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<SEC-DOCUMENT>0000950124-96-004012.txt : 19960917
<SEC-HEADER>0000950124-96-004012.hdr.sgml : 19960917
ACCESSION NUMBER: 0000950124-96-004012
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19960731
FILED AS OF DATE: 19960916
SROS: CSX
SROS: NYSE
SROS: PSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: KMART CORP
CENTRAL INDEX KEY: 0000056824
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331]
IRS NUMBER: 380729500
STATE OF INCORPORATION: MI
FISCAL YEAR END: 0129
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-00327
FILM NUMBER: 96630554
BUSINESS ADDRESS:
STREET 1: 3100 W BIG BEAVER RD
CITY: TROY
STATE: MI
ZIP: 48084
BUSINESS PHONE: 8106431000
MAIL ADDRESS:
STREET 1: 3100 W BIG BEAVER ROAD
CITY: TROY
STATE: MI
ZIP: 48084
FORMER COMPANY:
FORMER CONFORMED NAME: KRESGE S S CO
DATE OF NAME CHANGE: 19770921
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<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 31, 1996
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission File No. 1-327
-----
KMART CORPORATION
-----------------
(Exact name of registrant as specified in its charter)
Michigan 38-0729500
- -------------------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 West Big Beaver Road - Troy, Michigan 48084
- ------------------------------------------ ---------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (810) 643-1000
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed, by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of August 28, 1996, 483,861,582 shares of Common Stock of the Registrant
were outstanding.
1
<PAGE> 2
INDEX
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ------
Item 1. Financial Statements
Consolidated Condensed Statements of 3
Operations -- 13 weeks and 26 weeks ended
July 31, 1996 and July 26, 1995
Consolidated Balance Sheets -- 4
July 31, 1996, July 26, 1995 and
January 31, 1996
Consolidated Statements of Cash Flows -- 5
26 weeks ended July 31, 1996 and
July 26, 1995
Notes to Consolidated Financial 6 - 7
Statements
Item 2. Management's Discussion and Analysis of 8 - 16
Results of Operations and Financial
Condition
PART II OTHER INFORMATION
- ------- -----------------
Item 2. Changes in Securities 17
Item 4. Submission of Matters to a Vote of Security
Holders 17-19
Item 6. Exhibits and Reports on Form 8-K 19-20
Signatures 21
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
KMART CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
-------------- --------------
July 31, July 26, July 31, July 26,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $8,312 $8,440 $15,892 $15,883
Cost of merchandise sold, including buying and occupancy costs 6,508 6,544 12,429 12,332
------- ------ ------- -------
Gross margin 1,804 1,896 3,463 3,551
Licensee fees and other income 65 63 125 121
Selling, general and administrative expenses 1,710 1,827 3,372 3,594
Gain on pension curtailment - - - (124)
------- ------ ------- -------
Operating income 159 132 216 202
Interest expense, net 110 114 226 223
------- ------ ------ -------
Income (loss) from continuing operations before taxes, equity income
and dividends on convertible preferred securities of subsidiary 49 18 (10) (21)
Equity in net income of unconsolidated companies 12 14 14 16
Income taxes (benefit) 21 10 2 (2)
Dividends on convertible preferred securities of subsidiary, net of
income taxes of $3 6 - 6 -
------ ------ ------- -------
Net income (loss) from continuing operations 34 22 (4) (3)
Loss on disposal of discontinued operations, net of income taxes
of $63, $33 and $65, respectively - (76) (61) (79)
------ ------ ------- -------
Net income (loss) $ 34 $ (54) $ (65) $ (82)
====== ====== ======= =======
Earnings (loss) per common share:
Continuing operations $ .07 $ .05 $ (.01) $ (.02)
Loss on disposal of discontinued operations - (.17) (.13) (.17)
------ ------ ------- -------
Net income (loss) $ .07 $ (.12) $ (.13) $ (.19)
====== ====== ======= =======
Dividends declared per common share $ -- $ .12 $ -- $ .24
====== ====== ======= =======
Primary weighted average shares (millions) 488.1 459.3 484.7 459.0
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
The Consolidated Condensed Statements of Operations for the prior periods have
been restated for discontinued operations.
3
<PAGE> 4
KMART CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
July 31, July 26, January 31,
1996 1995 1996
-------- ---------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash (includes temporary investments of $94, $28 and $637, respectively) $ 459 $ 293 $ 1,095
Merchandise inventories 7,393 7,371 6,635
Other current assets 1,368 1,406 1,092
Net current assets of discontinued operations 149 88 --
-------- ------- -------
Total current assets 9,369 9,158 8,822
Investments in affiliated retail companies 51 73 94
Property and equipment - net 5,018 5,934 5,301
Property held for resale 918 -- 434
Other assets and deferred charges 399 232 432
Net long-term assets of discontinued operations -- 411 314
-------- ------- -------
$15,755 $15,808 $15,397
======== ======= =======
LIABILITIES AND EQUITY
Current Liabilities:
Long-term debt due within one year $ 125 $ 29 $ 7
Notes payable -- 846 --
Trade accounts payable 2,326 2,865 1,993
Accrued payrolls and other liabilities 989 889 1,076
Taxes other than income taxes 295 341 188
Income taxes 32 79 --
------- ------- -------
Total current liabilities 3,767 5,049 3,264
Capital lease obligations 1,564 1,725 1,629
Long-term debt 3,054 1,956 3,935
Other long-term liabilities 1,152 1,232 1,289
Company-obligated mandatorily redeemable convertible preferred securities
of a subsidiary Trust holding solely 7 3/4% convertible junior subordinated
debentures of Kmart (redemption value $1,000 at July 31, 1996) 980 -- --
Preferred stock, 10,000,000 shares authorized -- 131 --
Common stock, 1,500,000,000 shares authorized; shares issued
486,935,512, 465,279,932 and 486,511,184, respectively 487 465 486
Capital in excess of par value 1,612 1,515 1,624
Retained earnings 3,261 3,878 3,326
Treasury shares and restricted stock (54) (93) (92)
Foreign currency translation adjustment (68) (50) (64)
------- ------- -------
$15,755 $15,808 $15,397
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
The Consolidated Balance Sheets for the prior periods have been restated for
discontinued operations.
4
<PAGE> 5
KMART CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
26 Weeks Ended
------------------------
July 31, July 26,
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $ (4) $ (3)
Adjustments to reconcile net loss from continuing operations to net
cash used for operating activities:
Depreciation and amortization 325 353
Increase in inventories (758) (518)
Increase in accounts payable 333 226
Deferred income taxes 125 164
Undistributed equity income and dividends received 50 36
Decrease in other long-term liabilities (181) (220)
Changes in certain assets and liabilities 7 (563)
-------- --------
Net cash used for continuing operations (103) (525)
Discontinued operations 41 162
-------- --------
Net Cash Used For Operating Activities (62) (363)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (128) (258)
Increase in property held for resale (600) (82)
Proceeds from asset sales 180 885
Other - net (1) 3
-------- --------
Net Cash Provided By (Used For) Investing Activities (549) 548
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt and notes payable 1,461 161
Refinancing costs related to long-term debt and notes payable (190) --
Reduction in long-term debt and notes payable (2,225) (314)
Net proceeds from issuance of convertible preferred securities of subsidiary Trust 971 --
Reduction in capital lease obligations (68) (59)
Dividends paid -- (169)
Other - net 26 9
-------- --------
Net Cash Used For Financing Activities (25) (372)
Net Decrease In Cash (636) (187)
Cash At Beginning Of Year 1,095 480
-------- --------
Cash At End Of Period $ 459 $ 293
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
The Consolidated Statement of Cash Flows for the prior period has been restated
for discontinued operations.
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 1995 Annual Report and Form 10-K filed for
the fiscal year ended January 31, 1996.
Certain reclassifications of prior year balance sheet accounts have been
made to conform to current year presentation. In addition, certain prior year
amounts have been restated for the effect of divested and discontinued
operations and to conform to current year presentation (see note 4).
2.) SUBSEQUENT EVENT
In August 1996, the Company terminated its joint venture with Metro
(Private) Limited, which operated three Kmart stores in Singapore. The cost to
dissolve the business is not significant.
3.) TRUST CONVERTIBLE PREFERRED SECURITIES
On June 17, 1996, a trust sponsored and wholly owned by the Company issued
20,000,000 shares of Trust Convertible Preferred Securities (the "Preferred
Securities") to the public and 618,557 shares of Trust Common Securities to the
Company, the proceeds of which were invested by the trust in $1,030,927,850
aggregate principal amount of the Company's newly issued 7 3/4% Convertible
Junior Subordinated Debentures (the "Debentures"). The aggregate principal
amount of the Debentures represents the sole asset of the trust. The proceeds
from the issuance of the Debentures were used by the Company together with (i)
the proceeds of borrowings under a Credit Agreement, dated June 6, 1996, by
and among the Company, the several banks, financial institutions and other
entities parties thereto and Chemical Bank, as Administrative Agent and
(ii) available cash balances resulting from the removal of payment restrictions
contained in the Company's then existing bank credit facilities and certain
real estate related debt, to repay such bank credit facilities and certain real
estate related debt, to fund the Company's working capital and other
operational needs, to finance capital expenditures and for other general
corporate purposes. The Debentures and related income statement effects are
eliminated in the Company's consolidated financial statements.
The Preferred Securities accrue and pay cash distributions quarterly at a
rate of 7 3/4% per annum of the stated liquidation amount of $50 per Preferred
Security. Kmart has guaranteed, on a subordinated basis, distributions and
other payments due on the Preferred Securities (the "Guarantee"). The
Guarantee, when taken together with Kmart's obligations under the Debentures
and in the indenture pursuant to which the Debentures were issued and Kmart's
obligations under the Amended and Restated Declaration of Trust governing the
trust, provide a full and unconditional guarantee of amounts due on the
Preferred Securities. The Preferred Securities are mandatorily redeemable upon
the maturity of the Debentures on June 15, 2016, or to the extent of any
earlier redemption of any Debentures by Kmart.
6
<PAGE> 7
KMART CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4.) DISCONTINUED OPERATIONS AND DIVESTITURES
In April 1996, the Company received $62 million from the sale of
approximately 30% of its investment in the common stock of Thrifty PayLess
Holdings, Inc. ("TPH"). In conjunction with the sale, which netted proceeds
below the Company's carrying value of the investment, the Company revalued its
remaining investment and recorded a $61 million loss in discontinued
operations, net of income taxes. Subsequent to the first quarter, the Company
sold an additional approximate 3% of its original investment in TPH and
received $8 million in net proceeds. As a result of management's intent to
dispose of its remaining interest within a one-year time frame, the Company has
accounted for its investment in TPH and in PayLess Drug Stores Northwest, Inc.,
which was sold to TPH in the first quarter of 1994, as a discontinued operation
and has restated its prior period consolidated financial statements and
accompanying notes.
In March 1996, the Company completed the sale of its Czech and Slovak
Republics and received net proceeds of $115 million which approximated book
value.
5.) PENSION CURTAILMENT
Prior to 1996, U.S. Kmart and Builders Square had defined benefit pension
plans covering eligible associates who met certain requirements of age, length
of service and hours worked per year. Effective January 31, 1996, the pension
plans were frozen and associates no longer earn additional benefits under the
plans. Benefits paid to retirees under the frozen plans are based upon age at
retirement and years of credited service and earnings as of January 31, 1996.
Kmart Canada Limited associates are covered by a defined contribution plan.
Kmart's policy is to fund at least the minimum amounts required by the Employee
Retirement Income Security Act of 1974. The plans' assets consist primarily of
equity securities, fixed income securities, guaranteed insurance contracts and
real estate. As a result of freezing the plans, the Company recorded a pretax
net pension curtailment gain of $124 million in the first quarter of 1995.
6.) 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 31, 1996, July 26,
1995 and January 31, 1996 were $766 million, $818 million and $751 million
lower than the amounts that would have been reported under the first-in,
first-out (FIFO) method, respectively.
7
<PAGE> 8
ITEM 2
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FOR THE 13 WEEKS ENDED JULY 31, 1996
Results Of Operations
Store Activity
The Company's store activity for the 13 weeks ended July 31, 1996 is summarized
as follows:
<TABLE>
<CAPTION>
Second Quarter
May 1, Activity July 31, July 26,
----------------
General Merchandise 1996 Opened Closed 1996 1995
- ------------------- ------ ------- ------ -------- --------
<S> <C> <C> <C> <C> <C>
Kmart:
United States 2,157 4 (18) 2,143 2,232
Canada 127 -- -- 127 125
International and Other 9 -- (2) 7 8
------ ------- ----- -------- --------
Total General Merchandise 2,293 4 (20) 2,277 2,365
Builders Square 167 1 -- 168 172
------ ------- ----- -------- --------
Total Continuing 2,460 5 (20) 2,445 2,537
------ ------- ----- -------- --------
Czech and Slovak Republics (a) -- -- -- -- 13
------ ------- ----- -------- --------
Total Stores 2,460 5 (20) 2,445 2,550
====== ======= ===== ======== ========
</TABLE>
(a) The Company completed the sale of its Czech and Slovak Republics operations
during the first quarter of 1996.
8
<PAGE> 9
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
Sales
<TABLE>
<CAPTION> % Change
July 31, July 26, -----------------------------------
($ Millions) 1996 1995 All Stores Comparable Stores
-------- ------------ ------------- -----------------
General Merchandise
- -------------------
<S> <C> <C> <C> <C>
United States $7,336 $7,386 (0.7) 2.2
International 230 296 (22.1) (7.0)(a)
------ ------
Total General Merchandise 7,566 7,682 (1.5) 1.9
Builders Square 746 758 (1.6) (0.8)
------ ------
Consolidated Sales $8,312 $8,440 (1.5) 1.6
====== ======
</TABLE>
(a) International comparable store sales change is calculated on sales in
the applicable local currency.
Sales
Sales for the 13 weeks ended July 31, 1996 were $8,312 million, a 1.5%
decrease from sales of $8,440 million in the same period of the prior year.
Comparable store sales increased 1.6% over the same period of the prior year.
The increase in comparable sales resulted from continued promotional activity
and better in-stock positions in the U.S. Kmart division, while the decrease in
total sales primarily reflects fewer number of open stores together with weak
sales in Canadian and Builders Square operations. Comparable sales in
softlines and hardlines showed low to mid-single digit increases for the
majority of the current quarter with weakness in the last two weeks of July
which resulted in relatively flat comparable sales for the quarter.
Consumables continued with strong comparable sales gains as the Company
continued to focus on customer frequency and its new high frequency format.
Gross Margin
Gross margin for the 13 weeks ended July 31, 1996 was $1,804 million as
compared to $1,896 million in the same period of the prior year. Gross margin
as a percentage of sales was 21.7% and 22.5% in 1996 and 1995, respectively.
The 80 basis point gross margin rate decline was the result of higher levels of
promotional and competitive markdowns, lower levels of import merchandise,
increased clearance markdowns and the sale of the automotive service business
to Penske Auto Centers in the fourth quarter of 1995. The decrease in gross
margin from these items was partially offset by fewer markdowns for
discontinued merchandise and reduced freight costs.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses decreased $117 million for the 13 weeks ended July 31, 1996
to $1,710 million, or 20.6% of sales, from $1,827 million, or 21.6% of sales,
in the same period of the prior year. Of the $117 million, approximately $36
million relates to reductions in expenses for comparable U.S. Kmart stores. The
remaining decrease, as a percentage of sales, is primarily the result of cost
reduction initiatives, the impact of stores closed during 1995 and the adoption
of Financial Accounting Standard No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121") in
the fourth quarter of 1995. The impact of FAS 121 on depreciation expense was
a reduction of $12 million as compared to the prior year period. The overall
decrease in SG&A expenses were partially offset by typically higher expenses
associated with operations of newer stores.
9
<PAGE> 10
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
Operating Income (Loss)
13 Weeks Ended
--------------
July 31, July 26,
($ Millions) 1996 1995
-------- -------
General Merchandise
- -------------------
United States $155 $133
International (15) (10)
---- ----
Total General Merchandise 140 123
Builders Square 19 9
---- ----
Consolidated Operating Income $159 $132
==== ====
Operating income for the 13 weeks ended July 31, 1996 was $159 million, or
1.9% of sales, as compared to operating income of $132 million, or 1.6% of
sales, in the same period of the prior year. This increase was the direct
result of the decrease in selling, general and administrative expenses
discussed above.
Interest Expense
Net interest expense for the 13 weeks ended July 31, 1996 was $110
million, or 1.3% of sales, as compared to $114 million, or 1.4% of sales, for
the same period of the prior year. The net interest expense on borrowings
decreased as a result of higher investment income due to increased cash and
investment levels through mid June 1996. The Company had accumulated excess
cash prior to the refinancing of its long-term debt. See "Liquidity and
Financial Condition".
Income Tax Expense
Income tax expense for the 13 weeks ended July 31, 1996 was $21 million
with an effective tax rate of 34.0% as compared to $10 million with an
effective tax rate of 32.3% in the same period in the prior year.
Net Income (Loss)
As the result of the combination of the foregoing factors, the net income
for the 13 weeks ended July 31, 1996 was $34 million, or 0.4% of sales, as
compared to a net loss of $54 million, or 0.6% of sales, in the same period of
the prior year.
10
<PAGE> 11
ITEM 2
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
FOR THE 26 WEEKS ENDED JULY 31, 1996
Results Of Operations
Store Activity
The Company's store activity for the 26 weeks ended July 31, 1996 is summarized
as follows:
<TABLE>
<CAPTION>
Year-To-Date
January 31, Activity July 31, July 26,
-----------------
General Merchandise 1996 Opened Closed 1996 1995
- ------------------- ----------- ------ ------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Kmart:
United States 2,161 14 (32) 2,143 2,232
Canada 127 -- -- 127 125
International and Other 9 -- (2) 7 8
------- ------- ------- ------- -------
Total General Merchandise 2,297 14 (34) 2,277 2,365
Builders Square 167 2 (1) 168 172
------- ------- ------- ------- -------
Total Continuing 2,464 16 (35) 2,445 2,537
------- ------- ------- ------- -------
Czech and Slovak Republics (a) 13 -- (13) -- 13
------- ------- ------- ------- -------
Total Stores 2,477 16 (48) 2,445 2,550
======= ======= ======= ======= =======
</TABLE>
(a) The Company completed the sale of its Czech and Slovak Republics operations
during the first quarter of 1996.
11
<PAGE> 12
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
Sales
<TABLE>
<CAPTION>
26 Weeks Ended
------------------ % Change
July 31, July 26, -----------------------------
($ Millions) 1996 1995 All Stores Comparable Stores
-------- -------- ---------- -----------------
General Merchandise
- -------------------
<S> <C> <C> <C> <C>
United States $14,028 $13,950 0.6 2.9
International 513 545 (5.9) (3.7)(a)
------- -------
Total General Merchandise 14,541 14,495 0.3 2.7
Builders Square 1,351 1,388 (2.7) (1.9)
------- -------
Consolidated Sales $15,892 $15,883 0.1 2.3
======= =======
</TABLE>
(a) International comparable store sales change is calculated on sales in
the applicable local currency.
Sales
Sales for the 26 weeks ended July 31, 1996 were $15,892 million, a 0.1%
increase over sales of $15,883 million in the same period of the prior year.
Comparable store sales increased 2.3% over the same period of the prior year.
The increase in comparable sales resulted from continued promotional activity
and better in-stock positions in the U.S. Kmart division, while the decrease in
total sales reflects fewer number of open stores together with weak sales in
its Canadian and Builders Square operations. Sales relating to softlines and
hardlines were relatively weak during the first quarter with somewhat stronger
performances during the second quarter. As a result, comparable sales were
flat compared to the prior year for softlines while hardlines showed slight
improvement. Consumables sales growth remained strong throughout the first and
second quarters as a result of the Company's continued focus on customer
frequency and its new high frequency format.
Gross Margin
Gross margin for the 26 weeks ended July 31, 1996 was $3,463 million as
compared to $3,551 million in the same period of the prior year. Gross margin
as a percentage of sales was 21.8% and 22.4% in 1996 and 1995, respectively.
The 60 basis point gross margin rate decline was the result of higher levels of
promotional and competitive markdowns, lower levels of import merchandise,
increased clearance markdowns and the sale of the automotive service business
to Penske Auto Centers in the fourth quarter of 1995. The decrease in gross
margin from these items was partially offset by fewer markdowns for
discontinued merchandise and reduced freight costs.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses decreased $222 million for the 26 weeks ended July 31, 1996
to $3,372 million, or 21.2% of sales, from $3,594 million, or 22.6% of sales,
in the same period of the prior year. Of the $222 million, approximately $47
million relates to reductions in expenses for comparable U.S. Kmart stores. The
remaining decrease, as a percentage of sales, is primarily the result of
continued cost reduction initiatives, the impact of stores closed during 1995
and the adoption of FAS 121 in the fourth quarter of 1995. The impact of FAS
121 on depreciation expense was a reduction of $21 million as compared to the
same period in the prior year. The total decrease, as a percentage of sales, is
primarily the result of continued cost reduction initiatives and the impact of
stores closed during 1995, partially offset by the typically higher expenses
associated with operations of newer stores.
12
<PAGE> 13
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
Operating Income (Loss)
<TABLE>
<CAPTION>
26 Weeks Ended
---------------------
July 31, July 26,
($ Millions) 1996 1995
--------- ---------
General Merchandise
- -------------------
<S> <C> <C>
United States $213 $219
International (16) (15)
---- ----
Total General Merchandise 197 204
Builders Square 19 (2)
---- ----
Consolidated Operating Income $216 $202
==== ====
</TABLE>
Operating income for the 26 weeks ended July 31, 1996 was $216 million, or
1.4% of sales, as compared to operating income of $202 million, or 1.3% of
sales, in the same period of the prior year. The increase in operating income,
net of the first quarter 1995 one-time pension curtailment gain of $124
million, was $138 million. This increase was the direct result of the decrease
in selling, general and administrative expenses discussed above.
Interest Expense
Net interest expense for the 26 weeks ended July 31, 1996 was $226
million, or 1.4% of sales, as compared to $223 million, or 1.4% of sales, for
the same period of the prior year. The net interest expense on borrowings
increased as a result of restrictions on debt repayments in accordance with
bank credit facility and certain real estate related debt agreements and higher
interest rates due to market conditions and lower debt ratings. The increase
in interest expense was partially offset by higher investment interest income
resulting from increased cash levels prior to the refinancing. See "Liquidity
and Financial Condition".
Income Tax Expense (Benefit)
Income tax expense for the 26 weeks ended July 31, 1996 was $2 million
with an effective tax rate of 34.0% as compared to a benefit of $2 million with
an effective tax rate of 34.6% in the same period in the prior year.
Discontinued Operations
The loss on disposal of discontinued operations for the 26 weeks ended
July 31, 1996 was $61 million and reflects the loss on sale of approximately
30% of the Company's investment in the common stock of TPH and the revaluation
of its remaining TPH holding. The loss from discontinued operations for the 26
weeks ended July 26, 1995 reflects a net loss of $79 million from the
disposal of the Borders Group, Inc. and the Company's remaining investment in
OfficeMax, Inc. and The Sports Authority, Inc.
Net Loss
As the result of the combination of the foregoing factors, primarily
effects of the losses from discontinued operations, the net loss for the 26
weeks ended July 31, 1996 was $65 million, or 0.4% of sales, as compared to net
loss of $82 million, or 0.5% of sales, in the same period of the prior year.
13
<PAGE> 14
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
LIQUIDITY AND FINANCIAL CONDITION
For the past nine months, the Company's primary sources of working capital
have been cash flows from operations and borrowings through bank facilities.
Prior to fall of 1995, the Company also used the commercial paper market as a
source of working capital. The Company had working capital of $5,602, $5,558,
$4,109 and $3,562 million at July 31, 1996, January 31, 1996, July 26, 1995 and
January 25, 1995, respectively. Working capital ratios were 2.5:1, 2.7:1,
1.8:1 and 1.7:1, respectively, at the same dates. The Company's working
capital fluctuates in relation to (i) profitability, (ii) seasonal inventory
levels during the course of the year and (iii) the number and timing of new
store openings.
In June 1996, the Company restructured its credit facilities to enhance
its credit, liquidity and financial flexibility. The Company entered into a
Credit Agreement with Chemical Bank ("Chemical") and Chase Securities, Inc.
(successor to Chemical Securities, Inc.) ("CSI") as agents and a syndicate of
banks and other financial institutions (the "Lenders") to provide $3.7 billion
of financing for three years. The Credit Agreement consists of two credit
facilities, a $2.5 billion revolving credit facility (the "Revolver") and a $1.2
billion term loan facility (the "Term Loan").
Revolver. Under the Revolver, a commitment of $2.5 billion was made
available to the Company by the Lenders to refinance indebtedness, to fund the
Company's working capital and other operational needs, to finance capital
expenditures and for other general corporate purposes. The Revolver matures on
June 17, 1999 and amounts borrowed and repaid may be subsequently reborrowed to
the extent of the available commitment and subject to compliance with certain
provisions. As of July 31, 1996, the Company had $261 million borrowed under
the Revolver.
The interest rates available at the Company's option under the Revolver are
based on a specified margin over the following base rates: (i) the highest of
(a) Chemical's prime rate, (b) the secondary market rate for certificates of
deposit, plus 1%, and (c) the federal funds effective rate from time to time,
plus 0.5% and (ii) the then existing rate for various dollar deposits in the
interbank eurodollar market. The Company may also request competitive bid
loans, pursuant to which interest rates will be determined by bids submitted by
the Lenders at the Company's request.
The Company may reduce without penalty all or a portion of the commitment
under the Revolver to an amount not less than the outstanding borrowings
thereunder. Aggregate borrowings under the Revolver and the Term Loan
(discussed below) may not exceed the borrowing base, which is the sum of 55% of
the value of the Company's eligible inventory and 60% of the net appraised
value of certain of the Company's owned real estate.
The Revolver is subject to an annual clean-down provision, requiring that
no amounts are to be outstanding thereunder (excluding undrawn letters of
credit) in excess of $750 million for at least 30 consecutive days during each
fiscal year. As of July 31, 1996, the Company has met the annual clean-down
requirement for the first year of the Credit Agreement.
Term Loan. Pursuant to the Credit Agreement, certain Lenders provided a
$1.2 billion Term Loan to the Company. The Term Loan also matures on June 17,
1999, does not amortize, and all principal amounts then outstanding are due at
maturity.
14
<PAGE> 15
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- CONTINUED
The applicable interest rates and voluntary prepayment terms under the
Term Loan are determined in the same manner as under the Revolver, subject to
an increase of 0.5% over the applicable interest rate margin after the first
anniversary of the Term Loan.
The Term Loan is subject to mandatory prepayment from, among other things,
the following: (i) 100% of the net cash proceeds of the incurrence of certain
indebtedness; (ii) 50% of the net cash proceeds of any sale or transaction
involving certain specified assets; and (iii) 100% of the net cash proceeds of
any sale of any existing real properties owned by the Company.
Guaranty. All obligations under the Credit Agreement are unconditional,
guaranteed by the Company's principal domestic subsidiaries, (the "Domestic
Subsidiaries").
Security. The Company and each Domestic Subsidiary, respectively, have
granted as security for the borrowings under the Credit Agreement a first
perfected security interest in substantially all of their existing and future
material United States assets subject to certain exceptions. The Company may
elect to cause its obligation to certain vendors in respect of trade accounts
payable to be secured by a perfected security interest in inventory, which
security interest will be subordinate to the security interest under the Credit
Agreement. Upon repayment of the Term Loan, the collateral securing the Credit
Agreement obligations will be released automatically under certain circumstances
pertaining to the financial condition and credit rating of the Company.
Covenants. The Credit Agreement contains several affirmative and negative
covenants, including among others the following negative covenants: (i) the
granting of liens, loans and guarantees; (ii) mergers and sales of certain
assets; (iii) dividends and other payments in respect of capital stock; (iv) the
ratio of Earnings Before Interest, Taxes, Depreciation, Amortization and Rent
("EBITDAR") to interest and rental expense at the end of each fiscal quarter
calculated on a rolling four quarter basis; (vi) the ratio of funded debt to
capital funds; and (vii) limitations on indebtedness and capital expenditures.
The Company was in compliance with all covenants as of July 31, 1996.
In June of 1996, Kmart Financing I, a Delaware Trust, which is a wholly
owned subsidiary of the Company, issued $1 billion of 7 3/4% Trust Convertible
Preferred Securities. The net proceeds of this offering and from the Credit
Agreement were used to retire existing indebtedness.
Net cash used for operating activities for the 26 weeks ended July 31,
1996 was $62 million as compared to $363 million for the same period of 1995.
The improvement in cash used for operating activities compared to the prior
period was primarily the result of decreases in cash used for various accruals
and income taxes payable, partially offset by a decrease in cash from
discontinued operations. Merchandise inventories increased 0.3% to $7,393
million at July 31, 1996 from $7,371 million at July 26, 1995.
Net cash used for investing activities was $549 million for the 26 weeks
ended July 31, 1996 compared to cash provided by investing activities of $548
million for the 26 weeks ended July 26, 1995. The increase in cash used for
investing activities was mainly caused by an increase in real property held for
resale as a result of the refinancing of certain real estate related debt in
1996 and a decrease in cash received from asset sales in the prior year.
15
<PAGE> 16
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION--CONTINUED
Net cash used for financing activities amounted to $25 million during the
26 weeks ended July 31, 1996 compared to $372 million for the 26 weeks ended
July 26, 1995. The improvement in cash from financing activities was
essentially a result of new financing provided by the New Credit Facility
Agreement and the Trust Convertible Preferred Securities offset by the payoff
of existing bank credit facilities and certain real estate related debt
together with refinancing costs.
Management believes the funds and liquidity generated by its recently
completed debt restructuring together with cash from operations and proceeds
from the refinancing or sale of certain real properties held for sale will be
sufficient to satisfy its working capital and capital expenditure needs for the
duration of the New Credit Facility Agreement.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 2. Changes In Securities
Reference is made to management's discussion and analysis under "Liquidity and
Financial Condition" as to the Company's Credit Agreement, which contains
working capital restrictions and limitations upon the payment of dividends.
ITEM 4. Submission Of Matters To A Vote Of Security Holders
The following information is furnished with respect to the Annual Meeting of
Shareholders of Kmart Corporation held during May 1996:
(a) Annual Meeting was held on May 21, 1996.
(b) Not applicable.
(c) Proposal 1
----------
At such meeting all of the nominees for election as directors were elected
for the term of office set forth below:
The votes cast with respect to each nominee for election as a director
were as follows:
<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 1999 367,171,100 7,405,065
Steven F. Bollenbach 1999 367,401,775 7,174,390
Floyd Hall 1999 367,285,909 7,290,256
Robert D. Kennedy 1999 367,325,394 7,250,771
William P. Weber 1999 367,328,984 7,247,181
James O. Welch, Jr. 1997 367,318,570 7,257,595
</TABLE>
A plurality of the votes cast were in favor of all nominees, and they were
therefore elected.
Proposal 2
----------
The votes cast to amend the Company's Directors Stock Plan regarding
non-employee directors' stock compensation were as follows:
For -- 351,004,380
Against -- 19,185,141
Abstain -- 4,405,407
A majority of the votes cast were in favor of proposal 2 and, therefore,
it was passed.
17
<PAGE> 18
PART II. OTHER INFORMATION (Continued)
ITEM 4. Submission Of Matters To A Vote Of Security Holders
Proposal 3
----------
The votes cast to amend the Company's 1992 Stock Option Plan regarding the
authority of the Compensation and Incentives Committee to determine
post-employment exercise period and size of awards, were as follows:
For -- 297,723,228
Against -- 26,874,237
Abstain -- 5,086,724
A majority of the votes cast were in favor of Proposal 3 and, therefore,
it was passed.
Proposal 4
----------
The votes cast to ratify the appointment of Price Waterhouse LLP as
independent accountants of the Company for the 1996 fiscal year:
For -- 365,901,558
Against -- 5,814,144
Abstain -- 2,860,460
A majority of the votes cast were in favor of Proposal 4 and, therefore,
it was passed.
Proposal 5
----------
The votes cast on the Stockholder Proposal to request the adoption of a
stock option plan whereby certain awards are contingent upon stock price
increases were as follows:
For -- 45,155,471
Against -- 191,435,254
Abstain -- 8,220,168
A majority of the votes cast were not in favor of Proposal 5 and,
therefore, it was not passed.
Proposal 6
----------
The votes cast on the Stockholder Proposal to request the adoption of
cumulative voting were as follows:
For -- 64,660,054
Against -- 156,171,799
Abstain -- 23,977,884
A majority of the votes cast were not in favor of Proposal 6 and,
therefore, it was not passed.
18
<PAGE> 19
PART II. OTHER INFORMATION (Continued)
ITEM 4. Submission Of Matters To A Vote Of Security Holders
Proposal 7
----------
The votes cast on the Stockholder Proposal to request the elimination
of the classification of the Board of Directors were as follows:
For -- 95,921,580
Against -- 126,494,631
Abstain -- 22,393,496
A majority of the votes cast were not in favor of Proposal 7 and ,
therefore, it was not passed.
Proposal 8
----------
The votes cast on the Stockholder Proposal to request the elimination
of the current retirement plan for non-employee directors were as
follows:
For -- 65,797,607
Against -- 155,496,201
Abstain -- 23,517,998
A majority of the votes cast were not in favor of Proposal 8 and,
therefore, it was not passed.
Proposal 9
----------
The votes cast on the Stockholder Proposal to request a feasibility
study of a sale or merger of Kmart or other extraordinary initiatives
were as follows:
For -- 30,202,767
Against -- 202,151,056
Abstain -- 12,457,785
A majority of the votes cast were not in favor of Proposal 9 and,
therefore, it 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 - Information on Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K: Four (4) reports were filed on Form 8-K by the
Registrant during the 13 weeks ended July 31, 1996.
The first report, dated May 24, 1996 contained a press
release announcing first quarter results.
The second report, dated June 10, 1996 contained a restatement
of prior period results relating to the divestiture of Thrifty
PayLess Holdings, Inc.
19
<PAGE> 20
PART II. OTHER INFORMATION (Continued)
ITEM 6. Exhibits And Reports On Form 8-K
The third report, dated June 25, 1996 contained the following
exhibits filed in connection with the Company's Registration
Statement on Form S-3:
1) Underwriting Agreement, 2) Indenture, 3) Form of Trust
Convertible Preferred Security, 4) Form of Convertible
Debenture, 5) Amended and Restated Declaration of Trust of
Kmart Financing I, a First Supplemental Indenture and a
Trust Convertible Preferred Securities Guarantee Agreement.
The fourth report, dated July 18, 1996, reported written
agreements entered into by Kmart Corporation regarding a $3.7
billion credit facility.
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
The signatory hereby acknowledges and adopts the typed form of his name in the
electronic filing of this document with the Securities and Exchange Commission.
Date: September 12, 1996
Kmart Corporation
----------------------------------------
(Registrant)
By: /s/ M.E. Welch, III
------------------------------
M.E. Welch, III
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Duly Authorized Officer,
Principal Financial Officer)
By: /s/ William C. Najdecki
-----------------------------
William C. Najdecki
VICE PRESIDENT CONTROLLER
(Duly Authorized Officer,
Principal Accounting Officer)
21
<PAGE> 22
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
11 Information on Computation of Per Share Earnings
27 Financial Data Schedule
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>2
<DESCRIPTION>COMPUTATION OF EARNINGS
<TEXT>
<PAGE> 1
EXHIBIT 11
KMART CORPORATION
INFORMATION ON COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
($ Millions, except per share data) 13 Weeks Ended 26 Weeks Ended
-------------- --------------
July 31, July 26, July 31, July 26,
1996 1995 1996 1995
------- -------- ------- -------
<S> <C> <C> <C> <C>
I. Earnings per common and common equivalent share:
Income (loss) from continuing retail operations $ 34 $ 22 $ (4) $ (3)
Less-Series C convertible preferred shares dividend declared - (2) - (3)
------- ------- -------- -------
(a) Adjusted income (loss) from continuing retail operations 34 20 (4) (6)
(b) Discontinued operations, net of income taxes - 1 - (2)
(c) Disposal of discontinued operations, net of income taxes - (77) (61) (77)
------- ------- -------- -------
(d) Adjusted net income (loss) $ 34 $ (56) $ (65) $ (85)
======= ======= ======== =======
Weighted average common shares outstanding 483.5 459.2 482.9 458.9
Stock Options--
Common shares assumed issued 14.2 1.9 5.9 0.6
Less--common shares assumed repurchased (9.6) (1.8) (4.1) (0.5)
------- ------- -------- -------
4.6 0.1 1.8 0.1
------- ------- -------- -------
(e) Applicable common shares, as adjusted 488.1 459.3 484.7 459.0
======= ======= ======== =======
Earnings per common and common equivalent share:
Adjusted income (loss) from continuing retail
operations (a)/(e) $ 0.07 $ 0.05 $ (0.01) $ (0.02)
Discontinued operations, net of income taxes (b)/(e) - - - -
Disposal of discontinued operations, net of income
taxes (c)/(e) - (0.17) (0.13) (0.17)
------- ------- ------- -------
Net income (loss)(d)/(e) $ 0.07 $ (0.12) $ (0.13) $ (0.19)
======= ======= ======== =======
II. Earnings per common and common equivalent share
assuming full dilution:
(f) Income (loss) from continuing retail operations $ 34 $ 22 $ (4) $ (3)
Less --Convertible Preferred Securities dividend 7 - - -
(g) Discontinued operations, net of income taxes - 1 - (2)
(h) Disposal of discontinued operations, net of income taxes - (77) (61) (77)
------- ------- -------- -------
(i) Adjusted net income (loss) $ 41 $ (55) $ (65) $ (83)
======= ======= ======== =======
Weighted average common shares outstanding 483.5 459.2 482.9 458.9
Weighted average Series C convertible preferred shares
outstanding - 8.2 - 8.2
Convertible Preferred Securities 32.2 - 16.1 -
Stock options--
Common shares assumed issued 14.2 2.0 11.0 1.0
Less--common shares assumed repurchased (9.6) (1.6) (7.5) (0.8)
------- ------- -------- -------
4.6 0.4 3.5 0.2
------- ------- -------- -------
(j) Applicable common shares, as adjusted 520.3 467.8 502.6 467.3
======= ======= ======== =======
Earnings per common and common equivalent share
assuming full dilution:
Income (loss) from continuing retail operations (f)/(j) $ 0.07 0.05 $ 0.01 $ (0.01)
Discontinued operations, net of income taxes (g)/(j) - - - -
Disposal of discontinued operations, net of income taxes - (0.17) (0.12) (0.17)
(h)/(j) ------ ------- -------- -------
Net income (loss)(i)/(j) $ 0.08 $ (0.12) $ (0.12) $ (0.18)
======= ======= ======== =======
(1) (2) (1) (1)
</TABLE>
(1) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an anti-dilutive result.
(2) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> JUL-31-1996
<CASH> 459
<SECURITIES> 0
<RECEIVABLES> 498
<ALLOWANCES> 0
<INVENTORY> 7,393
<CURRENT-ASSETS> 9,369
<PP&E> 9,935
<DEPRECIATION> 4,917
<TOTAL-ASSETS> 15,755
<CURRENT-LIABILITIES> 3,767
<BONDS> 3,054
<PREFERRED-MANDATORY> 980
<PREFERRED> 0
<COMMON> 487
<OTHER-SE> 4,751
<TOTAL-LIABILITY-AND-EQUITY> 15,755
<SALES> 15,892
<TOTAL-REVENUES> 16,017
<CGS> 12,429
<TOTAL-COSTS> 12,429
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 226
<INCOME-PRETAX> 4
<INCOME-TAX> 2
<INCOME-CONTINUING> (4)
<DISCONTINUED> (61)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (65)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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