-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WlkQqkxTUFAfEMAN+DWtt0s8Yt0oyW/d5JWnF4BiEK1y6JAouaEyKkayxHk1EwVO 1br/U/DNKuulo7F1EtjPZg== 0000950124-01-504176.txt : 20020412 0000950124-01-504176.hdr.sgml : 20020412 ACCESSION NUMBER: 0000950124-01-504176 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011031 FILED AS OF DATE: 20011127 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: 1800217 BUSINESS ADDRESS: STREET 1: 3100 W BIG BEAVER RD CITY: TROY STATE: MI ZIP: 48084 BUSINESS PHONE: 2486431000 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 10-Q 1 k66335e10-q.txt FORM 10-Q FOR THE QUARTERLY PERIOD END 10/31/01 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 31, 2001 ---------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to _____________ Commission File No. 1-327 ----- KMART CORPORATION ----------------- (Exact name of registrant as specified in its charter) Michigan 38-0729500 ----------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3100 West Big Beaver Road - Troy, Michigan 48084 ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (248) 463-1000 -------------- 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 October 31, 2001, 498,416,655 shares of Common Stock of Kmart Corporation were outstanding. 1 INDEX
PART I FINANCIAL INFORMATION PAGE - ------ --------------------- ---- Item 1. Financial Statements Consolidated Statements of Operations-- 3 13 and 39 weeks ended October 31, 2001 and October 25, 2000 Consolidated Balance Sheets-- 4 October 31, 2001, October 25, 2000 and January 31, 2001 Consolidated Statements of Cash Flows-- 5 39 weeks ended October 31, 2001 and October 25, 2000 Notes to Consolidated Financial 6 - 11 Statements Item 2. Management's Discussion and Analysis of Results of 12 - 18 Operations and Financial Condition PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS KMART CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
13 WEEKS ENDED 39 WEEKS ENDED ---------------------------------- ------------------------------- OCTOBER 31, OCTOBER 25, OCTOBER 31, OCTOBER 25, 2001 2000 2001 2000 ---------------- ---------------- ---------------- ------------- Sales $ 8,019 $ 8,199 $ 25,274 $ 25,392 Cost of sales, buying and occupancy 6,425 6,518 20,092 20,530 -------- -------- -------- -------- Gross margin 1,594 1,681 5,182 4,862 Selling, general and administrative expenses 1,818 1,697 5,248 5,379 Charges for BlueLight.com and other 5 -- 120 -- -------- -------- -------- -------- Loss before interest, income taxes and dividends on convertible preferred securities of subsidiary trust (229) (16) (186) (517) Interest expense, net 96 71 267 205 Income tax benefit (112) (31) (143) (263) Dividends on convertible preferred securities of subsidiary trust, net of income taxes of $6, $6, $18 and $18, respectively 11 11 34 34 -------- -------- -------- -------- Net loss $ (224) $ (67) $ (344) $ (493) ======== ======== ======== ======== Basic/Diluted loss per common share: $ (0.45) $ (0.14) $ (0.70) $ (1.00) ======== ======== ======== ======== Basic/Diluted weighted average shares (millions) 497.8 482.1 492.4 481.9
See accompanying Notes to Consolidated Financial Statements. 3 KMART CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS)
(UNAUDITED) --------------------------------- OCTOBER 31, OCTOBER 25, JANUARY 31, 2001 2000 2001 ---------------- --------------- --------------- Current Assets: Cash and cash equivalents $ 366 $ 285 $ 401 Merchandise inventories 8,318 7,878 6,412 Other current assets 872 909 811 ------- ------- ------- Total current assets 9,556 9,072 7,624 Property and equipment, net 6,968 6,481 6,557 Other assets and deferred charges 483 487 523 ------- ------- ------- Total Assets $17,007 $16,040 $14,704 ======= ======= ======= Current Liabilities: Long-term debt due within one year $ 478 $ 295 $ 68 Trade accounts payable 3,273 2,555 2,093 Accrued payroll and other liabilities 1,438 1,515 1,525 Taxes other than income taxes 271 267 187 ------- ------- ------- Total current liabilities 5,460 4,632 3,873 Long-term debt and notes payable 3,310 2,835 2,084 Capital lease obligations 881 956 943 Other long-term liabilities 612 911 834 Company obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely 7 3/4% convertible junior subordinated debentures of Kmart (redemption value $898, $898 and $898, respectively) 890 886 887 Common stock, $1 par value, 1,500,000,000 shares authorized; 498,416,655, 483,391,211 and 486,509,736 shares outstanding, respectively 498 483 487 Capital in excess of par value 1,682 1,567 1,578 Retained earnings 3,674 3,770 4,018 ------- ------- ------- Total Liabilities and Shareholders' Equity $17,007 $16,040 $14,704 ======= ======= =======
See accompanying Notes to Consolidated Financial Statements. 4 KMART CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS) (UNAUDITED)
39 WEEKS ENDED ------------------------------------ OCTOBER 31, OCTOBER 25, 2001 2000 ----------------- ---------------- CASH FLOW FROM OPERATING ACTIVITIES Net loss from continuing operations $ (344) $ (493) Adjustments to reconcile net loss from continuing operations to net cash used for operating activities: Restructuring, impairments and employee severance 268 728 Depreciation and amortization 618 584 Equity loss in unconsolidated subsidiaries 14 2 Dividends received from Meldisco 51 44 Cash used for store closings and other charges (90) (46) Increase in inventories (1,901) (1,142) Increase in trade accounts payable 1,173 525 Deferred income taxes and taxes payable (101) (357) Changes in other assets (131) (134) Changes in other liabilities 68 (34) ------- ------- Net cash used for continuing operations (375) (323) Net cash used for discontinued operations (67) (75) ------- ------- Net cash used for operating activities (442) (398) ------- ------- CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures (1,084) (699) Investment in BlueLight.com (45) (55) ------- ------- Net cash used for investing activities (1,129) (754) ------- ------- CASH FLOW FROM FINANCING ACTIVITIES Proceeds from issuance of debt 1,887 1,366 Issuance of common shares 40 41 Purchase of convertible preferred securities of subsidiary trust -- (84) Purchase of common shares -- (56) Payments on debt (275) (61) Payments on capital lease obligations (62) (58) Payments of dividends on preferred securities of subsidiary trust (54) (55) ------- ------- Net cash provided by financing activities 1,536 1,093 ------- ------- Net decrease in cash and cash equivalents (35) (59) Cash and cash equivalents, beginning of year 401 344 ------- ------- Cash and cash equivalents, end of period $ 366 $ 285 ======= =======
See accompanying Notes to Consolidated Financial Statements. 5 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 our 2000 Annual Report on Form 10-K filed for the fiscal year ended January 31, 2001. Certain reclassifications of prior period financial statements have been made to conform to the current year presentation.
2. LOSS PER SHARE (in millions, except per share data) 13 Weeks Ended 39 Weeks Ended ------------------------------- --------------------------------- October 31, October 25, October 31, October 25, 2001 2000 2001 2000 ------------- --------------- --------------- --------------- Basic/Diluted loss per common share: Net Loss $ (224) $ (67) $ (344) $ (493) Add: Discount on redemption of preferred securities, net -- 1 -- 10 ------- ------ ------- ------ Adjusted net loss available to common shareholders $ (224) $ (66) $ (344) $ (483) Basic/Diluted weighted average shares outstanding 497.8 482.1 492.4 481.9 ======= ====== ======= ====== Basic/Diluted loss per common share $ (0.45) $(0.14) $ (0.70) $(1.00) ======= ====== ======= ======
In each period, certain outstanding stock options were excluded from the computation of diluted earnings per share because they would have been anti-dilutive. As of October 31, 2001, options to purchase 53.5 million shares of common stock at prices ranging from $5.34 to $26.03 were excluded from the 13 and 39 week calculations. As of October 25, 2000, options to purchase 46.9 million shares of common stock at prices ranging from $5.34 to $26.03 were excluded from the 13 and 39 week calculations. The calculations also exclude the effect of trust convertible preferred securities and written put options. For the 13 and 39 week periods ended October 31, 2001, diluted shares outstanding exclude approximately 59.9 million common shares from potential conversion of certain trust convertible preferred securities due to their anti-dilutive effect. For the 13 and 39 week periods ended October 25, 2000, diluted shares outstanding exclude approximately 60.2 million and 61.3 million common shares, respectively, from potential conversion of certain trust convertible preferred securities due to their anti-dilutive effect. For the 39 week period ended October 25, 2000, diluted shares outstanding exclude approximately 0.5 million common shares from the potential conversion of written put options due to their anti-dilutive effect. 3. INVENTORIES AND COST OF MERCHANDISE SOLD A substantial portion of our 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 31, 2001, October 25, 2000 and January 31, 2001 were $194 million, $202 million and $194 million lower, respectively, than the amounts that would have been reported under the first-in, first-out method. 6 KMART CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. INTEREST INCOME Interest income is included in the line Interest expense, net in the Consolidated Statements of Operations. For the 13 week periods ended October 31, 2001 and October 25, 2000 interest income was $1 million and $8 million, respectively. For the 39 week periods ended October 31, 2001, and October 25, 2000 interest income was $3 million and $15 million, respectively. 5. RESTRUCTURINGS SUPPLY CHAIN OPERATIONS On September 6, 2001 we announced that we would restructure certain aspects of our supply chain infrastructure, including the reconfiguration of our distribution center network and implementation of new operating software across our supply chain. Completion of these actions is expected by the end of the second quarter of 2002. In conjunction with these actions, we will record special charges totaling $189 million ($120 million, after-tax), of which $148 million ($94 million after-tax) is recorded in the third quarter. We recorded a $92 million charge related to the planned disposal of supply chain software and hardware and other assets that will no longer be utilized, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." As certain components of our supply chain software will continue to be utilized until replaced, depreciation will be accelerated to reflect the revised useful lives and these assets will be fully-amortized by mid-2002. In the third quarter we recorded a charge of $9 million related to the accelerated depreciation on these assets. The expected incremental depreciation aggregates $14 million in the fourth quarter of 2001, and $27 million in 2002. A $47 million charge was provided for lease terminations and contractual employment obligations for staff reductions of 956 employees at our distribution centers in accordance with EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The majority of the employees will be severed in the fourth quarter of fiscal year 2001, with the remaining employees severed in the first quarter of fiscal year 2002. No costs were paid and charged against the reserve during the quarter. The following table summarizes the significant components and presentation, in the Consolidated Statements of Operations, of the charge for the restructuring of our supply chain operations during the third quarter of 2001.
Cost of sales, buying and (in millions) occupancy SG&A Total ------------ ---------- ----------- Lease obligations $ 37 $ -- $ 37 Accelerated depreciation of software 9 -- 9 Asset impairment 5 87 92 Contractual employment obligations 10 -- 10 ---- ---- ---- Total $ 61 $ 87 $148 ==== ==== ====
BLUELIGHT.COM We recorded a $92 million charge ($73 million after-tax) related to our e-commerce site, BlueLight.com, in the second quarter, comprised of $41 million for the impairment of our investment in BlueLight.com and $51 million for the restructuring of our e-commerce business. These charges are included in the line Charges for BlueLight.com and other in the Consolidated Statements of Operations. 7 KMART CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Based upon the changed environment for internet businesses, in which the ability for internet businesses to raise capital became restricted, management's revised future cash flow projections and the potential need for significant additional cash advances, we adopted a multi-step plan to substantially restructure the operations of BlueLight.com. The initial step was executed by acquiring the remaining 40% interest in BlueLight.com, LLC, through the purchase of all outstanding common and preferred stock of BlueLight.com, Inc., a holding company. BlueLight.com, Inc. and BlueLight.com LLC (hereinafter together or individually, "BlueLight.com") then became wholly-owned subsidiaries of Kmart, which allowed us to execute the subsequent steps of our plan. The purchase price of the additional interest was $85 million, with $69 million being satisfied through the issuance of 6.1 million unregistered shares of Kmart common stock and $16 million paid in cash. Based upon the revised cash flow projections for the business, we recorded a $41 million charge to write-down our investment in BlueLight.com to estimated fair value in accordance with SFAS No. 121. Fair value was estimated using the present value of estimated future cash flows. In conjunction with the transaction, the return of capital puts for $62.5 million and the 4.4 million warrants for Kmart stock originally granted to SOFTBANK and other investors, previously disclosed, were terminated. The $62.5 million liability for the return of capital puts, recorded due to the uncertainties surrounding a start-up operation in the highly competitive e-commerce industry, was relieved. Of the $51 million restructuring charge, $29 million related to assets impaired as a result of the restructuring. These assets represent furniture and fixtures, leasehold improvements, and computer software and hardware, the majority of which were located in the headquarters of BlueLight.com, and have not been utilized in the restructured operations. These assets were reduced to the lower of carrying amount or fair value less cost to sell in accordance with SFAS No. 121. Fair value was determined using the present value of estimated future cash flows. Liabilities for lease terminations, contract terminations and other costs totaling $22 million were established in accordance with EITF 94-3 as a result of the decision to exit the BlueLight.com headquarters building and outsource certain aspects of our overall e-commerce business, including fulfillment, technology and customer service. After the application of the provisions of SFAS No. 121, as described above, we had remaining long-lived assets with an estimated fair value of $2.5 million, which are being depreciated over their remaining estimated useful life of 2.5 years. During the third quarter, we continued executing our restructuring plan, including formally communicating to 114 employees at the BlueLight.com headquarters expected severance dates and the severance benefit amount they will receive when they are terminated. In conjunction with this communication, we recorded an additional $5 million ($3 million after-tax) charge to provide for these costs. These charges are included in the line Charges for BlueLight.com and other in the Consolidated Statements of Operations. Seventy-three employees were terminated during the quarter. We also outsourced the hosting of our site, fulfillment of e-commerce orders and all related customer service. We have substantially completed our restructuring plan and expect to accomplish the remaining steps in the fourth quarter of this year. 8 KMART CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table provides information regarding liabilities established during the 39 week periods ending October 31, 2001 and October 25, 2000, with respect to the fiscal year 2000 strategic actions charge, the fiscal year 2001 BlueLight.com restructuring charge and the fiscal year 2001 supply chain restructuring charge. The liabilities aggregated $213 million and $288 million at October 31, 2001 and October 25, 2000, respectively.
39 Weeks Ended -------------------------------------------------------------------------- October 31, October 25, 2001 2000 --------------------------------------------------------- --------------- ($ in millions) 2001 2001 2000 2000 Supply BlueLight Strategic Strategic Chain .com Actions Total Actions ----------- ----------- ----------- ----------- ----------- Balance, beginning of period $ -- $ -- $177 $177 $ -- Additions charged to earnings: Second quarter -- 92 -- 92 740 Third quarter 148 5 -- 153 -- ---- ---- ---- ---- ---- Total Additions 148 97 -- 245 740 Reductions: Cash payments: Lease obligations -- 1 31 32 -- Employee costs -- 3 -- 3 -- Contractual obligations -- 2 -- 2 -- Other costs -- 1 -- 1 -- Non-cash reductions: Adjustments -- -- -- -- 12 Assets writedowns 101 70 -- 171 440 ---- ---- ---- ---- ---- Balance, end of period $ 47 $ 20 $146 $213 $288 ==== ==== ==== ==== ====
6. OTHER CHARGES During the first quarter of 2001, our workforce was reduced by 350 employees through a voluntary early retirement program ("VERP") and other employee separations. The total cost of the realignment aggregated $23 million ($15 million, net of tax) which is included in our Consolidated Statements of Operations in the line Charges for BlueLight.com and other. The charge includes 130 employees that accepted the VERP offer, with costs aggregating $6 million. The remaining 220 employees were severed and given post-employment benefits including severance, outplacement services, continuation of healthcare benefits and other benefits totaling $17 million. Our year-to-date payments associated with these actions were $16 million. An additional $3 million will be paid to employees in accordance with the terms of the related severance agreements. Benefit payments to employees accepting the VERP are paid from the Kmart Employee Pension Plan, except certain payments for highly compensated employees which we pay directly. 7. COMPREHENSIVE INCOME Comprehensive income represents net income, adjusted for the effect of other items that are recorded directly to shareholders' equity. Net income and comprehensive income are equivalent for all periods presented. 9 KMART CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. EFFECTIVE TAX RATE The effective tax benefit rates for the 13 and 39 week periods ended October 31, 2001 were 34.6% and 31.6%, respectively. In 2001, the actual tax benefit rates are lower than the statutory rate due to the preclusion of recording certain tax benefits related to our acquisition of the remaining interest in BlueLight.com. 9. INVESTMENTS IN AFFILIATED RETAIL COMPANIES Meldisco For the 13 week period ended October 31, 2001, Meldisco had net sales of $293 million, gross profit of $138 million and net income of $22 million. For the 13 week period ended October 25, 2000, Meldisco had net sales of $305 million, gross profit of $144 million and net income of $23 million. For the 39 week period ended October 31, 2001, Meldisco had net sales of $904 million, gross profit of $434 million and net income of $69 million. For the 39 week period ended October 25, 2000, Meldisco had net sales of $946 million, gross profit of $448 million and net income of $72 million. BlueLight.com For the 13 week period ended October 25, 2000, BlueLight.com had net sales of $2 million, no gross profit and a net loss of $21 million. For the period from February 1, 2001 to July 31, 2001, BlueLight.com had net sales of $8 million, gross profit of $1 million and a net loss of $55 million. For the 39 week period ended October 25, 2000, BlueLight.com had net sales of $3 million, gross profit of $1 million and a net loss of $58 million. BlueLight.com's operations were fully consolidated into our financial statements commencing July 31, 2001. 10. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," effective for all business combinations initiated after June 30, 2001. This statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or thereafter. Also, in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," and SFAS No. 143, "Accounting for Asset Retirement Obligations," effective for fiscal years beginning after December 15, 2001. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective for fiscal years beginning after December 15, 2001. The adoption of these statements is not expected to have a material impact on our earnings or financial position. 11. SHARE REPURCHASE PROGRAMS In July 2001, we terminated the common stock repurchase program that was initiated in April 1999. Under the program we repurchased approximately 22 million shares of common stock during 1999 and 2000 at a cost of approximately $255 million. We also terminated the trust convertible preferred securities repurchase program that was initiated in February 2000. Under the program we repurchased approximately 2 million shares of trust convertible securities at a cost of approximately $84 million. 10 KMART CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 12. OTHER COMMITMENTS AND CONTINGENCIES Lease Guarantees As of October 31, 2001, we had outstanding guarantees for real property leases of certain former subsidiaries as follows:
($ Millions) Present Value of Gross Future Future Lease Lease Obligations @ 7% Obligations ---------------- ---------------- The Sports Authority ("TSA") $188 $318 Borders Group 90 153 OfficeMax 69 101 ---- ---- Total $347 $572 ==== ====
The possibility of having to honor our contingent obligations is dependent upon the future operating results of the former subsidiaries. Should a reserve be required, it would be recorded at the time the obligation was determined to be both probable and estimable. Our rights and obligations with respect to our guarantee of TSA, OfficeMax and Borders Group leases are governed by Lease Guaranty, Indemnification and Reimbursement Agreements dated as of November 23, 1994, November 9, 1994 and May 24, 1995, respectively, as amended from time to time. Other There are various claims, lawsuits and pending actions incident to our operations. It is the opinion of management that the ultimate resolution of these matters will not have a material adverse effect on our liquidity, financial position or results of operations. 11 KMART CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ITEM 2. ANALYSIS OF OPERATIONS EXCLUDING NON-COMPARABLE ITEMS DESCRIBED BELOW The following table segregates operating income excluding non-comparable items from operating income as reported in the Consolidated Statements of Operations:
13 WEEKS 39 WEEKS ---------------------------------- ----------------------------------- ($ MILLIONS) OCTOBER 31, OCTOBER 25, OCTOBER 31, OCTOBER 25, 2001 2000 2001 2000 --------------- ---------------- ---------------- ---------------- SALES $ 8,019 $ 8,199 $ 25,274 $ 25,392 COST OF SALES, BUYING AND OCCUPANCY 6,364 6,518 20,031 20,165 -------- -------- -------- -------- GROSS MARGIN 1,655 1,681 5,243 5,227 SELLING, GENERAL AND ADMINISTRATIVE 1,731 1,709 5,161 5,016 -------- -------- -------- -------- OPERATING INCOME (LOSS) EXCLUDING NON-COMPARABLE ITEMS (76) (28) 82 211 CHARGE FOR SUPPLY CHAIN RESTRUCTURING 148 -- 148 -- CHARGE FOR BLUELIGHT.COM 5 -- 97 -- CHARGE FOR EMPLOYEE SEVERANCE AND VERP -- -- 23 -- STRATEGIC ACTIONS CHARGE -- (12) -- 728 -------- -------- -------- -------- OPERATING LOSS AS REPORTED $ (229) $ (16) $ (186) $ (517) ======== ======== ======== ======== SAME-STORE SALES % (1.5%) 1.4% 0.4% 0.7% EPS EXCLUDING NON-COMPARABLE ITEMS $ (0.25) $ (0.16) $ (0.32) $ (0.04) ======== ======== ======== ======== EPS INCLUDING NON-COMPARABLE ITEMS $ (0.45) $ (0.14) $ (0.70) $ (1.00) ======== ======== ======== ========
SALES for the 13 weeks ended October 31, 2001 were $8,019 million, a decrease of 2.2% from sales of $8,199 million for the 13 weeks ended October 25, 2000. Sales for the 39 weeks ended October 31, 2001 were $25,274 million, a decrease of 0.5% from sales of $25,392 for the 39 weeks ended October 25, 2000. The decrease in total sales is due in part to the reduction in the number of Kmart stores from 2,163 at October 25, 2000 to 2,113 at October 31, 2001. Same-store sales decreased 1.5% for the 13 week period ended October 31, 2001 and increased 0.4% for the 39 week period ended October 31, 2001. The decrease in same-store sales for the 13 weeks ended October 31, 2001, is due primarily to the effect of prior year clearance sales of discontinued merchandise, the deflationary effect of our BlueLight Always program, under which we lowered prices on approximately 38,000 high-frequency items, and fewer sales transactions due to reduced promotional activity. Same-store sales include sales of all stores open, that have been open for greater than 13 full months. Divisions showing particular strength on a year-to-date basis included pharmacy, beauty and health care, home entertainment and food and consumables. We opened 16 stores and closed 8 stores during the 39 weeks ended October 31, 2001. A weekly report of our sales performance at our over 2,100 retail stores is available by phone at (248) 614-0480. Additional information is also available at our website www.bluelight.com. GROSS MARGIN decreased $26 million to $1,655 million, for the 13 weeks ended October 31, 2001, from $1,681 million for the 13 weeks ended October 25, 2000. Gross margin, as a percentage of sales, was 20.6% and 20.5% for the 13 weeks ended October 31, 2001 and October 25, 2000, respectively. The increase in gross margin, as a percentage of sales, is attributable to lower food and consumable distribution costs under 12 KMART CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) our arrangement with Fleming and unfavorable prior year distribution center physical inventory results, partially offset by an increase in sales, as a percentage of total sales, of food and consumables, which carry a lower margin. In addition, lower promotional and clearance markdowns offset price reductions attributable to the BlueLight Always program. For the 39 week period ended October 31, 2001 gross margin increased $16 million to $5,243 million from $5,227 million for the 39 week period ended October 25, 2000. Gross margin, as a percentage of sales, was 20.8% and 20.6% for the 39 week periods ended October 31, 2001 and October 25, 2000, respectively. The increase in gross margin, as a percentage of sales, is attributable to lower distribution costs under our arrangement with Fleming, solid performance in reducing store shrinkage, and unfavorable prior year distribution center physical inventory results, partially offset by an increase in sales, as a percentage of total sales, of food and consumables, which carry a lower margin, and pricing effects of our BlueLight Always program. SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES increased $22 million for the 13 weeks ended October 31, 2001 to $1,731, or 21.6% of sales, from $1,709, or 20.8% of sales, for the 13 weeks ended October 25, 2000. The increase is due primarily to wage rate increases and additional investment in store labor. SG&A expenses increased $145 million for the 39 weeks ended October 31, 2001 to $5,161, or 20.4% of sales, from $5,016, or 19.7% of sales, for the 39 weeks ended October 25, 2000. The increase is due primarily to wage rate increases, additional investment in store labor and utility rate increases, partially offset by reductions in net advertising costs. OPERATING LOSS for the 13 weeks ended October 31, 2001 was $76 million, or 1.0% of sales, as compared to an operating loss of $28 million, or 0.3% of sales, for the same period of the prior year. For the 39 week period ended October 31, 2001 operating income was $82 million, or 0.4% of sales, as compared to $211 million, or 0.9% of sales, for the comparable period of the previous year. Due to the seasonal nature of the retail industry, merchandise sales are historically higher in the fourth quarter than any other period, resulting in a disproportionate amount of operating income earned in the fourth quarter. As a result, operating performance for the 13 and 39 weeks ended October 31, 2001 is not necessarily indicative of operating performance for the entire year. NET INTEREST EXPENSE for the 13 weeks ended October 31, 2001 and October 25, 2000 was $96 million and $71 million, respectively. For the 39 week periods ended October 31, 2001 and October 25, 2000, net interest expense was $267 million and $205 million, respectively. Net interest expense increased as a result of the issuance in January 2001 of $400 million of 9.375% Notes due January 2006, the issuance in June 2001 of $430 million of 9 7/8% Notes due June 2008 and increased borrowings under our Revolving Credit Agreement ("Revolver"). See "Liquidity and Financial Condition." 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 $4,096, $4,440 and $3,751 million at October 31, 2001, October 25, 2000 and January 31, 2001, 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 $1.46 billion borrowings outstanding under our $1.60 billion Revolver at the end of the third quarter of fiscal 2001. There were $1.37 billion borrowings outstanding under our existing credit facilities at the end of the third quarter of fiscal 2000. Net cash used for operating activities for the 39 weeks ended October 31, 2001 was $442 million as compared to net cash used for operating activities of $398 million for the same period in 2000. The increase in cash used for operating activities as compared to the same period of the prior year was primarily the result of lower net earnings, excluding non-comparable items, and higher inventory purchases. Inventory increased by $1,906 million during the first 39 weeks of fiscal year 2001 due to seasonal inventory fluctuations and actions taken to improve our overall in-stock position. 13 KMART CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) Net cash used for investing activities was $1,129 million for the 39 weeks ended October 31, 2001 compared to $754 million for the same period in 2000. The increase in cash used for investing activities was primarily due to higher capital expenditures for the expansion of Kmart stores to Kmart Super Centers, construction of new Kmart Super Centers, expansion of midways to provide easier traffic flow for our customers and to increase visibility of promotional items and an investment in point-of-sale equipment. Net cash provided by financing activities was $1,536 million for the 39 weeks ended October 31, 2001 compared to net cash provided by financing activities of $1,093 million for the comparable period in 2000. The increase in cash provided was primarily the result of the issuance of $430 million of 9 7/8% Notes due June 2008 and increased borrowings under the Revolver, partially offset by the paydown of $262 million Collateralized Mortgage Backed Securities in July. In July 2001, we terminated the common stock repurchase program that was initiated in April 1999 and the trust convertible preferred securities repurchase program initiated in February 2000. We repurchased approximately 22 million shares of common stock at a cost of approximately $255 million and 2 million shares of trust convertible securities at a cost of approximately $84 million under the programs. On November 15, 2001 we signed an agreement for the renewal of our unsecured 364-Day Credit Facility ("Facility") for the amount of $400 million. The Facility is scheduled to fund concurrent with the expiration of the current facility on or before December 2, 2001. We believe that future operating cash flows and our financing arrangements (including the Facility) will be sufficient to meet our liquidity needs. DESCRIPTION OF NON-COMPARABLE ITEMS During the first nine months of fiscal years 2000 and 2001, we have instituted certain restructuring actions to improve our operations. These actions are summarized below: SUPPLY CHAIN OPERATIONS On September 6, 2001 we announced that we would restructure certain aspects of our supply chain operations. This restructuring program focuses on the supply chain infrastructure, including the reconfiguration of our distribution center network and implementation of new operating software across our supply chain. As a result of these actions, we recorded a pre-tax charge of $148 million during the third quarter of 2001. Reconfiguration of the distribution center network entails the replacement of two aging distribution centers with two state-of-the-art facilities. The existing distribution centers are not properly fitted for softline DC operations and require significant investment to upgrade. Replacing the facilities will enable increased throughput and quicker inventory turns. In addition, the distribution of slower-moving goods are being centralized at one newly designated center, to improve efficiency across all other centers and facilitate the expansion of our BlueLight Always campaign. During the third quarter we recorded a pre-tax charge of $37 million for a reserve for future lease obligations related to the closing of the two aging distribution centers and a $10 million charge to provide for contractual employee obligations. These charges are included in Cost of sales, buying and occupancy in the Consolidated Statements of Operations. There were no reductions to the reserve during the third quarter. We recorded an $87 million charge for the disposal of computer equipment and software, leasehold improvements and other assets that will no longer be utilized. These charges are included in Selling, general and administrative expenses in the Consolidated Statements of Operations. In addition, we recorded a $5 million charge for other supply chain assets which are included in Cost of sales, buying and occupancy in the Consolidated Statements of Operations. New real-time distribution software will be implemented across our supply chain improving product flow and efficiency while enabling a world class distribution network. The current warehouse management software system does not provide adequate performance reporting and is not cost effective to upgrade. Due to increased efficiency associated with the new software we will be able to increase productivity through improved cube management while reducing labor costs. Completion of the implementation is expected by the 14 KMART CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) end of the second quarter of fiscal 2002. The existing supply chain software will continue to be utilized until replaced in 2002. Depreciation will be accelerated to reflect the remaining revised useful lives. We recorded a charge of $9 million related to the accelerated depreciation for these assets in the third quarter. These charges are included in Cost of sales, buying and occupancy in the Consolidated Statements of Operations. As a result of these actions we expect earnings before income taxes to increase by approximately $15 million per year. These savings will be achieved through reductions in labor costs, depreciation expense and maintenance costs, and increased productivity. The following table summarizes the significant components and presentation, in the Consolidated Statements of Operations, of the charge for the restructuring of our supply chain operations during the third quarter of 2001.
Cost of sales, buying and (in millions) occupancy SG&A Total ----------- -------- ---------- Lease obligations $ 37 $ -- $ 37 Accelerated depreciation of software 9 -- 9 Asset impairment 5 87 92 Contractual employment obligations 10 -- 10 ---- ---- ---- Total $ 61 $ 87 $148 ==== ==== ====
BLUELIGHT.COM As a result of the changed environment for internet businesses, in which the ability for internet businesses to raise capital became restricted, management's revised future cash flow projections and the potential need for significant additional cash advances, we adopted a multi-step plan to substantially restructure the operations of BlueLight.com. At the end of the second quarter, we acquired the remaining 40% interest in BlueLight.com, giving us control of the entity. To acquire the 40% interest, we issued $69 million in shares of Kmart common stock and paid $16 million in cash for a total purchase price of $85 million. In connection with the acquisition, the return of capital put rights were terminated, the related $62.5 million liability was relieved, and the 4.4 million warrants for Kmart common stock issued to SOFTBANK and other investors were cancelled. As a result of these activities, we recorded a $92 million charge ($73 million after-tax) in the second quarter. Of the charge, $41 million related to the impairment of our investment in Bluelight.com, which was written down to fair value. This charge was recorded based upon our revised cash flow projections for the business in accordance with SFAS No. 121. The remaining $51 million of the charge related to the restructuring of our e-commerce business. Of the $51 million restructuring charge, $29 million related to assets impaired as a result of the restructuring. These assets represent furniture and fixtures, leasehold improvements, and computer software and hardware, the majority of which were in the headquarters of BlueLight.com, and have not been utilized in the restructured operations. This charge was recorded in accordance with SFAS No. 121. Liabilities for lease terminations, contract terminations and other costs totaling $22 million were established as a result of the decision to exit the BlueLight.com headquarters building and outsource certain aspects of our overall e-commerce business, including fulfillment, technology and customer service. During the quarter, $5 million has been paid and charged against the liability. During the third quarter, we continued executing our restructuring plan, including formally communicating severance benefits to 114 employees at the BlueLight.com headquarters and terminating seventy-three of those employees during the quarter. We recorded an additional $5 million ($3 million after- 15 KMART CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) tax) charge to provide for these costs, $2 million of which has been paid and charged against the liability during the quarter. We also outsourced the hosting of our site, fulfillment of e-commerce orders and all related customer service. We have substantially completed our restructuring plan and expect to accomplish the remaining steps in the fourth quarter of fiscal year 2001. We expect the restructuring will reduce the operating costs of BlueLight.com by over 80%, which will improve our e-commerce results of operations by over $30 million in 2002 from 2001 levels. All charges for the restructuring and impairment of the investment are included in the line Charges for BlueLight.com and other in the Consolidated Statements of Operations. The results of BlueLight.com's operations are fully consolidated in our financial statements commencing July 31, 2001. EMPLOYEE SEVERANCE AND VERP During the first quarter of 2001, we realigned our organization around our three strategic imperatives: to dramatically improve retail execution to achieve World Class Execution throughout our business, to create a Customer Centric Culture so our behaviors are linked to serving our customers, and to aggressively pursue Sales and Marketing Opportunities to define a market position differentiating Kmart from our competitors. As a result of our realignment, our workforce was reduced by 350 employees in the first quarter through a voluntary early retirement program ("VERP") and other employee separations. The total cost of the realignment aggregated $23 million ($15 million, net of tax) which is included in our Consolidated Statements of Operations in the line Charges for BlueLight.com and other. The charge relates to 130 employees that accepted the VERP offer, with costs aggregating $6 million. The remaining 220 employees were severed and given post- employment benefits including severance, outplacement services, continuation of healthcare benefits and other benefits totaling $17 million. Payments associated with these actions have aggregated $16 million. An additional $3 million will be paid to employees in accordance with the terms of the related severance agreements. Benefit payments to employees accepting the VERP are paid from the Kmart Employee Pension Plan, except certain payments for highly compensated employees which we pay directly. 2000 STRATEGIC ACTIONS In the second quarter of 2000, we announced a series of strategic actions aimed at strengthening financial performance by achieving improvements in return on invested capital. These actions included deciding to close certain Kmart and Kmart Super Center stores, accelerating certain inventory reductions and redefining our information technology strategy. As a result of these actions, we recorded a pre-tax charge of $740 million ($471 million after-tax) during the second quarter of 2000. During the third quarter of fiscal year 2000, we reduced this charge by $12 million ($8 million after-tax) due to reducing the number of scheduled store closings from 72 to 69, thus reducing the reserve for closed stores from $300 million to $288 million. There were no other adjustments to the reserve during the period. 16 KMART CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) The impact of these restructuring charges on our effective tax rate for the 13 and 39 week periods ended October 31, 2001 is summarized in the following tables.
13 Weeks ended October 31, 2001 ----------------------------------------------------------- As BlueLight Supply Excluding ($ in millions) Reported .com Chain Charges -------- --------- --------- ----------- Loss before interest, income tax and dividends on convertible preferred securities of subsidiary trust $(229) $ (5) $(148) $ (76) Interest expense, net 96 -- -- 96 Income tax benefit (112) (2) (54) (56) Dividends on convertible preferred securities of subsidiary trust, net of income taxes 11 -- -- 11 ----- ----- ----- ----- Net loss $(224) $ (3) $ (94) $(127) ===== ===== ===== ===== Effective tax benefit rate 34.6% 36.5% 36.5% 33.0% ===== ===== ===== ===== 39 Weeks ended October 31, 2001 ------------------------------------------------------------------ As BlueLight Supply Other Excluding ($ in millions) Reported .com Chain Charges Charges -------- --------- --------- ----------- ----------- Loss before interest, income tax and dividends on convertible preferred securities of subsidiary trust $(186) $ (97) $(148) $ (23) $ 82 Interest expense, net 267 -- -- -- 267 Income tax benefit (143) (20) (54) (8) (61) Dividends on convertible preferred securities of subsidiary trust, net of income taxes 34 -- -- -- 34 ----- ----- ----- ----- ----- Net loss $(344) $ (77) $ (94) $ (15) $(158) ===== ===== ===== ===== ===== Effective tax benefit rate 31.6% 21.1% 36.5% 33.0% 33.0% ===== ===== ===== ===== =====
OTHER MATTERS 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 we guaranteed is approximately $347 million. The possibility of having to honor our contingent obligations is dependent upon the future operating results of these former subsidiaries. Other There are various claims, lawsuits and pending actions incident to our 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. 17 KMART CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This quarterly report, as well as other verbal or written statements or reports made by or on behalf of the Company, may contain or may incorporate material by reference which 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 we expect or anticipate 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. Our ability to achieve such results is subject to certain risks and uncertainties, including, but not limited to: - - general economic conditions - - weather conditions, including those which affect buying patterns of our customers, - - changes in consumer spending and our ability to anticipate buying patterns and implement appropriate inventory strategies, - - the availability and the cost of various sources of capital, - - competitive pressures and other third party actions, - - ability to timely acquire desired goods and/or fulfill labor needs at planned costs, - - ability to successfully implement business strategies and otherwise execute planned changes in various aspects of the business, - - regulatory and legal developments, and - - other factors affecting business beyond our 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 will be realized or that they will have the expected effects on our business or operations. The forward-looking statements contained herein or otherwise made by or on behalf of the Company speak only as of the date of this report, or if not contained herein, as of the date when made, and the Company does not undertake to update these risk factors. 18 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 10 - Special Supplemental Executive Retirement Plan Exhibit 10.1 - Long Term Cash Incentive Plan In reliance upon Item 601(B)(4)(iii)(A) of Regulation S-K, various instruments defining the rights of holders of long-term debt of the registrant are not being filed herewith because the total amount of securities authorized under each such instrument does not exceed 10% of the total assets of Kmart. We agree to furnish a copy to the Commission upon request of the following instruments defining the rights of holders of long-term debt: 9 7/8% Notes Due 2008 (b) Reports on Form 8-K: We filed a Current Report on Form 8-K dated September 6, 2001 to report, under Item 5, that Kmart Corporation issued a press release announcing the restructuring of our supply chain operations and related charge to earnings and to furnish, under item 7, a copy of the press release. 19 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: November 27, 2001 Kmart Corporation ------------------------------------------------ (Registrant) By: /s/ John T. McDonald, Jr. ------------------------------------------------ John T. McDonald, Jr. EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (Principal Financial Officer) /s/ Richard J. Noechel ------------------------------------------------ Richard J. Noechel VICE PRESIDENT AND CONTROLLER (Principal Accounting Officer) 20 Exhibit Index Exhibit No. Description 10 Special Supplemental Executive Retirement Plan 10.1 Long Term Cash Incentive Plan EX-10 3 k66335ex10.txt SPECIAL SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EXHIBIT 10 SPECIAL SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN KMART CORPORATION SECTION 1. PURPOSE This Special Supplemental Executive Retirement Plan (the "Plan") has been adopted by Kmart Corporation (the "Company") for the purpose of providing supplemental retirement income to certain senior officers and other key executive employees of the Company, in order to attract and retain superior and highly qualified executive employees. This Plan is intended to be an arrangement that is unfunded and is maintained by the Company primarily for the purpose of providing deferred compensation for employees who are members of a select group of management or highly compensated employees within the meaning of Sections 201(2) and 301(a)(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), and shall be interpreted and administered to the extent possible in a manner consistent with that intent. SECTION 2. EFFECTIVE DATE The effective date of the Plan is April 1, 2001. SECTION 3. DEFINITIONS (a) Accrued Benefit means the benefit payable to a Participant as determined under Section 5.1. (b) Annual Compensation means the sum of the Participant's base pay and bonus determined on a calendar year basis, for the calendar year ending immediately before the first day of a Plan Year. (c) Early Retirement Age means the attainment of the Participant's fifty-fifth (55th) birthday. (d) Early Retirement Date means the first day of a month coincident with or next following (i) a Participant's attainment of age fifty-five (55), (ii) termination of employment, and (iii) written application on or after attainment of age fifty-five (55) or termination of employment, provided, that such Early Retirement Date is prior to the Participant's Normal Retirement Date. (e) Final Average Compensation means the average of the three years (or such lesser time that the Participant may have been employed by the Company) of a Participant's Annual Compensation that produce the highest average. (f) Initial Participant means the initial select group of employees designated by the Compensation and Incentives Committee as Participants in this Plan as of the Effective Date. (g) Normal Retirement Age means the attainment of the Participant's sixtieth (60th) birthday. (h) Normal Retirement Date means the first day of the month coincident with or next following attainment of Normal Retirement Age. (i) Participant means an Initial Participant or an employee who is a member of a select group of management or is a highly compensated employee within the meaning of Sections 201(2) and 301(a)(3) of ERISA and who is designated as a Participant in this Plan pursuant to Section 4. (j) Pension Plan means the Kmart Corporation Employee Pension Plan, as amended from time to time. (k) Plan Year means the 12-month period beginning on the Effective Date or any subsequent anniversary date. (l) Years of Participation shall be credited for Plan Years of participation on and after the Effective Date; provided, however, that the Initial Participants shall be credited with one Year of Participation as of the 1 Effective Date. A Participant shall be credited with a Year of Participation for each Plan Year in which the Participant completes at least 1,000 Hours of Employment (as defined in the Pension Plan) and is a Participant in this Plan. SECTION 4. ELIGIBILITY The Initial Participants shall begin participation in the Plan on the Effective Date. The Office of the Chief Executive Officer has the authority to amend the select group of employees who are eligible to participate in the Plan, and their respective entry dates into the Plan, as it may deem necessary or desirable. Any Participant who may be removed from the select group of employees shall not forfeit any Accrued Benefit that is vested as of the date of such removal. However, any Participant that is removed from the select group of employees will not accrue any additional benefit after the effective date of such removal. SECTION 5. AMOUNT AND PAYMENT OF BENEFITS 5.1 Amount of Benefit. Subject to the vesting schedule set forth in Section 5.2, a Participant's Accrued Benefit under the Plan shall be determined as follows: 5% x Final Average Compensation x Years of Participation in the Plan, with a maximum benefit of 50% of the Participant's Final Average Compensation. 5.2 Vesting of Benefit. The benefit payable from the Plan shall be a percentage of the Participant's Accrued Benefit determined under the following schedule: Years of Participation Percentage of Benefit 1 through 2 0% 3 50% 4 75% 5 or more 100% 5.3 Payment of Benefit. Benefits shall be payable from the Plan as follows: (a) Normal Retirement Age. A Participant who terminates employment with the Company and retires at or after Normal Retirement Age shall be entitled to receive his or her Accrued Benefit commencing on the first day of the month coincident with or next following attainment of Normal Retirement Age or actual retirement date, if later. (b) Early Retirement Age. A Participant who terminates employment with the Company and retires at Early Retirement Age shall be entitled to receive his or her Accrued Benefit at (i) Normal Retirement Date, or (ii) any Early Retirement Date. If the Participant elects to receive his or her Accrued Benefit at an Early Retirement Date, the Accrued Benefit shall be reduced by 1/2 of 1% for each month by which the Participant's age at retirement precedes Normal Retirement Age. (c) Other Termination of Employment. A Participant who terminates employment with the Company before attainment of Early Retirement Age for any reason (including death or disability) with at least three Years of Participation shall be entitled to receive his or her Accrued Benefit. The benefit shall be payable (i) at Normal Retirement Date or (ii) at any Early Retirement Date, subject to reduction as provided in Section 5.3(b), as elected by the Participant. 5.4 Form of Benefit Payment. Benefits shall be paid to a Participant in the form, and subject to the same terms and conditions, as set forth in Section VI of the Pension Plan. In the event of a death of a Participant, benefits shall in paid in the form, and subject to the same terms and conditions, as set forth in subsection 1 of Section VII of the Pension Plan. 5.5 Restrictions on Payment of Benefits. Notwithstanding any other provision of this Plan to the contrary, no Participant (or his or her joint annuitant or beneficiary) shall be entitled to benefits under the Plan if, as determined by the Board of Directors in its sole discretion, such Participant (a) breaches the covenants or agreements which are included in any agreement between the Participant and Company including, without limitation, provisions regarding confidentiality, non-solicitation, non-competition or disparagement with respect to the Company or an Affiliated Company (as defined in the Pension Plan), or (b) participated in any theft, embezzlement, fraud, or acts of a similar nature against the Company or an Affiliated Company. 2 SECTION 6. FUNDING Benefits under the Plan shall be payable solely from the general assets of the Company or the appropriate participating Affiliated Company. The Plan shall remain unfunded during the entire period of its existence. SECTION 7. RIGHTS OF EMPLOYEES AND CONDITIONS OF EMPLOYMENT 7.1 Rights of Employees and Beneficiaries. Payment of benefits pursuant to the Plan shall be made only to a Participant, joint annuitant or beneficiary. Such benefits shall not be subject in any manner to the debts or other obligations of the person to whom they are payable and shall not be sold, transferred, assigned or encumbered in any manner, either voluntarily or involuntarily. 7.2 Conditions of Employment Not Affected by Plan. The establishment and maintenance of the Plan shall not be construed as conferring any legal rights upon any person to the continuance of employment with the Company or any Affiliated Company, nor shall the Plan limit or affect the right of the Company of any Affiliated Company to discharge any person from its employ. SECTION 8. ADMINISTRATION The Company shall be responsible for the administration of the Plan and for carrying out the purposes and provisions of the Plan. As administrator, the Company: (a) May adopt such rules, regulations and forms and establish such procedures as it deems necessary or appropriate in its discretion for the administration of the Plan. (b) Shall have discretionary authority to interpret, construe and determine the application of the Plan and its terms and to resolve all issues arising under the Plan. This discretionary authority shall include the authority to (i) construe disputed or doubtful terms of the Plan or of any rule, regulation, form or procedure, (ii) determine the eligibility of an individual to participate in the Plan, (iii) determine the amount, if any, of benefits to which any Participant or other person may be entitled under the Plan, (iv) determine the timing and manner of payment of benefits, (v) determine any such matter relating to the administration of the Plan or any claim under the Plan, and (vi) resolve all other issues arising under the Plan, any such determinations to be final and binding upon all persons. (c) May take such other action as it deems necessary or appropriate in its discretion for the proper administration of the Plan. (d) May delegate any of the foregoing powers to any person or persons or committee or committees. SECTION 9. AMENDMENT AND TERMINATION The Company reserves the right to amend or discontinue the Plan if, in its sole judgment, such an amendment or discontinuance is deemed necessary or desirable. No such amendment or termination of the Plan shall operate to reduce the Accrued Benefit hereunder of any Participant under the Plan as of the effective date of amendment or termination. SECTION 10. CHANGE IN CONTROL 10.1 Effect of a Change in Control. Upon a Change in Control (as defined in Section 10.2), the following provisions shall become immediately effective and shall supersede any provisions of the Plan to the contrary: (a) The requirement that a Participant must complete three Years of Participation in order to be eligible to receive a benefit from the Plan shall be waived. (b) For a Participant with less than five Years of Participation, his or her vested Percentage of Benefit set forth in Section 5.2 shall be increased to 100% of his or her Accrued Benefit immediately upon the date the Change in Control occurs. 3 (c) A Participant's minimum Accrued Benefit from the Plan shall be the Accrued Benefit determined under the Plan's benefit formula as of the end of the Plan Year in which the Change in Control occurs. (d) A Participant's Accrued Benefit shall be payable immediately upon consummation of a Change in Control and shall be paid in the form of an actuarially equivalent lump sum distribution. 10.2 Definition of Change in Control. "Change in Control" of the Company is deemed to have occurred as of the first day that any one or more of the following conditions shall have been satisfied: (a) The "Beneficial Ownership" of securities representing more than thirty-three percent (33%) of the combined voting power of the Company is acquired by any "person" as defined in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company); or (b) The stockholders of the Company approve a definitive agreement to merge or consolidate the Company with or into another corporation or to sell or otherwise dispose of all or substantially all of its assets, or adopt a plan of liquidation; or (c) During any period of three consecutive years, individuals who at the beginning of such period were members of the Board cease for any reason to constitute at least a majority thereof (unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least a majority of the directors then still in office who were directors at the beginning of such period or whose election or nomination was previously so approved). SECTION 11. MISCELLANEOUS 11.1 Controlling Law. To the extent not preempted by the laws of the United States of America, the laws of the State of Michigan shall be the controlling law in all matters relating to the Plan. 11.2 Severability. If any provisions of the Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts of the Plan and the Plan shall be construed and enforced as if said illegal and invalid provisions had never been included herein. 11.3 Limitations on Provisions. The Plan shall not operate or be construed in any way to modify, amend or affect the terms and provisions of the Pension Plan. 11.4 Extension of Plan to Subsidiaries. The Plan may be extended to an Affiliated Company on such terms and conditions as determined by the Board of Directors of the Company. 4 EX-10.1 4 k66335ex10-1.txt LONG TERM CASH INCENTIVE PLAN EXHIBIT 10.1 KMART CORPORATION LONG-TERM CASH INCENTIVE PLAN 1. PURPOSES; CONSTRUCTION. The purposes of the Kmart Corporation Long-Term Cash Incentive Plan (the "Plan") are to attract and retain highly-qualified executives by providing appropriate performance-based long-term incentive awards, to align executive and stockholder interests by creating a direct link between executive compensation and company performance, thereby enhancing stockholder return, and to provide incentives to executives to contribute to the success of the Company. 2. DEFINITIONS. As used in this Plan, the following words and phrases shall have the following meanings: (a) "Board" shall mean the Board of Directors of the Company. (b) "Bonus" shall mean any incentive bonus award granted pursuant to this Plan; the payment of any such award shall be contingent upon the attainment of Performance Goals with respect to a Performance Cycle. (c) "Change in Control" shall mean the occurrence of an event described in Section 6(d) hereof. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (e) "Committee" shall mean the Compensation and Incentives Committee of the Board. (f) "Company" shall mean Kmart Corporation, a corporation organized under the laws of the State of Michigan, or any successor corporation. (g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time, and as now or hereafter construed, interpreted and applied by regulations, rulings and cases. (h) "Participant" shall mean an officer of the Company (corporate vice presidents and higher) or one of its Subsidiaries who is eligible to participate herein pursuant to Article 3 hereof and for whom a target Bonus is established with respect to the relevant Performance Cycle. (i) "Performance Cycle" shall mean the two year period commencing on the first day of a Plan Year and ending on the last day of the next Plan Year (j) "Performance Goal(s)" shall mean the criteria and objectives which must be met during a Performance Cycle as a condition of the Participant's receipt of payment with respect to a Bonus, as described in Article 5 hereof. (k) "Plan" shall mean this Kmart Corporation Long-Term Cash Incentive Plan, as amended from time to time. (l) "Plan Year" shall mean the Company's fiscal year. (m) "Subsidiary" shall mean any subsidiary of the Company which is designated by the Board or the Committee to have any one or more of its officers or employees participate in the Plan. 3. ELIGIBILITY. Bonuses may be granted hereunder to such officers of the Company and any of its Subsidiaries as are designated by the Committee. In determining the officers to whom Bonuses shall be granted, the Committee shall take into account such factors as the Committee shall deem relevant in connection with accomplishing the purposes of the Plan. 1 4. NO STOCK SUBJECT TO PLAN. No shares of any stock shall be reserved for, or issued under, the Plan. 5. PERFORMANCE GOALS. Performance Goals may be expressed in terms of (i) the Company's return on equity, assets, capital or investment, (ii) pre-tax or after-tax profit levels of the Company, the Subsidiaries, subdivisions thereof, or any combination of the foregoing, (iii) expense reduction levels; (iv) implementation of critical projects or processes, (v) changes in market price of the stock, (vi) leadership effectiveness, (vii) customer satisfaction, (viii) inventory, and/or (ix) any other goals or objectives the Committee shall deem relevant in connection with accomplishing the purposes of the Plan. To the extent applicable, any such Performance Goal shall be determined in accordance with generally accepted accounting principles and reported upon by the Company's independent accountants. Performance Goals: (a) shall include the target level of performance at which 100% Bonus payment shall be made and below which no Bonus payment shall be made, and a maximum level of performance at which 150% Bonus payment shall be made and above which no additional Bonus shall be paid; and (b) may include levels of performance at which specified percentages of the target Bonus between 100% and 150% shall be paid if and to the extent the Participant exceeded the Performance Goal(s). The Performance Goals established by the Committee may be (but need not be) different each Performance Cycle and different goals may be applicable to different Participants. 6. BONUSES. (a) In General. For each Performance Cycle, the Committee shall specify the Performance Goal(s) applicable to each Participant for such Performance Cycle and the amount of, or the formula for determining, the target Bonus for each Participant with respect to such Performance Cycle. A Participant's target Bonus for each Performance Cycle shall be expressed as either a dollar amount or as a percentage of the salary midpoint for the Participant's salary grade. Unless otherwise provided by the Committee in its, or except as set forth in Section 6(d) hereof, payment of a Bonus for a particular Performance Cycle shall: (i) be made only if and to the extent the Performance Goal(s) with respect to such Performance Cycle are fully attained and only if the Participant is employed by the Company or a Subsidiary on the last day of the Performance Cycle; and (ii) be prorated if the Participant was on a leave of absence for a period greater than 90 days during the Performance Cycle or was not an eligible Participant for the entire Performance Cycle. The actual amount of Bonus payable under the Plan shall be 100% of the target bonus if the Participant achieved the Performance Goal(s), or be between 100% and 150% of the target bonus if the Participant exceeded the Performance Goal(s). No Bonus shall be payable if the Performance Goal(s) have not been fully achieved. The Committee may, in its discretion, reduce or eliminate the amount payable to any Participant, in each case based upon such factors as the Committee may deem relevant, but shall not increase the amount payable to any Covered Employee. (b) Time of Payment. Unless otherwise determined by the Committee, or except as provided in Section 6(d) hereof, all payments in respect of Bonuses granted under this Article 6 shall be made within a reasonable period after the end of the Performance Cycle. (c) Form of Payment. The Participant's Bonus payable for any Performance Cycle (less applicable payroll deductions) shall be paid in cash. (d) Change in Control. Notwithstanding any other provision of the Plan to the contrary, (i) if a "Change in Control" of the Company (as defined in this Section 6(d)) shall occur following a Performance Cycle as to which the Committee has determined the actual Bonuses to be paid (but such Bonuses have not yet been paid), such Bonuses shall be paid immediately in cash, (ii) if a Change in Control shall occur following a Performance Cycle as to which the Committee has not yet determined the actual Bonuses to be paid, such Bonuses shall be immediately determined and paid in cash, and (iii) if a Change in Control shall occur during a Performance Cycle (but the actual Bonuses to be paid have not yet been determined), such Performance Cycle shall be deemed to have been completed, the target levels of performance set forth under the respective Performance Goals shall be deemed to have been attained and a pro rata portion of the Bonus so determined for each Participant for such partial Performance Cycle (based on the number of full and partial months which have elapsed with respect to such Performance Cycle) shall be paid immediately in cash to each Participant for whom a target Bonus for such Performance Cycle was established. For purposes of this Article 6, the first to occur of any of the following events shall be deemed to be a Change in Control of the Company: 2 (i) the "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act) of securities representing more than 33% of the combined voting power of the Company is acquired by any "person," as defined in sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), or (ii) the stockholders of the Company approve a definitive agreement to merge or consolidate the Company with or into another corporation or to sell or otherwise dispose of all or substantially all of its assets, or adopt a plan of liquidation, or (iii) during any period of three consecutive years, individuals who at the beginning of such period were members of the Board cease for any reason to constitute at least a majority thereof (unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least a majority of the directors then still in office who were directors at the beginning of such period or whose election or nomination was previously so approved). 7. ADMINISTRATION. The Plan shall be administered by the Committee. The Committee shall have the authority in its sole discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority: to grant Bonuses; to determine the persons to whom and the time or times at which Bonuses shall be granted; to determine the terms, conditions, restrictions and performance criteria relating to any Bonus; to make adjustments in Performance Goals in response to changes in applicable laws, regulations or accounting principles except as otherwise provided in Section 6(a) hereof; to adjust compensation payable upon attainment of Performance Goals; to construe and interpret the Plan and any Bonus; to prescribe, amend and rescind rules and regulations relating to the Plan; and to make all other determinations deemed necessary or advisable for the administration of the Plan. The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all persons, including the Company, a Subsidiary, a Participant (or any person claiming any rights under the Plan from or through any Participant) and any stockholder. No member of the Board or the Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Bonus granted hereunder. 8. GENERAL PROVISIONS. (a) Compliance with Legal Requirements. The Plan and the granting of Bonuses, and the other obligations of the Company under the Plan shall be subject to all applicable federal and state laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may be required. (b) No Right To Continued Employment. Nothing in the Plan or in any Bonus granted pursuant hereto shall confer upon any Participant the right to continue in the employ of the Company or any of its Subsidiaries or to be entitled to any remuneration or benefits not set forth in the Plan or to interfere with or limit in any way the right of the Company or any of its Subsidiaries to terminate such Participant's employment. (c) Withholding Taxes. The Company or Subsidiary employing any Participant shall deduct from all payments and distributions under the Plan any taxes required to be withheld by federal, state or local governments. (d) Amendment and Discontinuance of the Plan. The Board or the Committee may at any time and from time to time alter, amend, suspend or discontinue the Plan in whole or in part. The Committee may also make such amendments as it deems necessary to comply with applicable laws, rules and regulations. Notwithstanding the foregoing, no amendment, suspension or discontinuance of the Plan shall affect adversely any of the rights of any Participant under any Bonus theretofore granted hereunder without the consent of such Participant. 3 (e) Participant Rights. No Participant shall have any claim to be granted any Bonus under the Plan, and there is no obligation for uniformity of treatment of Participants. (f) Unfunded Status of Bonuses. The Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any payments which at any time are not yet made to a Participant pursuant to a Bonus, nothing contained in the Plan or any Bonus shall give any such Participant any rights that are greater than those of a general creditor of the Company. (g) Governing Law. The Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the State of Michigan without giving effect to the choice of law principles thereof, except to the extent that such law is preempted by federal law. (h) Effective Date; Approval of Stockholders. The Plan shall take effect upon its adoption by the Committee. August 15, 2001. 4 -----END PRIVACY-ENHANCED MESSAGE-----