<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 28, 1999
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 West Big Beaver Road - Troy, Michigan 48084
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(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 August 25, 1999, 493,697,774 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 and 26 weeks ended July 28,1999 and
July 29,1998
Consolidated Balance Sheets-- 4
July 28, 1999, July 29,1998 and
January 27,1999
Consolidated Statements of Cash Flows -- 5
26 weeks ended July 28,1999 and
July 29, 1998
Notes to Consolidated Financial 6 - 7
Statements
Item 2. Management's Discussion and Analysis of Results of 8 - 12
Operations and Financial
Condition
PART II OTHER INFORMATION
- ------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders 13 - 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</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 26 Weeks Ended
----------------------------- ----------------------------
July 28, July 29, July 28, July 29,
1999 1998 1999 1998
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $ 8,757 $ 8,116 $ 16,901 $ 15,631
Cost of sales, buying and occupancy 6,835 6,336 13,252 12,244
-------- -------- -------- --------
Gross margin 1,922 1,780 3,649 3,387
Selling, general and administrative expenses 1,640 1,561 3,181 3,010
Voluntary early retirement program - 19 - 19
-------- -------- -------- --------
Income before interest, income taxes and dividends on
convertible preferred securities of subsidiary 282 200 468 358
Interest expense, net 64 70 130 144
Income tax provision 72 38 112 62
Dividends on convertible preferred securities of subsidiary,
net of income taxes of $7, $7, $14, and $14 12 12 25 25
-------- -------- -------- --------
Income from continuing operations 134 80 201 127
Discontinued operations, net of income taxes of $124:
Provision for lease obligations resulting from
guarantee of previously owned Builders Square locations (230) - (230) -
-------- -------- -------- --------
Net income (loss) $ (96) $ 80 $ (29) $ 127
======== ======== ======== ========
Basic earnings (loss) per common share:
Income from continuing operations $ 0.27 $ 0.16 $ 0.41 $ 0.26
Discontinued operations (0.47) - (0.47) -
-------- -------- -------- --------
Net income (loss) $ (0.20) $ 0.16 $ (0.06) $ 0.26
======== ======== ======== ========
Diluted earnings (loss) per common share:
Income from continuing operations $ 0.26 $ 0.16 $ 0.40 $ 0.26
Discontinued operations (0.41) - (0.41) -
-------- -------- -------- --------
Net income (loss) $ (0.15) $ 0.16 $ (0.01) $ 0.26
======== ======== ======== ========
Basic weighted average shares (millions) 495.2 492.9 494.6 491.3
Diluted weighted average shares (millions) 567.0 570.6 567.0 568.2
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
KMART CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
July 28, July 29, January 27,
1999 1998 1999
-------------- ------------ ------------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 299 $ 556 $ 710
Merchandise inventories 7,061 6,808 6,536
Other current assets 622 673 584
------- ------- -------
Total current assets 7,982 8,037 7,830
Property and equipment, net 6,114 5,642 5,914
Other assets and deferred charges 538 447 422
------- ------- -------
Total Assets $14,634 $14,126 $14,166
======= ======= =======
Current Liabilities:
Long-term debt due within one year $ 81 $ 51 $ 77
Trade accounts payable 2,353 2,334 2,047
Accrued payroll and other liabilities 1,304 1,199 1,359
Taxes other than income taxes 251 241 208
------- ------- -------
Total current liabilities 3,989 3,825 3,691
Long-term debt and notes payable 1,526 1,636 1,538
Capital lease obligations 1,052 1,136 1,091
Other long-term liabilities 1,122 927 883
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 28, 1999) 985 983 984
Common stock, $1 par value, 1,500,000,000 shares authorized;
494,530,727, 493,284,068, and 493,358,504, shares issued 494 493 493
Capital in excess of par value 1,676 1,659 1,667
Retained earnings 3,790 3,467 3,819
------- ------- -------
Total Liabilities and Shareholders' Equity $14,634 $14,126 $14,166
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 5
KMART CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
26 Weeks Ended
----------------------------------
July 28, July 29,
1999 1998
----------------- ---------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Income from continuing operations $ 201 $ 127
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities:
Depreciation and amortization 377 332
Cash used for store restructuring and other charges (81) (65)
Increase in inventories (525) (441)
Increase in accounts payable 306 411
Increase in accounts receivable (1) (65)
Increase in sales tax payable 30 36
Deferred income taxes and taxes payable 26 160
Decrease in other long-term liabilities (23) (38)
Changes in certain assets and liabilities (13) 5
Voluntary early retirement program - 19
----- -----
Net cash provided by operating activities 297 481
----- -----
CASH FLOW FROM INVESTING ACTIVITIES
Acquisition of Caldor leases (86) -
Proceeds from sale of Canadian operations - 87
Capital expenditures (577) (400)
----- -----
Net cash used for investing activities (663) (313)
----- -----
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 44 -
Payments on long-term debt (52) (116)
Purchase of common shares (32) (8)
Issuance of common shares 34 57
Payments on capital lease obligations (39) (43)
----- -----
Net cash used for financing activities (45) (110)
----- -----
Net (decrease) increase in cash and cash equivalents (411) 58
Cash and cash equivalents at beginning of period 710 498
----- -----
Cash and cash equivalents at end of period $ 299 $ 556
===== =====
</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 1998 Annual Report and Form 10-K filed for the
fiscal year ended January 27, 1999.
Certain reclassifications of the January 27, 1999 and July 29, 1998
financial statements have been made to conform to current year presentation.
2. Pre-opening Costs
Beginning in fiscal 1999, Kmart is expensing pre-opening costs in the
period in which they are incurred in conformity with Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities". Prior to fiscal 1999,
pre-opening costs were deferred and expensed in the month the store opened. The
implementation of SOP 98-5 is not expected to have a material effect on the
Company's financial position, results of operations or cash flows for fiscal
1999. However, since the Company generally opens new locations during the second
half of the year, the change in accounting for pre-opening costs could have an
effect on quarterly results.
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 July 28, 1999, July 29, 1998
and January 27, 1999 were $410 million, $467 million and $407 million lower than
the amounts that would have been reported under the first-in, first-out (FIFO)
method, respectively.
4. Lease Acquisitions
During the first half of 1999, the Company entered into agreements with
Caldor Corporation to purchase the operating leases, fixtures and equipment of
sixteen Caldor stores. In addition to assuming annual minimum operating lease
obligations of $10.7 million, the total acquisition premium paid for these
locations was $86 million. The lease acquisition premium will be amortized over
the remaining term of the acquired leases. The Company expects to open these
stores in the second half of 1999.
5. Discontinued Operations
On June 11, 1999, Hechinger Company ("Hechinger"), which acquired
substantially all of the operating assets of former subsidiary Builders Square,
Inc., filed for Chapter 11 bankruptcy protection. As a result of the filing, the
Company recorded a non-cash charge of $354 million, $230 million aftertax. The
charge reflects Kmart's best estimate of the impact of Hechinger's default on
lease obligations for up to 110 former Builders Square locations, which are
guaranteed by Kmart.
6
<PAGE> 7
KMART CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Unaudited)
6. Other Commitments and Contingencies
Lease Guarantees
Kmart has outstanding guarantees for real property leases of certain
former subsidiaries as follows:
<TABLE>
<CAPTION>
Present Value of Gross
Future Lease Future
Obligations @ 7% Lease Obligation
---------------------- ----------------------
<S> <C> <C>
OfficeMax $ 101 $ 149
Borders Group 105 188
The Sports Authority 226 383
Builders Square 697 1,283
------ ------
Total $1,129 $2,003
====== ======
</TABLE>
The possibility of the Company having to honor its contingent
obligations is dependent upon the future operating results of the former
subsidiaries. Should a reserve be required, it would be recorded at the time the
obligation was determined to be both probable and estimable. As a result of the
Hechinger bankruptcy filing on June 11, 1999, the Company has recorded a second
quarter charge related to guarantees of lease obligations for previously owned
Builders Square locations (See Note 5 of the Notes to Consolidated Financial
Statements).
The Sports Authority
In October 1998, TSA announced that it had amended certain aspects of
its bank credit agreement, including modifying certain financial covenants, in
light of a restructuring charge taken in the third quarter 1998. Pursuant to
that amendment, TSA also granted its bank lenders a security interest in its
inventory and certain accounts receivable. On December 9, 1998, in its third
quarter 10-Q filing, TSA noted that its ability to satisfy ongoing working
capital and capital expenditure requirements would depend on the successful
negotiation of a new credit facility prior to the expiration of its bank credit
agreement in April 1999. On April 13, 1999, TSA entered into a new credit
facility.
For its second quarter 1999, TSA announced year-to-date same store
sales decreases of 3.2 percent, and year-to-date operating income of $3.8
million, as compared to operating income of $4.4 million for the same period of
the prior year.
Kmart's rights and obligations with respect to its guarantee of TSA
leases are governed by a Lease Guaranty, Indemnification and Reimbursement
Agreement dated as of November 23, 1994.
Other
There are various claims, lawsuits, and pending actions against Kmart
incident to its operations. It is the opinion of the Company's management that
the ultimate resolution of these matters will not have a material adverse effect
on Kmart's liquidity, financial position or results of operations.
7
<PAGE> 8
Item 2.
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
<TABLE>
<CAPTION>
13 Weeks % Change
-------------------------------------- ---------------------------------------
July 28, July 29, Comparable
1999 1998 All Stores stores
-------------- -------------- --------------- ---------------
($ Millions)
<S> <C> <C> <C> <C>
Sales $ 8,757 $ 8,116 7.9 5.9
============== ==============
Operating Income $ 282 $ 219
============== ==============
</TABLE>
Sales and comparable store sales increased 7.9% and 5.9%, respectively,
for the 13 weeks ended July 28, 1999. The increases were primarily due to:
improved merchandise assortments including exclusive private label lines such as
Martha Stewart Everyday, Route 66 apparel and accessories, as well as Jaclyn
Smith and Kathy Ireland ladies apparel; continued roll out of the Big Kmart
format, with 149 store conversions during the quarter and 281 conversions
year-to-date; and continued execution of the Company's competitive pricing
strategy. Divisions showing particular strength for the quarter included
pharmacy, housewares and home decor, consumables and edibles, home appliances
and electronics, outdoor lawn and garden, and ladies apparel. The Company closed
one store and opened one store during the second quarter.
Gross margin, as a percentage of sales, was 21.9% for both the 13 weeks
ended July 28, 1999 and July 29, 1998. This is attributable to the Company's
competitive pricing strategy and the continued expansion of the Big Kmart format
which emphasizes lower margined consumables, offset by margin improvements
resulting from refined merchandise assortments, performance of our apparel
division and a higher mix of private label goods.
Selling, general and administrative ("SG&A") expenses, as a percentage
of sales, were 18.7% and 19.2%, for the 13 weeks ended July 28, 1999, and July
29, 1998, respectively. The 50 basis point decrease resulted primarily from
increased expense leverage given additional sales volume, partially offset by
incremental costs associated with new stores opened during 1998.
Operating income for the 13 weeks ended July 28, 1999 was $282 million,
or 3.2% of sales, as compared to operating income, excluding the charge for a
Voluntary Early Retirement Program, of $219 million, or 2.7% of sales, for the
same period of the prior year. This increase was the result of increased sales
volumes and the leveraging of SG&A expenses.
Net interest expense for the 13 weeks ended July 28, 1999 was $64
million as compared to $70 million for the same period of the prior year. Net
interest expense decreased as a result of overall lower levels of borrowings
resulting from scheduled repayments and repurchases of existing debt. See
"Liquidity and Financial Condition".
8
<PAGE> 9
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- Continued
Results of Operations
<TABLE>
<CAPTION>
26 Weeks % Change
-------------------------------------- ----------------------------------------
July 28, July 29, Comparable
1999 1998 All Stores Stores
------------------ ----------------- --------------- -------------------
($ Millions)
<S> <C> <C> <C> <C>
Sales $ 16,901 $ 15,631 8.1 6.2
================== =================
Operating Income $ 468 $ 377
================== =================
</TABLE>
Sales and comparable store sales increased 8.1% and 6.2%, respectively,
for the 26 weeks ended July 28, 1999. The increases were primarily due to:
improved merchandise assortments including exclusive private label lines such as
Martha Stewart Everyday, Route 66 apparel and accessories, as well as Jaclyn
Smith and Kathy Ireland ladies apparel; continued roll out of the Big Kmart
format, with 281 store conversions during the period; and continued execution of
the Company's competitive pricing strategy. Divisions showing particular
strength included housewares and home decor, pharmacy, consumables and edibles,
home appliances and electronics and ladies apparel. The Company closed 13 stores
and opened three stores during the first half of 1999.
Gross margin, as a percentage of sales, was 21.6% and 21.7% for the 26
weeks ended July 28, 1999 and July 29, 1998, 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 margin improvements resulting from
refined merchandise assortments, performance of our apparel division, increased
import activity and a higher mix of private label goods.
Selling, general and administrative ("SG&A") expenses, as a percentage
of sales, were 18.8% and 19.3%, for the 26 weeks ended July 28, 1999, and July
29, 1998, respectively. The 50 basis point decrease resulted primarily from
increased expense leverage given additional sales volume, partially offset by
incremental costs associated with new stores opened during 1998.
Operating income for the 26 weeks ended July 28, 1999 was $468 million,
or 2.8% of sales, as compared to operating income, excluding the charge for a
Voluntary Early Retirement Program, of $377 million, or 2.4% of sales, for the
same period of the prior year. This increase was the result of increased sales
volumes and the leveraging of SG&A expenses.
Net interest expense for the 26 weeks ended July 28, 1999 was $130
million as compared to $144 million for the same period of the prior year. Net
interest expense decreased as a result of overall lower levels of borrowings
resulting from scheduled repayments and repurchases of existing debt. See
"Liquidity and Financial Condition".
9
<PAGE> 10
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 $3,993, $4,212 and $4,139 million at July 28, 1999, July 29, 1998,
and January 27, 1999, respectively. Working capital fluctuates in relation to
profitability, seasonal inventory levels net of trade accounts payable and the
level of store openings and closings. Borrowings of $44 million were outstanding
under the Company's $2.5 billion Revolving Credit Agreement ("Revolver") at the
end of the second quarter of 1999. No borrowings were outstanding at the end of
the second quarter of 1998.
Net cash provided by operating activities for the 26 weeks ended July
28, 1999 was $297 million as compared to $481 million for the same period in
1998. The decrease in cash provided by operating activities was primarily the
result of an increase in the Company's net inventory position resulting from the
new stores opened during 1998, Big Kmart conversions in 1999 and the second half
of 1998, as well as tax refunds received in the prior year.
Net cash used for investing activities was $663 million for the 26
weeks ended July 28, 1999 compared to $313 million for the same period in 1998.
The increase in cash used for investing activities was primarily the result of
increased capital expenditures related to the Big Kmart rollout, new stores,
expansion of existing stores and the acquisition of sixteen Caldor leases. The
prior year's investing activities were also partially offset by the proceeds
received from the divestiture of Kmart Canada.
Net cash used for financing activities was $45 million for the 26 weeks
ended July 28, 1999 compared to $110 million for the same period in 1998. The
decrease in cash used for financing activities was primarily a result of lower
payments on long-term debt due to bonds repurchased in the prior year and
increased borrowings under the Revolver, partially offset by repurchases of
common stock under the Company's stock repurchase program.
Management believes that its current financing arrangements will be
sufficient to meet the Company's liquidity needs for operations and capital
demands.
Year 2000
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 phases I, II and III. Phase IV is underway
and is planned to be completed midway through the fourth quarter of 1999.
Substantially all business critical applications have been returned to
production. The non-information technology equipment at a significant number of
the Company's operating locations is already fully Year 2000 ready.
Non-information technology equipment at the remainder of the Company's locations
is expected to be Year 2000 ready by the end of the third quarter of 1999.
The Company has initiated a formal communication program with
significant vendors to evaluate their Year 2000 readiness, and is assessing
their responses to the Company's Year 2000 readiness questionnaire. All
significant merchandise vendors have responded, most indicating 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, substitutes for
many of the goods the Company sells and services it receives can be obtained
from other vendors. However, the Company cannot assure timely readiness of
vendors and may be adversely affected by failure of a significant vendor to
supply merchandise or services due to Year 2000 failures. In addition, the
Company is currently conducting integration testing with selected third parties'
systems with which the Company's systems interface. The Company anticipates that
such testing will be substantially completed midway through the fourth quarter
of 1999.
10
<PAGE> 11
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. 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 ready.
In addition, due to the uncertainty of the effect of Year 2000 failures
on Kmart's customers, the Company is 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.
During the second quarter of 1999, the Company revised its estimated
costs for the Year 2000 Compliance Program to $80 million. Total program costs
to date include $5 million incurred in 1997, $46 million incurred in 1998, and
$14 million incurred year-to-date. Year 2000 Compliance Program costs are being
funded through operating cash flows. Certain information technology projects
have been delayed as a result of the Company's Year 2000 readiness 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 which may be updated as additional
information becomes available. Forward-looking statements contained herein
should be read in conjunction with the Company's disclosures under the heading
"Cautionary Statement Regarding Forward-looking Information".
The Year 2000 statement set forth above is a Year 2000 Readiness
Disclosure, pursuant to the Year 2000 Information and Readiness Disclosure Act,
15 U.S.C. ss. 1 note. 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.
Share Repurchase Programs
In the first quarter of fiscal 1999, the Company repurchased 62,300
shares of common stock at a cost of approximately $1 million, completing a
year-long program to repurchase an aggregate of 2,000,000 shares of the
Company's common stock to fund certain employee benefit plans.
On May 18, 1999, the board of directors approved a common stock
repurchase program to acquire up to $1 billion of the Company's common shares
over a period of up to three years. During the second quarter of fiscal 1999,
the Company repurchased 2 million shares of common stock at a cost of
approximately $31 million.
11
<PAGE> 12
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- Continued
Other Matters
Kmart has guaranteed leases for properties operated by certain former
subsidiaries including Borders Group, Inc., OfficeMax, Inc., The Sports
Authority, Inc. and Builders Square, Inc. The present value of the lease
obligations guaranteed by Kmart is approximately $1.1 billion. The possibility
of the Company having to honor its contingent obligations is dependent upon the
future operating results of the former subsidiaries. (See Notes 5 and 6 of the
Notes to Consolidated Financial Statements)
On June 11, 1999, Hechinger Company, which acquired substantially all
of the operating assets of former subsidiary Builders Square Inc., filed for
Chapter 11 bankruptcy protection. As a result of the filing, the Company
recorded a non-cash charge of $354 million, $230 million aftertax. The charge
reflects Kmart's best estimate of the impact of Hechinger's default on lease
obligations for up to 110 former Builders Square locations which are guaranteed
by Kmart. (See Note 5 of the Notes to Consolidated Financial Statements)
During the second quarter of 1999, the Company signed binding Letters
of Understanding with Supervalu, Inc. and Fleming Companies Inc. to assume
responsibility for the distribution and replenishment of $3.9 billion
(annualized at cost) of grocery-related products to all of its stores and
created a Food and Consumables merchandising group. These initiatives are
expected to improve operating efficiency, reduce working capital requirements
and improve logistics capabilities. Forward-looking statements contained herein
should be read in conjunction with the Company's disclosures under the heading
"Cautionary Statement Regarding Forward-looking Information".
There are various claims, lawsuits, and pending actions against Kmart
incident to its operations. It is the opinion of the Company's management that
the ultimate resolution of these matters will not have a material adverse effect
on Kmart's liquidity, financial position or results of operations.
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. Statements,
other than those based on historical facts, including the discussion of
management's expectations for Year 2000 compliance, which address activities,
events or developments that the Company expects or anticipates may occur in the
future are forward-looking statements which are based upon a number of
assumptions concerning future conditions that may ultimately prove to be
inaccurate. Actual events and results may materially differ from anticipated
results described in such statements. The Company's ability to achieve such
results is subject to certain risks and uncertainties, including, but not
limited to, economic and weather conditions which affect buying patterns of the
Company's customers, changes in consumer spending and the Company's ability to
anticipate buying patterns and implement appropriate inventory strategies,
continued availability of capital and financing, competitive factors 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.
12
<PAGE> 13
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
Stockholders of Kmart Corporation:
(a) The Annual Meeting was held on May 18, 1999.
(b) All nominees for director as listed in the Company's proxy statement
dated April 12, 1999 were elected. The directors whose terms of office
continued after the meeting are also listed in the proxy statement.
(c) Proposal 1
Election of the following directors:
<TABLE>
<CAPTION>
Votes to Withhold
Year When Term of Votes for Authority to Vote for
Nominee Office Expires the Nominee Nominee
------- ----------------- ----------- ---------------------
<S> <C> <C> <C>
James B. Adamson 2002 421,843,207 8,015,679
Stephen F. Bollenbach 2002 421,755,419 8,103,467
Floyd Hall 2002 421,665,600 8,193,286
Robert D. Kennedy 2002 421,701,268 8,157,618
William P. Weber 2002 423,531,823 6,327,063
</TABLE>
A plurality of the votes cast were in favor of all nominees, and they
were therefore elected.
Proposal 2
Stockholder re-affirmation of the existing performance goals, as well
as the provision regarding the maximum amounts payable, contained in
the Annual Incentive Bonus Plan, which were originally approved by
stockholders in 1994.
<TABLE>
<CAPTION>
<S> <C>
For -- 369,591,971
Against -- 57,524,697
Abstain -- 2,742,218
</TABLE>
A majority of the votes cast were in favor of proposal 2 and,
therefore, it was passed.
Proposal 3
Ratification of the appointment of PricewaterhouseCoopers LLP as
independent accountants of the Company for the 1999 fiscal year.
<TABLE>
<CAPTION>
<S> <C>
For -- 426,232,818
Against -- 1,866,599
Abstain -- 1,759,469
</TABLE>
A majority of the votes cast were in favor of proposal 3 and,
therefore, it was passed.
13
<PAGE> 14
Proposal 4
Stockholder proposal on adoption of a policy regarding the exercise
price of existing and future stock options for senior executives.
<TABLE>
<CAPTION>
<S> <C>
For -- 82,892,318
Against -- 264,724,703
Abstain -- 6,559,073
Non Vote -- 75,682,792
</TABLE>
A majority of the votes cast were not in favor of proposal 4 and,
therefore, it was not passed.
Proposal 5
Stockholder proposal on amendment of the Articles of Incorporation of
the Company to eliminate the classification of the Board of Directors.
<TABLE>
<CAPTION>
<S> <C>
For -- 218,690,196
Against -- 130,754,222
Abstain -- 4,731,682
Non Vote -- 75,682,786
</TABLE>
A majority of the votes cast were in favor of proposal 5, however,
under the Articles of Incorporation of the Company, 58 percent of
outstanding shares are required to be voted in favor in order to adopt
the proposal. Therefore, the proposal was not passed.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as a part of this report:
Exhibit 11 - Statement re Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K with the Commission
dated June 11,1999 to report, under Item 5, that the Registrant issued
a press release on June 11 1999, to announce a $230 million aftertax
charge as a result of Hechinger Company's Chapter 11 bankruptcy filing.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
The signatory hereby acknowledges and adopts the typed form of his/her name in
the electronic filing of this document with the Securities and Exchange
Commission.
Date: September 3, 1999
Kmart Corporation
--------------------------------------------
(Registrant)
By: M.E. Welch, III
--------------------------------------------
M.E. Welch, III
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial Officer)
By: Lois M. Connelly
--------------------------------------------
Lois M. Connelly
VICE PRESIDENT, CONTROLLER
(Principal Accounting Officer)
15
<PAGE> 16
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
Ex-11 Computation of Earnings Per Share
Ex-27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11
KMART CORPORATION
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
($ Millions, except per share data) 13 Weeks Ended 26 Weeks Ended
---------------------------- ----------------------------
July 28, July 29, July 28, July 29,
1999 1998 1999 1998
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
I. Basic earnings (loss) per common share:
(a) Income from continuing operations $ 134 $ 80 $ 201 $ 127
(b) Discontinued operations (230) - (230) -
------------- ------------ ------------- ------------
(c) Net income (loss) $ (96) $ 80 $ (29) $ 127
============= ============ ============= ============
(d) Weighted average common shares outstanding 495.2 492.9 494.6 491.3
============= ============ ============= ============
Basic earnings (loss) per common share:
Income from continuing operations (a)/(d) $ 0.27 $ 0.16 $ 0.41 $ 0.26
Discontinued operations (b)/(d) (0.47) - (0.47) -
------------- ------------ ------------- ------------
Net income (loss) (c)/(d) $ (0.20) $ 0.16 $ (0.06) $ 0.26
============= ============ ============= ============
II. Diluted earnings (loss) per common share:
Income from continuing operations $ 134 $ 80 $ 201 $ 127
Add: Dividends Preferred Stock, Net 12 12 25 25
------------- ------------ ------------- ------------
(e) Income from continuing operations 146 92 226 152
(f) Discontinued operations (230) - (230) -
------------- ------------ ------------- ------------
(g) Net income (loss) $ (84) $ 92 $ (4) $ 152
============= ============ ============= ============
Weighted average common shares outstanding 495.2 492.9 494.6 491.3
Weighted average trust convertible preferred securities
outstanding 66.7 66.7 66.7 66.7
Stock Option Dilution Activity 5.1 11.0 5.7 10.2
------------- ------------ ------------- ------------
(h) Applicable common shares, as adjusted 567.0 570.6 567.0 568.2
============= ============ ============= ============
Diluted earnings (loss) per common share:
Income from continuing operations (e)/(h) $ 0.26 $ 0.16 $ 0.40 $ 0.27
Discontinued operations (f)/(h) (0.41) - (0.41) -
------------- ------------ ------------- ------------
Net income (loss) (g)/(h) $ (0.15) $ 0.16 $ (0.01) $ 0.27
============= ============ ============= ============
(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 CONSOLIDATED
STATEMENTS OF OPERATIONS 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-26-2000
<PERIOD-START> JAN-28-1999
<PERIOD-END> JUL-28-1999
<CASH> 299
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 7,061
<CURRENT-ASSETS> 7,982
<PP&E> 11,316
<DEPRECIATION> 5,202
<TOTAL-ASSETS> 14,634
<CURRENT-LIABILITIES> 3,989
<BONDS> 1,526
985
0
<COMMON> 494
<OTHER-SE> 5,466
<TOTAL-LIABILITY-AND-EQUITY> 14,634
<SALES> 16,901
<TOTAL-REVENUES> 16,901
<CGS> 13,252
<TOTAL-COSTS> 13,252
<OTHER-EXPENSES> 3,181
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 130
<INCOME-PRETAX> 338
<INCOME-TAX> 112
<INCOME-CONTINUING> 201
<DISCONTINUED> (230)<F1>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.01)
<FN>
<F1>DISCONTINUED OPERATIONS: ON JUNE 11, 1999, HECHINGER COMPANY ("HECHINGER"),
WHICH ACQUIRED SUBSTANTIALLY ALL OF THE OPERATING ASSETS OF FORMER SUBSIDIARY
BUILDERS SQUARE INC., FILED FOR CHAPTER 11 BANKRUPTCY PROTECTION. AS A RESULT
OF THE FILING, KMART CORPORATION RECORDED A NON-CASH CHARGE OF $354 MILLION,
$230 AFTER TAX. THE CHARGE REFLECTS KMART'S BEST ESTIMATE OF THE IMPACT OF
HECHINGER'S DEFAULT ON LEASE OBLIGATIONS FOR UP TO 110 FORMER BUILDERS SQUARE
LOCATIONS, WHICH ARE GUARANTEED BY KMART.
</FN>
</TABLE>
