<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 July 27, 1994
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
Commission File No. 1-327
Kmart Corporation
(Exact name of registrant as specified in its charter)
Michigan 38-0729500
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 West Big Beaver Road - Troy, Michigan 48084
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (810) 643-1000
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
Number of shares of Common Stock outstanding at August 24, 1994: 410,380,730
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KMART CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
--------------------- ----------------------
JULY 27, JULY 28, JULY 27, JULY 28,
1994 1993 1994 1993
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 8,828 $ 8,439 $16,638 $15,791
Licensee fees and rental income 73 71 133 124
Equity in income of affiliated retail companies 25 29 33 39
-------- -------- ------- -------
8,926 8,539 16,804 15,954
-------- -------- ------- -------
Cost of merchandise sold (includes buying and occupancy costs) 6,637 6,309 12,477 11,775
Selling, general and administrative expenses 2,030 1,925 3,916 3,669
Interest expense:
Debt -- net 57 75 124 149
Capital lease obligations and other 59 50 116 98
-------- -------- ------- -------
8,783 8,359 16,633 15,691
-------- -------- ------- -------
Income from continuing retail operations before income taxes 143 180 171 263
Income taxes 49 55 59 80
-------- -------- ------- -------
Net income from continuing retail operations before
extraordinary item and the effect of accounting changes 94 125 112 183
Discontinued operations including the effect of accounting
changes, net of income taxes of $0 and $1, respectively -- (23) -- (16)
Extraordinary item, net of income taxes of $(6) -- -- -- (10)
Effect of accounting changes, net of income taxes of $(37) -- -- -- (32)
-------- -------- ------- -------
Net income $ 94 $ 102 $ 112 $ 125
======== ======== ======= =======
Earnings per common and common equivalent share:
Net income from continuing retail operations before
extraordinary item and the effect of accounting changes $ .20 $ .27 $ .24 $ .39
Discontinued operations including the effect of accounting
changes, net of income taxes -- (.05) -- (.03)
Extraordinary item, net of income taxes -- -- -- (.02)
Effect of accounting changes, net of income taxes -- -- -- (.07)
-------- -------- ------- -------
$ .20 $ .22 $ .24 $ .27
======== ======== ======= =======
Dividends declared per common share $ .24 $ .24 $ .48 $ .48
======== ======== ======= =======
Weighted average shares 456.1 456.0 456.0 456.3
======== ======== ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
The consolidated statements of income for the prior periods have been restated
for discontinued operations.
2
<PAGE> 3
KMART CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
JULY 27, JULY 28, JANUARY 26,
1994 1993 1994
-------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash (includes temporary investments of $62, $142 and $32,
respectively) $ 318 $ 550 $ 449
Merchandise inventories 8,328 9,437 7,252
Accounts receivable and other current assets 1,407 1,290 1,235
Discontinued operations 672 -- 911
------- ------- -------
Total current assets 10,725 11,277 9,847
Investments in Affiliated Retail Companies 615 541 606
Property and Equipment -- net 6,174 6,774 5,886
Other Assets and Deferred Charges 322 366 469
Goodwill -- net of accumulated amortization of $68, $109 and $59,
respectively 686 1,231 696
------- ------- -------
$18,522 $20,189 $17,504
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year $ 229 $ 120 $ 390
Notes payable 1,585 1,893 918
Accounts payable -- trade 3,541 3,173 2,763
Accrued payrolls and other liabilities 1,220 1,140 1,347
Taxes other than income taxes 407 445 271
Income taxes -- 113 35
------- ------- -------
Total current liabilities 6,982 6,884 5,724
Capital Lease Obligations 1,791 1,876 1,720
Long-Term Debt 2,042 2,979 2,227
Other Long-Term Liabilities (includes store restructuring obligations) 1,696 811 1,740
Deferred Income Taxes -- 215 --
Shareholders' Equity:
Preferred stock, 10,000,000 shares authorized;
Series A, 5,750,000 shares authorized and issued 986 986 986
Series C, 796,827 shares authorized; 784,938 shares issued 157 157 157
Common stock, 1,500,000,000 shares authorized; shares
issued 416,772,739, 416,189,888 and 416,546,780, respectively 417 416 417
Capital in excess of par value 543 524 538
Performance restricted stock deferred compensation (2) (4) (3)
Retained earnings 4,108 5,585 4,237
Treasury shares (95) (115) (109)
Foreign currency translation adjustment (103) (125) (130)
------- ------- -------
Total shareholders' equity 6,011 7,424 6,093
------- ------- -------
$18,522 $20,189 $17,504
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
KMART CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
26 WEEKS ENDED
-------------------------
JULY 27, JULY 28,
1994 1993
----------- ------------
(Unaudited)
<S> <C> <C>
CASH PROVIDED BY (USED FOR):
OPERATIONS
Net income from continuing retail operations before extraordinary
item and the effect of accounting changes $ 112 $ 183
Adjustments to reconcile net income to operating cash flows:
Depreciation and amortization 382 343
Deferred income taxes 97 (4)
Increase (decrease) in other long-term liabilities (61) 5
Other -- net 67 61
Cash used for current assets and current liabilities (520) (720)
------- -------
Total cash provided by (used for) continuing retail operations 77 (132)
------- -------
Discontinued Operations
Proceeds from the sale of discontinued operations -- net 590 --
Loss from discontinued operations -- (16)
Items not affecting cash -- net -- 44
Cash used for discontinued operations (291) --
------- -------
Total cash provided by discontinued operations 299 28
------- -------
Net cash provided by (used for) operations 376 (104)
------- -------
INVESTING
Capital expenditures -- owned property (562) (476)
Acquisitions -- (268)
Proceeds from the sale of assets 5 30
Other -- net 2 3
------- -------
Net cash used for investing (555) (711)
------- -------
FINANCING
Proceeds from issuance of long-term debt and notes payable 718 1,306
Reduction in long-term debt and notes payable (398) (257)
Reduction in capital lease obligations (59) (73)
Capital contributions from minority interest 17 --
Issuance of common stock 5 16
Reissuance of treasury shares 14 7
Extraordinary item for bond redemptions -- (10)
Dividends paid (249) (235)
------- -------
Net cash provided by financing 48 754
------- -------
NET DECREASE IN CASH AND EQUIVALENTS (131) (61)
Cash and Equivalents at Beginning of Year 449 611
------- -------
CASH AND EQUIVALENTS AT END OF PERIOD $ 318 $ 550
======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Certain prior year amounts have been restated for the effect of discontinued
operations.
4
<PAGE> 5
KMART CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per-share data)
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements do not
include all information and footnotes necessary for the annual presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles.
In the opinion of Kmart Corporation, all adjustments necessary for a
fair statement of the results for the interim periods have been included. All
adjustments were of a normal and recurring nature.
SUBSEQUENT EVENT
In August 1994, Kmart Corporation announced plans for public offerings
of majority interests in the Borders-Walden Group, The Sports Authority and
OfficeMax through Initial Public Offerings (IPO's). Plans call for OfficeMax
to be the first IPO with a filing with the SEC to be made in September 1994.
The Borders-Walden Group and The Sports Authority will follow in an orderly
manner dependent upon market conditions.
AGREEMENT TO SELL EQUITY INTEREST IN COLES MYER, LTD.
Kmart Corporation announced in July 1994 that it had accepted an offer
by Coles Myer, Ltd. to purchase Kmart's 21.5% equity interest in the Australian
retailer. The transaction is conditional upon the approval of Coles Myer
shareholders and is subject to Coles Myer obtaining necessary approval by
Australian regulatory authorities. A meeting of Coles Myer shareholders to
vote on the transaction is scheduled for September 19, 1994. If approved, a 30
day waiting period is required under Australian law before the transaction may
be completed.
The total proceeds would amount to approximately A$1,259, equivalent
to U.S. $924 at the time the transaction was announced. Kmart expects to
realize a pre-tax gain in the third quarter of 1994 if the transaction is
completed. The gain is subject to foreign currency exchange rate risk as
proceeds are fixed in Australian dollars. The agreement provides that Coles
Myer will directly buy back shares representing approximately half of Kmart's
Coles Myer shares, and Coles Myer or a designate will purchase a Kmart
subsidiary which owns the remaining shares. If Coles Myer shareholders do not
approve the purchase, Kmart will receive a payment of U.S. $21 from Coles Myer.
DISCONTINUED OPERATIONS
Discontinued operations include the results of PayLess Drug Stores
Northwest, Inc. and PACE Membership Warehouse, Inc. which have been
reclassified to reflect the respective plans for disposition announced in the
fourth quarter of 1993. In January 1994, PACE sold to Sam's Club, a division
of Wal*Mart, the assets and lease obligations of 93 of its warehouses and
virtually all of the inventory and membership files in the 34 warehouses not
included in the transaction. Operations of the 34 remaining PACE sites not
included in the transaction were discontinued, and PACE is in the process of
evaluating and marketing these leased sites as well as leased premises for
unopened warehouses and corporate facilities.
5
<PAGE> 6
KMART CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(Dollars in millions, except per-share data)
(Unaudited)
DISCONTINUED OPERATIONS-CONTINUED
In addition, in April 1994, Kmart sold its PayLess Drug Stores
subsidiary to Thrifty PayLess Holdings, Inc. (TPH) and its subsidiary Thrifty
PayLess, Inc. for approximately $595 in cash, $100 in Senior Notes of TPH and
approximately 46% of the common equity of TPH. Of the cash proceeds, $50 was
invested in Senior Subordinated Notes of Thrifty PayLess, Inc. which Kmart
subsequently sold in May 1994 at a slight premium. It is Kmart Corporation's
intention to divest substantially all of its interest in TPH within one year.
Management expects the disposition to be achieved either through a private
offering or other alternative means. Accordingly, Kmart Corporation has
reported PayLess as a discontinued operation and has recorded its investment in
TPH at net realizable value.
In June 1994, Kmart Corporation called for early redemption of all
$300 of its 8 3/8% debentures due January 15, 2017 using the proceeds of the
sale of the PayLess Drug Stores subsidiary to redeem the issue. The resulting
redemption premium and associated cost of $18, net of applicable income taxes,
was recorded in the fourth quarter of 1993 as part of the loss on disposal of
discontinued operations. Kmart Corporation's current short-term and long-term
borrowing rates at the time of the call were 4.50% and 8.65%, respectively.
EXTRAORDINARY ITEM AND ACCOUNTING CHANGES
In August 1993, Kmart Corporation called for early redemption of all
$200 of its 8 1/8% debentures due January 1, 1997. The debentures were
redeemed at 100% of the principal amount plus interest accrued to the date of
redemption. In April 1993, Kmart Corporation called for early redemption of
all $200 of its 10 1/2% Sinking Fund Debentures due December 1, 2017. The
resulting redemption premium of $10, net of applicable income taxes, has been
reported as an extraordinary item.
Kmart Corporation adopted Financial Accounting Standard No. 109
"Accounting for Income Taxes" (FAS 109) in the first quarter of 1993. FAS 109
requires that deferred taxes be calculated using the liability approach rather
than the deferred method. In addition, the standard requires adjustment of
deferred tax liabilities to reflect enacted changes in the statutory federal
income tax rate. As a result of the adjustment of deferred tax balances to the
enacted tax rate at the date of adoption, a benefit of $45, or $0.10 per share,
was recorded in the first quarter of 1993 as the cumulative effect of the
accounting change.
Kmart Corporation also adopted Financial Accounting Standard No. 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS
106) at the beginning of fiscal 1993. This statement requires that Kmart
Corporation accrue for future postretirement medical benefits. In prior years,
these claims were expensed when paid. Net of applicable tax, a charge of $77,
or $0.17 per share, was included in net income in the first quarter of 1993 as
the effect of an accounting change.
INVENTORIES AND COST OF MERCHANDISE SOLD
A substantial portion of the inventories is accounted for using the
last-in, first-out (LIFO) method. If the first-in, first-out (FIFO) method of
inventory accounting had been used by Kmart Corporation, inventories would have
been $874, $1,057 and $861 higher than reported at July 27, 1994, July 28, 1993
and January 26, 1994, respectively.
6
<PAGE> 7
KMART CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(Dollars in millions, except per-share data)
(Unaudited)
SHAREHOLDERS' EQUITY
In October 1992, Kmart Corporation issued 784,938 shares of Series B
convertible preferred stock in exchange for all the outstanding stock of
Borders, Inc. As of July 8, 1994, all of the outstanding shares of Series B
convertible preferred stock were exchanged for 784,938 shares of Series C
convertible preferred stock. The Series C convertible preferred stock has
substantially the same terms as the Series B convertible preferred stock, i.e.,
each share of Series C convertible preferred stock is convertible by the
holders at any time into 6.49 shares of common stock, subject to adjustment in
certain events, and is redeemable into common stock by Kmart Corporation after
November 1, 1999 at a redemption rate based on the then-current market price of
the common stock. In addition, the holders have the right to compel the
Company to call for redemption into common stock, at a redemption rate based on
the then-current market price of the common stock, up to 25% of the outstanding
shares of Series C convertible preferred stock between the date of issuance and
December 15, 1995, up to 50% of outstanding Series C shares between December
16, 1995 and November 1, 1997 and up to all of the outstanding Series C shares
after November 1, 1997.
<TABLE>
<CAPTION>
JULY 27, JULY 28, JANUARY 26,
1994 1993 1994
-------- --------- -----------
<S> <C> <C> <C>
Preferred Stock -- 10,000,000 shares authorized:
Series A conversion preferred stock;
shares authorized and issued 5,750,000 $ 986 $ 986 $ 986
Series A junior participating preferred stock;
shares designated 500,000; none issued None None None
Series C convertible preferred stock; 796,827 shares
authorized; 784,938 shares issued 157 157 157
Common Stock -- 1,500,000,000 shares authorized;
46,000,000 shares reserved for conversion of Series A conversion
preferred stock; 5,092,050 shares reserved for conversion
of Series C convertible preferred stock; shares issued
416,772,739, 416,189,888 and 416,546,780, respectively 417 416 417
Capital in Excess of Par Value 543 524 538
Restricted Stock Deferred Compensation (2) (4) (3)
Retained Earnings:
Balance at beginning of fiscal year 4,237 5,700 5,700
Net income 112 125 (974)
Cash dividends declared:
Common stock (197) (196) (392)
Series A conversion preferred stock (39) (39) (78)
Series C convertible preferred stock (5) (5) (9)
Minimum pension liability in excess of intangible
pension asset -- -- (10)
------ ------- -------
Total Retained Earnings 4,108 5,585 4,237
Less: Treasury Stock -- 6,526,151, 8,071,632 and 7,468,564
shares, at cost, respectively (95) (115) (109)
Cumulative Foreign Currency Translation Adjustment (103) (125) (130)
------ ------- -------
Total Shareholders' Equity $6,011 $7,424 $6,093
====== ======= =======
</TABLE>
7
<PAGE> 8
KMART CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS 13 WEEKS ENDED JULY 27, 1994
Kmart Corporation's store activity during the second quarter of 1994 is
summarized as follows:
<TABLE>
<CAPTION> SECOND QUARTER
ACTIVITY
IN OPERATION AT ------------------------ IN OPERATION AT
APRIL 27, 1994 OPENED CLOSED JULY 27, 1994
--------------- ------ ------ ---------------
<S> <C> <C> <C> <C>
General Merchandise
Kmart
United States 2,330 17 (21) 2,326
Canada 127 -- (2) 125
Czech Republic and Slovakia 13 -- -- 13
Mexico -- 2 -- 2
Singapore -- 1 -- 1
Other 21 2 (2) 21
------ ------- ------- -------
Total General Merchandise 2,491 22 (25) 2,488
------ ------- ------- -------
Specialty Retail
Borders-Walden Group 1,189 8 (28) 1,169
Builders Square 180 7 (6) 181
OfficeMax 323 10 (1) 332
The Sports Authority 82 3 -- 85
------ ------- ------- -------
Total Specialty Retail 1,774 28 (35) 1,767
------ ------- ------- -------
Total Stores 4,265 50 (60) 4,255
====== ======= ======= =======
</TABLE>
Sales for the 13 weeks ended July 27, 1994 were $8.83 billion, a 4.6%
increase over sales of $8.44 billion in the same period in the prior year (see
table below). Inventory mix adjustments and reductions from the comparable
prior year period in the U.S. Kmart store division contributed to reduced store
traffic and the resulting 0.1% decrease in comparable store sales for the
second quarter of 1994 over the same period last year.
<TABLE>
<CAPTION>
13 WEEKS ENDED
------------------------- % CHANGE
JULY 27, JULY 28, -------------------------------------
SALES ($ MILLIONS) 1994 1993 ALL STORES COMPARABLE STORES
------------------ ---------- ---------- -------------- -------------------
<S> <C> <C> <C> <C>
General Merchandise
United States $6,842 $6,642 3.0 (1.2)
International 273 258 5.8 5.0 (a)
------- -------
Total General Merchandise 7,115 6,900 3.1 (1.0)
Specialty Retail
Borders-Walden Group 325 289 12.5 -- (b)
Builders Square 827 794 4.2 0.9
OfficeMax 360 310 16.1 16.1
The Sports Authority 201 146 37.7 3.8
------- -------
Total Specialty Retail 1,713 1,539 11.3 4.3
------- -------
Consolidated $ 8,828 $ 8,439 4.6 (0.1)
======= =======
</TABLE>
(a) International comparable store sales change is calculated on sales in
the applicable local currency.
(b) Borders sales in millions were $85 and $45 in the 1994 and 1993 periods,
respectively, and Walden Book Company sales were $241 and $244 in the
respective periods. Comparable store sales were up 19.1% at Borders and
up 4.1% at Walden Book Company.
8
<PAGE> 9
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
Cost of merchandise sold, including buying and occupancy costs, for
the 13 weeks ended July 27, 1994 was $6,637 million as compared to $6,309
million in the same period in the prior year. Gross margin as a percent of
sales was 24.8% and 25.2% in the 1994 and 1993 periods, respectively. The
decrease, as a percent of sales, reflects the effect of lower than expected
comparable store sales on fixed occupancy costs and the increasing impact of
the grocery component of the Super Kmart Centers. The impact of inflation
included in the cost of merchandise sold reduced pretax earnings by $2 million
for the second quarter of 1994 and $14 million for the comparable period of
1993.
Selling, general and administrative expense for the 13 weeks ended
July 27, 1994 was $2,030 million, or 23.0% of sales, as compared to $1,925
million, or 22.8% of sales, in the same period in the prior year. The increase
as a percent of sales resulted from lower than expected comparable store sales
which more than offset the cost control programs that have been implemented at
the U.S. Kmart store division.
Operating income from continuing retail operations for the 13 weeks
ended July 27, 1994 was $232 million, or 2.6% of sales, as compared to $274
million, or 3.2% of sales, in the same period in the prior year (see table
below). The decrease in operating income resulted primarily from the lower
gross margin and higher selling, general and administrative expense as a
percent of sales related to lower than expected sales at the U.S. Kmart store
division.
<TABLE>
<CAPTION>
13 WEEKS ENDED
--------------------
JULY 27, JULY 28,
OPERATING INCOME ($ MILLIONS) 1994 1993 % CHANGE
- ----------------------------- -------- -------- --------
<S> <C> <C> <C>
General Merchandise
United States $ 201 $ 247 (18.6)
International 1 3 (66.7)
------ ------
Total General Merchandise 202 250 (19.2)
Specialty Retail
Borders-Walden Group (4) (6) 33.3
Builders Square 26 31 (16.1)
OfficeMax 0 (6) --
The Sports Authority 8 5 60.0
------ ------
Total Specialty Retail 30 24 25.0
------ ------
Consolidated $ 232 $ 274 (15.3)
====== =====
</TABLE>
Net interest expense for the 13 weeks ended July 27, 1994 was $116
million, or 1.3% of sales, as compared to $125 million, or 1.5% of sales, for
the same period in the prior year. Net interest expense on debt was down 24.0%
in the 1994 second quarter, reflecting reduced borrowings as a result of lower
average inventory levels and the early retirement of high-cost, long-term debt.
Interest expense related to capital lease obligations and other increased $9
million, reflecting the interest expense related to the discounting of closed
store lease obligations included in the 1993 store restructuring reserve.
Income from continuing retail operations before income taxes for the
13 weeks ended July 27, 1994 was $143 million, or 1.6% of sales, as compared to
$180 million, or 2.1% of sales, in the same period last year.
9
<PAGE> 10
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
Income tax expense for the 13 weeks ended July 27, 1994 was $49
million with an effective tax rate of 34.5% as compared to $55 million with an
effective tax rate of 30.6% in the same period of 1993 due to a higher
projected annual tax rate for 1994, including the August 1993 1% increase in
the statutory federal corporate rate.
Net income from continuing retail operations before extraordinary
item and the effect of accounting changes for the 13 weeks ended July 27, 1994
was $94 million, or 1.1% of sales, as compared to $125 million, or 1.5% of
sales, in the same period last year.
Net loss from discontinued operations for the 13 weeks ended July 28,
1993 was $23 million. Discontinued operations included the results of PayLess
Drug Stores Northwest, Inc. and PACE Membership Warehouse, Inc. which have been
reclassified to reflect their respective dispositions announced in the fourth
quarter of 1993.
As a result of the foregoing factors, net income for the 13 weeks
ended July 27, 1994 was $94 million, or 1.1% of sales, as compared to $102
million, or 1.2% of sales, in the same period in the prior year.
RESULTS OF OPERATIONS 26 WEEKS ENDED JULY 27, 1994
Sales for the 26 weeks ended July 27, 1994 were $16.6 billion, a 5.4%
increase over sales of $15.8 billion in the same period in the prior year (see
table below). Comparable store sales for the 26-week period increased 0.5%
over the same period last year. Comparable store sales were affected by the
inventory mix adjustments and reductions made in late 1993 and early in 1994 in
the U.S. Kmart store division which contributed to lower store traffic.
<TABLE>
<CAPTION>
26 WEEKS ENDED
----------------------- % CHANGE
JULY 27, JULY 28, -----------------------------------
SALES ($ MILLIONS) 1994 1993 ALL STORES COMPARABLE STORES
------------------ -------- -------- -------------- -----------------
<S> <C> <C> <C> <C>
General Merchandise
United States $12,860 $12,467 3.2 (0.7)
International 485 487 (0.4) 2.6 (a)
------- -------
Total General Merchandise 13,345 12,954 3.0 (0.6)
Specialty Retail
Borders-Walden Group 628 576 9.0 -- (b)
Builders Square 1,510 1,396 8.2 3.3
OfficeMax 780 600 30.0 18.6
The Sports Authority 375 265 41.5 6.3
------- -------
Total Specialty Retail 3,293 2,837 16.1 6.1
------- -------
Consolidated $16,638 $ 15,791 5.4 0.5
======= ========
</TABLE>
(a) International comparable store sales change is calculated on sales in
the applicable local currency.
(b) Borders sales in millions were $156 and $87 in the 1994 and 1993 periods,
respectively, and Walden Book Company sales were $472 and $489 in the
respective periods. Comparable store sales were up 19.3% at Borders and
up 1.6% at Walden Book Company.
10
<PAGE> 11
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
Cost of merchandise sold, including buying and occupancy costs, for
the 26 weeks ended July 27, 1994 was $12,477 million as compared to $11,775
million in the same period in the prior year. Gross margin as a percent of
sales was 25.0% and 25.4% in the 1994 and 1993 periods, respectively. The
decrease, as a percent of sales, reflects the effect of lower than expected
comparable store sales on fixed occupancy costs and the increasing impact of
the grocery component of the Super Kmart Centers. The impact of inflation
included in the cost of merchandise sold reduced pretax earnings by $13 million
for the first 26 weeks of 1994 and $26 million for the comparable period of
1993.
Selling, general and administrative expense for the 26 weeks ended
July 27, 1994 was $3,916 million, or 23.5% of sales, as compared to $3,669
million, or 23.2% of sales, in the same period in the prior year. The increase
as a percent of sales resulted from lower than expected comparable store sales
which more than offset the cost control programs that have been implemented at
the U.S. Kmart store division.
Operating income from continuing retail operations for the 26 weeks
ended July 27, 1994 was $377 million, or 2.3% of sales, as compared to $470
million, or 3.0% of sales, in the same period in the prior year (see table
below). The decrease in operating income resulted primarily from the lower
gross margin and higher selling, general and administrative expense as a
percent of sales related to lower than expected sales in the U.S. Kmart store
division.
<TABLE>
<CAPTION>
26 WEEKS ENDED
--------------------
JULY 27, JULY 28,
OPERATING INCOME ($ MILLIONS) 1994 1993 % CHANGE
----------------------------- ------- ------- --------
<S> <C> <C> <C>
General Merchandise
United States $ 335 $ 449 (25.4)
International 2 3 (33.3)
------ ------
Total General Merchandise 337 452 (25.4)
Specialty Retail
Borders-Walden Group (8) (13) 38.5
Builders Square 29 31 (6.5)
OfficeMax 9 (6) --
The Sports Authority 10 6 66.7
------ ------
Total Specialty Retail 40 18 122.2
------ ------
Consolidated $ 377 $ 470 (19.8)
====== ======
</TABLE>
Net interest expense for the 26 weeks ended July 27, 1994 was $240
million, or 1.4% of sales, as compared to $247 million, or 1.6% of sales, for
the same period in the prior year. Net interest expense on debt was down 16.8%
in the 1994 26-week period, primarily as a result of reduced borrowings
resulting from lower inventory levels in the 1994 period and the early
retirement of high-cost, long-term debt. Interest expense related to capital
lease obligations and other increased $18 million as a result of interest
expense related to the discounting of closed store lease obligations included
in the 1993 store restructuring reserve.
Income from continuing retail operations before income taxes for the
26 weeks ended July 27, 1994 was $171 million, or 1.0% of sales, as compared to
$263 million, or 1.7% of sales, in the same period last year.
Income tax expense for the 26 weeks ended July 27, 1994 was $59
million with an effective tax rate of 34.5% as compared to $80 million with an
effective tax rate of 30.3% in the same period of 1993 due to a higher
projected annual tax rate for 1994, including the August 1993 1% increase in
the statutory federal corporate rate.
11
<PAGE> 12
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
Net income from continuing retail operations before extraordinary
item and the effect of accounting changes for the 26 weeks ended July 27, 1994
was $112 million, or 0.7% of sales, as compared to $183 million, or 1.2% of
sales, in the same period last year.
Net loss from discontinued operations for the 26 weeks ended July 28,
1993 was $16 million. Discontinued operations included the results of PayLess
Drug Stores Northwest, Inc. and PACE Membership Warehouse, Inc. which have been
reclassified to reflect their respective dispositions announced in the fourth
quarter of 1993.
Effect of accounting changes. Kmart Corporation adopted Financial
Accounting Standard No. 109 "Accounting for Income Taxes" (FAS 109) in the
first quarter of 1993. FAS 109 requires that deferred taxes be calculated
using the liability approach rather than the deferred method. As a result of
the adjustment of deferred tax balances to the enacted tax rate at the date of
adoption, Kmart Corporation recorded a benefit of $45 million in the first
quarter of 1993 as the cumulative effect of an accounting change.
Kmart Corporation also adopted Financial Accounting Standard No. 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS
106) at the beginning of fiscal 1993. This statement requires that Kmart
Corporation accrue for future postretirement medical benefits. In prior years,
these claims were expensed when paid. Net of applicable tax, a charge of $77
million was included in net income in the first quarter of 1993 as the effect
of an accounting change.
In addition, Kmart Corporation adopted Financial Accounting Standard
No. 112 "Employers' Accounting for Postemployment Benefits" (FAS 112) in the
first quarter of 1993. FAS 112 is an extension of the concepts underlying FAS
106 for similar benefits provided to terminated or laid-off employees. The
financial effects of this statement were not material.
As a result of the foregoing factors, net income for the 26 weeks
ended July 27, 1994 was $112 million, or 0.7% of sales, as compared to $125
million, or 0.8% of sales, in the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows generated by operating, investing and financing activities
as reported in the Consolidated Statements of Cash Flows for the 26 weeks
ending July 27, 1994 are summarized below. The net decrease in cash and
equivalents for the 26 weeks ended July 27, 1994 was $131 million as compared
to $61 million in the same period in the prior year.
Total cash provided by (used for) continuing retail operations for the
26 weeks ended July 27, 1994 was $77 million as compared to $(132) million in
the same period of 1993. The change is primarily attributable to the slower
rate of increase in inventory net of accounts payable in 1994 than in the prior
year.
Merchandise inventories, which were primarily accounted for under the
LIFO method of inventory valuation, decreased 11.8% to $8,328 million at July
27, 1994 from $9,437 million at July 28, 1993. The decrease was largely the
result of the PACE and PayLess dispositions and improved inventory management
in U.S. Kmart stores. U.S. Kmart inventory was reduced by $270 million on a
FIFO basis, or 3.6% from July 28, 1993.
Total cash provided by discontinued operations for the 26 weeks ended
July 27, 1994 was $299 million as compared to $28 million in the same period
last year. The increase was primarily attributable to the proceeds from the
sale of PayLess in 1994.
12
<PAGE> 13
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
Net cash used for investing for the 26 weeks ended July 27, 1994, was
$555 million as compared to $711 million in the same period last year. The
decrease was primarily due to the prior year OfficeMax acquisition of BizMart
partially offset by an increase in capital expenditures. The 26 weeks ended
July 27, 1994 reflect the activity for the U.S. Kmart store modernization
program including 18 new locations, 35 relocations with 50 closings, 32
expansions and 15 refurbishments as compared to 19 new locations, 32
relocations, 39 expansions and 7 refurbishments in the 1993 period.
Net cash provided by financing of $48 million during the 26 weeks
ended July 27, 1994 was attributable to a net increase in long-term debt and
notes payable of $320 million. The $754 million provided by financing during
the 26 weeks ended July 28, 1993 was attributable to a $1,049 million net
increase in long-term debt and notes payable. The decrease in proceeds from
debt is primarily attributable to lower borrowings resulting from lower
inventory levels, increased vendor financing of inventory and the proceeds from
the sale of PayLess.
Kmart Corporation's working capital ratio was 1.5 at July 27, 1994 and
1.6 at July 28, 1993. Total working capital at July 27, 1994 was $3,743
million compared with $4,393 million at July 28, 1993, a decrease of $650
million.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The following information is furnished with respect to the Annual Meeting of
shareholders of Kmart Corporation held during June 1994:
(a) A meeting was held on June 3, 1994 and was an Annual Meeting.
(b) Not applicable.
(c)
Proposal 1
At such meeting all of the nominees for election as directors were elected
for the term of office set forth below. The votes cast with respect to
each nominee for election as a director is as follows:
<TABLE>
<CAPTION>
Votes to
Withhold
Year When Authority
Term of Office Votes for to Vote for
Nominee Expires the Nominee the Nominee
- ---------------------- -------------- ----------- -----------
<S> <C> <C> <C>
Joseph A Califano, Jr. 1997 276,488,896 79,903,355
Enrique C. Falla 1997 276,762,289 79,629,962
David B. Harper 1997 276,662,388 79,729,863
J. Richard Munro 1997 276,744,868 79,647,383
Joseph R. Thomas 1997 277,898,320 78,493,931
</TABLE>
Proposal 2
To amend the Company's Restated Articles of Incorporation concerning the
Specialty Retail Stock Proposal:
For -- 188,526,794 shares
Against -- 110,561,519 shares
Abstain -- 7,248,918 shares
A majority of the company's outstanding common and preferred shares did not
vote in favor of Proposal 2 and, therefore, it was not passed.
Proposal 3
To amend the Company's Restated Articles of Incorporation relating to its
Preferred Stock:
For -- 142,613,424 shares
Against -- 149,600,093 shares
Abstain -- 9,047,939 shares
A majority of the company's outstanding common and preferred shares did not
vote in favor of Proposal 3 and, therefore, it was not passed.
14
<PAGE> 15
Proposal 4
To amend the Company's Restated Articles of Incorporation relating to
certain voting provisions:
For -- 199,164,123 shares
Against -- 92,035,710 shares
Abstain -- 10,061,624 shares
At least 58% of the outstanding common and preferred stores did not vote in
favor of Proposal 4 and, therefore, it was not passed.
Proposal 5
To adopt an Employee Stock Purchase Plan for each Specialty Retail Group:
For -- 222,024,736 shares
Against -- 68,680,260 shares
Abstain -- 8,951,796 shares
Although a majority of the votes cast voted in favor of Proposal 5, it was
conditional upon approval of Proposal 2 and, therefore, it will not be
implemented because Proposal 2 was not passed.
Proposal 6
To provide for the issuance of Specialty Retail Stock under the Directors
Stock Plan:
For -- 212,247,408 shares
Against -- 78,700,904 shares
Abstain -- 10,313,143 shares
Although a majority of the votes cast voted in favor of Proposal 6, it was
conditional upon approval of Proposal 2 and, therefore, it will not be
implemented because Proposal 2 was not passed.
Proposal 7
To provide for the issuance of Specialty Retail Stock under the Performance
Restricted Stock Plan:
For -- 208,478,445 shares
Against -- 82,548,119 shares
Abstain -- 10,234,786 shares
Although a majority of the votes cast voted in favor of Proposal 7, it was
conditional upon approval of Proposal 2 and, therefore, it will not be
implemented because Proposal 2 was not passed.
Proposal 8
To provide for the substitution of Specialty Retail Stock for existing
Common Stock issuable upon exercise of certain outstanding options under
the 1973 and 1981 Stock Option Plans:
For -- 206,863,346 shares
Against -- 84,953,716 shares
Abstain -- 9,444,288 shares
Although a majority of the votes cast voted in favor of Proposal 8, it was
conditional upon approval of Proposal 2 and, therefore, it will not be
implemented because Proposal 2 was not passed.
15
<PAGE> 16
Proposal 9
To provide for the substitution of Specialty Retail Stock for existing
Common Stock issuable upon exercise of certain outstanding options
granted, and for the issuance of Specialty Retail Stock, under the 1992
Stock Option Plan and for certain other Plan amendments:
For -- 203,055,666 shares
Against -- 88,016,430 shares
Abstain -- 10,197,755 shares
Although a majority of the votes cast voted in favor of Proposal 9, it was
conditional upon approval of Proposal 2 and, therefore, it will not be
implemented because Proposal 2 was not passed.
Proposal 10
To add certain allocation provisions to the 1992 Stock Option Plan:
For -- 294,775,988 shares
Against -- 51,073,318 shares
Abstain -- 8,409,411 shares
A majority of the votes cast having voted in favor of Proposal 10, it was
passed.
Proposal 11
To adopt the Management Stock Purchase Plan:
For -- 275,407,452 shares
Against -- 72,756,699 shares
Abstain -- 8,483,746 shares
A majority of the votes represented at the meeting having voted in favor of
Proposal 11, it was passed.
Proposal 12
To adopt the Annual Incentive Bonus Plan:
For -- 288,371,000 shares
Against -- 59,569,034 shares
Abstain -- 8,709,862 shares
A majority of the votes represented at the meeting having voted in favor of
Proposal 12, it was passed.
Proposal 13
To ratify the appointment of Price Waterhouse as independent accountants
for the Company for fiscal 1994:
For -- 335,257,348 shares
Against -- 12,580,135 shares
Abstain -- 6,941,011 shares
A majority of the votes cast having voted in favor of Proposal 13, it was
passed.
16
<PAGE> 17
Proposal 14
A stockholder proposal as set forth in the Proxy Statement dated April 28,
1994, which was opposed by the Board of Directors:
For -- 40,149,358 shares
Against -- 243,566,976 shares
Abstain -- 19,714,172 shares
A majority of the votes cast did not vote in favor of Proposal 14 and,
therefore, it was not passed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report:
1. (4) - Certificate of Designation, Preferences and Rights Providing for
an Issue of Preferred Stock Designated "Series C Convertible
Preferred Stock"
2. (11) - Information on Computation of Per Share Earnings
(b) Reports on Form 8-K. There was one report on Form 8-K filed by the
Registrant during the thirteen weeks ended July 27, 1994. The report,
dated June 8, 1994, included a press release issued June 6, 1994
announcing that the Company will move forward with its action plan to
improve the performance of U.S. Kmart discount stores while the Company
analyzes other alternatives related to its specialty retail operations.
17
<PAGE> 18
SIGNATURES
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.
The signatory hereby acknowledges and adopts the typed form of his name in the
electronic filing of this document with the Securities and Exchange Commission.
Date: September 7, 1994
---------------------------------
Kmart Corporation
(Registrant)
By T. F. Murasky
---------------------------------
T. F. Murasky
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER
(Duly Authorized Officer and
Principal Accounting Officer)
18
<PAGE> 1
EXHIBIT 4
KMART CORPORATION
Certificate of Designation,
Preferences and Rights Providing for
an Issue of Preferred Stock Designated
"Series C Convertible Preferred Stock"
Pursuant to the authority vested in the Board of Directors of
Kmart Corporation (the "Company") by the Articles of Incorporation, a series of
Preferred Stock is hereby created and the designation and amount thereof and
the relative rights and preferences of the shares of such series are as
follows:
F. Series C Convertible Preferred Stock.
1. Designation and Amount. The shares of such series
shall be designated as "Series C Convertible Preferred Stock", no par value
(hereinafter called the "Series C Preferred Stock"), and the authorized number
of shares constituting such series shall be 796,827 shares.
2 Dividends. From the date of issuance of the Series C
Preferred Stock, the holders of outstanding shares of the Series C Preferred
Stock will be entitled to receive, when and as declared by the Board of
Directors out of funds legally available therefor, cumulative preferential cash
dividends at the per share rate of $2.875 per quarter for each of the quarters
ending on March 14, June 14, September 14 and December 14, and no more
(hereinafter called "Preferential Dividends"), payable in arrears on each
succeeding March 15, June 15, September 15 and December 15, respectively (each
such date being hereinafter referred to as a "Preferential Dividend Payment
Date"), commencing September 15, 1994. If as of any Preferential Dividend
Payment Date between November 1, 1996 and October 31, 1998, the average of the
daily Closing Prices of the Common Stock for the 90 Trading Dates ending on the
second Trading Date prior to such Preferential Dividend Payment Date (with such
Closing Prices appropriately adjusted to take into account the occurrence
during such 90-day period of any stock splits, combinations, stock dividends
and the like) is 25 percent or more above the amount obtained by dividing $200
by the Conversion Rate then in effect, the dividend payable on that
Preferential Dividend Payment Date only shall be reduced to an amount equal to
the product of the dividend paid per share on the Common Stock during the
immediately preceding three months period multiplied by the number of shares
of Common Stock which a holder of Series C Preferred Stock would have been
entitled to receive if his or her shares of such stock had been converted at
the Conversion Rate in effect immediately prior to the record date for the
Series C Preferred Stock dividend. If any Preferential Dividend Payment Date
shall be or be declared a national or New York state holiday or if New York
money center banks shall be closed because of a banking moratorium or otherwise
on such date, then the Preferential Dividend Payment Date shall be on the next
succeeding day on which such banks shall be open. Each such dividend will be
payable to holders of record as they appear on the stock books of the Company
on such record dates, not less than 10 nor more than 50 days preceding the
payment dates thereof, as shall be fixed by the Board of Directors. Dividends
on the Series C Preferred Stock shall accrue on a daily basis commencing on the
date of issuance of the Series C Preferred Stock and accrued dividends for each
quarterly dividend period shall accumulate, to the extent not paid, on the
Preferential Dividend Payment Date first following the quarter for which they
accrue. Preferential Dividends shall accrue
<PAGE> 2
whether or not the Company shall have earnings, whether or not there
shall be funds legally available for the payment of such dividends and whether
or not such dividends are declared. Accumulated dividends shall not bear
interest. Dividends (or cash amounts equal to accrued and unpaid dividends)
payable on the Series C Preferred Stock for any period longer or shorter than a
quarterly dividend period shall be computed on the basis of a 360-day year of
twelve 30-day months.
3. Conversion into Common Stock.
(a) General; Conversion Rate. Each holder of shares of
Series C Preferred Stock shall have the right, at such holder's option, at any
time (but not later than the close of business on the date fixed for the
redemption thereof in any notice of redemption given pursuant to the provisions
of Section 4(b) hereof if there is no default in redemption payments) in whole
or in part, upon written notice to the Company to convert all or a portion of
such shares into fully paid and non-assessable shares of Common Stock. A
holder of shares of Series C Preferred Stock, upon conversion of each such
share, shall:
(i) receive 6.4872 shares of Common Stock for each share of
Series C Preferred Stock being converted by such holder
(subject to adjustment as set forth below, hereinafter called
the "Conversion Rate"); and
(ii) be entitled to receive an amount in cash equal to all
accrued and unpaid dividends on such share to and including
the date of conversion, whether or not earned or declared, out
of funds legally available therefor.
(b) Notice of Conversion. Each share of Series C
Preferred Stock shall be convertible at the office of the Company or at such
other office or offices, if any, as the Company may designate. The right of
the holders of Series C Preferred Stock to convert their shares shall be
exercised by surrendering for such purpose to the Company or other designated
office, as provided above, certificates representing shares to be converted,
duly endorsed in blank or accompanied by proper instruments of transfer.
(c) Adjustments to Conversion Rate. The Conversion Rate
to be used to determine the number of shares of Common Stock to be delivered on
conversion of the Series C Preferred Stock into shares of Common Stock shall be
subject to adjustment from time to time as provided below in this subparagraph
(c). All adjustments to the Conversion Rate shall be calculated to the nearest
1/100th of a share of Common Stock. Such rate in effect at any time is
hereinafter called the "Conversion Rate."
(i) If the Company shall at any time on or after June 3,
1994 either
(1) pay a dividend or make a distribution with
respect to Common Stock in shares of Common Stock,
2
<PAGE> 3
(2) subdivide or split its outstanding shares of
Common Stock,
(3) combine its outstanding shares of Common Stock
into a smaller number of shares, or
(4) issue by reclassification of its shares of
Common Stock any shares of Common Stock of the Company,
then, in any such event, the Conversion Rate in effect
immediately prior thereto shall be adjusted so that the holder
of a share of Series C Preferred Stock shall be entitled to
receive on the conversion of such share of Series C Preferred
Stock, the number of shares of Common Stock which such holder
would have owned or been entitled to receive after the
happening of any of the events described above had such share
of the Series C Preferred Stock been surrendered for
conversion at the Conversion Rate in effect immediately prior
to such time. Such adjustment shall become effective at the
opening of business on the business day next following the
record date for determination of stockholders entitled to
receive such dividend or distribution in the case of a
dividend or distribution and shall become effective
immediately after the effective date in case of a subdivision,
split, combination or reclassification; and any shares of
Common Stock issuable in payment of a dividend shall be deemed
to have been issued immediately prior to the close of business
on the record date for such dividend for purposes of
calculating the number of outstanding shares of Common Stock
under clauses (ii) and (iii) below.
(ii) If the Company shall at any time on or after
June 3, 1994 issue Common Stock (or rights or warrants or
other securities convertible into or exchangeable or
exercisable for shares of Common Stock, collectively
hereinafter called "Derivative Securities"), to all holders of
its Common Stock at a price per share less than the Current
Market Price per share (determined pursuant to clause (vi)
below) of the Common Stock on the record date for the
determination of stockholders entitled to receive such
Derivative Securities, then in each case the Conversion Rate
shall be adjusted by multiplying the Conversion Rate in effect
immediately prior thereto by a fraction, the numerator of
which shall be the number of shares of Common Stock
outstanding on the date of issuance of such Derivative
Securities, immediately prior to such issuance, plus the
number of additional shares of Common Stock offered for
subscription or purchase, and the denominator of which shall
be the number of shares of Common Stock outstanding on the
date of issuance of such Derivative Securities, immediately
prior to such issuance, plus the number of shares which the
aggregate offering price of the total number of shares so
offered for subscription or purchase would purchase at such
Current Market Price (determined by multiplying such total
number of shares by the exercise price of such Derivative
Securities and dividing the product so obtained by such
Current Market Price). Shares of Common Stock owned by the
Company or by another company of which a majority of the
shares entitled to vote in the election of directors are held,
directly or indirectly, by the Company shall not be deemed to
be outstanding for purposes of such computation. Such
adjustment shall become effective at the opening of business
on the business day next following the record date for the
determination of stockholders entitled to receive such
Derivative Securities. In the case of the issuance of
Derivative Securities, to the extent that
3
<PAGE> 4
shares of Common Stock are not delivered after the expiration
of such Derivative Securities, the Conversion Rate shall be
readjusted to the Conversion Rate which would then be in
effect had the adjustments made upon the issuance of such
Derivative Securities been made upon the basis of delivery of
only the number of shares of Common Stock actually delivered.
(iii) If the Company shall at any time on or after
June 3, 1994 pay a dividend or make a distribution to all
holders of its Common Stock of evidence of its indebtedness,
securities or other assets (excluding any cash dividends or
distributions and dividends referred to in clause (i) above or
securities referred to in clause (ii) above), then in each
such case the Conversion Rate shall be adjusted by multiplying
the Conversion Rate in effect immediately prior to the date of
such distribution by a fraction, of which the numerator shall
be the Current Market Price per share of Common Stock
(determined pursuant to clause (vi) below) on the record date
mentioned below, and of which the denominator shall be such
Current Market Price per share of Common Stock less the fair
market value (as determined by the Board of Directors of the
Company, whose determination shall be conclusive) as of such
record date of the portion of the assets or evidences of
indebtedness so distributed, or of such subscription rights or
warrants, applicable to one share of Common Stock. Such
adjustment shall become effective on the opening of business
on the business day next following the record date for the
determination of stockholders entitled to receive such
distribution.
(iv) Anything in this Section 3 notwithstanding,
the Company shall be entitled to make such upward adjustments
in the Conversion Rate, in addition to those required by this
Section 3, as it in its discretion shall determine to be
advisable, in order that any stock dividends, subdivision of
shares, distribution of rights to purchase stock or
securities, or a distribution of securities convertible into
or exchangeable for stock (or any transaction which could be
treated as any of the foregoing transactions pursuant to
Section 305 of the Internal Revenue Code of 1986, as amended)
hereafter made by the Company to its stockholders shall not be
taxable.
(v) Anything in this Section 3 notwithstanding,
no adjustment in the Conversion Rate shall be made as a result
of any issuance of certificates representing, or otherwise as
a result of, the rights issued in connection with the Rights
Agreement dated as of May 17, 1988, as amended as of May 29,
1991 between the Company and NBD Bank, N.A., and as the same
may be further amended (hereinafter called the "Rights
Agreement").
(vi) As used in this Section 3, the Current Market
Price per share of Common Stock on any date shall be the
average of the daily Closing Prices for the five consecutive
Trading Dates ending on and including the date of
determination of the Current Market Price (appropriately
adjusted to take into account the occurrence during such
five-day period of any event that results in an adjustment of
the Conversion Rate); provided, however, that if the Closing
Price for the Trading Date next following such five-day period
(hereinafter called the "next-day closing price") is less than
95% of such average, then the Current Market Price per share
of Common Stock on such date of determination shall be the
next-day closing price.
(vii) Whenever the Company shall propose to take
any of the actions
4
<PAGE> 5
specified in Section 5 or in paragraphs (i), (ii) or (iii) of
this Section 3, the Company shall cause a notice to be mailed
at least 15 days prior to the date on which the books of the
Company will close or on which a record will be taken for such
action, to the holders of record of the outstanding Series C
Preferred Stock on the date of such notice. Such notice shall
specify the action proposed to be taken by the Company and the
date as of which holders of record of the Common Stock shall
participate in any such action or be entitled to exchange
their Common Stock for securities or other property, as the
case may be. The Company will also notify the holders of
record of the outstanding Series C Preferred Stock of the
occurrence of any event that would cause a Distribution Date
(as defined in the Rights Agreement) to occur; and such
notification shall be by personal delivery, facsimile or
reliable overnight courier, in each case delivered as soon as
possible but at least 5 business days prior to the
Distribution Date.
(d) Notice of Adjustments. Whenever the Conversion Rate
is adjusted as herein provided, the Company shall forthwith compute the
adjusted Conversion Rate in accordance with this Section 3 and prepare a
certificate signed by the Chairman, the President, any Vice President or the
Treasurer of the Company setting forth the adjusted Conversion Rate, the facts
requiring such adjustment and the method of calculation thereof and mail such
certificate to the holders of record of the outstanding shares of Series C
Preferred Stock.
(e) Reservation of Shares of Common Stock. A number of
shares of the authorized but unissued Common Stock sufficient to provide for
the conversion or redemption of the Series C Preferred Stock outstanding upon
the basis herein provided shall be reserved by the Company, free from
preemptive rights, for such conversion or redemption.
4. Redemption
(a) Company's Right to Call for Redemption. The Series C
Preferred Stock may not be redeemed by the Company pursuant to this Section 4
prior to November 1, 1999. Thereafter the Company shall have the right to
call, in whole or in part, the outstanding shares of Series C Preferred Stock
for redemption. Upon such call, the Company shall deliver to the holders
thereof in exchange for each such share called for redemption, (A) a number of
shares of Common Stock equal to one times a fraction, the numerator of which is
$200 and the denominator of which is the 20-Day Market Price of the Common
Stock on the second Trading Date prior to the Redemption Date, and (B) an
amount in cash equal to all accrued and unpaid dividends on such share to the
Redemption Date. Notwithstanding the above, a holder of Series C Preferred
Stock shall have the right to convert such stock pursuant to Section 3 at any
time prior to the Redemption Date (as defined below). If less than all
outstanding shares of Series C Preferred Stock are called for redemption, the
shares to be redeemed shall be selected by the Company on a pro rata basis
among all the holders of outstanding shares of Series C Preferred Stock.
(b) Notice of Call for Redemption by Company. The
Company will provide notice of any call for redemption of shares of Series C
Preferred Stock to holders of record of the Series C Preferred Stock to be
redeemed not less than 30 nor more than 60 days prior to the date
5
<PAGE> 6
fixed for redemption (hereinafter called the "Redemption Date"). Such notice
may be provided by mailing notice of such redemption first class postage
prepaid, to the holders of record of the Series C Preferred Stock to be
redeemed, at such holder's address as it appears on the stock register of the
Company. Each such notice shall state: (i) the Redemption Date; (ii) the
number of shares of Series C Preferred Stock to be redeemed and, if less than
all the shares held by such holder are to be redeemed, the number of such
shares to be redeemed from such holder; (iii) the number of shares of Common
Stock deliverable upon redemption; (iv) the place or places where certificates
for such shares are to be surrendered; and (v) that dividends on the shares to
be redeemed will cease to accrue on such Redemption Date unless the Company
shall default in providing the shares of Common Stock at the time and place
specified in such notice.
(c) Holder(s) Right to Compel the Company to Call for
Redemption. At any time and from time to time after the date of issuance of
the Series C Preferred Stock and until December 15, 1995, the holder(s) of
shares of Series C Preferred Stock shall have the right to require the Company
to call for redemption up to twenty-five percent (25%) of the outstanding
shares of Series C Preferred Stock, and at any time and from time to time after
December 15, 1995 and until November 1, 1997, the holder(s) of shares of Series
C Preferred Stock shall have the right to require the Company to call for
redemption up to twenty-five percent (25%) of the outstanding shares of Series
C Preferred Stock plus such number of the outstanding shares of Series C
Preferred Stock which the holders thereof had the right to require the Company
to call for redemption as provided above prior to December 15, 1995 but which
were not redeemed as provided above prior to December 15, 1995. Provided,
however, each redemption provided above must be for a minimum of 36,678 shares
of Series C Preferred Stock or, if less, all of the Series C Preferred Stock
owned by the holder requesting redemption. After November 1, 1997, the
holder(s) of shares of Series C Preferred Stock shall have the right to
require the Company to call up to all of the outstanding shares of Series C
Preferred Stock for redemption. If holder(s) of Series C Preferred Stock
request redemption of their shares into a greater percentage than permitted
above, the shares of Series C Preferred Stock to be redeemed shall be selected
by the Company on a pro-rata basis among those holders requesting redemption
based upon the number of shares of Series C Preferred Stock owned by such
holders. Such right on the part of the holder(s) of the Series C Preferred
Stock shall expire on October 30, 2017. Upon such call, the Company shall
deliver to the holders thereof in exchange for each such share called for
redemption, (A) a number of shares of Common Stock equal to one times a
fraction, the numerator of which is $200 and the denominator of which is the
20-Day Market Price of the Common Stock on the second Trading Date prior to the
Holder's Redemption Date (defined below), and (B) an amount in cash equal to
all accrued and unpaid dividends on such share to the Holder's Redemption Date.
Notwithstanding the above, a holder of Series C Preferred Stock shall have the
right to convert such stock pursuant to Section 3 at any time prior to the
Holder's Redemption Date.
(d) Notice of Call for Redemption by Holder(s). The
holder(s) of Series C Preferred Stock shall provide notice to the Company not
less than 30 nor more than 60 days prior to the date the holder(s) exercise the
right to compel redemption as set forth in subparagraph (c) above. Such notice
may be provided by mailing notice of such required redemption first class
postage prepaid to the Company. Such notice shall specify the date fixed for
redemption (hereinafter called the "Holder's Redemption Date").
(e) Status of Shares. Provided that the Company has (i)
in the case of a redemption at the option of the Company, given the redemption
notice described in subparagraph (b) above, and (ii) in the case of any
redemption delivered all shares of Common Stock and amounts owing for
fractional shares upon such redemption, then all shares to be so redeemed shall
be deemed to have been redeemed as of the close of business of the Company on
the Redemption Date.
6
<PAGE> 7
5. Recapitalization, Consolidation, Merger or Sale of
Assets. In the event that the Company shall be a party to any transaction
including without limitation any (i) recapitalization or reclassification of
the Common Stock (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination of the Common Stock), (ii) any consolidation or merger of the
Company with or into any other person or any merger of another person into the
Company (other than a merger which does not result in a reclassification,
conversion, exchange or cancellation of outstanding shares of Common Stock of
the Company, (iii) any sale or transfer of all or substantially all of the
assets of the Company, or (iv) any compulsory share exchange pursuant to which
the Common Stock shall be exchanged for, converted into, acquired for or
constitute solely the right to receive other securities, cash or other
property, then appropriate provision shall be made as part of the terms of such
transaction whereby the holder of each share of Series C Preferred Stock then
outstanding shall thereafter have the right to convert such shares only into
the kind and amount of securities, cash and other property receivable upon such
recapitalization, reclassification, consolidation, merger, sale, transfer or
share exchange by a holder of the number of shares of Common Stock into which
such share of Series C Preferred Stock might have been converted immediately
prior to such transaction. The corporation or the person formed by such
consolidation or resulting from such merger or which acquired such assets or
which acquired the Company's shares, as the case may be, shall make provisions
in its certificate or articles of incorporation or other constituent document
to establish such right. Such certificate or articles of incorporation or
other constituent document shall provide for adjustments which, for events
subsequent to the effective date of such certificate or articles of
incorporation or other constituent document, shall be nearly equivalent as may
be practicable to the adjustments provided for in this Section 5. The above
provisions shall similarly apply to successive transactions of the type
described in this Section.
6. No Fractional Shares. No fractional shares of Common
Stock shall be issued upon conversion or redemption of shares of the Series C
Preferred Stock but, in lieu of any fraction of a share of Common Stock which
would otherwise be issuable in respect of the aggregate number of shares of the
Series C Preferred Stock surrendered by the same holder for conversion or
redemption on any conversion or redemption date, the holders shall have the
right to receive in lieu of such fraction an amount in cash equal to the same
fraction of the Current Market Price of the Common Stock (determined pursuant
to Section 3(c)(vi)) determined, in the case of any conversion or redemption,
as of the second Trading Date immediately preceding the relevant Notice Date.
7. Liquidation Rights.
(a) The amount which the holders of Series C
Preferred Stock shall be entitled to receive in the event of any dissolution,
liquidation or winding up of the affairs of the Company, whether voluntary or
involuntary (collectively, hereinafter called a "Liquidation") out of the net
assets of the Company, shall be $200 per share plus an amount equal to all
Preferential Dividends accrued and unpaid thereon (including dividends
accumulated and unpaid) to the date of Liquidation, and no more. After such
amount is paid in full, no further distributions or payment shall be made in
respect of shares of Series C Preferred Stock, such shares of Series C
Preferred Stock shall no longer be deemed to be outstanding or be entitled to
any privilege of exchange or conversion or to any other powers, preferences,
rights or privileges, including voting rights, and such shares of Series C
Preferred Stock shall be surrendered for cancellation to the Company.
(b) The full amount payable to the holders of the
Series C Preferred Stock shall be paid before any distribution shall be made to
the holders of Common Stock or any
7
<PAGE> 8
other class of stock or series thereof ranking junior to the Series C Preferred
Stock with respect to the distribution of assets upon dissolution, liquidation
or winding up of the affairs of the Company. No payment on account of any
Liquidation shall be made to the holders of any class or series of stock
ranking on a parity with the Series C Preferred Stock in respect of the
distribution of assets upon dissolution, liquidation or winding up unless
there shall likewise be paid at the same time to the holders of the Series C
Preferred Stock like proportionate amounts determined ratably in proportion to
the full amounts to which the holders of all outstanding shares of Series C
Preferred Stock and the holders of all outstanding shares of such parity stock
are respectively entitled with respect to such distribution.
(c) If the assets distributable to the holders of
Series C Preferred Stock on any Liquidation shall be insufficient to permit the
payment to such holders of the full amounts to which they are entitled in such
circumstances, then such assets or the proceeds thereof shall be distributed
among such holders ratably in proportion to the sums which would be payable to
such holders if all such sums were paid in full.
(d) Neither the merger nor consolidation of the
Company into or with any other corporation, nor the merger or consolidation of
any other corporation into or with the Company, nor a sale, transfer or lease
of all or any part of the assets of the Company, shall be deemed to be a
Liquidation for purposes of this Section 7.
8. Voting Rights. The holders of shares of Series C
Preferred Stock shall have such voting rights as provided in Section B of
Article III of the Articles of Incorporation.
9. Definitions. As used herein:
(a) the term "business day" shall have the same
meaning set forth in the Rights Agreement (as defined in
Section 3(c)(v));
(b) the term "Closing Price" on any day shall
mean the closing sale price regular way on such day or, in
case no such sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in each
case on the New York Stock Exchange, or, if the Common Stock
is not listed or admitted to trading on such Exchange, on the
principal national securities exchange on which the Common
Stock is listed or admitted to trading, or, if not listed or
admitted to trading on any national securities exchange, the
average of the closing bid and asked prices of the Common
Stock on the over- the-counter market on the day in question
as reported by the National Quotation Bureau Incorporated, or
a similarly generally accepted reporting service, or if not so
available in such manner as furnished by any New York Stock
Exchange member firm selected from time to time by the Board
of Directors of the Company for that purpose;
(c) the term "Common Stock" shall mean the
Company's Common Stock, $1.00 par value per share;
(d) the term "Notice Date" with respect to any
notice given by the Company in connection with a conversion or
redemption or with respect to any
8
<PAGE> 9
notice given by a holder of the Series C Preferred Stock in
connection with a conversion or required redemption, of any
of the Series C Preferred Stock shall be the date of the
mailing of such notice;
(e) the term "Trading Date" shall mean a date on
which the New York Stock Exchange (or any successor to such
Exchange) is open for the transaction of business.
(f) the term "20-Day Market Price of the Common
Stock" shall mean on any date the average of the daily Closing
Prices of the Common Stock for the twenty consecutive Trading
Dates ending on and including the date of determination of the
20-Day Market Price of the Common Stock (appropriately
adjusted to take into account the occurrence during such
twenty-day period of any stock splits, combinations, stock
dividends and the like); provided, however, that if the
Closing Price for the Trading Date next following such
twenty-day period (hereinafter called the "next-day closing
price") is less than 95% of such average, then the 20-Day
Market Price of the Common Stock on such date of determination
shall be the next-day closing price.
10. Cancellation. All shares of Series C Preferred Stock
which shall have been converted or redeemed for shares of Common Stock or
which shall have been purchased or otherwise acquired by the Company shall
assume the status of authorized but unissued shares of Preferred Stock
undesignated as to series.
11. Increase in Shares. The number of shares of Series C
Preferred Stock may, to the extent of the Company's authorized and unissued
Preferred Stock, be increased by further resolution duly adopted by the Board
of Directors and the filing of an amendment to the Articles of Incorporation of
the Company.
9
<PAGE> 1
KMART CORPORATION AND SUBSIDIARY COMPANIES
EXHIBIT 11 - INFORMATION ON COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
(Millions, except per-share data) 13 Weeks Ended 26 Weeks Ended
----------------- ------------------
July 27, July 28, July 27, July 28,
1994 1993 1994 1993
------ ------ ------ -------
<S> <C> <C> <C> <C>
I. Earnings per common share assuming no dilution:
(a) Income from continuing retail operations before
extraordinary item and the effect of accounting changes $ 94 $ 125 $ 112 $ 183
(b) Discontinued operations including the effect of
accounting changes, net of income taxes -- (23) -- (16)
(c) Extraordinary item, net of income taxes -- -- -- (10)
(d) Effect of accounting changes, net of income taxes -- -- -- (32)
------ ------ ------ -------
(e) Net income $ 94 $ 102 $ 112 $ 125
====== ====== ====== =======
Weighted average common shares outstanding 410.0 408.0 409.6 407.6
Weighted average $3.41 Depositary Shares outstanding
(1/4 share Series A conversion preferred) 46.0 46.0 46.0 46.0
------ ------ ------ -------
(f) Weighted average number of shares outstanding 456.0 454.0 455.6 453.6
====== ====== ====== =======
Earnings per common share assuming no dilution:
Income from continuing retail operations before
extraordinary item and the effect of accounting changes (a)/(f) $ 0.21 $ 0.28 $ 0.25 $ 0.40
Discontinued operations including the effect
of accounting changes (b)/(f) -- (0.05) -- (0.03)
Extraordinary item (c)/(f) -- -- -- (0.02)
Effect of accounting changes (d)/(f) -- -- -- (0.07)
------ ------ ------ -------
Net income (e)/(f) $ 0.21 $ 0.23 $ 0.25 $ 0.28
====== ====== ====== =======
II. Earnings per common and common equivalent share:
Income from continuing retail operations before
extraordinary item and the effect of accounting changes $ 94 $ 125 $ 112 $ 183
Less--Series B convertible preferred shares dividend declared (2) (2) (5) (5)
------ ------ ------ -------
(g) Adjusted income from continuing retail operations before
extraordinary item and the effect of accounting changes 92 123 107 178
(h) Discontinued operations including the effect of
accounting changes, net of income taxes -- (23) -- (16)
(i) Extraordinary item, net of income taxes -- -- -- (10)
(j) Effect of accounting changes, net of income taxes -- -- -- (32)
------ ------ ------ -------
(k) Adjusted net income $ 92 $ 100 $ 107 $ 120
====== ====== ====== =======
Weighted average common shares outstanding 410.0 408.0 409.7 407.6
Weighted average $3.41 Depositary Shares outstanding
(1/4 share Series A conversion preferred) 46.0 46.0 46.0 46.0
Stock Options --
Common shares assumed issued 0.3 13.7 4.1 15.5
Less--common shares assumed repurchased (0.2) (11.7) (3.8) (12.8)
------ ------ ------ -------
0.1 2.0 0.3 2.7
------ ------ ------ -------
(l) Applicable common shares, as adjusted 456.1 456.0 456.0 456.3
====== ====== ====== =======
Earnings per common and common equivalent share:
Adjusted income from continuing retail operations before
extraordinary item and the effect of accounting changes (g)/(l) $ 0.20 $ 0.27 $ 0.24 $ 0.39
Discontinued operations including the effect
of accounting changes (h)/(l) -- (0.05) -- (0.03)
Extraordinary item (i)/(l) -- -- -- (0.02)
Effect of accounting changes (j)/(l) -- -- -- (0.07)
------ ------ ------ -------
Net income (k)/(l) $ 0.20 $ 0.22 $ 0.24 $ 0.27
====== ====== ====== =======
</TABLE>
<PAGE> 2
KMART CORPORATION AND SUBSIDIARY COMPANIES
EXHIBIT 11 - INFORMATION ON COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
(Millions, except per-share data) 13 Weeks Ended 26 Weeks Ended
----------------- ------------------
July 27, July 28, July 27, July 28,
1994 1993 1994 1993
------ ------ ------ -------
<S> <C> <C> <C> <C>
III. Earnings per common and common equivalent share
assuming full dilution:
(m) Income from continuing retail operations before
extraordinary item and the effect of accounting changes $ 94 $ 125 $ 112 $ 183
(n) Discontinued operations including the effect of
accounting changes, net of income taxes -- (23) -- (16)
(o) Extraordinary item, net of income taxes -- -- -- (10)
(p) Effect of accounting changes, net of income taxes -- -- -- (32)
------ ------ ------ -------
(q) Net income $ 94 $ 102 $ 112 $ 125
====== ====== ====== =======
Weighted average common shares outstanding 410.0 407.9 409.7 407.6
Weighted average $3.41 Depositary Shares outstanding
(1/4 share Series A conversion preferred) 46.0 46.0 46.0 46.0
Weighted average Series C convertible preferred shares outstanding 9.6 6.8 9.6 6.8
Stock options--
Common shares assumed issued 0.3 13.7 4.1 15.5
Less--common shares assumed repurchased (0.2) (11.7) (3.8) (12.8)
------ ------ ------ -------
0.1 2.0 0.3 2.7
------ ------ ------ -------
(r) Applicable common shares, as adjusted 465.7 462.7 465.6 463.1
====== ====== ====== =======
Earnings per common and common equivalent share
assuming full dilution:
Income from continuing retail operations before
extraordinary item and the effect of accounting changes (m)/(r) $ 0.20 $ 0.27 $ 0.24 $ 0.39
Discontinued operations including the effect
of accounting changes (n)/(r) -- (0.05) -- (0.03)
Extraordinary item (o)/(r) -- -- -- (0.02)
Effect of accounting changes (p)/(r) -- -- -- (0.07)
------ ------ ------ -------
Net income (q)/(r) $ 0.20 $ 0.22 $ 0.24 $ 0.27
====== ====== ====== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-25-1995
<PERIOD-END> JUL-27-1994
<CASH> 294
<SECURITIES> 24
<RECEIVABLES> 481
<ALLOWANCES> 0
<INVENTORY> 8,328
<CURRENT-ASSETS> 10,725
<PP&E> 11,400
<DEPRECIATION> 5,226
<TOTAL-ASSETS> 18,522
<CURRENT-LIABILITIES> 6,982
<BONDS> 2,042
<COMMON> 417
986
157
<OTHER-SE> 4,451
<TOTAL-LIABILITY-AND-EQUITY> 18,522
<SALES> 16,638
<TOTAL-REVENUES> 16,804
<CGS> 12,477
<TOTAL-COSTS> 12,477
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 240
<INCOME-PRETAX> 171
<INCOME-TAX> 59
<INCOME-CONTINUING> 112
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
