<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 26, 2000
-------------
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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<TABLE>
<S><C>
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
--------------
</TABLE>
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 July 26, 2000, 480,098,675 shares of Common Stock of the Registrant were
outstanding.
1
<PAGE> 2
<TABLE>
<CAPTION>
INDEX
PART I FINANCIAL INFORMATION PAGE
------ --------------------- ----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Operations-- 3
13 and 26 weeks ended July 26, 2000 and
July 28,1999
Consolidated Balance Sheets-- 4
July 26, 2000, July 28, 1999 and
January 26, 2000
Consolidated Statements of Cash Flows-- 5
26 weeks ended July 26, 2000 and
July 28, 1999
Notes to Consolidated Financial 6 - 7
Statements
Item 2. Management's Discussion and Analysis of Results of 8 - 13
Operations and Financial Condition
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
KMART CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
13 WEEKS ENDED 26 WEEKS ENDED
------------------------------- ----------------------------
JULY 26, JULY 28, JULY 26, JULY 28,
2000 1999 2000 1999
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Sales $ 8,998 $ 8,780 $ 17,193 $ 16,858
Cost of sales, buying and occupancy 7,518 6,854 14,012 13,224
-------- -------- -------- ----------
Gross margin 1,480 1,926 3,181 3,634
Selling, general and administrative expenses 2,101 1,638 3,682 3,177
-------- -------- -------- ----------
Income (loss) before interest, income taxes and dividends on
convertible preferred securities of subsidiary trust (621) 288 (501) 457
Interest expense, net 65 64 134 130
Income tax provision (benefit) (250) 74 (232) 108
Dividends on convertible preferred securities of subsidiary
trust, net of income taxes of $6, $7, $12 and $14,
respectively 12 12 23 25
-------- -------- -------- ----------
Net income (loss) from continuing operations (448) 138 (426) 194
Discontinued operations, net of income taxes of $124 - (230) - (230)
-------- -------- -------- ----------
Net loss $ (448) $ (92) $ (426) $ (36)
======== ======== ======== ==========
Basic earnings (loss) per common share:
Net income (loss) from continuing operations $ (0.93) $ 0.28 $ (0.87) $ 0.39
Discontinued operations - (0.47) - (0.47)
-------- -------- -------- ----------
Net loss $ (0.93) $ (0.19) $ (0.87) $ (0.08)
======== ======== ======== ==========
Diluted earnings (loss) per common share:
Net income (loss) from continuing operations $ (0.93) $ 0.26 $ (0.87) $ 0.39
Discontinued operations - (0.41) - (0.47)
-------- -------- -------- ----------
Net loss $ (0.93) $ (0.15) $ (0.87) $ (0.08)
======== ======== ======== ==========
Basic weighted average shares (millions) 481.3 495.2 481.8 494.6
Diluted weighted average shares (millions) 541.8 567.0 544.4 567.0
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
KMART CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
JULY 26, JULY 28, JANUARY 26,
2000 1999 2000
----------------- ----------------- -----------------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 333 $ 299 $ 344
Merchandise inventories 6,586 7,061 7,101
Other current assets 862 622 715
----------------- ----------------- -----------------
Total current assets 7,781 7,982 8,160
Property and equipment, net 6,351 6,114 6,410
Other assets and deferred charges 397 538 534
----------------- ----------------- -----------------
Total Assets $ 14,529 $ 14,634 $ 15,104
================= ================= =================
Current Liabilities:
Long-term debt due within one year $ 38 $ 81 $ 66
Trade accounts payable 2,488 2,353 2,204
Accrued payroll and other liabilities 1,253 1,311 1,574
Taxes other than income taxes 268 251 232
----------------- ----------------- -----------------
Total current liabilities 4,047 3,996 4,076
Long-term debt and notes payable 1,742 1,526 1,759
Capital lease obligations 975 1,052 1,014
Other long-term liabilities 1,004 1,122 965
Company obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely 7 3/4% convertible
junior subordinated debentures of Kmart (redemption value $904, $1,000
and $1,000, respectively) 891 985 986
Common stock, $1 par value, 1,500,000,000 shares authorized; 480,098,675,
494,530,727 and 481,383,569 shares issued 480 494 481
Capital in excess of par value 1,551 1,676 1,555
Retained earnings 3,839 3,783 4,268
----------------- ----------------- -----------------
Total Liabilities and Shareholders' Equity $ 14,529 $ 14,634 $ 15,104
================= ================= =================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 5
KMART CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
26 WEEKS ENDED
---------------------------------------
JULY 26, JULY 28,
2000 1999
------------------ -----------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) from continuing operations $ (426) $ 194
Adjustments to reconcile net income (loss) from continuing operations
to net cash provided by operating activities:
One-time charge for strategic actions 740 -
Depreciation and amortization 395 377
Equity loss in BlueLight.com 25 -
Deferred income taxes and taxes payable (329) 22
Cash used for store restructuring and other charges (33) (46)
Decrease (increase) in inventories 150 (525)
Increase in accounts payable 284 330
Increase in accounts receivable (18) (1)
Decrease in other long-term liabilities (54) (18)
Changes in other assets and liabilities (114) 4
------------------ -----------------
Net cash provided by continuing operations 620 337
Net cash used for discontinued operations (60) (40)
------------------ -----------------
Net cash provided by operating activities 560 297
------------------ -----------------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (377) (577)
Acquisition of Caldor leases - (86)
------------------ -----------------
Net cash used for investing activities (377) (663)
------------------ -----------------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt - 44
Purchase of convertible preferred securities (80) -
Purchase of common shares (56) (32)
Issuance of common shares 26 34
Payments on long-term debt (45) (52)
Payments on capital lease obligations (39) (39)
------------------ -----------------
Net cash used for financing activities (194) (45)
------------------ -----------------
Net decrease in cash and cash equivalents (11) (411)
Cash and cash equivalents, beginning of year 344 710
------------------ -----------------
Cash and cash equivalents, end of period $ 333 $ 299
================== =================
</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 ("SEC"), 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 1999 Annual Report on Form 10-K filed
for the fiscal year ended January 26, 2000.
The quarterly consolidated financial statements for the fiscal year
ended January 26, 2000 have been restated to reflect the change in the Company's
method of accounting for layaway sales adopted in consideration of SEC Staff
Accounting Bulletin No. 101.
Certain reclassifications of the January 26, 2000 and July 28, 1999
financial statements have been made to conform to the current year presentation.
2. EARNINGS PER SHARE
For the thirteen week period ended July 26, 2000 and the twenty-six
week periods ended July 26, 2000 and July 28, 1999, diluted earnings per share
is reported as basic earnings per share due to the anti-dilutive impact of
dilutive potential common shares.
3. ONE-TIME CHARGE FOR STRATEGIC ACTIONS
On July 25, 2000, the Company announced a series of strategic actions
aimed at strengthening financial performance by enhancing the productivity of
its store base, inventory and information systems. These initiatives included
deciding to close certain stores, accelerating certain inventory reductions and
redefining Kmart's information technology strategy. As a result of these
initiatives, the Company recorded a pretax charge totaling $740 million. A total
of 66 traditional Kmart and 6 Super Kmart stores will close, most by November 1,
2000.
The following table summarizes the significant components and
presentation in the statements of operations of the charge for strategic actions
taken during the second quarter (in millions). There were no significant
reductions to reserves during the second quarter.
<TABLE>
<CAPTION>
Cost of
sales,
buying and
occupancy SG&A Total
------------- ---- -----
<S> <C> <C> <C>
Store closings:
Lease obligations and maintenance $ - $ 197 $ 197
Asset impairments - 103 103
Inventory write-down 75 - 75
Inventory reduction 290 - 290
Information technology - 60 60
Contractual employment obligations - 15 15
---------- --------- ---------
Total $ 365 $ 375 $ 740
========== ========= =========
</TABLE>
6
<PAGE> 7
KMART CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. 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 26, 2000,
July 28, 1999 and January 26, 2000 were $360 million, $410 million and $360
million lower, respectively, than the amounts that would have been reported
under the first-in, first-out (FIFO) method.
5. SHARE REPURCHASE PROGRAMS
In February 2000, the Company extended its existing stock repurchase
program to include up to $200 million of trust convertible preferred securities.
Through the second quarter of fiscal year 2000, the Company repurchased
approximately 1.9 million shares of convertible preferred securities at a cost
of approximately $80 million. For purposes of computing earnings per share, the
discount on the repurchase, net, was added to net income to arrive at income
available to common shareholders. In addition, during the first two quarters of
fiscal year 2000, the Company repurchased 5 million shares of its common stock
at a cost of approximately $55 million pursuant to the exercise of previously
outstanding put options. There were no outstanding put options remaining as of
July 26, 2000.
6. OTHER COMMITMENTS AND CONTINGENCIES
Lease Guarantees
As of July 26, 2000, Kmart had outstanding guarantees for real property
leases of certain former subsidiaries as follows:
<TABLE>
<CAPTION>
Present Value of Gross
Future Lease Future
Obligations @ 7% Lease Obligations
------------------------ ----------------------------
($ Millions)
<S> <C> <C>
The Sports Authority $ 210 $ 356
Borders Group 100 169
OfficeMax 91 134
------------ ------------
Total $ 401 $ 659
============ ============
</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.
The Sports Authority
For its first quarter ended April 29, 2000, The Sports Authority (TSA)
reported an increase in same store sales of 0.8% and an operating loss of $4.0
million, as compared to an operating loss of $4.7 million for the first quarter
in 1999.
Kmart's rights and obligations with respect to its guarantee of TSA
leases are governed by a Lease Guaranty, Indemnification and Reimbursement
Agreement dated as of November 23, 1994.
Other
There are various claims, lawsuits and pending actions against Kmart
incident to its operations. It is the opinion of the Company's management that
the ultimate resolution of these matters will not have a material adverse effect
on Kmart's liquidity, financial position or results of operations.
7
<PAGE> 8
ITEM 2.
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
13 WEEKS % CHANGE
-------------------------------------- -----------------------------------------
JULY 26, JULY 28,
2000 1999 ALL STORES COMPARABLE STORES
------------------ ----------------- ---------------- -------------------
($ Millions)
<S> <C> <C> <C> <C>
SALES $ 8,998 $ 8,780 2.5 0.7
================== =================
OPERATING INCOME (LOSS) $ (621) $ 288
================== =================
</TABLE>
SALES increased 2.5% for the 13 weeks ended July 26, 2000. Divisions
showing particular strength during the second quarter included pharmacy, home
electronics and appliances, outdoor living, housewares and home decor and food
and consumables. We opened 3 stores and closed 9 stores during the second
quarter.
GROSS MARGIN, as a percentage of sales, was 16.4% and 21.9% for the 13
weeks ended July 26, 2000 and July 28, 1999, respectively. The decrease is
primarily attributable to the one-time charge for strategic actions recorded
during the second quarter, of which $365 million related to inventory
write-downs and is included as a component of Cost of sales, buying and
occupancy expense. In addition, the gross margin percentage is lower than prior
year due to fees incurred in connection with the distribution of grocery-related
goods, as well as higher clearance markdowns driven by soft sales in apparel and
seasonal merchandise.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES, as a percentage
of sales, were 23.3% and 18.6% for the 13 weeks ended July 26, 2000 and July 28,
1999, respectively. The increase is primarily attributable to the one-time
charge for strategic actions recorded during the second quarter, of which $375
million is included as a component of SG&A expense. In addition, the SG&A
percentage is higher than prior year due to increased expenses resulting from 14
additional stores, increased depreciation and other expenses as a result of
prior year Big Kmart conversions and our share of the operating losses of
BlueLight.com.
OPERATING INCOME (LOSS) for the 13 weeks ended July 26, 2000 was $(621)
million, or (6.9)% of sales, as compared to operating income of $288 million, or
3.3% of sales, for the same period of the prior year. The decrease in operating
income is due primarily to the one-time charge for strategic actions of $740
million.
NET INTEREST EXPENSE for the 13 weeks ended July 26, 2000 and July 28, 1999
was $65 million and $64 million, respectively. The increased interest expense
associated with higher borrowings in the current year is offset by lower
amortization of debt financing expenses. See "Liquidity and Financial
Condition".
8
<PAGE> 9
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
26 WEEKS % CHANGE
-------------------------------------- -----------------------------------------
JULY 26, JULY 28,
2000 1999 ALL STORES COMPARABLE STORES
------------------ ----------------- ---------------- -------------------
($ Millions)
<S> <C> <C> <C> <C>
SALES $ 17,193 $ 16,858 2.0 0.3
================== =================
OPERATING INCOME (LOSS) $ (501) $ 457
================== =================
</TABLE>
SALES increased 2.0% for the 26 weeks ended July 26, 2000. Divisions
showing particular strength on a year-to-date basis included pharmacy, home
electronics and appliances, outdoor living, housewares and home decor and food
and consumables. We opened 7 stores and closed 13 stores during the 26 weeks
ended July 26, 2000.
GROSS MARGIN, as a percentage of sales, was 18.5% and 21.6% for the 26
weeks ended July 26, 2000 and July 28, 1999, respectively. Consistent with the
13 week period, the decrease in gross margin on a year-to-date basis is
attributable to the one-time charge for strategic actions recorded during the
second quarter, fees incurred in connection with the distribution of
grocery-related goods and higher clearance markdowns driven by soft sales in
apparel and seasonal merchandise
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES, as a percentage
of sales, were 21.4% and 18.9% for the 26 weeks ended July 26, 2000 and July 28,
1999, respectively. Consistent with the 13 week period, the increase is
attributable to the one-time charge for strategic actions recorded during the
second quarter, increased expenses resulting from 14 additional locations,
increased depreciation and other expenses as a result of prior year Big Kmart
conversions and our share of the operating losses of BlueLight.com.
OPERATING INCOME (LOSS) for the 26 weeks ended July 26, 2000 was $(501)
million, or (2.9)% of sales, as compared to operating income of $457 million, or
2.7% of sales, for the same period of the prior year. The decrease in operating
income is due primarily to the one-time charge for strategic actions of $740
million.
NET INTEREST EXPENSE for the 26 weeks ended July 26, 2000 and July 28, 1999
was $134 million and $130 million, respectively. Net interest expense increased
as a result of higher levels of outstanding debt resulting from the issuance of
certain notes during December 1999, offset by lower amortization of debt
financing expenses. 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
Our primary sources of working capital are cash flows from operations
and borrowings under our credit facilities. We had working capital of $3,734,
$3,986 and $4,084 million at July 26, 2000, July 28, 1999 and January 26, 2000,
respectively. Working capital fluctuates in relation to profitability, seasonal
inventory levels net of trade accounts payable (net inventory) and the level of
store openings and closings. There were no borrowings outstanding under our $1.7
billion Revolving Credit Agreement ("Revolver") at the end of the second quarter
of fiscal 2000.
Net cash provided by operating activities for the 26 weeks ended July
26, 2000 was $560 million as compared to $297 million for the same period in
1999. The increase in cash provided by operating activities was due primarily to
a reduction in net inventory from year-end in the current year (excluding the
impact of the one-time charge for strategic actions) as compared to an increase
in net inventory for the same period one year ago, offset by higher payments for
income taxes and payroll in the current year.
Net cash used for investing activities was $377 million for the 26
weeks ended July 26, 2000 compared to $663 million for the same period in 1999.
The decrease in cash used for investing activities was primarily the result of
completing the Big Kmart rollout in early 2000. In addition, prior year's
investing activities included the acquisition of sixteen store leases from
Caldor Corporation.
Net cash used for financing activities was $194 million for the 26
weeks ended July 26, 2000 compared to $45 million for the same period in 1999.
The increase in cash used for financing activities was primarily a result of
repurchases of trust convertible preferred securities and common stock and lower
borrowings under the Revolver.
We believe that our current financing arrangements will be sufficient
to meet our liquidity needs for operations and capital demands.
OTHER MATTERS
Implementation of Strategic Actions
During the second quarter of fiscal year 2000, we announced a series of
strategic actions aimed at strengthening our financial performance by achieving
improvements in return on invested capital. These actions included deciding to
close certain traditional Kmart and Super Kmart stores, accelerating certain
inventory reductions and redefining our information technology strategy. As a
result of these actions, we recorded a pretax charge of $740 million during the
second quarter of 2000.
10
<PAGE> 11
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
Implementation of Strategic Actions (continued)
These actions are discussed below in further detail:
Store closings
During the second quarter, we completed an analysis of
traditional, Big Kmart and Super Kmart locations, identifying 72 stores
that did not fit our long-term strategic vision. While in most cases
these stores were marginally profitable, they were determined not to
justify additional capital investment due to a variety of factors such
as their size and location, their suitability for expansion, their
competitive standing and the business outlook in their local markets.
Accordingly, we have begun the process of closing these stores.
Liquidation sales began immediately after the closings were announced
on July 25, 2000, with most closings expected to be completed by
November 1, 2000. We recorded a pretax charge of $300 million for a
reserve relating to costs to close these stores, which is included in
selling, general and administrative expenses in the accompanying
statement of operations, and a pretax charge of $75 million relating to
the write-down of inventory at closed stores to its net realizable
value, which is included in cost of sales, buying and occupancy in the
accompanying statements of operations.
The components of the reserve for store closures of $300
million include $197 million of contractual lease obligations and
costs to maintain locations up to the time of disposition and asset
impairments of $103 million representing anticipated losses on the
disposal of fixed assets and discontinuation of leasehold improvements
at the closed stores. There were no significant reductions to the
reserve during the second quarter.
Inventory reductions
During the second quarter, we conducted an assessment of
inventory productivity and decided to reduce immediately certain
inventories to improve our return on investment. A clearance sale will
be conducted during the third quarter to liquidate this merchandise, in
addition to the merchandise included in the liquidation sales discussed
above. We recorded a pretax charge of $290 million to write-down the
inventory to its net realizable value. This charge is included in cost
of sales, buying and occupancy in the accompanying statements of
operations.
Information technology
During the second quarter, as a result of redefining our
information technology infrastructure, we determined that certain
systems previously under development and related hardware were no
longer part of our long-term strategy. Accordingly, we recorded a
pretax charge of $60 million to fully expense the costs for these
systems. These charges are included in selling, general and
administrative expenses in the accompanying statements of operations.
In addition to the above charges, we recorded a pretax charge
of $15 million relating to certain contractual employment obligations,
which is included in selling, general and administrative expenses in
the accompanying statements of operations.
11
<PAGE> 12
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
Implementation of Strategic Actions (continued)
The following table summarizes the significant components and
presentation in our statements of operations of the charge for strategic actions
taken during the second quarter (in millions):
<TABLE>
<CAPTION>
Cost of
sales,
buying and
occupancy SG&A TOTAL
--------- ---- -----
<S> <C> <C> <C>
Store closings:
Lease obligations and maintenance $ - $ 197 $ 197
Asset impairments - 103 103
Inventory write-down 75 - 75
Inventory reduction 290 - 290
Information technology - 60 60
Contractual employment obligations - 15 15
--------------- ------------ ----------
Total $ 365 $ 375 $ 740
=============== ============ ==========
</TABLE>
The impact of the charge for strategic actions on our statements of
operations and effective tax rate for the thirteen and twenty-six week periods
ended July 26, 2000 is summarized in the following tables (in millions):
<TABLE>
<CAPTION>
13 weeks ended July 26, 2000 26 weeks ended July 26, 2000
---------------------------- ----------------------------
Charge Excluding Charge Excluding
For Charge For For Charge For
Strategic Strategic Strategic Strategic
As Reported Actions Actions As Reported Actions Actions
----------- -------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 8,998 $ - $ 8,998 $ 17,193 $ - $ 17,193
Cost of sales, buying and occupancy 7,518 (365) 7,153 14,012 (365) 13,647
-------- ------- -------- -------- ------ --------
Gross margin 1,480 365 1,845 3,181 365 3,546
Selling, general and administrative
expense 2,101 (375) 1,726 3,682 (375) 3,307
-------- ------- -------- -------- ------ --------
Income (loss) before interest, income
taxes and dividends on convertible
preferred securities of subsidiary trust (621) 740 119 (501) 740 239
Interest expense - net 65 - 65 134 - 134
Income taxes (250) 269 19 (232) 269 37
Preferred dividends of subsidiary,
net of income taxes 12 - 12 23 - 23
-------- ------- -------- -------- ------ --------
Net income (loss) $ (448) $ 471 $ 23 $ (426) $ 471 $ 45
======== ======= ======== ======== ====== ========
Effective income tax rate (36.4%) (36.4%) 35.2% (36.5%) (36.4%) 35.2%
Basic and diluted earnings (loss) per share $ (0.93) $ (0.98) $ 0.05 $ (0.87) $(0.98) $ 0.11
======== ======= ======= ======== ====== ========
</TABLE>
12
<PAGE> 13
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
Implementation of Strategic Actions (continued)
As a result of the store closings discussed above, we expect earnings
before income taxes to benefit by approximately $10 million annually.
Specifically, these stores had combined annual revenues of $800 million in
fiscal year 1999, the loss of which will be offset by expense savings of $810
million, comprised of costs of sales, buying and occupancy expenses, selling,
general and administrative expenses and interest expense.
Proceeds from the liquidation of inventories to occur in the third
quarter of this year related to the store closings and the inventory reduction
are expected to be approximately $300 million. Cash expenditures related to the
store closings will be funded through operating cash flows over the terms of the
underlying leases, which are expected to be approximately $200 million on a
discounted basis.
Lease Guarantees
We have 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 $401 million. The possibility of having to honor its contingent
obligations is dependent upon the future operating results of the former
subsidiaries. (See Note 5 of the Notes to Consolidated Financial Statements)
Other
There are various claims, lawsuits and pending actions against Kmart
incident to its operations. It is the opinion of management that the ultimate
resolution of these matters will not have a material adverse effect on our
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, 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.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following information is furnished with respect to the 2000 Annual Meeting
of Stockholders of Kmart Corporation:
(a) The Annual Meeting was held on May 16, 2000.
(b) All nominees for director as listed in the Company's proxy statement
dated April 13, 2000 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>
Joseph A. Califano, Jr. 2003 426,388,412 13,623,989
------------------------------- ------------------------ ----------------------- ------------------------------
J. Richard Munro 2003 426,720,757 13,291,644
------------------------------- ------------------------ ----------------------- ------------------------------
Robin B. Smith 2003 426,968,214 13,044,187
------------------------------- ------------------------ ----------------------- ------------------------------
Thomas T. Stallkamp 2003 427,191,580 12,820,821
------------------------------- ------------------------ ----------------------- ------------------------------
James O. Welch, Jr. 2003 427,073,211 12,939,190
------------------------------- ------------------------ ----------------------- ------------------------------
</TABLE>
A plurality of the votes cast were in favor of all nominees, and they
were therefore elected.
Proposal 2
The votes cast with respect to the proposal to increase shares reserved
under the 1997 Long-Term Equity Compensation Plan were as follows:
<TABLE>
<S> <C> <C>
For -- 255,620,009
Against -- 181,002,407
Abstain -- 3,389,985
</TABLE>
A majority of the votes cast were in favor of proposal 2, and it was
therefore passed.
Proposal 3
The votes cast with respect to the proposal to ratify the appointment
of PricewaterhouseCoopers LLP as independent accountants to examine the
books and records of the Company for fiscal 2000 were as follows:
<TABLE>
<S> <C> <C>
For -- 433,880,358
Against -- 3,526,697
Abstain -- 2,605,346
</TABLE>
A majority of the votes cast were in favor of proposal 3, and it was
therefore passed.
14
<PAGE> 15
PART II. OTHER INFORMATION (CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
(c) (continued)
Proposal 4
The votes cast with respect to the stockholder proposal to amend the
Company's Articles of Incorporation to eliminate the classification of
directors of the Company were as follows:
<TABLE>
<S> <C> <C>
For -- 220,409,243
Against -- 101,457,549
Abstain -- 6,979,577
</TABLE>
Less than 58% of the outstanding shares of common stock voted in favor
of the proposal, and it was therefore not passed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report:
Exhibit 10 - Employment Agreement with C. C. Conaway
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 July 26, 2000.
15
<PAGE> 16
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 1, 2000
Kmart Corporation
----------------------------------------
(Registrant)
By: /s/ M.E. Welch, III
----------------------------------------
M.E. Welch, III
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial Officer)
By: Matthew Hilzinger
----------------------------------------
Matthew Hilzinger
Vice President, Controller
(Principal Accounting Officer)
16
<PAGE> 17
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
Exhibit 10 Employment Agreement with C.C. Conaway
Exhibit 11 Statement re: Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
</TABLE>
