<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 October 30, 1996
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 1-327
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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
--- ---
As of November 27, 1996, 484,361,240 shares of Common Stock of the Registrant
were outstanding.
1
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Operations -- 3
13 weeks and 39 weeks ended
October 30, 1996 and October 25, 1995
Consolidated Balance Sheets -- 4
October 30, 1996, October 25, 1995 and
January 31, 1996
Consolidated Statements of Cash Flows -- 5
39 weeks ended October 30, 1996 and
October 25, 1995
Notes to Consolidated Financial 6 - 7
Statements
Item 2. Management's Discussion and Analysis of 8 - 16
Results of Operations and Financial
Condition
PART II OTHER INFORMATION
- ------- -----------------
Item 4. Submission of Matters to a Vote 17
of Security Holders
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
KMART CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
--------------------------------- ------------------------------------
October 30, October 25, October 30, October 25,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 7,847 $ 7,975 $ 23,739 $ 23,858
Cost of sales, buying and occupancy 6,077 6,286 18,506 18,618
-------- -------- -------- --------
Gross margin 1,770 1,689 5,233 5,240
Licensee fees and other income 63 66 188 187
Selling, general and administrative expenses 1,686 1,834 5,058 5,428
Gain on pension curtailment - - - (124)
-------- -------- -------- --------
Operating income (loss) 147 (79) 363 123
Interest expense, net 123 96 349 319
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes, equity income, and dividends
on convertible preferred securities of subsidiary 24 (175) 14 (196)
Equity in net income of unconsolidated company 8 7 22 23
Income taxes (benefit) 10 (50) 12 (52)
Dividends on convertible preferred securities of
subsidiary, net of income taxes of $7 and $10,
respectively 13 - 19 -
-------- -------- -------- --------
Net income (loss) from continuing operations 9 (118) 5 (121)
Gain (loss) on disposal of discontinued operations,
net of income taxes of $26, $33 and $88,
respectively - 49 (61) (30)
-------- -------- -------- --------
Net income (loss) $ 9 $ (69) $ (56) $ (151)
======== ======== ======== ========
Earnings (loss) per common share:
Continuing operations $ 0.02 $ (0.26) $ 0.01 $ (0.28)
Gain (loss) on disposal of discontinued
operations - 0.11 (0.13) (0.06)
-------- -------- -------- --------
Net income (loss) $ 0.02 $ (0.15) $ (0.12) $ (0.34)
======== ======== ======== ========
Dividends declared per common share - $ 0.12 - $ 0.36
======== ======== ======== ========
Primary weighted average shares (millions) 486.9 460.1 485.6 459.3
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
KMART CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
October 30, October 25, January 31,
1996 1995 1996
------------- ------------- --------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash (includes temporary investments of $94, $178 and $637, respectively) $ 480 $ 470 $ 1,095
Merchandise inventories 8,721 8,409 6,635
Other current assets 1,437 1,017 1,092
Net current assets of discontinued operations 219 88 -
-------- -------- --------
Total current assets 10,857 9,984 8,822
Investments in affiliated retail companies 52 80 94
Property and equipment, net 4,912 5,900 5,301
Property held for sale 882 590 434
Other assets and deferred charges 404 205 432
Net long-term assets of discontinued operations - 328 314
-------- -------- --------
$ 17,107 $ 17,087 $ 15,397
======== ======== ========
LIABILITIES AND EQUITY
Current Liabilities:
Long-term debt due within one year $ 155 $ 9 $ 7
Notes payable - 1,944 -
Trade accounts payable 3,154 3,206 1,993
Accrued payrolls and other liabilities 1,114 1,046 1,076
Taxes other than income taxes 245 304 188
-------- -------- --------
Total current liabilities 4,668 6,509 3,264
Capital lease obligations 1,538 1,704 1,629
Long-term debt and notes payable 3,576 1,954 3,935
Other long-term liabilities 1,046 1,202 1,289
Company-obligated mandatorily redeemable convertible preferred securities
of a subsidiary Trust holding solely 7 3/4% convertible junior subordinated
debentures of Kmart (redemption value $1,000 at July 31, 1996) 980 - -
Preferred stock, 10,000,000 shares authorized - 131 -
Common stock, 1,500,000,000 shares authorized; shares issued
486,966,508; 465,249,073 and 486,511,184, respectively 487 465 486
Capital in excess of par value 1,610 1,514 1,624
Retained earnings 3,270 3,752 3,326
Net unrealized holding gain on investment 45 - -
Treasury shares and restricted stock (45) (92) (92)
Foreign currency translation adjustment (68) (52) (64)
-------- -------- --------
$ 17,107 $ 17,087 $ 15,397
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
The Consolidated Balance Sheets for the prior periods have
been restated for discontinued operations.
4
<PAGE> 5
KMART CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
39 Weeks Ended
-----------------------------
October 30, October 25,
1996 1995
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) from continuing operations $ 5 $ (121)
Adjustments to reconcile net income (loss) to net cash used for
operating activities:
Depreciation and amortization 487 512
Deferred income taxes 169 97
Undistributed equity income and dividends received 42 29
Decrease in other long-term liabilities (221) (180)
Increase in inventories (2,086) (1,556)
Increase in accounts payable 1,161 568
Changes in certain assets and liabilities (125) (619)
------- -------
Net cash used for continuing operations (568) (1,270)
Discontinued operations 41 (32)
------- -------
Net cash used for operating activities (527) (1,302)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (197) (425)
Increase in property held for sale (583) (426)
Proceeds from asset sales and divestitures, net 182 1,526
Other, net 11 (4)
------- -------
Net cash provided by (used for) investing activities (587) 671
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt and notes payable 2,013 1,258
Refinancing costs related to long-term debt and notes payable (196) -
Reduction in long-term debt and notes payable (2,225) (335)
Issuance of convertible preferred securities of subsidiary Trust, net 971 -
Reduction in capital lease obligations (96) (88)
Dividends paid - (226)
Other, net 32 12
------- -------
Net cash provided by financing activities 499 621
Net decrease in cash and equivalents (615) (10)
Cash and equivalents at beginning of year 1,095 480
------- -------
Cash and equivalents at end of period $ 480 $ 470
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 6
KMART CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.) Basis of Presentation
These interim unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission, and in the opinion of management, reflect all
adjustments (which include normal recurring adjustments) necessary for a
fair statement of the results for the interim periods. These consolidated
financial statements should be read in conjunction with the financial
statements and the notes included in the Company's 1995 Annual Report and
Form 10-K filed for the fiscal year ended January 31, 1996.
Certain reclassifications of prior year balance sheet accounts have
been made to conform to current year presentation.
2.) Trust Convertible Preferred Securities
On June 17, 1996, a trust sponsored and wholly owned by the Company
issued 20,000,000 shares of Trust Convertible Preferred Securities (the
"Preferred Securities"). The Company has provided a full and unconditional
guarantee of amounts due on the Preferred Securities. The net proceeds from
this transaction were used by the Company together with (i) the proceeds of
borrowings under a Credit Agreement dated June 6, 1996, by and among the
Company, the several banks, financial institutions and other entities
parties thereto and Chemical Bank, as Administrative Agent and (ii)
available cash balances resulting from the removal of payment restrictions
contained in the Company's then existing bank credit facilities and certain
real estate related debt, to repay such bank credit facilities and certain
real estate related debt, to fund the Company's working capital and other
operational needs, to finance capital expenditures and for other general
corporate purposes.
The Preferred Securities accrue and pay cash distributions quarterly at
a rate of 7 3/4% per annum of the stated liquidation amount of $50 per
Preferred Security.
3.) Discontinued Operations and Divestitures
In April 1996, the Company received $62 million from the sale of
approximately 30% of its investment in the common stock of Thrifty PayLess
Holdings, Inc. ("TPH"). In conjunction with the sale, the Company revalued
its remaining investment and recorded a $61 million loss in discontinued
operations, net of income taxes. During the second quarter, the Company
sold an additional approximate 3% of its original investment in TPH and
received $8 million in net proceeds. As a result of management's intent to
dispose of its remaining interest within a one-year time frame, the Company
accounted for its investment in TPH as a discontinued operation. At October
30, 1996, the Company recorded a $45 million, net of tax, balance sheet only
mark-to-market adjustment for its remaining investment in TPH.
During October 1996, Rite Aid Corporation ("Rite Aid"), reached an
agreement with TPH to merge TPH into Rite Aid. Rite Aid will exchange 0.65
of its shares for each share of TPH. As a result, Kmart will own
approximately 6.9 million shares of Rite Aid common stock, representing
approximately 5% of Rite Aid's outstanding common stock. The transaction is
expected to close December 12, 1996.
6
<PAGE> 7
KMART CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4.) Pension Curtailment
Prior to 1996, U.S. Kmart and Builders Square had defined benefit
pension plans covering eligible associates who met certain requirements of
age, length of service and hours worked per year. Effective January 31,
1996, the pension plans were frozen and associates no longer earn
additional benefits under the plans. As a result, the Company recorded a
pretax net pension curtailment gain of $124 million in the first quarter
of 1995.
5.) Inventories and Cost of Merchandise Sold
Substantially all of the Company's inventory is accounted for using
the last-in, first-out (LIFO) method. Estimates are used for LIFO purposes
in the interim consolidated financial statements as LIFO costs can only be
determined at the end of each fiscal year when inflation rates and
inventory levels are finalized. Inventories valued on LIFO at October 30,
1996, October 25, 1995 and January 31, 1996 were $764 million, $812 million
and $751 million lower than the amounts that would have been reported under
the first-in, first-out (FIFO) method, respectively.
7
<PAGE> 8
ITEM 2
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FOR THE 13 WEEKS ENDED OCTOBER 30, 1996
Results of Operations
Store Activity
The Company's store activity for the 13 weeks ended October 30, 1996 is
summarized as follows:
<TABLE>
<CAPTION>
Third Quarter
July 31, Activity October 30, October 25,
---------------------
General Merchandise 1996 Opened Closed 1996 1995
- ------------------- -------- ------------ ------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Kmart:
United States 2,143 4 (4) 2,143 2,165
Canada 127 - (2) 125 127
International and Other 4 - - 4 6
-------- ----- ----- ------ ------
Total General Merchandise 2,274 4 (6) 2,272 2,298
Builders Square 168 - - 168 168
-------- ----- ----- ------ ------
Total Continuing 2,442 4 (6) 2,440 2,466
-------- ----- ----- ------ ------
Singapore (a) 3 - (3) - 3
Czech and Slovak Republics (b) - - - - 13
-------- ----- ----- ------ ------
Total Stores 2,445 4 (9) 2,440 2,482
======== ===== ===== ====== ======
</TABLE>
(a) The Company closed its Singapore stores during the third quarter of 1996.
(b) The Company completed the sale of its Czech and Slovak Republics
operations during the first quarter of 1996.
8
<PAGE> 9
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- Continued
Sales
<TABLE>
<CAPTION>
% Change
-----------------
October 30, October 25, All Comparable
($ Millions) 1996 1995 Stores Stores
----------- ----------- ------ ----------
<S> <C> <C> <C> <C>
General Merchandise
United States $6,989 $7,012 (0.3) 0.8
International 224 305 (26.9) (5.2)
------ ------
Total General Merchandise 7,213 7,317 (1.4) 0.4
Builders Square 634 658 (3.6) (2.6)
------ ------
Consolidated Sales $7,847 $7,975 (1.6) 0.1
====== ======
</TABLE>
International comparable store sales change is calculated on sales in the
applicable local currency.
Sales
Sales for the 13 weeks ended October 30, 1996 were $7,847 million, a 1.6%
decrease from sales of $7,975 million in the same period of the prior year.
Comparable store sales increased 0.1% over the same period of the prior year.
The increase in comparable sales resulted from continued promotional activity
and better in-stock positions in the U.S. Kmart division, while the decrease in
total sales primarily reflects fewer number of open stores together with
continued weak sales in Canadian and Builders Square operations. Comparable
sales in the prior year period increased 2.6% as a result of aggressive
markdowns and liquidation of discontinued hardlines merchandise throughout all
stores. Clearance markdowns in the 89 stores that closed in the prior year
period also contributed to the prior year comparable sales gain. As discussed
below, the Company did not have the same level of aggressive clearance of
merchandise in the current year period which contributed to the low level of
comparable sales growth.
Gross Margin
Gross margin for the 13 weeks ended October 30, 1996 was $1,770 million as
compared to $1,689 million in the same period of the prior year. Gross margin
as a percentage of sales was 22.6% and 21.2% in 1996 and 1995, respectively.
The 140 basis point gross margin rate improvement was the result of
significantly lower levels of clearance markdowns and higher invoice markon as
a result of reduced costs and a higher mix of import merchandise. The prior
year period included margin deterioration of 90 basis points as a result of
aggressive clearance of discontinued merchandise and promotional activity
discussed above.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses decreased $148 million for the 13 weeks ended October 30,
1996 to $1,686 million, or 21.5% of sales, from $1,834 million, or 23.0% of
sales, in the same period of the prior year. Of the $148 million,
approximately $76.2 million relates to reductions in expenses for comparable
U.S. Kmart stores. The remaining decrease, as a percentage of sales, is
primarily the result of cost reduction initiatives, the impact of stores closed
during 1995 and the adoption of Financial Accounting Standard No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" ("FAS 121") in the fourth quarter of 1995. The impact of
FAS 121 on depreciation expense was a reduction of $14.2 million as compared to
the prior year period.
9
<PAGE> 10
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- Continued
Operating Income (Loss)
<TABLE>
<CAPTION>
13 Weeks Ended
------------------------
October 30, October 25,
(Millions $) 1996 1995
----------- -----------
<S> <C> <C>
General Merchandise
United States $ 139 $ (81)
International 4 5
------ ------
Total General Merchandise 143 (76)
Builders Square 4 (3)
------ ------
Consolidated Operating Income $ 147 $ (79)
====== ======
</TABLE>
Operating income for the 13 weeks ended October 30, 1996 was $147 million,
or 1.9% of sales, as compared to an operating loss of $79 million, or (1.0)% of
sales, in the same period of the prior year. This improvement was the direct
result of the decrease in selling, general and administrative expenses and the
increase in gross margin rates as discussed on page 9.
Interest Expense
Net interest expense for the 13 weeks ended October 30, 1996 was $123
million, or 1.6% of sales, as compared to $96 million, or 1.2% of sales, for
the same period of the prior year. Net interest for the prior year period was
unusually low as a result of a $17 million favorable litigation settlement and
lower average borrowings as a result of over $1 billion of proceeds from asset
sales and divestitures received in the first nine months of the prior year.
Current quarter net interest expense includes $13 million of amortization of
debt expenses related to the Company's refinancing completed in June of this
year. See "Liquidity and Financial Condition".
Income Tax Expense (Benefit)
Income tax expense for the 13 weeks ended October 30, 1996 was $10 million
with an effective tax rate of 34.0% as compared to a $50 million tax benefit at
an effective tax rate of 29.9% in the same period of the prior year.
Discontinued Operations
The net gain from discontinued operations in the third quarter of the
prior year reflected the sale of the Company's remaining interest in The Sports
Authority, Inc.
10
<PAGE> 11
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- Continued
FOR THE 39 WEEKS ENDED OCTOBER 30, 1996
Results of Operations
Store Activity
The Company's store activity for the 39 weeks ended October 30, 1996 is
summarized as follows:
<TABLE>
<CAPTION>
Year-to-Date
January 31, Activity October 30, October 25,
-------------------
General Merchandise 1996 Opened Closed 1996 1995
- ------------------- ---------- ----------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Kmart:
United States 2,161 18 (36) 2,143 2,165
Canada 127 - (2) 125 127
International and Other 6 - (2) 4 6
------ ----- ----- ------ ------
Total General Merchandise 2,294 18 (40) 2,272 2,298
Builders Square 167 2 (1) 168 168
------ ----- ----- ------ ------
Total Continuing 2,461 20 (41) 2,440 2,466
------ ----- ----- ------ ------
Singapore (a) 3 - (3) - 3
Czech and Slovak Republics (b) 13 - (13) - 13
------ ----- ----- ------ ------
Total Stores 2,477 20 (57) 2,440 2,482
====== ===== ===== ====== ======
</TABLE>
(a) The Company closed its Singapore stores during the third quarter of 1996.
(b) The Company completed the sale of its Czech and Slovak Republics
operations during the first quarter of 1996.
11
<PAGE> 12
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- Continued
Sales
<TABLE>
<CAPTION>
% Change
------------------
October 30, October 25, All Comparable
($ Millions) 1996 1995 Stores Stores
----------- ----------- ------ ----------
<S> <C> <C> <C> <C>
General Merchandise
United States $21,017 $20,962 0.3 2.2
International 736 850 (13.4) (1.2)
------- -------
Total General Merchandise 21,753 21,812 (0.3) 2.2
Builders Square 1,986 2,046 (2.9) (2.1)
------- -------
Consolidated Sales $23,739 $23,858 (0.5) 1.8
======= =======
</TABLE>
International comparable store sales change is calculated on sales in the
applicable local currency.
Sales
Sales for the 39 weeks ended October 30, 1996 were $23,739 million, a 0.5%
decrease from sales of $23,858 million in the same period of the prior year.
Comparable store sales increased 1.8% over the same period of the prior year.
The increase in comparable sales resulted from continued promotional activity
and better in-stock positions in the U.S. Kmart division, while the decrease in
total sales reflects fewer number of open stores together with weak sales in
Canadian and Builders Square operations.
Gross Margin
Gross margin for the 39 weeks ended October 30, 1996 was $5,233 million as
compared to $5,240 million in the same period of the prior year. Gross margin
as a percentage of sales was 22.0% in both 1996 and 1995, respectively. The
gross margin rate was 60 basis points below the prior year for the first six
months. The 140 basis point improvement in the third quarter, discussed above,
brought the year to date margin rate to prior year levels. The Company's
overall gross margin rate is 30 basis points over the prior year nine month
period after taking into account the prior year sale of the Company's
automotive service business to Penske Auto Centers in the fourth quarter of
1995.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses decreased $370 million for the 39 weeks ended October 30,
1996 to $5,058 million, or 21.3% of sales, from $5,428 million, or 22.8% of
sales, in the same period of the prior year. Of the $370 million reduction,
approximately $121.3 million relates to reductions in expenses for comparable
U.S. Kmart stores. The remaining decrease, as a percentage of sales, is
primarily the result of continued cost reduction initiatives, the impact of
stores closed during 1995 and the adoption of FAS 121 in the fourth quarter of
1995. The impact of FAS 121 on depreciation expense was a reduction of $41.4
million as compared to the same period in the prior year.
12
<PAGE> 13
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- Continued
Operating Income (Loss)
<TABLE>
<CAPTION>
39 Weeks Ended
------------------------
October 30, October 25,
(Millions $) 1996 1995
----------- -----------
<S> <C> <C>
General Merchandise
United States $352 $138
International (12) (10)
---- ----
Total General Merchandise 340 128
Builders Square 23 (5)
---- ----
Consolidated Operating Income $363 $123
==== ====
</TABLE>
Operating income for the 39 weeks ended October 30, 1996 was $363 million,
or 1.5% of sales, as compared to operating income of $123 million, or 0.5% of
sales, in the same period of the prior year. The increase in operating income,
net of the first quarter 1995 one-time pension curtailment gain of $124
million, was $364 million. This increase was the direct result of the decrease
in selling, general and administrative expenses and the increase in gross
margin rates as discussed on page 12.
Interest Expense
Net interest expense for the 39 weeks ended October 30, 1996 was $349
million, or 1.5% of sales, as compared to $319 million, or 1.3% of sales, for
the same period of the prior year. The net interest expense on borrowings
increased as a result of restrictions on debt repayments, prior to refinancing,
in accordance with the bank credit facility and certain real estate related
debt agreements and higher interest rates due to market conditions and lower
debt ratings. The increase in interest expense was partially offset by higher
investment interest income resulting from increased cash levels prior to the
refinancing. Additionally, the prior year period was unusually low as a result
of a $17 million favorable litigation settlement and lower average borrowings
as a result of over $1 billion of proceeds from asset sales and divestitures
received in the first nine months of the prior year. See "Liquidity and
Financial Condition".
Income Tax Expense (Benefit)
Income tax expense for the 39 weeks ended October 30, 1996 was $12 million
with an effective tax rate of 34.0% as compared to a benefit of $52 million
with an effective tax rate of 30.0% in the same period in the prior year.
Discontinued Operations
The loss on disposal of discontinued operations for the 39 weeks ended
October 30, 1996 was $61 million and reflects the loss on sale of approximately
30% of the Company's investment in the common stock of TPH and the revaluation
of its remaining TPH holding. The $30 million loss from discontinued
operations for the 39 weeks ended October 25, 1995 reflects a net loss from the
disposal of the Borders Group, Inc. and the Company's remaining investment in
OfficeMax, Inc. and The Sports Authority, Inc.
13
<PAGE> 14
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION--Continued
Liquidity and Financial Condition
For the past nine months, the Company's primary sources of working capital
have been cash flows from operations and borrowings through bank facilities.
Prior to fall of 1995, the Company also used the commercial paper market as a
source of working capital. The Company had working capital of $6,189, $5,558,
$3,475 and $3,561 million at October 30, 1996, January 31, 1996, October 25,
1995 and January 25, 1995, respectively. Working capital ratios were 2.3:1,
2.7:1, 1.5:1 and 1.6:1, respectively, at the same dates. The Company's working
capital fluctuates in relation to (i) profitability, (ii) seasonal inventory
levels during the course of the year and (iii) the number and timing of new
store openings and closings.
In June 1996, the Company restructured its credit facilities to enhance
its credit, liquidity and financial flexibility. The Company entered into a
Credit Agreement with Chemical Bank ("Chemical") and Chase Securities, Inc.
(successor to Chemical Securities, Inc.) ("CSI") as agents and a syndicate of
banks and other financial institutions (the "Lenders") to provide $3.7 billion
of financing for three years. The Credit Agreement consists of two credit
facilities, a $2.5 billion revolving credit facility (the "Revolver") and a
$1.2 billion term loan facility (the "Term Loan").
Revolver. Under the Revolver, a commitment of $2.5 billion was made
available to the Company by the Lenders to refinance indebtedness, to fund the
Company's working capital and other operational needs, to finance capital
expenditures and for other general corporate purposes. The Revolver matures on
June 17, 1999. Amounts borrowed and repaid may be subsequently reborrowed to
the extent of the available commitment and subject to compliance with certain
provisions. As of October 30, 1996, the Company had $822 million borrowed
under the Revolver.
The interest rates available, at the Company's option, under the Revolver
are based on a specified margin over the following base rates: (i) the highest
of (a) Chemical's prime rate, (b) the secondary market rate for certificates of
deposit, plus 1%, and (c) the federal funds effective rate from time to time,
plus 0.5% and (ii) the then existing rate for various dollar deposits in the
interbank eurodollar market. The Company may also request competitive bid
loans, pursuant to which interest rates will be determined by bids submitted by
the Lenders at the Company's request.
The Company may reduce without penalty all or a portion of the commitment
under the Revolver to an amount not less than the outstanding borrowings
thereunder. Aggregate borrowings under the Revolver and the Term Loan
(discussed below) may not exceed the borrowing base, which is the sum of 55% of
the value of the Company's eligible inventory and 60% of the net appraised
value of certain of the Company's owned real estate.
The Revolver is subject to an annual clean-down provision, requiring that
no amounts are to be outstanding thereunder (excluding undrawn letters of
credit) in excess of $750 million for at least 30 consecutive days during each
fiscal year. As of October 30, 1996, the Company has met the annual clean-down
requirement for the first year of the Credit Agreement.
Term Loan. Pursuant to the Credit Agreement, certain Lenders provided a
$1.2 billion Term Loan to the Company. The Term Loan also matures on June 17,
1999, does not amortize, and all principal amounts then outstanding are due at
maturity. As of October 30, 1996, the Company had $1.19 billion outstanding
under the Term Loan.
14
<PAGE> 15
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION--Continued
The applicable interest rates and voluntary prepayment terms under the
Term Loan are determined in the same manner as under the Revolver, subject to
an increase of 0.5% over the applicable interest rate margin after the first
anniversary of the Term Loan.
The Term Loan is subject to mandatory prepayment from, among other things,
the following: (i) 100% of the net cash proceeds of the incurrence of certain
indebtedness; (ii) 50% of the net cash proceeds of any sale or transaction
involving certain specified assets; and (iii) 100% of the net cash proceeds of
any sale of certain real properties owned by the Company.
Guaranty. All obligations under the Credit Agreement are unconditional
and are guaranteed by the Company's principal domestic subsidiaries (the
"Domestic Subsidiaries").
Security. The Company and each Domestic Subsidiary, respectively, have
granted as security for the borrowings under the Credit Agreement a first
perfected security interest in substantially all of their existing and future
material United States assets, subject to certain exceptions. The Company may
elect to cause its obligations to certain vendors in respect of trade accounts
payable to be secured by a perfected security interest in inventory, which
security interest will be subordinate to the security interest under the Credit
Agreement. Upon repayment of the Term Loan, the collateral securing the Credit
Agreement obligations will be released automatically under certain
circumstances pertaining to the financial condition and credit rating of the
Company.
Covenants. The Credit Agreement contains several affirmative and negative
covenants, including, among others, the following negative covenants (i) the
granting of liens, loans and guarantees; (ii) mergers and sales of certain
assets; (iii) dividends and other payments in respect of capital stock; (iv)
the ratio of Earnings Before Interest, Taxes, Depreciation, Amortization and
Rent ("EBITDAR") to interest and rental expense at the end of each fiscal
quarter calculated on a rolling four quarter basis; (vi) the ratio of funded
debt to capital funds; and (vii) limitations on indebtedness and capital
expenditures. The Company was in compliance with all covenants as of October
30, 1996.
In June of 1996, Kmart Financing I, a Delaware Trust, which is a wholly
owned subsidiary of the Company, issued $1 billion of 7 3/4% Trust Convertible
Preferred Securities. The net proceeds from this offering and borrowings under
the Credit Agreement were used to retire existing indebtedness.
Net cash used for operating activities for the 39 weeks ended October 30,
1996 was $527 million as compared to $1.30 billion for the same period of 1995.
The improvement in cash used for operating activities compared to the prior
period was primarily the result of decreases in cash used for various accruals
and income taxes payable, partially offset by a decrease in cash from
discontinued operations. Merchandise inventories increased 3.7% to $8.72
billion at October 30, 1996 from $8.41 billion at October 25, 1995.
Net cash used for investing activities was $587 million for the 39 weeks
ended October 30, 1996 compared to cash provided by investing activities of
$671 million for the same period of 1995. The prior year period included $1.53
billion of net proceeds from asset sales and divestitures, while the current
year period reflects an increase in cash used for investing activities caused
by an increase in property held for sale as a result of the refinancing of
certain real estate related debt in June 1996.
15
<PAGE> 16
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION--Continued
Net cash provided by financing activities amounted to $499 million during
the 39 weeks ended October 30, 1996 compared to $621 million for the same
period of 1995. The improvement in cash from financing activities was
essentially a result of new financing provided by the Credit Agreement and the
offering of the Trust Convertible Preferred Securities, and the discontinuance
of dividend payments on the Company's common stock, offset by the payment of
the Company's former bank credit facilities, certain real estate related debt
and refinancing costs.
Management believes the funds and liquidity generated by debt
restructuring together with cash from operations and proceeds from the
refinancing or sale of certain real properties held for sale will be sufficient
to satisfy its working capital and capital expenditure needs for the duration
of the Credit Agreement.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The following information is furnished with respect to the Annual Meeting of
Kmart held on May 21, 1996:
Proposal 7
The Registrant hereby amends the results of the vote on a Stockholder Proposal
to request the elimination of the classification of the Board of Directors
previously reported in its Form 10-Q for the quarterly period ended July 31,
1996, as follows:
For -- 136,427,109
Against -- 102,476,486
Abstain -- 22,393,496
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as a part of this report:
Exhibit 11 - Information on Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K: One report was filed on Form 8-K by the
Registrant during the 13 weeks ended October 30, 1996.
This report, dated June 17, 1996, reported opinions and a consent
filed in connection with the Company's Registration Statement on
Form S-3.
17
<PAGE> 18
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.
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: December 11, 1996
Kmart Corporation
------------------------------
(Registrant)
By: William C. Najdecki
------------------------------
William C. Najdecki
VICE PRESIDENT CONTROLLER
(Duly Authorized Officer,
Principal Accounting Officer)
18
<PAGE> 19
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
11 Information on Computation of per share earnings
27 FINANCIAL DATA SCHEDULE
<PAGE> 1
EXHIBIT 11
KMART CORPORATION
INFORMATION ON COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
($ Millions, except per share data) 13 Weeks Ended 39 Weeks Ended
-------------------- ---------------------
Oct. 30, Oct. 25, Oct. 30, Oct. 25,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
I. Earnings per common and common equivalent share:
Income (loss) from continuing retail operations $ 9 $ (118) $ 5 $ (121)
Less-Series C convertible preferred shares dividend declared - (2) - (6)
-------- -------- -------- --------
(a) Adjusted income (loss) from continuing retail operations 9 (120) 5 (127)
(b) Discontinued operations, net of income taxes - 1 - (1)
(c) Disposal of discontinued operations, net of income taxes - 48 (61) (29)
-------- -------- -------- --------
(d) Adjusted net income (loss) $ 9 $ (71) $ (56) $ (157)
======== ======== ======== ========
Weighted average common shares outstanding 484.0 459.4 483.3 459.1
Common shares assumed issued and repurchased, net 2.9 0.7 2.3 0.2
-------- -------- -------- --------
(e) Applicable common shares, as adjusted 486.9 460.1 485.6 459.3
======== ======== ======== ========
Earnings per common and common equivalent share:
Adjusted income (loss) from continuing retail operations (a)/(e) $ 0.02 $ (0.26) $ 0.01 $ (0.28)
Discontinued operations, net of income taxes (b)/(e) - 0.00 - (0.00)
Disposal of discontinued operations, net of income taxes (c)/(e) - 0.10 (0.13) (0.06)
-------- -------- -------- --------
Net income (loss) (d)/(e) $ 0.02 $ (0.15) $ (0.12) $ (0.34)
======== ======== ======== ========
II. Earnings per common and common equivalent share
assuming full dilution:
(f) Income (loss) from continuing retail operations $ 9 $ (118) $ 5 $ (121)
Less- Convertible Preferred Securities dividend 12 - 19 -
(g) Discontinued operations, net of income taxes - 1 - (1)
(h) Disposal of discontinued operations, net of income taxes - 48 (61) (29)
-------- -------- -------- --------
(i) Adjusted net income (loss) $ 21 $ (69) $ (37) $ (151)
======== ======== ======== ========
Weighted average common shares outstanding 484.0 459.4 483.3 459.1
Weighted average Series C convertible preferred shares outstanding - 13.1 - 13.1
Convertible Preferred Securities 66.7 - 33.0 -
Common shares assumed issued and repurchased, net 2.9 0.7 2.3 0.5
-------- -------- -------- --------
(j) Applicable common shares, as adjusted 553.5 473.2 518.6 472.7
======== ======== ======== ========
Earnings per common and common equivalent share
assuming full dilution:
Income (loss) from continuing retail operations (f)/(j) $ 0.04 $ (0.25) $ 0.05 $ (0.26)
Discontinued operations, net of income taxes (g)/(j) - 0.00 - (0.00)
Disposal of discontinued operations, net of income taxes (h)/(j) - 0.10 (0.13) (0.06)
-------- -------- -------- --------
Net income (loss) (i)/(j) $ 0.04 $ (0.15) $ (0.08) $ (0.32)
======== ======== ======== ========
(1) (1) (1) (1)
</TABLE>
(1) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an anti-dilutive result.
<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> 3-MOS
<FISCAL-YEAR-END> JAN-29-1997
<PERIOD-END> OCT-30-1996
<CASH> 480
<SECURITIES> 0
<RECEIVABLES> 689
<ALLOWANCES> 0
<INVENTORY> 8,721
<CURRENT-ASSETS> 10,799
<PP&E> 9,991
<DEPRECIATION> 5,079
<TOTAL-ASSETS> 17,107
<CURRENT-LIABILITIES> 4,668
<BONDS> 3,576
980
0
<COMMON> 487
<OTHER-SE> 4,812
<TOTAL-LIABILITY-AND-EQUITY> 17,107
<SALES> 23,739
<TOTAL-REVENUES> 23,927
<CGS> 18,506
<TOTAL-COSTS> 18,506
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 349
<INCOME-PRETAX> 36
<INCOME-TAX> 12
<INCOME-CONTINUING> 5
<DISCONTINUED> (61)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (56)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
