998 Annual Report on Form 10-K of Montgomery Ward Holding Corp. ("MW Holding" or, together with its subsidiaries, the "Company"). Capitalized terms not otherwise defined herein have the meaning ascribed to such terms in the 1998 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to be comparable with the current period presentation. Comprehensive Income In 1998, the Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income. This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income (loss) consists of unrealized holding gains and losses on available-for-sale securities. The adoption of SFAS 130 had no impact on total shareholders' deficit. Comprehensive loss was $109 million and $140 million for the quarterly periods ended April 3, 1999 and April 4, 1998, respectively. 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 Financial/Marketing, Inc. ("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. 6 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. REORGANIZATION (CONTINUED) The Company filed its plan of reorganization and disclosure statement with the Bankruptcy Court on April 30, 1999. The 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. Under the reorganization plan, secured and non-tax priority claimholders will generally receive cash equal to the amount of their allowed claim. Claims held by unsecured creditors and certain allowed vendor claims held by GE Capital will be satisfied by cash distributions for a portion of the allowed claims. It is estimated that unsecured creditors will receive a recovery of approximately 28% to 29% of their allowed claim amount, other than holders of allowed claims against Lechmere, Inc. ("Lechmere") who will receive up to 14% to 14.5% of their allowed claim amount. In exchange for its remaining claims, GE Capital will receive 100% of the equity in a new limited liability company, Montgomery Ward LLC, which will acquire substantially all of the ongoing retail operations of Wards and its subsidiaries. Pursuant to an order of the Bankruptcy Court dated April 30, 1999, GE Capital deposited $650 million with an escrow agent pursuant to an escrow agreement. These funds will be distributed under the plan of reorganization to unsecured creditors. Other distributions under the plan of reorganization will be funded through Wards' exit financing. The reorganization plan will be consummated and Wards will emerge from Chapter 11 on the effective date. The effective date shall occur and the plan of reorganization will be consummated upon (a) entry of a confirmation order by the Bankruptcy Court on or before July 30, 1999, and (b) the earlier to occur (i) the consummation of the restructuring transactions set forth in the plan of reorganization or (ii) August 31, 1999. However, the creditors' committee may extend either or both of the foregoing dates to a date not later than December 31, 1999. If the effective date has not occurred by December 31, 1999 the plan of reorganization shall be voided. It is further contemplated that contemporaneously with or after the effective date GE Capital will acquire Signature. The accompanying consolidated 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. 7 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. DISCONTINUED OPERATIONS On February 1, 1999, Wards announced that GE Capital, a major shareholder and creditor, will acquire Signature, Wards' direct marketing response operations segment. Signature's results of operations have been classified as discontinued operations and prior periods have been restated. The net loss for the period ended January 2, 1999 included the cumulative effect of $33 million associated with a change in the method of accounting for the printing and mailing of membership material costs. Historically, these costs were capitalized and amortized ratably over the membership period as revenue is recognized. Effective in fiscal year 1998, these costs were expensed upon the mailing of membership materials. In the fourth quarter of 1998, Signature announced its intent to dispose of its dining business and in March 1999, signed a definitive agreement to sell this business to Transmedia Network Inc. Summarized financial data of discontinued operations are as follows:
For the 13-Week Periods Ended ---------------------------------------------- April 3, April 4, (In millions) 1999 1998 --------------- -------------- Revenues $ 165 $ 219 Income (loss) from operations before income taxes $ 6 $ (19) Income tax expense $ 2 $ - Net income (loss) $ 4 $ (19) April 3, January 2, (In millions) 1999 1999 --------------- -------------- Net assets of discontinued operations Cash and investments $ 444 $ 440 Direct response and insurance acquisition costs 455 466 Other assets 278 293 Short-term debt (105) (105) Insurance policy claim reserves (230) (234) Accrued liabilities (174) (194) --------------- -------------- Net assets of discontinued operations $ 668 $ 666 =============== ==============
Signature's short-term debt balance represents a loan from Lechmere. 8 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. 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.
April 3, January 2, (In millions) 1999 1999 ---------------- -------------- Accounts payable $1,383 $1,380 Long Term Credit Agreement 603 603 Short Term Credit Agreement 442 442 Note Purchase Agreements 276 276 Other long-term debt 4 4 Obligations under capital leases 62 64 Lease and other contract rejection claims 115 118 Other liabilities 562 560 -------------- ------------ $3,447 $3,447 ============== ============
The Company has $55 million of liabilities due Marinco which have been eliminated in consolidation but are subject to compromise. In addition, obligations under capital leases include amounts due Signature of $21 million and $22 million at April 3, 1999 and January 2, 1999, respectively. 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 $31 million for the quarterly periods ended April 3, 1999 and April 4, 1998. 9 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. REORGANIZATION COSTS Reorganization costs recorded for the quarterly periods ended April 3, 1999 and April 4, 1998, consisted of the following:
For the 13-Week Periods Ended -------------------------------------- April 3, April 4, (In millions) 1999 1998 -------------- ------------- Corporate data center exit costs $ 11 $ - Pension plan restructuring 5 - Interim Account Agreement Fees 8 6 Store closings (9) 4 Settlement of finance lease claims (11) - Professional fees 5 5 Other 3 3 Interest income (2) (2) ----------- ---------- $ 10 $ 16 =========== ==========
In February 1999, Wards received Bankruptcy Court approval to enter into a post-petition contract to exit its corporate data center. The expenses associated with the transaction include software transfer charges, lease obligation termination fees, severance and other expenses. Pension plan restructuring represents losses associated with the spin-off and termination of a portion of the Company's over-funded deferred benefit pension plan. Store closings for the quarter ended April 3, 1999 represents a reversal of a portion of the reserve recorded in 1998 related to store closings due to an increase in the estimated proceeds to be received from the sale of properties. In early 1999, the Company settled with third-parties as to the amount of claims to be allowed associated with finance lease obligations. The claim amounts settled upon were lower than amounts previously provided for in the financial statements. Professional fees incurred consisted of consulting and legal fees for bankruptcy activity and restructuring efforts on behalf of the Company and Creditors' Committee. 10 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6. Net Loss Per Common Share Net loss per common share is computed as follows:
For the 13-Week For the 13-Week Period Ended Period Ended April 3, 1999 April 4, 1998 ---------------------------- --------------------------- (In millions, except share and per share amounts) Class A Class B Class A Class B ------------ ----------- ----------- ----------- Net loss $ 52 $ 54 $ 71 $ 70 Weighted-average number of common shares outstanding 18,322,152 25,000,000 18,322,237 25,000,000 Net loss per common share, before discontinued operations $ (2.98) $ (2.23) $ (3.32) $ (2.43) Discontinued operations .11 .08 (.53) (.39) ------------ ----------- ----------- ----------- $ (2.87) $ (2.15) $ (3.85) $ (2.82) ============ =========== =========== ===========
7. COMMITMENTS AND CONTINGENT LIABILITIES MW Holding, Wards and its subsidiaries are engaged in various litigation and have a number of unresolved claims, as set forth in the 1998 Annual Report on Form 10-K. 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. 11 MONTGOMERY WARD HOLDING CORP. ITEM 2. 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 the first quarter of 1999 to the first quarter of 1998. All dollar amounts referred to in this discussion are in millions, and all income and expense items are shown before income taxes, unless specifically stated otherwise. The Company's business is seasonal, with approximately one-third of the sales traditionally occurring in the fourth quarter. Accordingly, the results of operations for the quarter are not necessarily indicative of the results for the entire year. Forward-Looking Statements Information included in this Report on Form 10-Q 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. Results of Operations First Quarter 1999 Compared with First Quarter 1998 Net sales were $729 in the first quarter of 1999, compared with $772 in the first quarter of 1998, a decrease of $43, or 6%. Sales on a comparable store basis increased approximately 3% after adjusting for the closing of stores and the exit of certain product lines. The decrease in net sales is attributable to the closing of 39 retail stores in February 1999 and nine retail stores in the third quarter of 1998. These closed stores reported net sales of $55 in the first quarter of 1998. The sales decrease was also caused by the Company's decision to exit certain product offerings which reported net sales of $5 in the first quarter of 1999 and $12 in the first quarter of 1998. The increase in comparable net sales is comprised of increases in appliance, consumer electronics, furniture and home furnishings and fine jewelry sales, offset by declines in apparel and Auto Express sales. Gross margin (net sales less cost of goods sold) dollars were $133, a decrease of $14, or 10%, from the first quarter of 1998. This decrease was due to the gross margin impact of decreased sales of $12 and a decrease in the gross margin rate on sales of $8, offset by decreased occupancy and other margin-related expenses of $6 primarily related to the closed stores. The decline in the gross margin rate of one percentage point is primarily due to increased markdowns taken in the first quarter of 1999 as compared to the first quarter of 1998 as a result of lower than anticipated winter apparel sales. 12 MONTGOMERY WARD HOLDING CORP. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Results of Operations (continued) First Quarter 1999 Compared with First Quarter 1998 (continued) Operating, selling and general and administrative expenses were $218 in the first quarter of 1999, as compared to $241 in the first quarter of 1998, a decrease of $23 or 10%. The decrease was primarily due to decreased payroll costs primarily related to closed stores of $12, decreased bad debt expense of $5, decreased Year 2000 expenditures of $4, and a decrease in all other costs of $2. Net interest expense was $15 in the first quarter of 1999 as compared to $12 in the first quarter of 1998, an increase of $3. The increase in interest expense is due to additional borrowings under the Post-Petition Loan and Guaranty Agreement to fund operations. The Company stopped accruing interest on its pre-petition short-term debt in connection with the Chapter 11 filing. Reorganization costs were $10 in the first quarter of 1999 as compared to $16 in the first quarter of 1998. See Note 5 to the Consolidated Financial Statements for the components of these costs. On February 1, 1999, Wards announced that GE Capital, a major shareholder and creditor, will acquire Signature, Wards' direct marketing response operations segment. Signature's results of operations have been classified as discontinued operations. The income from discontinued operations was $4 million for the first quarter of 1999 as compared to a loss of $19 in the first quarter of 1998. The prior year's results of discontinued operations included the write-off of $33 of capitalized fulfillment costs. 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 Court. 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. 13 MONTGOMERY WARD HOLDING CORP. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Discussion of Financial Condition (continued) The Company filed its plan of reorganization and disclosure statement with the Bankruptcy Court on April 30, 1999. The 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. Under the reorganization plan, secured and non-tax priority claimholders will generally receive cash equal to the amount of their allowed claim. Claims held by unsecured creditors and certain allowed vendor claims held by GE Capital will be satisfied by cash distributions for a portion of the allowed claims. It is estimated that unsecured creditors will receive a recovery of approximately 28% to 29% of their allowed claim amount, other than holders of allowed claims against Lechmere, Inc. ("Lechmere") who will receive up to 14% to 14.5% of their allowed claim amount. In exchange for its remaining claims, GE Capital will receive 100% of the equity in a new limited liability company, Montgomery Ward LLC, which will acquire substantially all of the ongoing retail operations of Wards and its subsidiaries. Pursuant to an order of the Bankruptcy Court dated April 30, 1999, GE Capital deposited $650 with an escrow agent pursuant to an escrow agreement. These funds will be distributed under the plan of reorganization to unsecured creditors. Other distributions under the plan of reorganization will be funded through Wards' exit financing. The reorganization plan will be consummated and Wards will emerge from Chapter 11 on the effective date. The effective date shall occur and the plan of reorganization will be consummated upon (a) entry of a confirmation order by the Bankruptcy Court on or before July 30, 1999, and (b) the earlier to occur (i) the consummation of the restructuring transactions set forth in the plan of reorganization or (ii) August 31, 1999. However, the creditors' committee may extend either or both of the foregoing dates to a date not later than December 31, 1999. If the effective date has not occurred by December 31, 1999 the plan of reorganization shall be voided. It is further contemplated that contemporaneously with or after the effective date GE Capital will acquire Signature. Net cash used in the Company's operating activities for continuing operations totaled $153 for the first quarter of 1999 compared to $192 for the first quarter of 1998, a decrease of $39. The lower cash usage is summarized as follows: Cash impact of smaller operating loss $ 16 Decrease in cash received from reorganization activities (64) Increase in cash provided by merchandise inventories and accounts payable, net 74 All other cash from operations 13 ---------- $ 39 ==========
Cash received from reorganization activities represents proceeds from the disposition of properties, net of costs associated with the going out-of- business sales and other reorganization activities. The first quarter of 1998 included proceeds from the disposal of properties in connection with the 1997 store closings. The increase in cash provided by inventory and accounts payable is due to the reduction in inventories and accounts payable as a result of store closings. 14 MONTGOMERY WARD HOLDING CORP. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Discussion of Financial Condition (continued) Net cash used for capital expenditures totaled $26 for the first quarter of 1999, compared to $10 million for the first quarter of 1998. The increase in capital expenditures relates to systems development and the remodeling of stores. Wards is remodeling 40 stores in 1999 and anticipates remodeling a minimum of 40 stores per year in 2000 and 2001. In 1998, Wards remodeled three stores, which serve as the prototype for the remodeling of future stores. These three stores reflected sales increases over the prior year in excess of 40 percentage points above the combined performance of the entire chain from September 1998 through March 1999. The Company plans to spend $180 over the next three years related to the remodeling of approximately 120 stores. Net cash provided by financing activities of continuing operations totaled $202 for the first quarter of 1999, compared to $229 for the first quarter of 1998, which primarily represents borrowings under the Post-Petition Loan and Guaranty Agreement. The decrease in borrowings under the Post-Petition Loan and Guaranty Agreement is due to less cash used by operating activities offset by increased capital expenditures. The Company had borrowed to the full extent of its financing facilities (excluding the Seasonal Credit Agreement) prior to the Chapter 11 filing. 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, as amended, 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 $1,000. 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. Total borrowings outstanding were $510 and letters of credit outstanding were $126 at April 3, 1999. The Company had $158 of borrowing availability under the DIP Facility at April 3, 1999. On April 30, 1999, the Bankruptcy Court approved the Amended and Restated Post-Petition Loan and Guaranty Agreement ("Amended and Restated DIP Facility"). The Amended and Restated DIP Facility amends and restates certain provisions of the DIP Facility including an extension of the $1 billion DIP Facility through March 31, 2000 and provides for a $200 million subordinated loan tranche from GE Capital. The maximum amount available under the DIP Facility, as amended by the Amended and Restated DIP Facility, will remain at $1 billion. Prior to the bankruptcy filing, Wards entered into a long term credit agreement, as amended, ("Long Term Credit Agreement") and a short term credit agreement, as amended, ("Short Term Credit Agreement") both dated as of September 15, 1994; note purchase agreements, as amended, dated March 1, 1993 and July 11, 1995 ("Note Purchase Agreements"); and a credit agreement, as amended, ("Seasonal Credit Agreement") dated October 4, 1996. The Company is currently in default of the terms of these agreements and no future amounts may be drawn thereunder. 15 MONTGOMERY WARD HOLDING CORP. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Discussion of Financial Condition (continued) On September 15, 1998, the Company received approval from the Bankruptcy Court to permit Lechmere to lend Signature the funds to repay its borrowings of $102 under a Credit Agreement between Signature and various lenders, plus interest and other fees associated with the extension and refinancing of such agreement. On September 30, 1998, Signature's loan under the Credit Agreement was repaid from the $105 of funds advanced by Lechmere to Signature. The Lechmere loan to Signature, which accrues interest at either the prime rate plus 1.75% or the LIBO rate plus 2.75%, is secured by a pledge of stock of certain Signature subsidiaries and is guaranteed by Wards. Such guarantee is subordinate to the DIP Facility. The loan shall become immediately due upon the earliest of (i) upon demand; (ii) the effective date of a plan of reorganization for the debtor subsidiary; (iii) the conversion of the bankruptcy case from a Chapter 11 case to a Chapter 7 case under the Bankruptcy Code; (iv) the sale of all or substantially all of Signature's assets, the merger or consolidation of Signature with or into another entity, or the sale of more than 50% of an interest in Signature to another entity; or (v) December 31, 1999. 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 increasing its sales base, continuing to improve its gross margin rates and controlling expenses. In addition, the financial performance of the remaining retail stores will be reviewed on a continuing basis and additional stores may be closed if warranted. Management has also reevaluated the Company's merchandising, marketing, store operations and logistics strategies, and is in the process of implementing the new strategy. Future cash is 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. The Company began addressing Year 2000 date conversion issues in the fall of 1996 and has developed a plan to assess and remediate both information technology ("IT") and non-IT systems. The Company's plan consists of two phases. The assessment phase includes the inventory of all systems (IT and non-IT) subject to the Year 2000 issue and developing a plan for addressing the problem as related to each system. The remediation phase includes the implementation of the identified changes required and testing of these changes before implementation. For IT systems, the Company has completed its assessment phase and the remediation phase is 95% complete. The remainder of the remediation phase is expected to be completed in the third quarter of 1999. For non-IT systems, the Company anticipates the assessment phase to be completed in the second quarter 1999 and the remediation phase to be completed by September 30, 1999. The Company is also in the process of assessing the Year 2000 readiness of its suppliers and service providers and is participating in a National Retail Federation survey of such providers. 16 MONTGOMERY WARD HOLDING CORP. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Discussion of Financial Condition (continued) In the first quarter of 1999, the Company expensed $2 related to Year 2000 readiness. Prior to 1999, the Company expensed $34. The Company estimates an additional $2 will be expensed as incurred to become Year 2000 ready. In addition, the Year 2000 issue has accelerated the timing of an estimated $26 of capital expenditures of which $19 has been capitalized as of April 3, 1999. No significant capital projects have been delayed as a result of addressing the Year 2000 issue. Based on the Company's plan, the remaining costs to be expended to become Year 2000 ready are not expected to materially impact future cash flows. The Company believes that its program will result in Year 2000 readiness. However, due to the complexity of the issue, there can be no assurances given that the Company's plan will be fully effective. The Company could experience interruptions of business at some of its operations, including those caused by, but not limited to, the inability of utility companies to provide telecommunications and electrical services, the failure of financial institutions to process transactions, and the inability of vendors to deliver products on a timely basis. The Company is in the process of developing contingency plans which are anticipated to be completed by September 30, 1999, with respect to the Company's facilities and merchandise supply and distribution networks. As discussed in Note 2 to the Consolidated Financial Statements, the accompanying consolidated 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. 17 MONTGOMERY WARD HOLDING CORP. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES The Company's Certificate of Incorporation provides that the holders of shares of Senior Preferred Stock of the Company are entitled to receive, before any dividends may be declared or paid upon or set aside for the Common Stock, cash dividends in quarterly payments on the last business day of March, June, September and December. The Company did not make any dividend payment with respect to the Senior Preferred Stock on June 30, 1997. The holder of all 1,750 outstanding shares of the Senior Preferred Stock would have been entitled to receive $3,066,875 in such dividend on such date. Such amount also represents the total arrearage on the payment of dividends on the Senior Preferred Stock as of the date of filing of this report. The redemption provisions of the Senior Preferred Stock have been stayed by the Chapter 11 proceedings. No further dividends will be declared or paid prior to the approval of a plan of reorganization. The Company's Certificate of Incorporation provides that the holders of shares of Series C Preferred Stock of the Company are entitled to receive, before any dividends may be declared or paid upon or set aside for the Common Stock, cash dividends in quarterly payments on the last business day of March, June, September and December. If for any reason the full dividend on any payment date is not paid in cash on such date, the unpaid amount thereof will be automatically, without further action, be deemed added to the Liquidation Value. The Company did not make any dividend payment with respect to the Series C Preferred Stock on June 30, 1997. The holder of all 352 shares would have been entitled to receive $1,726,154 in such dividend on such date. This amount was added to the Liquidation Value. The redemption provisions of the Series C Preferred Stock have been stayed by the Chapter 11 proceedings. No further dividends will be declared or paid prior to the approval of a plan of reorganization. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. 18 MONTGOMERY WARD HOLDING CORP. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27. Financial Data Schedule. (b) Reports on Form 8-K On February 3, 1999, the Registrant filed a Form 8-K to communicate that the Company will emerge from Chapter 11 bankruptcy protection in mid-1999 as a result of an agreement reached with Wards' Creditor's Committee. The press release issued by Montgomery Ward & Co., Incorporated on February 1, 1999 was included as an exhibit thereto. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. REGISTRANT MONTGOMERY WARD HOLDING CORP. BY /s/ THOMAS J. PAUP -------------------------------------------------- NAME AND TITLE THOMAS J. PAUP, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER DATE: MAY 14, 1999 19 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000,000 3-MOS JAN-01-2000 JAN-03-1999 APR-03-1999 80 3 320 0 896 0 1,774 (808) 3,447 0 0 117 0 1 (1,798) 3,447 729 729 596 596 218 10 15 (110) 0 (110) 4 0 0 (106) (2.87) (2.15)
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