<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 27, 1999
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
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(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
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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
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As of November 24, 1999, 486,894,587 shares of Common Stock of the Registrant
were outstanding.
1
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INDEX
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Income-- 3
13 and 39 weeks ended October 27,1999 and
October 28,1998
Consolidated Balance Sheets-- 4
October 27, 1999, October 28,1998 and
January 27,1999
Consolidated Statements of Cash Flows -- 5
39 weeks ended October 27,1999 and
October 28, 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
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Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KMART CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
--------------------------- --------------------------
OCTOBER 27, OCTOBER 28, OCTOBER 27, OCTOBER 28,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 8,057 $ 7,642 $ 24,958 $ 23,273
Cost of sales, buying and occupancy 6,317 5,954 19,569 18,198
-------- -------- --------- ----------
Gross margin 1,740 1,688 5,389 5,075
Selling, general and administrative expenses 1,581 1,540 4,762 4,550
Voluntary early retirement program - - - 19
-------- -------- --------- ----------
Income before interest, income taxes and dividends on
convertible preferred securities of subsidiary 159 148 627 506
Interest expense, net 76 76 206 220
Income tax provision 27 21 139 83
Dividends on convertible preferred securities of subsidiary,
net of income taxes of $6, $6, $20 and $20 13 13 38 38
-------- -------- --------- ----------
Income from continuing operations 43 38 244 165
Discontinued operations, net of income taxes of $124:
Provision for lease obligations resulting from
guarantee of previously owned Builders Square locations - - (230) -
-------- -------- --------- ----------
Net income $ 43 $ 38 $ 14 $ 165
======== ======== ========= ==========
Basic / diluted earnings per common share:
Income from continuing operations $ 0.09 $ 0.08 $ 0.49 $ 0.34
Discontinued operations - - (0.46) -
-------- -------- --------- ----------
Net income $ 0.09 $ 0.08 $ 0.03 $ 0.34
======== ======== ========= ==========
Basic weighted average shares (millions) 492.1 492.8 493.8 491.7
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
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KMART CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 27, OCTOBER 28, JANUARY 27,
1999 1998 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 345 $ 350 $ 710
Merchandise inventories 8,486 8,060 6,536
Other current assets 865 844 584
----------------- ----------------- -----------------
Total current assets 9,696 9,254 7,830
Property and equipment, net 6,313 5,852 5,914
Other assets and deferred charges 489 443 422
----------------- ----------------- -----------------
Total Assets $ 16,498 $ 15,549 $ 14,166
================= ================= =================
Current Liabilities:
Long-term debt due within one year $ 74 $ 60 $ 77
Trade accounts payable 3,119 3,019 2,047
Accrued payroll and other liabilities 1,324 1,242 1,359
Taxes other than income taxes 252 240 208
----------------- ----------------- -----------------
Total current liabilities 4,769 4,561 3,691
Long-term debt and notes payable 2,730 2,313 1,538
Capital lease obligations 1,031 1,114 1,091
Other long-term liabilities 1,057 928 883
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 October 27, 1999) 985 983 984
Common stock, $1 par value, 1,500,000,000 shares authorized;
487,138,899, 492,752,144, and 493,358,504, shares issued 487 493 493
Capital in excess of par value 1,607 1,654 1,667
Retained earnings 3,832 3,503 3,819
----------------- ----------------- -----------------
Total Liabilities and Shareholders' Equity $ 16,498 $ 15,549 $ 14,166
================= ================= =================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
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KMART CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS ENDED
----------------------------------
OCTOBER 27, OCTOBER 28,
1999 1998
--------------- ---------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Income from continuing operations $ 244 $ 165
Adjustments to reconcile income from continuing operations to net cash
used for operating activities:
Depreciation and amortization 568 498
Cash used for store restructuring and other charges (111) (95)
Increase in inventories (1,950) (1,693)
Increase in accounts payable 1,072 1,096
Increase in accounts receivable (181) (176)
Increase in prepaid expenses (35) (69)
Increase in sales tax payable 19 30
Deferred income taxes and taxes payable 73 166
Decrease in other long-term liabilities (23) (2)
Changes in other assets and liabilities (14) 9
Voluntary early retirement program - 19
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Net cash used for operating activities (338) (52)
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CASH FLOW FROM INVESTING ACTIVITIES
Acquisition of Caldor leases (86) -
Proceeds from sale of Canadian operations - 87
Capital expenditures (997) (722)
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Net cash used for investing activities (1,083) (635)
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CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 1,250 750
Payments on long-term debt (61) (180)
Purchase of common shares (117) (30)
Issuance of common shares 44 64
Payments on capital lease obligations (60) (65)
--------------- ---------------
Net cash provided by financing activities 1,056 539
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Net decrease in cash and cash equivalents (365) (148)
Cash and cash equivalents at beginning of period 710 498
--------------- ---------------
Cash and cash equivalents at end of period $ 345 $ 350
=============== ===============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
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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 October 28, 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 October 27,
1999, October 28, 1998 and January 27, 1999 were $397 million, $465 million and
$407 million lower than the amounts that would have been reported under the
first-in, first-out (FIFO) method, respectively. The effect of LIFO adjustments
for the 13 weeks ended October 27, 1999 and October 28, 1998 was a pre-tax
credit of $13 million and a pre-tax credit of $2 million, respectively. The
effect of LIFO adjustments for the 39 weeks ended October 27, 1999 and October
28, 1998 was a pre-tax credit of $10 million and a pre-tax charge of $8 million,
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.
5. DISCONTINUED OPERATIONS
On June 11, 1999, Hechinger Company ("Hechinger"), which had previously
acquired substantially all of the operating assets of former subsidiary Builders
Square, Inc., filed for Chapter 11 bankruptcy protection. In the second quarter
of 1999, the Company recorded a non-cash charge of $354 million, $230 million
after tax, which 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.
On September 9, 1999, Hechinger announced that it would liquidate its
stores. During the third quarter of 1999, certain locations with leases
guaranteed by Kmart were subject to auction by Hechinger as part of its
liquidation. The remaining locations with leases guaranteed by the Company were
subject to auction on November 30, 1999. The Company is currently assessing the
results of these auctions and believes its reserve to be adequate.
6
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KMART CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(UNAUDITED)
6. 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. Through the third quarter of fiscal 1999,
the Company repurchased 10.1 million shares of common stock at a cost of
approximately $126 million.
7. OTHER COMMITMENTS AND CONTINGENCIES
Lease Guarantees
Kmart has outstanding guarantees for real property leases of certain
former subsidiaries as follows:
<TABLE>
<CAPTION>
Present Value of Gross
Future Lease Future
Obligations @ 7% Lease Obligation
---------------------------- --------------------------------
($ Millions)
<S> <C> <C>
The Sports Authority $ 222 $ 376
Borders Group 99 179
OfficeMax 99 145
------------ ------------
Total $ 420 $ 700
============ ============
</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. (See also Note 5
"Discontinued Operations.")
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. In its 1998 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 third quarter 1999, TSA announced year-to-date same store sales
decreases of 4.3 percent, and a year-to-date operating loss of $9.9 million, as
compared to an operating loss of $94.5 million for the same period of the prior
year. In addition, TSA announced that comparable store sales for the month of
November declined 4.6%.
Kmart's rights and obligations with respect to its guarantee of TSA
leases are governed by a Lease Guaranty, Indemnification and Reimbursement
Agreement dated as of November 23, 1994.
Other
There are various claims, lawsuits, and pending actions against Kmart
incident to its operations. It is the opinion of the Company's management that
the ultimate resolution of these matters will not have a material adverse effect
on Kmart's liquidity, financial position or results of operations.
7
<PAGE> 8
ITEM 2.
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
13 WEEKS % CHANGE
-------------------------------------- ----------------------------------------
OCTOBER 27, OCTOBER 28, COMPARABLE
1999 1998 ALL STORES STORES
------------------ ----------------- --------------- --------------------
($ Millions)
<S> <C> <C> <C> <C>
SALES $ 8,057 $ 7,642 5.4 3.2
================== =================
OPERATING INCOME $ 159 $ 148
================== =================
</TABLE>
SALES and comparable store sales increased 5.4% and 3.2%, respectively,
for the 13 weeks ended October 27, 1999. The increases were primarily due to:
continued roll out of the Big Kmart format, with 293 store conversions during
the quarter and 574 conversions year-to-date; and continued execution of the
Company's competitive pricing strategy. Divisions showing particular strength
for the quarter included consumables & edibles, pharmacy, housewares & home
decor and fashion accessories. The Company opened 10 stores and closed three
stores during the third quarter.
GROSS MARGIN, as a percentage of sales, was 21.6% and 22.1% for the 13
weeks ended October 27, 1999 and October 28, 1998, respectively. This is
attributable to the Company's competitive pricing strategy, the mix of sales
being affected by lower than expected apparel sales and the continued expansion
of the Big Kmart format which emphasizes lower margined consumables.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES, as a percentage
of sales, were 19.6% and 20.1% for the 13 weeks ended October 27, 1999 and
October 28, 1998, respectively. The 50 basis point improvement resulted
primarily from increased expense leverage as a result of additional sales
volume, partially offset by incremental costs associated with new stores opened
during 1998.
OPERATING INCOME for the 13 weeks ended October 27, 1999 was $159
million, or 2.0% of sales, as compared to operating income of $148 million, also
2.0% of sales, for the same period of the prior year. The increase in operating
income was the result of increased sales volumes and the leveraging of SG&A
expenses, partially offset by the declining gross margin rate.
NET INTEREST EXPENSE for both the 13 weeks ended October 27, 1999 and
October 28, 1998 was $76 million. Net interest expense was flat due to the
increased use of the Revolver during the third quarter of 1999, offsetting the
favorable trend experienced through the second quarter. See "Liquidity and
Financial Condition".
8
<PAGE> 9
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
39 WEEKS % CHANGE
-------------------------------------- ----------------------------------------
OCTOBER 27, OCTOBER 28, COMPARABLE
1999 1998 ALL STORES STORES
------------------ ----------------- --------------- -------------------
($ Millions)
<S> <C> <C> <C> <C>
SALES $ 24,958 $ 23,273 7.2 5.2
================== =================
OPERATING INCOME $ 627 $ 525
================== =================
</TABLE>
SALES and comparable store sales increased 7.2% and 5.2%, respectively,
for the 39 weeks ended October 27, 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 574 store conversions during the period; and continued execution of
the Company's competitive pricing strategy. Divisions showing particular
strength included consumables & edibles, pharmacy, housewares & home decor, home
appliances & electronics and ladies apparel. The Company opened 14 stores and
closed 16 stores during the first three quarters of 1999.
GROSS MARGIN, as a percentage of sales, was 21.6% and 21.8% for the 39
weeks ended October 27, 1999 and October 28, 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, increased import activity and a higher mix
of private label goods.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES, as a percentage
of sales, were 19.1% and 19.5% for the 39 weeks ended October 27, 1999 and
October 28, 1998, respectively. The 40 basis point improvement resulted
primarily from increased expense leverage as a result of additional sales
volume, partially offset by incremental costs associated with new stores opened
during 1998.
OPERATING INCOME for the 39 weeks ended October 27, 1999 was $627
million, or 2.5% of sales, as compared to operating income, excluding the $19
million pre-tax charge for a Voluntary Early Retirement Program, of $525
million, or 2.3% 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 39 weeks ended October 27, 1999 was $206
million as compared to $220 million for the same period of the prior year. Year
to date net interest expense decreased primarily as a result of overall lower
levels of borrowings throughout the first two quarters of 1999 resulting from
scheduled repayments and prior year 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 $4,927, $4,693 and $4,139 million at October 27, 1999, October 28,
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 $1.25 billion were
outstanding under the Company's $2.5 billion Revolving Credit Agreement
("Revolver") at the end of the third quarter of 1999.
Net cash used for operating activities for the 39 weeks ended October
27, 1999 was $338 million as compared to $52 million for the same period in
1998. The increase in cash used for operating activities was primarily the
result of an increase in the Company's net inventory position resulting from the
new stores opened during 1998 and 1999, Big Kmart conversions in 1999 and tax
refunds received in the prior year. These decreases in cash from operating
activities were offset by an increase in depreciation expense related to new
stores and increased income from continuing operations.
Net cash used for investing activities was $1,083 million for the 39
weeks ended October 27, 1999 compared to $635 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 provided by financing activities was $1,056 million for the 39
weeks ended October 27, 1999 compared to $539 million for the same period in
1998. The increase in cash provided by financing activities was primarily a
result of increased borrowings under the Revolver and lower payments on
long-term debt due to bonds repurchased in the prior year, partially offset by
repurchases of common stock under the Company's stock repurchase program.
On December 6, 1999, the Company entered into new financing agreements
aggregating $1.7 billion with a group of financial institutions ("New
Facilities") which replaced the Revolver. The New Facilities provide for a
3-year, $1.1 billion revolving credit facility and a 364-day $600 million
revolving credit facility. The 3-year revolving credit facility matures in
December 2002 and has a commitment fee of 25 basis points and interest rate
spread of LIBOR plus 100 basis points during the first year. The 364-day
revolving credit facility has a commitment fee of 20 basis points and interest
rate spread of LIBOR plus 100 basis points.
On December 8, 1999, the Company sold in an underwritten offering $300
million 8 3/8% Notes due December 1, 2004 ("Notes"). Interest is payable
semiannually on June 1 and December 1. The Company expects to use the net
proceeds from the Notes for property acquisition and development, including the
purchase of existing leased properties, and for other general corporate
purposes.
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 all four phases. Substantially all business
critical applications have been returned to production, and the information
technology equipment at Kmart's operating locations is substantially Year 2000
ready.
10
<PAGE> 11
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
YEAR 2000 (CONTINUED)
The Company has substantially completed a formal communication program
with significant vendors to evaluate their Year 2000 readiness. 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 has substantially
completed integration testing with selected third parties' systems with which
the Company's systems interface.
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
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.
The Company estimates that its total costs for the Year 2000 Compliance
Program will be $80 million. Total program costs to date include $5 million
incurred in 1997, $46 million incurred in 1998 and $23 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.
OTHER MATTERS
Kmart has guaranteed leases for properties operated by certain former
subsidiaries including Borders Group, Inc., OfficeMax, Inc., and The Sports
Authority, Inc. The present value of the lease obligations guaranteed by Kmart
is approximately $420 million. 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 7 of the Notes to Consolidated Financial
Statements)
11
<PAGE> 12
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
OTHER MATTERS (CONTINUED)
On June 11, 1999, Hechinger Company ("Hechinger"), which had previously
acquired substantially all of the operating assets of former subsidiary Builders
Square, Inc., filed for Chapter 11 bankruptcy protection. In the second quarter
of 1999, the Company recorded a non-cash charge of $354 million, $230 million
after tax, which 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.
On September 9, 1999, Hechinger announced that it would liquidate its
stores. During the third quarter of 1999, certain locations with leases
guaranteed by Kmart were subject to auction by Hechinger as part of its
liquidation. The remaining locations with leases guaranteed by the Company were
subject to auction on November 30, 1999. The Company is currently assessing the
results of these auctions and believes its reserve to be adequate.
During the second quarter of 1999, the Company signed agreements 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 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: No reports were filed on Form 8-K by the
Registrant during the 13 weeks ended October 27, 1999.
13
<PAGE> 14
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: December 10, 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)
14
<PAGE> 15
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
EX - 11 Statement Re Computation of Per Share Earnings
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 39 Weeks Ended
----------------------------- ---------------------------
October 27, October 28, October 27, October 28,
1999 1998 1999 1998
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
I. Basic earnings per common share:
(a) Income from continuing operations $ 43 $ 38 $ 244 $ 165
(b) Discontinued operations - - (230) -
----------- ---------- --------- --------
(c) Net income $ 43 $ 38 $ 14 $ 165
=========== ========== ========= ========
(d) Weighted average common shares outstanding 492.1 492.8 493.8 491.7
=========== ========== ========= ========
Basic earnings per common share:
Income from continuing operations (a)/(d) $ 0.09 $ 0.08 $ 0.49 $ 0.34
Discontinued operations (b)/(d) - - (0.46) -
----------- ---------- --------- --------
Net income (c)/(d) $ 0.09 $ 0.08 $ 0.03 $ 0.34
=========== ========== ========= ========
II. Diluted earnings per common share: (1)
Income from continuing operations $ 43 $ 38 $ 244 $ 165
Add: Dividends preferred stock, net 13 13 38 38
----------- ---------- --------- --------
(e) Income from continuing operations 56 51 282 203
(f) Discontinued operations - - (230) -
----------- ---------- --------- --------
(g) Net income $ 56 $ 51 $ 52 $ 203
=========== ========== ========= ========
Weighted average common shares outstanding 492.1 492.8 493.8 491.7
Weighted average trust convertible preferred securities
outstanding 66.7 66.7 66.7 66.7
Stock option dilution activity 3.4 4.5 6.0 6.4
----------- ---------- --------- --------
(h) Applicable common shares, as adjusted 562.2 564.0 566.5 564.8
=========== ========== ========= ========
Diluted earnings per common share:
Income from continuing operations (e)/(h) $ 0.10 $ 0.09 $ 0.50 $ 0.36
Discontinued operations (f)/(h) - - (0.41) -
----------- ---------- --------- --------
Net income (g)/(h) $ 0.10 $ 0.09 $ 0.09 $ 0.36
=========== ========== ========= ========
</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 antidilutive result.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF OPERATIONS 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-26-2000
<PERIOD-START> JAN-28-1999
<PERIOD-END> OCT-27-1999
<CASH> 345
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 8,486
<CURRENT-ASSETS> 9,696
<PP&E> 11,691
<DEPRECIATION> 5,378
<TOTAL-ASSETS> 16,498
<CURRENT-LIABILITIES> 4,769
<BONDS> 2,730
985
0
<COMMON> 487
<OTHER-SE> 5,439
<TOTAL-LIABILITY-AND-EQUITY> 16,498
<SALES> 24,958
<TOTAL-REVENUES> 24,958
<CGS> 19,569
<TOTAL-COSTS> 19,569
<OTHER-EXPENSES> 4,762
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 206
<INCOME-PRETAX> 421
<INCOME-TAX> 139
<INCOME-CONTINUING> 244
<DISCONTINUED> (230)<F1>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14
<EPS-BASIC> .03
<EPS-DILUTED> .03
<FN>
<F1>Discontinued Operations: On June 11, 1999, Hechinger Company ("Hechinger"),
which had previously acquired substantially all of the operating assets of
former subsidiary Builders Square, Inc., filed for Chapter 11 bankruptcy
protection. In the second quarter of 1999, the Company recorded a non-cash
charge of $354 million, $230 million after tax, which 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>
