<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 28, 1998
----------------
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 (248) 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 25, 1998, 492,931,875 shares of Common Stock of the Registrant
were outstanding.
1
<PAGE> 2
INDEX
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Earnings -- 3
13 and 39 weeks ended October 28, 1998 and
October 29, 1997
Consolidated Balance Sheets -- 4
October 28, 1998, October 29, 1997 and
January 28, 1998
Consolidated Statements of Cash Flows-- 5
39 weeks ended October 28, 1998 and
October 29, 1997
Notes to Consolidated Financial 6
Statements
Item 2. Management's Discussion and Analysis of Results of 7-10
Operations and Financial
Condition
PART II OTHER INFORMATION
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K 11
Signatures
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
KMART CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in millions, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
------------------------------- ------------------------------
OCTOBER 28, OCTOBER 29, OCTOBER 28, OCTOBER 29,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 7,642 $ 7,315 $23,273 $22,424
Cost of sales, buying and occupancy 5,954 5,683 18,198 17,517
------- ------- ------- -------
Gross margin 1,688 1,632 5,075 4,907
Selling, general and administrative expenses 1,540 1,492 4,550 4,480
Voluntary early retirement program -- -- 19 --
------- ------- ------- -------
Income before interest, income taxes and dividends on
convertible preferred securities of subsidiary 148 140 506 427
Interest expense, net 76 96 220 286
Income tax provision 21 13 83 41
Dividends on convertible preferred securities of subsidiary,
net of income taxes of $6, $7, $20, and $20, respectively 13 13 38 37
------- ------- ------- -------
Net income $ 38 $ 18 $ 165 $ 63
======= ======= ======= =======
Basic income per common share $ 0.08 $ 0.04 $ 0.34 $ 0.13
======= ======= ======= =======
Basic weighted average shares (millions) 492.8 488.0 491.7 486.8
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
KMART CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
OCTOBER 28, OCTOBER 29, JANUARY 28,
1998 1997 1998
----------- ------------ -----------
<S> <C> <C> <C>
Current Assets:
Cash and equivalents $ 350 $ 280 $ 498
Merchandise inventories 8,060 7,793 6,367
Other current assets 844 1,015 611
-------- -------- --------
Total current assets 9,254 9,088 7,476
Property and equipment, net 5,852 5,442 5,472
Other assets and deferred charges 443 505 610
-------- -------- --------
Total Assets $15,549 $15,035 $13,558
======== ======== ========
Current Liabilities:
Long-term debt due within one year $ 60 $ 76 $ 78
Trade accounts payable 3,019 2,824 1,923
Accrued payroll 855 838 863
Taxes other than income taxes 240 250 209
Other current liabilities 387 179 201
-------- -------- --------
Total current liabilities 4,561 4,167 3,274
Long-term debt and notes payable 2,313 2,347 1,725
Capital lease obligations 1,114 1,362 1,179
Other long-term liabilities 928 921 965
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 October 28, 1998) 983 979 981
Common stock, 1,500,000,000 shares authorized; shares issued
492,752,144, 488,367,468, and 488,811,271, respectively 493 489 489
Capital in excess of par value 1,654 1,605 1,605
Retained earnings 3,503 3,165 3,340
-------- -------- --------
Total Liabilities and Shareholders' Equity $15,549 $15,035 $13,558
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 5
KMART CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
39 WEEKS ENDED
------------------------------
OCTOBER 28, OCTOBER 29,
1998 1997
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 165 $ 63
Adjustments to reconcile net income to net cash
used for operating activities:
Voluntary early retirement program 19 -
Depreciation and amortization 498 496
Increase in accounts receivable (213) (114)
Increase in operating supplies and prepaids (62) (37)
Increase in inventories (1,693) (1,439)
Increase in accounts payable 1,096 815
Deferred income taxes and taxes payable 156 25
Decrease in other long-term liabilities (56) (46)
Changes in certain assets, liabilities and other items 20 85
------ ------
Net cash used for operating activities (70) (152)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from divestitures 87 145
Proceeds from real estate transactions and other 23 413
Capital contributions from minority interests - (55)
Capital expenditures (745) (489)
Other - (70)
------ ------
Net cash used for investing activities (635) (56)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt and notes payable 750 901
Changes in common stock 52 36
Payments on capital lease obligations (65) (85)
Payments on long-term debt and notes payable (180) (770)
------ ------
Net cash provided by financing activities 557 82
------ ------
Net change in cash and equivalents (148) (126)
Cash and equivalents at beginning of period 498 406
------ ------
Cash and equivalents at end of period $ 350 $ 280
====== ======
</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
thereto included in the Company's 1997 Annual Report and Form 10-K filed for the
fiscal year ended January 28, 1998.
Certain reclassifications of the January 28, 1998 and October 29, 1997
financial statements have been made to conform to current year presentation.
2.) DIVESTITURE
In February 1998, Hudson's Bay Co. purchased the Company's minority
interest in Kmart Canada Co. Under the terms of the purchase, Kmart received
approximately $8 million for the remaining equity interest in Kmart Canada Co.,
along with $79 million for repayment of an outstanding note and debentures.
3.) INVENTORIES AND COST OF MERCHANDISE SOLD
A substantial portion of the Company's inventory is accounted for using
the last-in, first-out (LIFO) method. Since LIFO costs can only be determined at
the end of each fiscal year when inflation rates and inventory levels are
finalized, estimates are used for LIFO purposes in the interim consolidated
financial statements. Inventories valued on LIFO at October 28, 1998, October
29, 1997 and January 28, 1998 were $465 million, $447 million and $457 million
lower than the amounts that would have been reported under the first-in,
first-out (FIFO) method, respectively.
4.) PENSION PLANS
In the second quarter of 1998, the Company announced and completed a
Voluntary Early Retirement Program for certain Kmart distribution center
associates. The Company recorded a charge of $19 million ($13 million after tax)
based on the acceptance of the program by associates. Payouts under this program
will be fully funded through existing pension plan assets.
5.) LEASE ACQUISITIONS
On May 1, 1998, the Company entered into an agreement with Kimco Realty
Corporation to lease stores previously operated by Venture Stores, Inc.
Forty-five of these locations have been converted to the Big Kmart format and
operations commenced on October 29, 1998.
6
<PAGE> 7
Item 2
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
13 WEEKS % CHANGE
---------------------------- -------------------------------------
($ Millions) OCTOBER 28, OCTOBER 29, COMPARABLE
1998 1997 ALL STORES STORES
----------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
SALES $7,642 $7,315 4.5 4.2
====== ======
OPERATING INCOME $ 148 $ 140
====== ======
</TABLE>
SALES and comparable store sales increased 4.5% and 4.2%, respectively
for the 13 weeks ended October 28, 1998. The increases were primarily due to:
improved merchandise assortments; continued roll out of the Big Kmart format,
with 267 store conversions during the quarter; and execution of the Company's
competitive pricing strategy. Divisions showing particular strength for the
quarter included consumables, home appliances and electronics, pharmacy, health
and beauty, and home decor. The Company closed 11 stores and opened 6 stores
during the third quarter.
GROSS MARGIN, as a percentage of sales, was 22.1% and 22.3% for the 13
weeks ended October 28, 1998 and October 29, 1997, respectively. The decrease in
the percentage reflects the execution of the Company's competitive pricing
strategy and the continued expansion of the Big Kmart format which emphasizes
lower margined consumables, partially offset by improved margins resulting from
increased import and private label goods.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES, as a percentage
of sales, were 20.1% and 20.4%, for the 13 weeks ended October 28, 1998, and
October 29, 1997, respectively. The 30 basis point decrease resulted primarily
from increased expense leverage given additional sales volume.
OPERATING INCOME for the 13 weeks ended October 28, 1998 was $148
million, or 2.0% of sales, as compared to operating income of $140 million, or
1.9% of sales, for the same period of the prior year. This increase was the
result of increased sales volumes, improved profitability of the apparel
division despite lower sales volumes and the leveraging of SG&A expenses.
NET INTEREST EXPENSE for the 13 weeks ended October 28, 1998 was $76
million as compared to $96 million for the same period of the prior year. Net
interest expense decreased as a result of lower levels of borrowings and
increased investment income. See "Liquidity and Financial Condition".
7
<PAGE> 8
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- Continued
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
39 WEEKS % CHANGE
---------------------------- -------------------------------------
($ millions) OCTOBER 28, OCTOBER 29, COMPARABLE
1998 1997 ALL STORES STORES
----------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
SALES
United States $23,273 $22,125 5.2 4.8
International - 299 (100.0) -
------- -------
Consolidated Sales $23,273 $22,424 3.8 4.8
======= =======
OPERATING INCOME
United States $ 506 $ 430
International - (3)
------- -------
Consolidated Operating Income $ 506 $ 427
======= =======
</TABLE>
SALES and comparable store sales increased 3.8% and 4.8%, respectively,
for the 39 weeks ended October 28, 1998. The increases were primarily due to:
improved merchandise assortments; continued roll out of the Big Kmart format,
with 519 store conversions during the period; and execution of the Company's
competitive pricing strategy. Divisions showing particular strength included
consumables, pharmacy, home appliances and electronics and apparel. The Company
operated a total of 2,109 stores as of October 28, 1998 compared to 2,121 stores
for the same period of the prior year. The Company closed 35 stores and opened 8
stores during the period.
GROSS MARGIN, as a percentage of sales, was 21.8% and 21.9% for the 39
weeks ended October 28, 1998 and October 29, 1997, respectively. This decrease
is attributable to the execution of the Company's competitive pricing strategy
and growth in lower margined sales categories such as consumables, partially
offset by improved margins resulting from increased import and private label
goods.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES, as a percentage
of sales, were 19.5% and 20.0%, for the 39 weeks ended October 28, 1998, and
October 29, 1997, respectively. The 50 basis point decrease resulted primarily
from the sale of international operations and increased expense leverage given
additional sales volume, offset by increased Year 2000 compliance expenses.
OPERATING INCOME for the 39 weeks ended October 28, 1998 was $506
million, or 2.2% of sales, as compared to operating income of $427 million, or
1.9% of sales, for the same period of the prior year. This increase was the
result of increased sales volumes, improved profitability of the apparel
division and continued leveraging of SG&A expenses.
NET INTEREST EXPENSE for the 39 weeks ended October 28, 1998 was $220
million as compared to $286 million for the same period of the prior year. Net
interest expense decreased as a result of lower levels of borrowings and
increased investment income. See "Liquidity and Financial Condition".
8
<PAGE> 9
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- Continued
LIQUIDITY AND FINANCIAL CONDITION
Kmart's primary sources of working capital are cash flows from
operations and borrowings under its credit facilities. The Company had working
capital of $4,693, $4,921 and $4,202 million at October 28, 1998, October 29,
1997, and January 28, 1998, respectively. The Company's working capital
fluctuates in relation to profitability, seasonal inventory levels net of trade
accounts payable and the level of store openings and closings.
In March 1998, the collateral securing the Company's borrowings under
the Revolving Credit Agreement was released. The Company continued to be in
compliance with all covenants contained in the Agreement during the third
quarter of 1998.
Net cash used for operating activities for the 39 weeks ended October
28, 1998 was $70 million as compared to $152 million for the same period in
1997. The decrease in cash used was primarily the result of increased earnings,
a decrease in cash used for inventory net of accounts payable and receipt of
federal tax refunds.
Net cash used for investing activities was $635 million for the 39
weeks ended October 28, 1998 compared to $56 million for the same period in
1997. The increase in cash used by investing activities was primarily the result
of increased capital expenditures and a reduced level of proceeds from real
estate transactions.
Net cash provided by financing activities was $557 million for the 39
weeks ended October 28, 1998 compared to $82 million for the same period in
1997. The increase in cash was primarily a result of the lower levels of debt
repayment in 1998 due to repayment of the remaining balance on the Term Loan in
1997.
Management believes the funds generated by operations, together with
funds available under existing credit arrangements, are sufficient to meet the
Company's currently anticipated funding requirements.
YEAR 2000
The Year 2000 statement set forth below is a Year 2000 Readiness
Disclosure, pursuant to the Year 2000 Information and Readiness Disclosure Act,
Public Law No. 105-271. Please note that, for purposes of any action brought
under the securities laws, as that term is defined in section 3(a)(47) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)), the Year 2000
Information and Readiness Disclosure Act does not apply to any statements
contained in any documents or materials filed with the Securities and Exchange
Commission, or with Federal banking regulators, pursuant to section 12(i) of the
Securities Exchange Act of 1934 (15 U.S.C. 78l(i)), or disclosures or writing
that when made accompanied the solicitation of an offer or sale of securities.
The Company's Year 2000 Compliance Program consists of four phases, (I)
inventory and assessment, (II) remediation and unit testing, (III) return to
production and (IV) integration testing. For information technology systems, the
Company has substantially completed phase I and has completed approximately 85
percent of phases II and III. The Company anticipates having substantially all
remaining business critical applications returned to production during the
fourth quarter of 1998. Integration tests are planned for the second, third and,
if necessary, the fourth quarters of 1999.
The Company has initiated a formal communication program with
significant vendors to evaluate their Year 2000 compliance, and is assessing
their responses to the Company's Year 2000 readiness questionnaire.
Approximately 85 percent of significant merchandise vendors have responded most
to the effect that their ability to supply the Company will not be affected by
the Year 2000 issue. Although the Company values its relationships with
significant vendors, should such a vendor become unable to deliver merchandise
or services, substitute merchandise for many of the goods the Company sells and
substitutes for many of the services it receives can be obtained from other
vendors. However, the Company cannot assure timely compliance of vendors and may
be adversely affected by failure of a significant vendor to supply merchandise
or services due to Year 2000 compliance failures.
9
<PAGE> 10
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- Continued
YEAR 2000 (continued)
Should the Company not successfully complete a significant portion of
its Year 2000 Compliance Program, its financial condition may be materially
adversely impacted; however, management does not consider the possibility of
such an occurrence to be likely. The Company anticipates that the most
reasonably likely worst case scenarios include, but are not limited to, loss of
communication with stores, loss of electric power and inability to process
transactions or engage in similar normal business activity. Certain contingency
plans have been or will be created, such as installation of backup power
supplies and around-the-clock support teams. Despite these contingency plans,
the Company may be adversely affected by failure of a significant third party
(such as suppliers of utilities, communication, transportation, banking and
other services) to become Year 2000 compliant. In addition, due to the
uncertainty of the effect of Year 2000 failures on our customers, we are unable
to assess the effect these failures will have on consumer spending or on returns
of merchandise that may contain hardware or software components. As a result,
the Company cannot estimate the impact of these events on the Company's results
of operations, liquidity or financial condition.
The total cost of the Company's Year 2000 Compliance Program is
estimated at $75 million, with $5 million incurred in 1997, and $33 million
incurred year-to-date. Estimated costs for fiscal 1998 total $43 million and are
being funded through operating cash flows. Certain information technology
projects have been delayed as a result of the Company's Year 2000 compliance
effort. Estimated future expenditures and the delay of information technology
projects are not expected to have a material adverse effect on the Company's
financial position, results of operations or cash flows.
Estimated costs of the Company's Year 2000 Compliance Program and
projected completion dates are based on management's best estimates of future
events and are forward-looking statements that may be updated as additional
information becomes available. Readers are cautioned that forward-looking
statements contained herein should be read in conjunction with the Company's
disclosures under the heading "Cautionary Statement Regarding Forward-looking
Information" following this disclosure.
OTHER MATTERS
As of the end of 1997, the board of directors approved the repurchase
of up to 2,000,000 shares of the Company's common stock to be used to fund the
Company's employee benefit plans. During 1998, the Company purchased
approximately 1,937,700 shares at a cost of $38.4 million.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This quarterly report includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements, including the discussion of management expectations for Year 2000
compliance, involve certain risks and uncertainties that may cause actual future
results to differ materially from those contemplated, projected, estimated or
budgeted in such forward-looking statements. Factors that may impact
forward-looking statements include, but are not limited to, the following:
economic and weather conditions which affect buying patterns of the Company's
customers, changes in consumer spending, the Company's ability to anticipate
buying patterns and implement appropriate inventory strategies, continued
availability of capital and financing, and competitive and other factors
affecting business beyond the Company's control. Consequently, all of the
forward-looking statements are qualified by these cautionary statements and
there can be no assurance that the results or developments anticipated by the
Company will be realized or that they will have the expected effects on the
Company or its business or operations.
10
<PAGE> 11
PART II. OTHER INFORMATION
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
Exhibit 99 - Amendment to Employment Agreement
(b) Reports on Form 8-K: No reports were filed on Form 8-K by the
Registrant during the 13 weeks ended October 28, 1998.
11
<PAGE> 12
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: December 7, 1998
Kmart Corporation
------------------------------------------------
(Registrant)
By: /S/ M.E. Welch, III
------------------------------------------------
M.E. Welch, III
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Duly Authorized Officer,
Principal Financial Officer)
By: /S/ Lois M. Connelly
------------------------------------------------
Lois M. Connelly
VICE PRESIDENT, CONTROLLER
(Duly Authorized Officer,
Principal Accounting Officer)
12
<PAGE> 13
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
Exhibit 11 - Information on computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
Exhibit 99 - Amendment to Employment Agreement
<PAGE> 1
EXHIBIT 11
KMART CORPORATION
INFORMATION ON COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
($ Millions, except per share data) 13 Weeks Ended 39 Weeks Ended
----------- ----------- ----------- -----------
October 28, October 29, October 28, October 29,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
I. Basic earnings per common share:
(a) Net income $ 38 $ 18 $ 165 $ 63
====== ====== ====== ======
(b) Weighted average common shares outstanding 492.8 488.0 491.7 486.8
====== ====== ====== ======
Basic earnings per common share:
Net income (a)/(b) $ 0.08 $ 0.04 $ 0.34 $ 0.13
====== ====== ====== ======
II. Earnings per common and common equivalent share
assuming dilution:
Income from operations $ 38 $ 18 $ 165 $ 63
Add: Dividends Preferred Stock, Net 13 13 38 37
------ ------ ------ ------
(c) Net income $ 51 $ 31 $ 203 $ 100
====== ====== ====== ======
Weighted average common shares outstanding 492.8 488.0 491.7 486.8
Weighted average trust convertible preferred securities outstanding 66.7 66.7 66.7 66.7
Stock Option Dilution Activity 4.5 5.8 6.4 5.5
------ ------ ------ ------
(d) Applicable common shares, as adjusted 564.0 560.5 564.8 559.0
====== ====== ====== ======
Diluted earnings per common and common equivalent share:
Net income (c)/(d) $ 0.09 $ 0.06 $ 0.36 $ 0.18
====== ====== ====== ======
(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 13 of SFAS 128 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 SHEET AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-27-1999
<PERIOD-START> JAN-29-1998
<PERIOD-END> OCT-28-1998
<CASH> 350
<SECURITIES> 0
<RECEIVABLES> 568
<ALLOWANCES> 0
<INVENTORY> 8,060
<CURRENT-ASSETS> 9,254
<PP&E> 9,609
<DEPRECIATION> 3,757
<TOTAL-ASSETS> 15,549
<CURRENT-LIABILITIES> 4,561
<BONDS> 2,313
983
0
<COMMON> 493
<OTHER-SE> 5,157
<TOTAL-LIABILITY-AND-EQUITY> 15,549
<SALES> 23,273
<TOTAL-REVENUES> 23,273
<CGS> 18,198
<TOTAL-COSTS> 18,198
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 220
<INCOME-PRETAX> 286
<INCOME-TAX> 83
<INCOME-CONTINUING> 165
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 165
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
<PAGE> 1
FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT
--------------------
This First Amendment to the Employment Agreement made as of June 4,
1995 (the "Agreement") between Kmart Corporation, a Michigan corporation
(together with its successors and assigns permitted under this Agreement, the
"Company"), and Floyd Hall (the "Executive") is made as of September 21, 1998.
1. Section 1(g) of the Agreement is hereby amended by the addition of
the following flush language at the end thereof:
"Notwithstanding the foregoing, the parties hereto agree that no
determination made or to be made by the Board in connection with the
stock options awarded pursuant to Section 6(d) hereof shall, by itself,
constitute grounds for a Constructive Termination Without Cause."
2. Section 2 of the Agreement is hereby revised to read, in its
entirety, as follows:
"2. Term of Employment.
-------------------
The Company hereby employs the Executive, and the
Executive hereby accepts such employment, for the period commencing
June 4, 1995 and ending at the close of business on April 1, 2001,
subject to earlier termination of the Term of Employment in accordance
with the terms of this Agreement; provided that the Term of Employment
may be extended by mutual consent of the Parties."
3. Section 6(a) of the Agreement is hereby revised to read, in its
entirety, as follows:
"(a) General. During the Term of Employment, the
Executive shall be eligible to participate in the long-term incentive
programs of the Company. In any event, he shall be entitled to the
awards described in Sections 6(b), 6(c) and 6(d) below, subject to the
conditions described therein."
<PAGE> 2
4. Section 6 of the Agreement is hereby revised by the addition of the
following new Section 6(d) at the end thereof:
"(d) Additional Stock Option Awards. In consideration
of the extension of the Term of Employment pursuant to the First
Amendment to the Agreement made as of September 21, 1998, the Company
shall grant the Executive additional 10-year options, substantially in
the form attached to the First Amendment as Exhibits A and B, to
purchase an aggregate 1,000,000 shares of Stock (the "Extension
Options"). The Extension Options shall be granted pursuant to the Kmart
Corporation 1997 Long-Term Equity Compensation Plan (the "1997 Plan")
and the Kmart Corporation 1992 Stock Option Plan (the "1992 Plan" and,
together with the 1997 Plan, the "Plans"), but to the extent that any
provisions of this Section 6(d) or Exhibit A or B to the First
Amendment conflict with the provisions of the Plans, the provisions of
this Section 6(d) and Exhibits A and B to the First Amendment shall be
controlling. As of September 21, 1998, Extension Options to purchase
686,615 shares of Stock shall be granted under the 1997 Plan, and
Extension Options to purchase 313,385 shares of Stock shall be granted
under the 1992 Plan. The exercise price of the Extension Options shall
be $13.19 per share, which was the Fair Market Value (as defined in the
respective Plan) of a share of Stock on the grant date. The Extension
Options shall vest (a "Vesting Event") only upon satisfaction of the
following two conditions: (Condition 1) the Executive's execution of a
separate written waiver of all cash payments described in Sections
10(d)(ii) and 10(d)(iv) or, to the extent relating to payments
described in Sections 10(d)(ii) and 10(d)(iv) hereof, Section 10(e)
hereof; and (Condition 2) either (x) the Board's formal approval of
successorship arrangements with respect to the Executive's positions
and responsibilities with the Company, which approval specifically
refers to the satisfaction of this vesting requirement, or (y) a Change
in Control (as defined in the Plans). Notwithstanding Section 10(e)
hereof, but subject to the immediately preceding sentence, the
Extension Options shall not vest upon a Change in Control. Vested
Extension Options shall become exercisable only upon the earliest to
occur of April 1, 2001, a Change in Control or the Executive's death.
Except as provided in the last sentence of this Section 6(d), Extension
Options which become exercisable shall remain exercisable for the
remainder of their 10-year terms. In the event that holders of the
Company's common stock receive cash, securities or other property in
respect of their common stock in connection with a Change in Control
transaction which results in a Vesting Event, the Company shall use its
reasonable efforts to enable the Executive (if he so
2
<PAGE> 3
elects) to exercise any vested Extension Options at a time and in a
fashion that will entitle him to receive in exchange for any shares
thus acquired the same consideration as is received in such Change in
Control transaction by other holders of the Company's common stock. In
the event of a Change in Control which does not result in a Vesting
Event and in which the Company is not the surviving entity, the Company
shall use its reasonable efforts to assure that the Executive shall be
provided replacement options that are exercisable for equity securities
of the surviving entity (or an equivalent award) which shall contain
terms, conditions and an after-tax economic opportunity (including,
without limitation, an aggregate spread value) no less favorable to the
Executive than did the Extension Options immediately prior to such
Change in Control. If the Executive's employment terminates under any
circumstances prior to a Vesting Event (including, without limitation,
because of death or disability), the unvested Extension Options shall
terminate without vesting upon such termination of employment.
Notwithstanding anything to the contrary in this Section 6(d), if the
Executive violates the provisions of Section 11 hereof (without regard
to the time limitations of such Section) prior to the exercise of all
Extension Options, all then unexercised Extension Options held by the
Executive (whether or not vested and exercisable) shall terminate upon
such violation."
5. Section 10(d)(ii) is hereby revised to read, in its entirety, as
follows:
"(ii) Base Salary, at the annualized rate in effect
on the date of termination of the Executive's employment (or in the
event a reduction in Base Salary is the basis for a Constructive
Termination Without Cause, then the Base Salary in effect immediately
prior to such reduction), for the period until the end of the
originally scheduled Term of Employment, as extended by the First
Amendment dated September 21, 1998; provided that in no event shall
such period be less than 12 months nor more than 36 months; and
provided further that the Executive and the Company may agree that the
Company shall pay him the present value of such salary continuation
payments in a lump sum (using as the discount rate the Applicable
Federal Rate for short-term Treasury obligations as published by the
Internal Revenue Service for the month in which such termination
occurs);"
6. As amended by this First Amendment, the Agreement is hereby
specifically ratified and reaffirmed and shall continue in full force and
effect.
3
<PAGE> 4
IN WITNESS WHEREOF, the undersigned have executed this First Amendment
as of September 21, 1998.
KMART CORPORATION
By /s/ Anthony N. Palizzi
----------------------------------
Anthony N. Palizzi
/s/ Floyd Hall
------------------------------------
Floyd Hall
4
<PAGE> 5
KMART CORPORATION
STOCK OPTION PLANS
NON-QUALIFIED STOCK OPTION AGREEMENT
<TABLE>
<S> <C>
OPTIONEE: Floyd Hall
SOCIAL SECURITY NUMBER: [__________]
OPTIONED SHARES: 686,615 shares of common stock, $1.00 par value, of
Kmart Corporation.
PLAN: 1997 Long Term Equity Compensation Plan
PER SHARE OPTION PRICE: $13.19
OPTION DATE: September 21, 1998
TERMINATION DATE: September 21, 2008
</TABLE>
This Stock Option Agreement (the "Agreement") is executed and delivered as of
the Option Date by and between Kmart Corporation (the "Company") and the
Optionee, an employee of the Company. The parties hereby agree as follows:
1. The Company, pursuant to the above Plan, which is incorporated herein
by reference, and subject to the terms and conditions thereof (except
as otherwise specified herein), hereby grants to the Optionee an option
to purchase the Optioned Shares at the Per Share Option Price (which
represents the fair market value of the Company's common stock on the
Option Date). The option granted hereby shall vest (a "Vesting Event")
only upon satisfaction of the following two conditions: (Condition 1)
the Optionee's execution of a separate written waiver of all cash
payments described in Sections 10(d)(ii) and 10(d)(iv) or, to the
extent relating to payments described in Sections 10(d)(ii) and
10(d)(iv), Section 10(e) of Optionee's Employment Agreement with the
Company made as of June 4, 1995, as amended from time to time (his
"Employment Agreement"); and (Condition 2) either (x) formal approval
by the Company's Board of Directors of successorship arrangements with
respect to the Optionee's positions and responsibilities with the
Company, which approval specifically refers to the satisfaction of
this vesting requirement, or (y) a Change in Control (as defined in the
Plan). If the option granted hereby becomes vested, it shall then
become exercisable only upon the earliest to occur of April 1, 2001, a
Change in Control or the Optionee's death.
2. Notwithstanding any provision to the contrary contained in the Plan,
but subject to Section 1 hereof, the option granted hereby shall not
vest upon a Change in Control, except as provided in Section 1 hereof.
Further, if the Optionee's employment terminates under any
circumstances prior to a Vesting Event (including, without limitation,
because of the Optionee's death or disability), the option shall
terminate without vesting upon such termination of employment.
Notwithstanding any provision of the Plan, the Optionee hereby
specifically waives any right to have the option granted hereby vest
except upon the occurrence of a Vesting Event and, subject to Section 3
hereof, any right to have the option granted hereby become exercisable
other than as provided in Section 1 hereof.
3. In the event that holders of the Company's common stock receive cash,
securities or other property in respect of their common stock in
connection with a Change in Control transaction, the Company shall use
its best efforts to enable the Optionee (if he so elects)
<PAGE> 6
to exercise any options granted hereby which shall have vested at a
time and in a fashion that will entitle him to receive in exchange for
any shares thus acquired the same consideration as is received in such
Change in Control transaction by other holders of the Company's common
stock. In the case of a Change in Control which does not result in a
Vesting Event and in which the Company is not the surviving entity, the
Company shall use its reasonable efforts to assure that the Optionee
shall be provided replacement options that are exercisable for equity
securities of the surviving entity (or an equivalent award) which shall
contain terms, conditions and an after-tax economic opportunity
(including, without limitation, an aggregate spread value) no less
favorable to the Optionee than did the options granted hereby
immediately prior to such Change in Control.
4. The option granted hereby shall not be treated as an incentive stock
option under the Internal Revenue Code.
5. The option granted hereby shall terminate no later than at the close of
business on the Termination Date; provided, however, that if the option
has not become vested on or before April 1, 2001, the option shall
terminate on April 1, 2001. If the option vests and becomes
exercisable, it shall remain exercisable until the close of business on
the Termination Date, except that if the Optionee violates the
provisions of Section 11 (without regard to the time limitations of
such Section) of his Employment Agreement, the option granted hereby
(whether or not vested and exercisable) shall terminate upon such
violation.
6. The Optionee shall comply with and be bound by all the terms and
conditions contained in the Plan, except that to the extent that any
provision of this Agreement conflicts with any provision of the Plan,
the provision of this Agreement shall be controlling.
7. The option granted hereby shall be exercisable during the Optionee's
lifetime only by the Optionee in accordance with the terms of this
Agreement and the terms of the Plan and shall not be assignable or
transferable except by Will or the laws of descent and distribution;
provided, however, that the option may after the death of the Optionee
be exercised pursuant to the terms of this Agreement and the terms of
the Plan by a Beneficiary of the Optionee.
8. The obligation of the Company to sell and deliver any stock under this
option is specifically subject to all applicable laws, rules,
regulations and governmental and stockholder approvals.
9. Any notice by the Optionee to the Company hereunder shall be in writing
and shall be deemed duly given only upon receipt thereof by the Company
at its principal offices. Any notice by the Company to the Optionee
shall be in writing and shall be duly given if mailed at the address
last specified to the Company by the Optionee.
10. The validity and construction of this Agreement shall be governed by
the laws of the State of Michigan.
2
<PAGE> 7
In Witness Whereof, the Company has caused this Agreement to be executed by a
duly authorized representative and the Optionee has hereunto set his hand as of
the day and year first above written.
KMART CORPORATION OPTIONEE
-------------------------------- -------------------------------
Anthony N. Palizzi Floyd Hall
Please Sign And Retain This Stock Option Agreement For Your Future Reference
3
<PAGE> 8
KMART CORPORATION
STOCK OPTION PLANS
NON-QUALIFIED STOCK OPTION AGREEMENT
<TABLE>
<S> <C>
OPTIONEE: Floyd Hall
SOCIAL SECURITY NUMBER: [__________]
OPTIONED SHARES: 313,385 shares of common stock, $1.00 par value, of
Kmart Corporation.
PLAN: 1992 Stock Option Plan
PER SHARE OPTION PRICE: $13.19
OPTION DATE: September 21, 1998
TERMINATION DATE: September 21, 2008
</TABLE>
This Stock Option Agreement (the "Agreement") is executed and delivered as of
the Option Date by and between Kmart Corporation (the "Company") and the
Optionee, an employee of the Company. The parties hereby agree as follows:
1. The Company, pursuant to the above Plan, which is incorporated herein
by reference, and subject to the terms and conditions thereof (except
as otherwise specified herein), hereby grants to the Optionee an option
to purchase the Optioned Shares at the Per Share Option Price (which
represents the fair market value of the Company's common stock on the
Option Date). The option granted hereby shall vest (a "Vesting Event")
only upon satisfaction of the following two conditions: (Condition 1)
the Optionee's execution of a separate written waiver of all cash
payments described in Sections 10(d)(ii) and 10(d)(iv) or, to the
extent relating to payments described in Sections 10(d)(ii) and
10(d)(iv), Section 10(e) of Optionee's Employment Agreement with the
Company made as of June 4, 1995, as amended from time to time (his
"Employment Agreement"); and (Condition 2) either (x) formal approval
by the Company's Board of Directors of successorship arrangements with
respect to the Optionee's positions and responsibilities with the
Company, which approval specifically refers to the satisfaction of this
vesting requirement, or (y) a Change in Control (as defined in the
Plan). If the option granted hereby becomes vested, it shall then
become exercisable only upon the earliest to occur of April 1, 2001, a
Change in Control or the Optionee's death.
2. Notwithstanding any provision to the contrary contained in the Plan,
the option granted hereby shall not vest upon a Change in Control,
except as provided in Section 1 hereof. Further, if the Optionee's
employment terminates under any circumstances prior to a Vesting Event
(including, without limitation, because of the Optionee's death or
disability), the option shall terminate without vesting upon such
termination of employment. Notwithstanding any provision of the Plan,
the Optionee hereby specifically waives any right to have the option
granted hereby vest except upon the occurrence of a Vesting Event and,
subject to Section 3 hereof, any right to have the option granted
hereby become exercisable other than as provided in Section 1 hereof.
<PAGE> 9
3. In the event that holders of the Company's common stock receive cash,
securities or other property in respect of their common stock in
connection with a Change in Control transaction, the Company shall use
its best efforts to enable the Optionee (if he so elects) to exercise
any options granted hereby which shall have vested at a time and in a
fashion that will entitle him to receive in exchange for any shares
thus acquired the same consideration as is received in such Change in
Control transaction by other holder of the Company's common stock. In
the case of a Change in Control which does not result in a Vesting
Event and in which the Company is not the surviving entity, the Company
shall use its reasonable efforts to assure that the Optionee shall be
provided replacement options that are exercisable for equity securities
of the surviving entity (or an equivalent award) which shall contain
terms, conditions and an after-tax economic opportunity (including,
without limitation, an aggregate spread value) no less favorable to the
Optionee than did the options granted hereby immediately prior to such
Change in Control.
4. The option granted hereby shall not be treated as an incentive stock
option under the Internal Revenue Code.
5. The option granted hereby shall terminate no later than at the close of
business on the Termination Date; provided, however, that if the option
has not become vested on or before April 1, 2001, the option shall
terminate on April 1, 2001. If the option vests and becomes
exercisable, it shall remain exercisable until the close of business on
the Termination Date, except that if the Optionee violates the
provisions of Section 11 (without regard to the time limitations of
such Section) of his Employment Agreement, the option granted hereby
(whether or not vested and exercisable) shall terminate upon such
violation
6. The Optionee shall comply with and be bound by all the terms and
conditions contained in the Plan, except that to the extent that any
provision of this Agreement conflicts with any provision of the Plan,
the provision of this Agreement shall be controlling.
7. The option granted hereby shall be exercisable during the Optionee's
lifetime only by the Optionee in accordance with the terms of this
Agreement and the terms of the Plan and shall not be assignable or
transferable except by Will or the laws of descent and distribution;
provided, however, that the option may after the death of the Optionee
be exercised pursuant to the terms of this Agreement and the terms of
the Plan by a Beneficiary of the Optionee.
8. The obligation of the Company to sell and deliver any stock under this
option is specifically subject to all applicable laws, rules,
regulations and governmental and stockholder approvals.
9. Any notice by the Optionee to the Company hereunder shall be in writing
and shall be deemed duly given only upon receipt thereof by the Company
at its principal offices. Any notice by the Company to the Optionee
shall be in writing and shall be duly given if mailed at the address
last specified to the Company by the Optionee.
2
<PAGE> 10
10. The validity and construction of this Agreement shall be governed by
the laws of the State of Michigan.
In Witness Whereof, the Company has caused this Agreement to be executed by a
duly authorized representative and the Optionee has hereunto set his hand as of
the day and year first above written.
KMART CORPORATION OPTIONEE
------------------------------- -------------------------------
Anthony N. Palizzi Floyd Hall
Please Sign And Retain This Stock Option Agreement For Your Future Reference
3
