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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 27, 2004
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. 000-50278
KMART HOLDING CORPORATION
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 32-0073116
- --------------------------------------------------------------------------------
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
As of November 5, 2004, 89,178,003 shares of Common Stock of the Registrant were
outstanding.
INDEX
PART I FINANCIAL INFORMATION PAGE
- ------ ---------------------- --------
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) -
for the 13-weeks ended October 27, 2004 and October 29,
2003 3
Condensed Consolidated Statements of Operations (Unaudited) -
Successor Company - for the 39-weeks ended October 27, 2004
and the 26-weeks ended October 29, 2003
Predecessor Company - for the 13-weeks ended April 30, 2003 4
Condensed Consolidated Balance Sheets (Unaudited) - as of
October 27, 2004, January 28, 2004 and October 29, 2003 5
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Successor Company - for the 39-weeks ended October 27, 2004
and the 26-weeks ended October 29, 2003
Predecessor Company - for the 13-weeks ended April 30, 2003 6
Notes to Unaudited Condensed Consolidated Financial Statements 7 - 20
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 21-30
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
Item 4. Controls and Procedures 31
PART II OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and
Issuer Purchases of Equity Securities 32
Item 6. Exhibits 32
Signatures 33
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
13-WEEKS ENDED
-------------------------------------
OCTOBER 27, 2004 OCTOBER 29, 2003
---------------- ----------------
Sales $ 4,392 $ 5,092
Cost of sales, buying and occupancy 3,247 3,925
------------- -------------
Gross margin 1,145 1,167
Selling, general and administrative expenses 1,043 1,179
Net gains on sales of assets (807) (1)
------------- -------------
Operating income (loss) 909 (11)
Interest expense, net 22 24
Bankruptcy-related recoveries (1) -
Equity income in unconsolidated subsidiaries - (1)
------------- -------------
Income (loss) from operations before income taxes 888 (34)
Provision for (benefit from) income taxes 335 (11)
------------- -------------
Net income (loss) $ 553 $ (23)
============= =============
Basic net income (loss) per common share $ 6.20 $ (0.26)
============= =============
Diluted net income (loss) per common share $ 5.45 $ (0.26)
============= =============
Basic weighted average shares (millions) 89.2 89.6
Diluted weighted average shares (millions) 101.6 89.6
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PREDECESSOR
SUCCESSOR COMPANY COMPANY
----------------------------------- --------------
39-WEEKS ENDED 26-WEEKS ENDED 13-WEEKS ENDED
OCTOBER 27, 2004 OCTOBER 29, 2003 APRIL 30, 2003
---------------- ---------------- --------------
Sales $ 13,792 $ 10,744 $ 6,181
Cost of sales, buying and occupancy 10,268 8,344 4,762
------------- ------------- -------------
Gross margin 3,524 2,400 1,419
Selling, general and administrative expenses 3,086 2,404 1,421
Net gains on sales of assets (911) (3) -
Restructuring, impairment and other charges - - 37
------------- ------------- -------------
Operating income (loss) 1,349 (1) (39)
Interest expense, net 79 45 57
Bankruptcy-related recoveries (13) - -
Equity income in unconsolidated subsidiaries (3) (3) (7)
Reorganization items, net - - 769
------------- ------------- -------------
Income (loss) from continuing operations before income taxes 1,286 (43) (858)
Provision for (benefit from) income taxes 485 (15) (6)
------------- ------------- -------------
Income (loss) from continuing operations 801 (28) (852)
Discontinued operations (net of income taxes of $0) - - (10)
------------- ------------- -------------
Net income (loss) $ 801 $ (28) $ (862)
============= ============= =============
Basic income (loss) per common share from continuing operations $ 8.96 $ (0.32) $ (1.63)
Discontinued operations - - (0.02)
------------- ------------- -------------
Basic net income (loss) per common share $ 8.96 $ (0.32) $ (1.65)
============= ============= =============
Diluted income (loss) per common share from continuing operations $ 7.93 $ (0.32) $ (1.63)
Discontinued operations - - (0.02)
------------- ------------- -------------
Diluted net income (loss) per common share $ 7.93 $ (0.32) $ (1.65)
============= ============= =============
Basic weighted average shares (millions) 89.4 89.6 522.7
Diluted weighted average shares (millions) 101.4 89.6 522.7
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
4
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
OCTOBER 27, 2004 JANUARY 28, 2004 OCTOBER 29, 2003
---------------- ---------------- ----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,564 $ 2,088 $ 941
Merchandise inventories 3,902 3,238 4,404
Accounts receivable, net 649 301 348
Other current assets 195 184 204
------------- ------------- -------------
TOTAL CURRENT ASSETS 7,310 5,811 5,897
Property and equipment, net 288 153 115
Other assets and deferred charges 67 120 105
------------- ------------- -------------
TOTAL ASSETS $ 7,665 $ 6,084 $ 6,117
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Long-term debt and mortgages payable due within one year $ 4 $ 4 $ 61
Accounts payable 1,264 820 1,203
Accrued expenses and other liabilities 777 671 733
Taxes other than income taxes 276 281 295
------------- ------------- -------------
TOTAL CURRENT LIABILITIES 2,321 1,776 2,292
LONG-TERM LIABILITIES
Long-term debt and mortgages payable 101 103 24
Capital lease obligations 288 374 419
Pension obligations 874 873 867
Unfavorable operating leases 302 342 322
Other long-term liabilities 720 424 486
------------- ------------- -------------
TOTAL LIABILITIES 4,606 3,892 4,410
SHAREHOLDERS' EQUITY
Preferred stock 20,000,000 shares authorized; no shares outstanding - - -
Common stock $0.01 par value, 500,000,000 shares authorized;
89,178,003, 89,633,760 and 89,655,445 shares issued, respectively 1 1 1
Treasury stock, at cost (36) (1) (1)
Capital in excess of par value 2,045 1,943 1,735
Retained earnings (Accumulated deficit) 1,049 248 (28)
Accumulated other comprehensive income - 1 -
------------- ------------- -------------
TOTAL SHAREHOLDERS' EQUITY 3,059 2,192 1,707
------------- ------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,665 $ 6,084 $ 6,117
============= ============= =============
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
PREDECESSOR
SUCCESSOR COMPANY COMPANY
------------------------------------ --------------
39-WEEKS 26-WEEKS 13-WEEKS
ENDED ENDED ENDED
OCTOBER 27, 2004 OCTOBER 29, 2003 APRIL 30, 2003
---------------- ---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 801 $ (28) $ (862)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 36 10 177
Store closings inventory charges 22 - -
Net gains on sales of assets (911) (3) -
Deferred income taxes 462 - -
Equity income in unconsolidated subsidiaries (3) (3) (7)
Restructuring, impairments and other charges - - 44
Reorganization items, net - - 769
Dividends received from Meldisco 3 - 36
Cash used for store closings and other charges - (11) (64)
Cash used for payments of exit costs and other
reorganization items - (470) (19)
Change in:
Merchandise inventories (686) 27 480
Accounts receivable 21 32 114
Accounts payable 444 43 (117)
Taxes payable 11 (4) (16)
Other assets - (39) 9
Other liabilities (29) 50 32
------------- ------------- -------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 171 (396) 576
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of assets 524 93 64
Capital expenditures (179) (61) (4)
------------- ------------- -------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 345 32 60
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations (37) (29) (16)
Payments on debt (3) (36) (1)
Proceeds from issuance of debt - 60 -
Debt issuance costs - (46) -
Fees paid to Plan Investors - (13) -
Issuance of common shares - 140 -
Purchase of treasury stock - (3) -
------------- ------------- -------------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (40) 73 (17)
------------- ------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 476 (291) 619
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,088 1,232 613
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,564 $ 941 $ 1,232
============= ============= =============
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Kmart Holding Corporation ("Kmart," "we," "us," "our," the "Company" or
the "Successor Company") is the nation's third largest discount retailer. We
operate in the general merchandise retailing industry through 1,484 Kmart
discount stores and Supercenters with locations in 49 states, Puerto Rico, the
U.S. Virgin Islands, Guam and through our e-commerce shopping site,
www.kmart.com.
These interim Unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (which include normal recurring
adjustments) considered necessary for a fair presentation have been included.
All significant intercompany accounts and transactions have been eliminated.
Operating results for the interim period are not necessarily indicative of the
results that may be expected for the full year. Readers of these interim period
statements should refer to the audited consolidated financial statements and
notes thereto which are included in our Annual Report on Form 10-K for the year
ended January 28, 2004. Certain prior period amounts have been reclassified to
conform to the current interim period presentation.
The American Institute of Certified Public Accountants Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" ("SOP 90-7") requires that the financial statements for the
period following filing for Chapter 11 bankruptcy protection through the date a
plan of reorganization is confirmed distinguish transactions and events that are
directly associated with the reorganization from the ongoing operations of the
business. Accordingly, revenues, expenses, realized gains and losses and
provisions for losses directly associated with reorganization and restructuring
of the business during the Predecessor Company's (defined below) bankruptcy
proceedings have been reported separately as Reorganization items, net in the
Unaudited Condensed Consolidated Statements of Operations. See below for a more
detailed discussion of the Company's Chapter 11 proceedings.
2. EMERGENCE FROM CHAPTER 11 BANKRUPTCY PROTECTION AND FRESH-START ACCOUNTING
Confirmation of Plan of Reorganization
On May 6, 2003 (the "Effective Date"), Kmart Corporation (the "Predecessor
Company") emerged from reorganization proceedings under Chapter 11 of the
federal bankruptcy laws ("Bankruptcy Code" or "Chapter 11") pursuant to the
terms of the Plan of Reorganization (defined below). The Predecessor Company
became a wholly-owned subsidiary of Kmart Management Corporation, which is a
wholly-owned subsidiary of Kmart Holding Corporation.
On January 22, 2002 (the "Petition Date"), the Predecessor Company and
37 of its U.S. Subsidiaries (collectively the "Debtors") filed voluntary
petitions for reorganization under Chapter 11 in the United States Bankruptcy
Court for the Northern District of Illinois (the "Court"). During the
reorganization proceedings, the Debtors continued to operate their business as
debtors-in-possession under the jurisdiction of the Court and in accordance with
the applicable provisions of the Bankruptcy Code and orders of the Court. On
January 24, 2003, the Debtors filed a Plan of Reorganization and related
Disclosure Statement and on February 25, 2003, filed an Amended Joint Plan of
Reorganization (the "Plan of Reorganization") and related amended Disclosure
Statement with the Court. The Plan of Reorganization received the formal
endorsement of the statutory creditors' committees and, as modified, was
confirmed by the Court by order docketed on April 23, 2003.
7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Plan Investors
At the time of emergence, ESL Investments, Inc. ("ESL") and Third Avenue
Trust, on behalf of certain of its investment series ("Third Avenue," and
together with ESL, the "Plan Investors") made a substantial investment in the
Successor Company in furtherance of our financial and operational restructuring
plan. The Plan Investors and their affiliates received approximately 32 million
shares of our newly issued common stock ("Common Stock") in satisfaction of
pre-petition claims they held, and we issued 14 million shares of Common Stock
to affiliates of ESL and to Third Avenue, in exchange for $127 million, net of
commitment fees and Plan Investor expenses of $13 million. In addition, we
issued a 9 percent, $60 million principal convertible note (the "Note") to
affiliates of ESL. With respect to the Note, the principal is convertible at any
time prior to its maturity in May 2006, at the option of the holder, into 6
million shares of Common Stock at a conversion price equal to $10 per share. ESL
was also granted the option to purchase, prior to May 6, 2005, approximately 6.6
million shares of Common Stock at a price of $13 per share. A portion of the
option was assigned to Third Avenue. The investment was made pursuant to an
Investment Agreement dated January 24, 2003, as amended (the "Investment
Agreement").
Discharge of Liabilities
Under Chapter 11, actions by creditors to collect indebtedness owed prior
to the Petition Date were stayed and certain other pre-petition contractual
obligations were not enforced against the Debtors. The Predecessor Company
received approval from the Court to pay certain pre-petition liabilities
including employee salaries and wages, benefits and other employee obligations.
On the Effective Date, all then-outstanding equity securities of the
Predecessor Company, as well as substantially all of its pre-petition
liabilities, were cancelled. Common Stock was issued in satisfaction of certain
of those claims. On the Effective Date, 89,677,509 shares of Common Stock and
8,173,145 options to purchase shares of Common Stock were issued pursuant to the
Plan of Reorganization. All of the shares of Common Stock issued on May 6, 2003
were or will be distributed pursuant to the Plan of Reorganization in
satisfaction of pre-petition claims, except that 14 million shares were issued
to affiliates of ESL and to Third Avenue pursuant to the Investment Agreement
described above. The options to purchase shares of Common Stock were issued to
the Plan Investors and our former Chief Executive Officer. All shares were
issued without registration under the Securities Act of 1933, as amended (the
"Securities Act") in reliance on the provisions of Section 1145 of the
Bankruptcy Code and Section 4(2) of the Securities Act. In addition, as part of
the Plan of Reorganization, an independent creditor litigation trust was
established for the benefit of the Predecessor Company's pre-petition creditors
and equity holders, and to pursue claims which arose from the Predecessor
Company's prior accounting and stewardship investigations.
Fresh-Start Adjustments
In connection with our emergence from Chapter 11, we reflected the terms
of the Plan of Reorganization in our consolidated financial statements, applying
the terms of SOP 90-7 with respect to financial reporting. Upon applying
Fresh-Start accounting, a new reporting entity (the Successor Company) is deemed
to be created and the recorded amounts of assets and liabilities are adjusted to
reflect their estimated fair values. The reported historical financial
statements of the Predecessor Company for periods ended prior to May 1, 2003
generally are not comparable to those of the Successor Company. In this
Quarterly Report on Form 10-Q, references to the 13-weeks ended April 30, 2003
and prior periods refer to the Predecessor Company. References to the Successor
Company refer to the Company on and after April 30, 2003 after giving effect to
the provisions of the Plan of Reorganization and the application of Fresh-Start
accounting.
8
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
To facilitate the calculation of the enterprise value of the Successor
Company, we developed a set of financial projections. Based on these financial
projections and with the assistance of a financial advisor, we determined the
enterprise value using various valuation methods, including (i) a comparison of
the Company and its projected performance to the market values of comparable
companies, (ii) a review and analysis of several recent transactions of
companies in similar industries to the Company, and (iii) a calculation of the
present value of the future cash flows under the projections. The estimated
enterprise value was highly dependent upon achieving the future financial
results set forth in the projections as well as the realization of certain other
assumptions which are not guaranteed. The estimated enterprise value of the
Company was calculated to be approximately $2.3 billion to $3.0 billion. We
selected the midpoint of the range, $2.6 billion, as the estimated enterprise
value. In applying Fresh-Start accounting, adjustments to reflect the fair value
of assets and liabilities, on a net basis, and the write-off of the Predecessor
Company's equity accounts resulted in a charge of $5.6 billion. The fair value
adjustments included the recognition of approximately $2.2 billion of intangible
assets that were previously not recorded in the Predecessor Company's financial
statements, such as favorable leasehold interests, Kmart brand rights, pharmacy
customer relationships and other lease and license agreements. The restructuring
of the Predecessor Company's capital structure and resulting discharge of
pre-petition debt resulted in a gain of $5.6 billion. The charge for the
revaluation of the assets and liabilities and the gain on the discharge of
pre-petition debt are recorded in Reorganization items, net in the Unaudited
Condensed Consolidated Statements of Operations. In addition, the excess of fair
value of net assets over reorganization value (i.e., "negative goodwill") of
approximately $5.6 billion was allocated on a pro-rata basis reducing our
non-current, non-financial instrument assets, including the previously
unrecorded intangible assets, to $10 million as of April 30, 2003.
Refer to our Annual Report on Form 10-K for the year ended January 28,
2004 for a more detailed discussion.
Claims Resolution
We continue to make progress in the reconciliation and settlement of the
various classes of claims associated with the discharge of the Predecessor
Company's liabilities subject to compromise pursuant to the Plan of
Reorganization. Since June 30, 2003, the first distribution date established in
the Plan of Reorganization, approximately 21.3 million shares of the 31.9
million shares previously issued to us as disbursing agent with respect to such
claims have been distributed to holders of Class 5 claims and approximately $4.1
million in cash has been distributed to holders of Class 7 claims. Due to the
significant volume of claims filed to-date, it is premature to estimate with any
degree of accuracy the ultimate allowed amount of such claims for each class of
claims under the Plan of Reorganization. Accordingly, our current distribution
reserve for claim settlements is 20 percent of shares issued. Differences
between amounts filed and our estimates are being investigated and will be
resolved in connection with our claims resolution process. In this regard, it
should be noted that the claims reconciliation process may result in material
adjustments to current estimates of allowable claims.
During the second quarter of fiscal 2004, we reduced the distribution
reserve from 30 percent to 20 percent, resulting in the distribution of
approximately an additional 2.2 million shares to claimants who had previously
received shares for allowed claims. The remaining shares in the distribution
reserve will be issued to claimants on a pro-rata basis if, upon settlement of
all claims, the ultimate amount allowed for Class 5 claims is consistent with
the Plan of Reorganization.
The next scheduled distribution under the Plan of Reorganization is
expected to commence on or about January 1, 2005.
On August 31, 2004, we entered into a settlement agreement with a past
provider of our surety bonds, Fireman's Fund Insurance Company ("Fireman's
Fund") to resolve all issues in connection with its pre-petition claims. In
accordance with the terms of the settlement agreement, Kmart assumed
responsibility for Fireman's Fund future obligations under the bonds issued with
respect to the Predecessor Company's workers' compensation insurance program and
Fireman's Fund assigned its Class 5 claim to the Company. We received 494,481
shares of the Company's Common Stock relating to the settlement between the
parties on August 31, 2004, which represents 80% of the shares Fireman's Fund
would have received for an allowed claim. The remaining 20% will be received
upon the final settlement of all Class 5 claims, as noted above. The Company
recorded a liability for the obligations under the bonds of approximately $33
million.
9
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Bankruptcy-Related Recoveries
For the 13-weeks and 39-weeks ended October 27, 2004, we recognized
recoveries of $1 million and $13 million, respectively, from vendors who had
received cash payments for pre-petition obligations (critical vendor claims) or
preference payments. See Note 19 - - Commitments and Contingencies for a more
detailed discussion of the critical vendor claims lawsuit.
We entered into two settlement agreements in the second quarter of fiscal
2004 with respect to certain other bankruptcy-related recoveries. These
agreements resulted in the receipt of $1.4 million in cash and the assignment of
a Class 5 claim to the Company. We received 8,217 shares of Common Stock
relating to this assignment in July 2004, which represents 80% of the total
claim. The remaining 20% will be received upon the final settlement of all Class
5 claims, as noted above.
3. REAL ESTATE AND PROPERTY TRANSACTIONS
Home Depot U.S.A., Inc.
On June 3, 2004, the Company entered into multiple agreements with Home
Depot U.S.A., Inc. (a subsidiary of The Home Depot, Inc.) ("Home Depot") to sell
owned properties and assign leased properties for a maximum purchase price of
$365 million in cash. These agreements were later amended to reflect that the
Company would sell four properties and assign 14 properties for an aggregate
purchase price of $271 million. Pursuant to these agreements, on June 15, 2004,
the Company completed the sale of four owned properties to Home Depot for $59
million in cash, resulting in a net gain of $43 million. The Company completed
the assignment of 13 of the remaining properties in the third quarter of fiscal
2004, resulting in proceeds to the Company of $200 million in cash, and a net
gain of $198 million. We anticipate closing on the final property during the
fourth quarter, resulting in additional proceeds of $12 million.
Sears, Roebuck and Co.
On June 29, 2004, the Company entered into an agreement with Sears,
Roebuck and Co. ("Sears") to sell owned properties and assign leased properties
for a maximum purchase price of $621 million in cash. On September 29, 2004, the
Company agreed to sell four owned properties, assign 45 leased properties and
lease one owned store to Sears for a total purchase price of approximately $576
million. The Company received 30% of the purchase price in September 2004 upon
closing, and recognized a gain on the transaction of $599 million. The remaining
70% of the purchase price will be received when Sears occupies the properties,
which shall take place no later than April 15, 2005. The receivable for the
remaining purchase price of $403 million is included in Accounts receivable, net
in our Unaudited Condensed Consolidated Balance Sheet as of October 27, 2004.
ESL and its affiliates own over 10 percent of both Sears and the Company.
Other
The Company also sold certain other assets, resulting in net gains of $10
million and $71 million for the 13-weeks and 39-weeks ended October 27, 2004,
respectively. Included within this gain for the 39-week period was $18 million
related to the sale of the Company's Trinidad subsidiary and its associated
property, $12 million related to the sale of the Company's corporate airplanes
and $41 million from sales of other real and personal property. During the
39-weeks ended October 27, 2004 and the 26-weeks ended October 26, 2003, we
purchased 28 and eight previously-leased operating properties for $103 million
and $61 million, respectively.
10
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. PENSION PLAN
The following table summarizes the net periodic expense recognized for our
qualified employee pension plan.
Predecessor
Successor Company Company
---------------------------------------------------------------------- --------------
13-Weeks Ended 13-Weeks Ended 39-Weeks Ended 26-Weeks Ended 13-Weeks Ended
(dollars in millions) October 27, 2004 October 29, 2003 October 27, 2004 October 29, 2003 April 30, 2003
- --------------------- ---------------- ---------------- ---------------- ---------------- --------------
Components of Net Periodic Expense
Interest costs $ 38 $ 38 $ 115 $ 76 $ 38
Expected return on plan assets (35) (32) (104) (61) (33)
Net loss recognition - - - - 18
Amortization of unrecognized
transition asset - - - - (2)
----------- ----------- ----------- ----------- -----------
Net periodic expense $ 3 $ 6 $ 11 $ 15 $ 21
=========== =========== =========== =========== ===========
During the 39-weeks ended October 27, 2004 contributions to the plan were
approximately $10 million. Contributions to the plan were not required during
fiscal 2003. The minimum required contribution for fiscal 2004 and fiscal 2005
is approximately $11 million and $4 million, respectively.
5. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during each period. Diluted
earnings per share assumes the exercise of stock options, the conversion of
convertible debt and the impact of restricted stock when dilutive.
A reconciliation of basic weighted average common shares outstanding to
diluted weighted average common shares outstanding is as follows:
13-weeks ended 39-weeks ended
(in millions) October 27, 2004 October 27, 2004
- ------------- ---------------- ----------------
Basic weighted average common shares 89.2 89.4
Dilutive effect of stock options 6.4 6.0
9% convertible note 6.0 6.0
----- -----
Diluted weighted average common shares 101.6 101.4
===== =====
A reconciliation of net income available to common shareholders to net
income available to common shareholders with assumed conversions is as follows:
13-Weeks Ended 39-Weeks Ended
(dollars in millions) October 27, 2004 October 27, 2004
- ---------------------------------------------------------------- ---------------- ----------------
Net income available to common shareholders $ 553 $ 801
Interest on 9% convertible note, net of tax 1 3
------------ ----------
Income available to common shareholders with assumed conversions $ 554 $ 804
============ ==========
Certain common stock equivalents were excluded from the calculation of
diluted earnings per share for the 13-weeks and 39-weeks ended October 27, 2004
as they were anti-dilutive. All common stock equivalents were excluded from the
calculation of diluted earnings per share for the 13-weeks ended October 29,
2003 and April 30, 2003 and the 26-weeks ended October 29, 2003 as they were
anti-dilutive. Upon our emergence from bankruptcy, all common stock equivalents
of the Predecessor Company were cancelled.
11
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. DEBT
Credit Facility
Our credit agreement (the "Credit Facility") is an $800 million revolving
credit facility with an equivalent letter of credit sub-limit under which Kmart
Corporation is the borrower. Availability under the Credit Facility is subject
to an inventory borrowing base formula. Since its issuance, we have only used
the Credit Facility to support outstanding letters of credit. To reduce the
overall cost of the facility, we voluntarily reduced the size of the Credit
Facility from $1.5 billion to $1.0 billion in July 2004 and we amended and
restated the Credit Facility in October 2004 to eliminate the synthetic term
loan provisions, which reduced the size of the Credit Facility from $1.0 billion
to $800 million. In conjunction with these reductions to our Credit Facility,
the accelerated amortization of the associated debt issuance costs totaled $3
million for the 13-week period and $12 million for the 39-weeks ended October
27, 2004, respectively. The Credit Facility is guaranteed by the Successor
Company, Kmart Management Corporation, Kmart Services Corporation (a subsidiary
of Kmart Management Corporation) and Kmart Corporation's direct and indirect
domestic subsidiaries. The Credit Facility is secured primarily by first liens
on inventory, the proceeds thereof and certain related assets of Kmart
Corporation and the guarantors.
Borrowings under the Credit Facility are subject to a sliding pricing
scale based on our earnings before interest, taxes, depreciation, amortization
and other charges ("EBITDA") levels and such adjustments are implemented
quarterly. Utilization of the Credit Facility in support of trade and standby
letters of credit currently bears interest at 1.25% and 2.00% per annum,
respectively. In addition, we are required to pay a fee based on the unutilized
commitment under the Credit Facility equal to 0.375% per annum. The Credit
Facility gives the Company the ability to repurchase up to $500 million of the
Company's Common Stock, depending on our EBITDA levels and subject to the
approval of the Company's Board of Directors.
As of October 27, 2004, we had utilized $22 million of the Credit Facility
for letters of credit issued for ongoing import purchasing operations, and
contractual and regulatory purposes, including letters of credit utilized as
collateral to support our self-insurance programs. During fiscal 2004, we have
replaced letters of credit used as collateral for certain programs with cash
collateral which reduces fees paid by the Company with respect to the letters of
credit. We continue to classify the cash collateral as Cash and cash equivalents
due to our ability to convert the cash to letters of credit at any time at our
discretion. As of October 27, 2004, $221 million of cash was posted as
collateral.
Total availability under the Credit Facility as of October 27, 2004 was
approximately $750 million.
The Credit Facility financial covenants include a requirement that we
maintain certain availability minimums, and failure to do so triggers additional
required minimum levels of EBITDA. The Credit Facility also contains other
customary covenants, including certain reporting requirements and covenants that
restrict our ability to incur or create liens, indebtedness and guarantees, make
investments, pay dividends or make other equity distributions, sell or dispose
of stock or assets, change the nature of our business and enter into affiliate
transactions, mergers and consolidations. Failure to satisfy these covenants
would result in an event of default that could result in our inability to access
the funds. As of October 27, 2004, and in all periods since our emergence from
Chapter 11, we have been in compliance with all Credit Facility covenants.
Letter of Credit Agreement
On August 13, 2004, the Company entered into a letter of credit agreement
(the "LC Agreement") with a commitment amount of up to $200 million through
January 7, 2005, and increasing to $600 million thereafter. Standby letters of
credit issued under the LC Agreement bear interest at 0.20% per annum. No
interest is charged for trade letters of credit issued under the LC Agreement;
however, we are required to pay a fee based on the unutilized commitment, as
defined in the LC Agreement, equal to 0.125% per annum.
We amended the LC Agreement on October 4, 2004, primarily to provide Kmart
with an election to post either cash or inventory as collateral. Electing
inventory would result in incremental costs under the LC Agreement. The LC
Agreement is subject to a pledge and security agreement pursuant to which, after
January 7, 2005, the Company must post as collateral cash in an amount equal to
100.5% of the face value of letters of credit outstanding under the LC Agreement
or elect to post inventory as collateral, subject to certain conditions. Prior
to January 7, 2005, the collateral posted by the Company is a leasehold mortgage
on certain properties leased by the Company.
12
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The LC Agreement contains customary covenants, including covenants that
restrict our ability to incur or create liens on collateralized assets, and
sell, transfer, assign or otherwise dispose of any collateralized assets.
Failure to satisfy these covenants would result in an event of default that
could result in our inability to issue new letters of credit. Subject to these
covenants the Company is required to maintain in a deposit account $250 million
of cash invested with the issuing bank until such time that the cash collateral
is equal to the 100.5% of the face value of the letters of credit outstanding,
as discussed above. This cash is classified as Cash and cash equivalents as of
October 27, 2004. As of October 27, 2004, and in all periods since inception of
the LC Agreement, we have been in compliance with all covenants of the LC
Agreement.
As of October 27, 2004, we had utilized $197 million of the LC Agreement.
Predecessor Company Debt
Borrowings of the Predecessor Company during Chapter 11 proceedings were
available through the Court-approved $2 billion debtor-in-possession financing
facility ("DIP Credit Facility") for the payment of permitted pre-petition
claims, working capital needs, letters of credit and other general corporate
purposes. On May 6, 2003, in connection with the Debtors' emergence from Chapter
11, the DIP Credit Facility was terminated.
Due to its filing for Chapter 11, the Predecessor Company was in default
on all of its debt agreements entered into prior to January 22, 2002. While
operating under Chapter 11, the Predecessor Company was prohibited under the
Bankruptcy Code from paying interest on unsecured pre-petition debts. On the
Petition Date, the Predecessor Company stopped accruing interest on all
unsecured pre-petition debt until it emerged from bankruptcy in accordance with
SOP 90-7. Contractual interest expense not accrued or recorded by the
Predecessor Company on certain pre-petition debt totaled $67 million for the
13-weeks ended April 30, 2003.
Interest Expense, Net
Predecessor
Successor Company Company
--------------------------------------------------------------------- --------------
13-Weeks Ended 13-Weeks Ended 39-Weeks Ended 26-Weeks Ended 13-Weeks Ended
(dollars in millions) October 27, 2004 October 29, 2003 October 27, 2004 October 29, 2003 April 30, 2003
- --------------------------------------------- ---------------- ---------------- ---------------- ---------------- --------------
Components of Interest Expense, Net
Interest expense $ 12 $ 17 $ 40 $ 35 $ 21
Accretion of obligations at net present value 13 5 38 5 -
Amortization of debt issuance costs 6 4 22 9 37
Interest income (9) (2) (21) (4) (1)
---------- ---------- ---------- ---------- ----------
Interest expense, net $ 22 $ 24 $ 79 $ 45 $ 57
========== ========== ========== ========== ==========
Cash paid for interest was $42 million, $37 million, and $19 million for
the 39-weeks ended October 27, 2004, the 26-weeks ended October 29, 2003 and the
13-weeks ended April 30, 2003, respectively.
7. INCOME TAXES
We recorded a tax provision of $335 million and $485 million during the
13-weeks and 39-weeks ended October 27, 2004, respectively, based on the
estimated effective tax rate for fiscal 2004 of 37.7%. We recorded an $11
million and $15 million tax benefit from our losses during the 13-weeks and
26-weeks ended October 29, 2003, respectively, based upon the estimated
effective tax rate for the 39-weeks ended January 28, 2004 (successor period).
The $6 million tax benefit recorded during the first quarter of fiscal 2003
relates to an Internal Revenue Code provision allowing for the 10-year carryback
of certain losses.
13
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Predecessor Company recorded a full valuation allowance against its
net deferred tax assets in accordance with SFAS No. 109, "Accounting for Income
Taxes," as realization of such assets in future years was uncertain.
Accordingly, no tax benefit was realized from the Predecessor Company's losses
in the first quarter of fiscal 2003. Given the Company's actual and forecasted
levels of profitability in fiscal 2004, management believes that a portion of
the pre-emergence net deferred tax assets will more likely than not be realized.
As such, the Company reduced the valuation allowance on its pre-emergence net
deferred tax assets by $92 million in the second quarter of fiscal 2004 to
reflect its estimated utilization through the end of fiscal 2004. The Company
will continue to assess the likelihood of realization of its pre-emergence net
deferred tax assets and would reduce the valuation allowance on such assets in
the future if it becomes more likely than not that the net deferred tax assets
will be utilized. In accordance with SOP 90-7, subsequent to emergence from
Chapter 11, the benefit from the reduction of the valuation allowance on
pre-emergence deferred tax assets is recorded as a direct credit to Capital in
excess of par value with no impact on the Company's earnings or cash flows.
During the second quarter of fiscal 2004 and the third quarter of fiscal
2003, we reduced our reserves for Predecessor Company income tax liabilities by
$5 million and $24 million, respectively, primarily due to favorable claims
settlements. We recorded these adjustments to Capital in excess of par value in
our Unaudited Condensed Consolidated Balance Sheets.
Cash paid for income taxes was $4 million for the 39-weeks ended October
27, 2004. Cash received for tax refunds and credits was $6 million and $2
million for the 26-weeks ended October 29, 2003 and the 13-weeks ended April 30,
2003, respectively.
8. TREASURY STOCK
The Company has a share repurchase program with authorization to
repurchase $100 million of Common Stock. Since the inception of the share
repurchase program in fiscal 2003, we have repurchased 128,400 shares of Common
Stock for grants of stock based compensation (weighted-average price of $28.87
per share) at a cost of approximately $4 million.
During fiscal 2004, we were assigned 507,974 shares of common stock
(weighted average price of $76.14 per share) with an approximate value of $39
million. These assignments were the result of settlement agreements resolving
claims arising from our Chapter 11 reorganization; see Note 2 - - Emergence from
Chapter 11 Bankruptcy Protection and Fresh-Start Accounting.
There were 499,506, 43,749 and 48,953 shares in treasury as of October 27,
2004, January 28, 2004 and October 29, 2003, respectively.
9. STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the fair value
method. Upon the departure of our former President and Chief Executive Officer,
Julian C. Day, in October 2004, the vesting period for 778,880 stock options was
accelerated and 389,439 stock options were cancelled effective immediately, as
required by the terms of his nonqualified stock option agreement, as amended,
with the Company. The accelerated vesting resulted in $2 million of compensation
cost to be recognized during the 13-weeks ended October 27, 2004.
On October 18, 2004, the Company's new President and Chief Executive
Officer, Aylwin B. Lewis, was granted 150,000 options to purchase shares of
Common Stock with a grant price of $88.62 per share and 50,781 shares of
restricted stock at a grant price of $88.62 per share. These grants vest in
installments over 4.25 years from the grant date and we will recognize
compensation expense of approximately $10 million during this same period. The
options expire 10 years from the date of grant.
The Predecessor Company accounted for stock options using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations, which
did not require the recognition of expense for the fair value of stock-based
compensation.
14
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In accordance with the disclosure requirements of SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure, an
Amendment of FASB Statement No. 123" the pro forma effects of recognizing the
fair value of stock-based compensation on net loss and loss per share had the
Predecessor Company applied the fair value method to stock options granted by
the Predecessor Company would have resulted in a pro forma adjustment of $38
million for stock-based employee compensation income, a pro forma net loss of
$824 million and a pro forma basic/diluted loss per share of $1.58 for the
13-weeks ended April 30, 2003. Pro forma stock-based employee compensation
income of $38 million for the 13-weeks ended April 30, 2003 is due to the
reversal of expense for options that were not vested upon cancellation of the
outstanding stock awards of the Predecessor Company.
Upon our emergence from Chapter 11, all outstanding stock options of the
Predecessor Company were cancelled in accordance with the Plan of
Reorganization.
We account for restricted stock grants as fixed awards, and record
deferred employee compensation to Capital in excess of par value. During the
39-weeks ended October 27, 2004, we granted 82,842 shares of restricted stock at
a weighted average price of $66.39 per share. During the 26-weeks ended October
29, 2003 we granted 68,436 shares of restricted stock at a weighted average
price of $29.22 per share. As of October 27, 2004, deferred employee
compensation on all outstanding restricted stock grants is $7 million and is
being amortized to compensation expense on a straight-line basis over the
vesting period of three to four years.
10. PROPERTY HELD FOR SALE
Property held for sale was $30 million, $56 million and $70 million as of
October 27, 2004, January 28, 2004 and October 29, 2003, respectively, and is
included within Other current assets in our Unaudited Condensed Consolidated
Balance Sheets. During the 13-weeks and 39-weeks ended October 27, 2004, we sold
$5 million and $22 million of these assets for a gain of $1 million and $1
million, respectively. During the second and third quarters of fiscal 2003, we
sold $90 million of assets classified as property held for sale for a net gain
of $2 million. See Note 3 - Real Estate and Property Transactions for further
discussion of these transactions.
11. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents net income or loss, adjusted for
the effect of other items that are recorded directly to shareholders' equity.
During the 39-weeks ended October 27, 2004, we sold available-for-sale equity
securities and in conjunction with these sales, reduced accumulated other
comprehensive income by $1 million. Comprehensive income and net income are
equivalent for the 13-weeks ended October 27, 2004. For the 13-weeks ended April
30, 2003, comprehensive loss included a minimum pension liability adjustment of
$94 million. No adjustments were made to comprehensive income (loss) for the
13-weeks and 26-weeks ended October 29, 2003.
12. INVESTMENTS IN AFFILIATED RETAIL COMPANIES
Kmart footwear departments are operated under a master agreement with
Footstar, Inc. ("FTS") and related license agreements with certain Meldisco
subsidiaries of FTS, most of which are 49% owned by Kmart and 51% owned by FTS.
On March 2, 2004, FTS and its direct and indirect subsidiaries, including all
Meldisco subsidiaries, filed for Chapter 11 protection in the United States
Bankruptcy Court for the Southern District of New York. FTS continues to operate
its businesses and manage its properties as debtors-in-possession. Given the
likelihood of future receipts of the amounts due from the Meldisco subsidiaries
with which we do business, no valuation reserve has been established for $24
million due to us from FTS as of October 27, 2004.
15
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On August 12, 2004, FTS filed a motion with the bankruptcy court to assume
the master agreement and the license agreements. On September 30, 2004, the
Company objected to that motion, and also filed a separate motion to terminate
the master agreement and the license agreements because of various defaults by
FTS under the agreements. Should the bankruptcy court overrule the Company's
objection and permit FTS to assume the master agreement and the license
agreements, FTS must cure all past defaults under those agreements. On July 26,
2004, the Company filed a proof of claim in the FTS bankruptcy case for an
amount in excess of our recorded receivable of $24 million; however, at this
time, we are not able to accurately determine the ultimate amount to be realized
as we have not received all information from FTS necessary for us to complete
our claim. The Company believes the cure amount may be substantially in excess
of $24 million. FTS asserts that the amount required to cure past defaults is
$18 million, and that such amount should be reduced by overpayments FTS alleges
it made to the Company for certain fees. If no resolution is achieved
consensually with FTS with respect to the assumption of the master agreement,
the license agreements and the cure amount, and the bankruptcy court permits FTS
to assume the master agreement and the license agreements, the cure amount will
be determined by the bankruptcy court.
In September 2004, FTS restated six years of its consolidated financial
statements for fiscal years 1997 through 2002. These restatements have not had a
significant effect on our previously reported equity income derived from our
investment in the Meldisco subsidiaries. FTS has yet to file audited financial
statements and periodic reports for fiscal years 2003 and periodic reports for
the first three quarters of fiscal 2004.
We have received preliminary financial results from FTS for fiscal 2003
and for the first two quarters of fiscal 2004 as of the filing of this quarterly
report on our Form 10-Q. These statements provide the basis of our estimate of
equity income as presented in our Unaudited Condensed Consolidated Statements of
Operations for the Meldisco subsidiaries with which we do business. We have not
received preliminary financial statements for the third quarter of fiscal 2004.
The Company has reviewed FTS' monthly operating reports for periods following
its Chapter 11 filing, and noted that FTS has allocated certain of its
reorganization and other costs to the Meldisco business. These charges have
adversely impacted our estimated earnings recorded in fiscal 2004. We disagree
with FTS' approach and have notified FTS of our position.
The table below lists the net sales at our footwear departments for those
Meldisco subsidiaries and our equity income earned from those Meldisco
subsidiaries for the 13-weeks ended October 27, 2004, October 29, 2003 and April
30, 2003, the 39-weeks ended October 27, 2004 and the 26-weeks ended October 29,
2003.
Predecessor
Successor Company Company
----------------------------------------------------------------------------- --------------
13-Weeks Ended 13-Weeks Ended 39-Weeks Ended 26-Weeks Ended 13-Weeks Ended
(dollars in millions) October 27, 2004 October 29, 2003 October 27, 2004 October 29, 2003 April 30, 2003
- --------------------- ---------------- ---------------- ---------------- ---------------- --------------
Net sales $ 177 $ 201 $ 561 $ 423 $ 246
Equity income $ - $ 1 $ 3 $ 3 $ 7
13. BARTER TRANSACTIONS
In fiscal 2004, we entered into barter transactions for advertising
services with The WB Television Network ("The WB") and E! Entertainment
Television, Inc. ("E!"). We promoted The WB in a significant number of our
television, newspaper and other advertising expenditures during the third
quarter of fiscal 2004. In return, we received advertising on certain television
shows of The WB. We are promoting E! in our print advertising from August 2004
through November 2004, and we are receiving apparel promotions on the E! News
Live show for a comparable period.
We recognize barter revenue in accordance with Emerging Issues Task Force
No. 99-17 ("EITF 99-17"), "Accounting for Advertising Barter Transactions." In
accordance with EITF 99-17, the fair value of these barter arrangements was not
determinable and therefore the revenue and expenses were not recognized in our
Unaudited Condensed Consolidated Statements of Operations.
16
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. RELATED PARTY TRANSACTIONS
As further discussed in the Company's MD&A, the Company is considering
various uses of its cash, including investments in various forms of securities.
The Board of Directors of the Company has delegated authority to invest the
Company's surplus cash, to Edward Lampert, subject to various limitations
including those in the Company's existing Credit Facility as well as additional
limitations that have been or may be from time to time adopted by the Board of
Directors and/or the Finance Committee of the Board of Directors. Mr. Lampert is
Chairman of the Company's Board of Directors and is the Chairman and Chief
Executive Officer of ESL. Neither Mr. Lampert nor ESL will receive compensation
for any such investment activities undertaken on behalf of the Company.
Further, to clarify the expectations that the Board of Directors has with
respect to the investment of our surplus cash, the Board has renounced, in
accordance with Delaware law, any interest or expectancy of the Company
associated with any investment opportunities in securities that may come to the
attention of Mr. Lampert or any employee, officer, director or adviser to ESL
and its affiliated investment entities who also serves as an officer or director
of the Company (each, a "Covered Party") other than (a) investment opportunities
that come to such Covered Party's attention directly and exclusively in such
Covered Party's capacity as a director of, officer or employee of the Company,
(b) control investments in companies in the mass merchandise or discount
retailing industry and (c) investment opportunities in companies or assets with
a significant role in the Company's retailing business, including investment in
real estate currently leased by the Company or in suppliers for which the
Company is a substantial customer representing over 10% of such companies'
revenues, unless in any such instance ESL has a pre-existing investment.
During the second quarter of fiscal 2004, ESL hired an employee of the
Company. This employee has assumed the role of Vice President of ESL, and will
continue to serve Kmart as Vice President - In-Store Business Development.
15. CORPORATE COST REDUCTION AND ASSOCIATE TERMINATION BENEFITS
We initiated a corporate cost reduction program in August 2004, and in
connection with this program, eliminated approximately 250 positions at our
corporate headquarters in Troy, Michigan. Severance benefits, outplacement
services and continuing health insurance benefits, which amounts were based on
employees' years of service and job grade, aggregating $6 million will be paid
to affected employees primarily through the end of the year. The anticipated
annual savings of this action is $18 million on a pre-tax basis. We are also
continuing efforts to reduce other corporate non-payroll expenses.
Upon the resignation of our former President and Chief Executive Officer,
he received a $2 million severance payment, pro-rata portions of his annual and
Long Term Incentive Plan bonuses and accelerated vesting of 778,880 stock
options, all as required by various agreements with the Company. In conjunction
with these actions, we incurred compensation expense of $5 million in the
third quarter of fiscal 2004, which is recorded in SG&A in our Unaudited
Condensed Consolidated Statement of Operations for the 13-weeks and 39-weeks
ended October 27, 2004.
16. DISCONTINUED OPERATIONS
During the first quarter of fiscal 2003, the Predecessor Company closed
316 stores, of which 66 stores met the criteria to be accounted for as
discontinued operations. The Company applied the provisions of SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," ("SFAS No.
144") which requires closed stores to be classified as discontinued operations
when the operations and cash flows of the stores have been (or will be)
eliminated from ongoing operations and the company no longer has any significant
continuing involvement in the operations associated with the stores after
closure. The table below sets forth the components of the net loss associated
with the discontinued operations for the 13-weeks ended April 30, 2003.
17
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Predecessor Company
-------------------
13-Weeks Ended
(dollars in millions) April 30, 2003
- --------------------- -------------------
Sales $ 232
Cost of sales, buying and occupancy 150
-----------
Gross margin 82
Selling, general and administrative expenses 43
Restructurings, impairments and other charges 5
Reorganization items, net 44
-----------
Discontinued operations, net of tax $ (10)
===========
The Company applied the provisions of SFAS No. 144 to the stores sold to
Home Depot and Sears and determined that none of the stores met the criteria to
be accounted for as discontinued operations.
17. SPECIAL CHARGES
Special charges are transactions which, in management's judgment, may make
meaningful comparisons of operating results between reporting periods difficult.
In determining what amounts constitute a special charge, management considers
the nature, magnitude and frequency of their occurrence. During fiscal 2002, the
Predecessor Company instituted certain restructuring actions to improve
operations and executed significant inventory liquidations as a result of the
stores closed under Chapter 11 proceedings. The effects of these actions on the
13-weeks ended April 30, 2003 are summarized below.
Corporate Cost Reduction Initiatives
During fiscal 2002 and the 13-weeks ended April 30, 2003, the Predecessor
Company eliminated approximately 950 positions with an initial charge of $50
million recorded in fiscal 2002. The Predecessor Company reduced its reserve for
such corporate cost reductions by $10 million in the 13-weeks ended April 30,
2003, as a result of a change in the estimated expenses. This reduction is
included in Restructuring, impairment and other charges in the Unaudited
Condensed Consolidated Statements of Operations.
Accelerated Depreciation
The Predecessor Company recorded charges of $52 million during the
13-weeks ended April 30, 2003 for accelerated depreciation on unimpaired assets
to be disposed of following the 316 store closings. Of the $52 million recorded,
$47 million is included in Restructurings, impairments and other charges and $5
million is included in Discontinued operations in the Unaudited Condensed
Consolidated Statements of Operations.
Reserve Activity
As part of Fresh-Start accounting, reserves established in connection with
certain restructurings were discharged as of April 30, 2003 in accordance with
the Plan of Reorganization. See Note 2 - Emergence from Chapter 11 Bankruptcy
Protection and Fresh-Start Accounting for a detailed discussion of the discharge
of Liabilities subject to compromise under the Plan of Reorganization.
18. REORGANIZATION ITEMS, NET
Reorganization items represent amounts the Predecessor Company incurred as
a result of its Chapter 11 reorganization, and are presented separately in the
Unaudited Condensed Consolidated Statements of Operations. For the 13-weeks
ended April 30, 2003, the following were recorded:
18
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Predecessor Company
-------------------
13-Weeks Ended
(dollars in millions) April 30, 2003
- ------------------------------------------------ -------------------
Gain on extinguishment of debt $ (5,642)
Revaluation of assets and liabilities 5,642
Fleming settlement 385
Estimated claims for rejected executory contracts 200
2003 store closings 158
Other 26
-------------
Reorganization items, net $ 769
=============
The following paragraphs provide additional information relating to costs
that were recorded in Reorganization items, net in the Unaudited Condensed
Consolidated Statement of Operations for the 13-weeks ended April 30, 2003.
Gain on extinguishment of debt/Revaluation of assets and liabilities
See Note 2 - Emergence from Chapter 11 Bankruptcy Protection and Fresh-
Start Accounting for a discussion on the extinguishment of debt and the
revaluation of assets and liabilities.
Fleming settlement
On February 3, 2003, the Predecessor Company announced the termination of
the supply relationship with Fleming Companies, Inc. ("Fleming") by means of a
rejection of the 2001 contract through the Debtor's Chapter 11 reorganization.
As part of the bankruptcy proceedings, Fleming filed a claim of $1.5 billion on
March 11, 2003. The Predecessor Company and Fleming came to an agreement on a
settlement of Fleming's claims, and on March 27, 2003, the Court approved the
settlement of all claims asserted by Fleming. Under the settlement, the
Predecessor Company paid Fleming $15 million of Fleming's net post-petition
administrative claim, which exceeded $30 million. Additionally, Fleming's
general unsecured claim was reduced from approximately $1.5 billion to $385
million, which was recorded in the first quarter of fiscal 2003.
Estimated claims for rejected executory contracts
For the 13-weeks ended April 30, 2003, the Predecessor Company recorded
expense of $200 million for estimated allowable claims for rejected executory
contracts, primarily equipment leases and service contracts. The estimate was
based on a review of each class of contract. On April 30, 2003, upon adoption of
Fresh-Start accounting, these liabilities were discharged in accordance with the
Plan of Reorganization; see Note 2 - Emergence from Chapter 11 Bankruptcy
Protection and Fresh-Start Accounting.
2003 store closings
As a result of the decision to close the 316 stores, the Predecessor
Company recorded a charge of $214 million in the first quarter of fiscal 2003
for lease terminations and other costs, of which $56 million is included in
Discontinued operations and the remaining $158 million is included in
Reorganization items, net in the Unaudited Condensed Consolidated Statements of
Operations.
Other reorganization items
For the 13-weeks ended April 30, 2003, the Predecessor Company recorded
professional fees of $43 million, employee costs of $66 million relating to the
Key Executive Retention Program, a gain of $17 million for the sale of pharmacy
customer lists, income of $65 million for lease auction proceeds related to the
2003 and 2002 closed stores, a gain of $15 million for the settlement of
pre-petition liabilities and net expenses of $14 million for other miscellaneous
reorganization items.
19
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
19. COMMITMENTS AND CONTINGENCIES
Other and Routine Actions
On November 7, 2003, the Company filed suit in the United States District
Court for the Eastern District of Michigan, which was later dismissed and
refiled in the Oakland County Circuit Court (State of Michigan), against Capital
One Bank, Capital One, F.S.B., and Capital One Services, Inc. (collectively,
"Capital One"). The complaint, as amended, alleges breach of contract, tortious
interference with business relationships, misappropriation of a trade secret,
trademark infringement, and a violation of the Michigan Consumer Protection Act,
which claims arise out of Capital One's alleged failure to market and support a
co-branded credit card under an agreement the parties had with respect to a
Kmart MasterCard. Kmart is seeking monetary damages. Capital One has filed a
motion to dismiss; a hearing on that motion has not been scheduled. Trial is
currently set for June, 2005. Discovery is proceeding.
On September 24, 2004, the Company filed suit against i2 Technologies,
Inc. ("i2") and two of its senior executives in the District Court for Dallas
County, Texas. The suit alleges fraud, breach of contract and rescission arising
out of the September 29, 2000 contract between Kmart and i2 for software
licenses, software development and consulting work (the "Contract"). After
entering into the Contract, Kmart experienced difficulty in integrating the new
software. Kmart also discovered that several of the software component packages
it had purchased did not exist. Kmart is seeking monetary damages. There are no
court dates set yet.
In Capital Factors v. Kmart Corporation, the United States District Court
for the Northern District of Illinois ruled that the Court did not have the
authority to authorize the payment of pre-petition claims of certain trade
vendors by the Company. That ruling was appealed by the Company to the Seventh
Circuit Court of Appeals. The Seventh Circuit upheld the decision of the
District Court. Critical vendors sought a rehearing by the Seventh Circuit,
which was denied, and filed petitions for Writ of Certiorari to the Supreme
Court, which were also denied. In order to satisfy our fiduciary responsibility
to pursue claims against the critical vendors, on January 26, 2004 we filed 45
lawsuits against a total of 1,189 vendors that received these payments.
Subsequently, many of the cases were severed into lawsuits against individual
defendants although all cases are proceeding on a common pretrial procedural
track. The lawsuits seek to recover critical vendor payments in excess of $174
million. The Company notified affected vendors that we are willing to settle
these claims for a percentage of the money they received, based on the amount of
the claim. The ultimate amount of recovery can not be determined at this time.
As of October 27, 2004, Kmart has settled 215 critical vendor claims.
We are a party to a substantial number of other claims, lawsuits and
pending actions which are routine and incidental to our business. To the extent
that any such claim relates to a contract which was assumed by us when we
emerged from Chapter 11 or relates to a time period occurring after the Petition
Date, the Company shall be responsible for any damages which may result. In
addition, certain contracts allow for damage provisions or other repayments as a
result of our termination of the contracts.
We assess the likelihood of potential losses on an ongoing basis, and when
they are considered probable and reasonably estimable, we record an estimate of
the ultimate outcome. If there is no single point estimate of loss that is
considered more likely than others, an amount representing the low end of the
range of possible outcomes is recorded. Our Unaudited Condensed Consolidated
Balance Sheet as of October 27, 2004 only reflects potential losses for which
the Company may have ultimate responsibility.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Part I, Item 2 of this report should be read in conjunction with Part II,
Item 7 of our Annual Report on Form 10-K for the year ended January 28, 2004.
The information contained herein is not a comprehensive discussion and analysis
of the financial condition and results of operations of the Company, but rather
an update of the previous disclosures.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Form 10-Q, as well as other statements or reports made by or on
behalf of Kmart, which address activities, events or developments that we expect
or anticipate may occur in the future are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, as amended,
that reflect, when made, Kmart's current views with respect to current events
and financial performance. The words "believe," "expect," "anticipate,"
"project," and similar expressions, among others, generally identify
"forward-looking statements," which speak only as of the date the statement was
made. Such forward-looking statements are based upon assumptions concerning
future conditions that may ultimately prove to be inaccurate and involve risks,
uncertainties and factors that could cause actual results to differ materially
from any anticipated future results, express or implied by such forward-looking
statements. Factors that could cause actual results to differ materially from
these forward-looking statements include, but are not limited to, factors
relating to Kmart's internal operations and the external environment in which it
operates; Kmart's ability to successfully implement business strategies and
otherwise fund and execute planned changes in various aspects of the business;
marketplace demand for the products of Kmart's key brand partners, as well as
the engagement of appropriate new brand partners; changes in consumer spending
and Kmart's ability to anticipate buying patterns and implement appropriate
inventory strategies; Kmart's ability to reverse its negative same-store sales
trend; competitive pressures and other third party actions, including pressures
from pricing and other promotional activities of competitors, as well as new
competitive store openings; Kmart's ability to properly monitor its inventory
needs in order to timely acquire desired goods in appropriate quantities and/or
fulfill labor needs at planned costs; Kmart's ability to attract and retain
customers; Kmart's ability to maintain normal terms with vendors and service
providers; Kmart's ability to maintain contracts, including leases, that are
critical to its operations; Kmart's ability to develop a market niche;
regulatory and legal developments; general economic conditions; weather
conditions, including those which affect buying patterns of Kmart's customers;
other factors affecting business beyond Kmart's control; and Kmart's ability to
attract, motivate and/or retain key executives and associates. Kmart undertakes
no obligation to release publicly the results of any revisions to these
forward-looking statements to reflect events or circumstances after the date
such statements were made.
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 that we make or are made on our behalf speak only as of the
date of this report, or if not contained herein, as of the date when made, and
we do not undertake to update these risk factors or such forward-looking
statements.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
RESULTS OF OPERATIONS
The following table is presented solely to complement management's
discussion and analysis.
SUCCESSOR COMPANY
-------------------------------
13-WEEKS ENDED 13-WEEKS ENDED
(dollars in millions) OCTOBER 27, 2004 OCTOBER 29, 2003
- --------------------- ---------------- ----------------
Sales $ 4,392 $ 5,092
Cost of sales, buying and occupancy 3,247 3,925
------------- -------------
Gross margin 1,145 1,167
Selling, general and administrative expenses 1,043 1,179
Net gains on sales of assets (807) (1)
------------- -------------
Operating income (loss) 909 (11)
Interest expense, net 22 24
Bankruptcy related recoveries (1) -
Equity income in unconsolidated subsidiaries - (1)
------------- -------------
Income (loss) from operations before income taxes 888 (34)
Provision for (benefit from) income taxes 335 (11)
------------- -------------
Net income (loss) $ 553 $ (23)
============= =============
13-WEEKS ENDED OCTOBER 27, 2004 COMPARED TO 13-WEEKS ENDED OCTOBER 29, 2003
Same-store sales and total sales decreased 12.8% and 13.7%, respectively,
for the 13-weeks ended October 27, 2004 as compared to the 13-weeks ended
October 29, 2003. Same-store sales include sales of all open stores that have
been open for more than 13 full months. The decline in same-store and total
sales has been affected by soft customer demand during the back-to-school
season, less promotional advertising in our circulars and increased competition
at certain store locations.
Favorable markon, improvements in shrink, and reductions in markdowns on
promotional and clearance items were the primary factors improving our gross
margin rate this quarter. This improvement in the current quarter was partially
offset by the effect of the decline in sales on certain fixed operating costs.
As a result, gross margin as a percentage of sales increased to 26.1% for
the 13-weeks ended October 27, 2004, from 22.9% in the prior year comparable
quarter. Gross margin decreased $22 million to $1.15 billion, for the
13-weeks ended October 27, 2004, from $1.17 billion for the 13-weeks ended
October 29, 2003.
Selling, general and administrative expenses ("SG&A") decreased $136
million to $1.04 billion for the 13-weeks ended October 27, 2004, from $1.18
billion for the 13-weeks ended October 29, 2003. SG&A, as a percentage of sales,
increased to 23.7% for the 13-weeks ended October 27, 2004, from 23.2% in the
prior year comparable quarter. The decline in SG&A resulted from a reduction in
store payroll and related expenditures due to increased operating efficiencies
and reduced sales volume at our stores, and to reductions in newspaper
advertising. Included in SG&A for the period is compensation expense of $5
million related to the departure of our former President and Chief Executive
Officer.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
Operating income for the 13-weeks ended October 27, 2004 was $909
million, or 20.7% of sales, as compared to a loss of $11 million, or (0.2%) of
sales, for the same period in the prior year. Adjusted operating income for the
13-weeks ended October 27, 2004 was $102 million, or 2.3% of sales, as compared
to a loss of $(12) million, or (0.2%) of sales, for the same period in the
prior year. Adjusted operating income for the 13-weeks ended October 27, 2004
and October 29, 2003 exclude $807 million and $1 million of gains on sales of
assets, respectively, primarily related the previously announced transactions
with Home Depot and Sears; see Note 3 - Real Estate and Property Transactions.
See below for a discussion of adjusted operating income as a non-GAAP measure.
Operating income increased in the current quarter due to the decrease in SG&A
as compared to the prior quarter in fiscal 2003, as discussed above.
Interest expense, net for the 13-weeks ended October 27, 2004 and
October 29, 2003 was $22 million and $24 million, respectively. During the
13-weeks ended October 27, 2004, $13 million of interest expense was recorded
for the accretion of obligations recorded at net present value. To reduce the
overall cost of our Credit Facility, we restated and amended it in October 2004,
reducing the facility from $1.0 billion to $800 million. We recognized $6
million of debt issuance costs in Interest expense, net for the 13-weeks ended
October 27, 2004, $3 million of which we accelerated in conjunction with the
reduction to our Credit Facility. Interest expense is net of interest income of
$9 million and $2 million for the 13-weeks ended October 27, 2004 and October
29, 2003, respectively.
The effective income tax rate was 37.7% and (32.4%) for the 13-weeks ended
October 27, 2004 and October 29, 2003, respectively; see Note 7 - Income Taxes
for a more detailed discussion.
The following table is presented solely to complement management's
discussion and analysis.
PREDECESSOR
SUCCESSOR COMPANY COMPANY
---------------------------------------------------- --------------
26-WEEKS ENDED 26-WEEKS ENDED 13-WEEKS ENDED 13-WEEKS ENDED
(dollars in millions) OCTOBER 27, 2004 OCTOBER 29, 2003 APRIL 28, 2004 APRIL 30, 2003
- --------------------- ---------------- ---------------- -------------- --------------
Sales $ 9,177 $ 10,744 $ 4,615 $ 6,181
Cost of sales, buying and occupancy 6,790 8,344 3,478 4,762
------------- ------------- ------------- -------------
Gross margin 2,387 2,400 1,137 1,419
Selling, general and administrative expenses 2,082 2,404 1,004 1,421
Net gains on sales of assets (879) (3) (32) -
Restructuring, impairment and other charges - - - 37
------------- ------------- ------------- -------------
Operating income (loss) 1,184 (1) 165 (39)
Interest expense, net 53 45 26 57
Bankruptcy related recoveries (6) - (7) -
Equity income in unconsolidated subsidiaries - (3) (3) (7)
Reorganization items, net - - - 769
------------- ------------- ------------- -------------
Income (loss) from continuing operations
before income taxes 1,137 (43) 149 (858)
Provision for (benefit from) income taxes 429 (15) 56 (6)
------------- ------------- ------------- -------------
Income (loss) from continuing operations 708 (28) 93 (852)
Discontinued operations - - - (10)
------------- ------------- ------------- -------------
Net income (loss) $ 708 $ (28) $ 93 $ (862)
============= ============= ============= =============
26-WEEKS ENDED OCTOBER 27, 2004 COMPARED TO 26-WEEKS ENDED OCTOBER 29, 2003
Same-store sales and total sales decreased 13.9% and 14.6%, respectively,
for the 26-weeks ended October 27, 2004 as compared to the 26-weeks ended
October 29, 2003. Factors contributing to the decline in same store and total
sales included reductions in promotional events and promotional advertising in
our circulars, soft customer demand during the back-to-school season and
increased competition at certain store locations.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
Favorable markon, improvements in shrink, and reductions in markdowns on
promotional and clearance items were the primary factors improving our gross
margin rate this period. The margin rate improvement in the current period was
partially offset by the effect of the decline in sales on certain fixed
operating costs. As a result, gross margin as a percentage of sales
increased to 26.0% for the 26-weeks ended October 27, 2004, from 22.3% for the
26-weeks ended October 29, 2003. Gross margin decreased $13 million to $2.39
billion, for the 26-weeks ended October 27, 2004, from $2.40 billion for the
26-weeks ended October 29, 2003.
SG&A decreased $322 million for the 26-weeks ended October 27, 2004 to
$2.08 billion, or 22.7% of sales, from $2.40 billion, or 22.4% of sales, for the
26-weeks ended October 29, 2003. The decline resulted from a reduction in store
payroll and related expenditures due to increased operating efficiencies and
reduced sales volume at our stores, and to reductions in newspaper advertising.
The remaining net reduction in SG&A is due primarily to continued efforts to
reduce our operating costs.
Operating income for the 26-weeks ended October 27, 2004 was $1.18 billion
as compared to a loss of $1 million for the same period of the prior year.
Adjusted operating income for the 26-weeks ended October 27, 2004 was $305
million as compared to a loss of $4 million, for the same period in the prior
year. Adjusted operating income for the 26-weeks ended October 27, 2004 and
October 29, 2003 exclude $879 million and $3 million of gains on sales of
assets, respectively, primarily related to the previously announced transactions
with Home Depot and Sears; see Note 3 - - Real Estate and Property Transactions.
See below for a discussion of adjusted operating income as a non-GAAP measure.
Operating income also increased in the current period due to the decrease in
SG&A as compared to the prior period in fiscal 2003, as discussed above.
Interest expense, net for the 26-weeks ended October 27, 2004 and October
29, 2003 was $53 million and $45 million, respectively. To reduce the overall
cost of the facility, we voluntarily reduced the size of the Credit Facility
from $1.5 billion to $1.0 billion in July 2004 and we amended and restated the
Credit Facility in October 2004 to eliminate the synthetic term loan provisions,
which reduced the size of the Credit Facility from $1.0 billion to $800 million.
We recognized $18 million of debt issuance costs in Interest expense, net for
the 26-weeks ended October 27, 2004, $12 million of which we accelerated in
conjunction with the reduction to our Credit Facility. During the 26-weeks ended
October 27, 2004, $26 million of interest expense was recorded for the accretion
of obligations recorded at net present value. Interest expense is net of
interest income of $16 million and $4 million for the 26-weeks ended October 27,
2004 and October 29, 2003, respectively.
Effective income tax rate was 37.7% and (34.9%) for the 26-weeks ended
October 27, 2004 and October 29, 2003, respectively.
13-WEEKS ENDED APRIL 28, 2004 COMPARED TO 13-WEEKS ENDED APRIL 30, 2003
Same-store sales and total sales decreased 12.9% and 25.3%, respectively,
for the 13-weeks ended April 28, 2004 as compared to the 13-weeks ended April
30, 2003. The decrease in same-store sales is due primarily to several
Company-wide promotional events occurring in the first quarter of fiscal 2003
along with a reduction in advertising, including the frequency of mid-week
circulars in the current year. The decrease in total sales is attributable to
the decrease in same-store sales and the closure of 316 stores in the first
quarter of fiscal 2003.
Gross margin decreased $282 million to $1.14 billion, for the 13-weeks
ended April 28, 2004, from $1.42 billion for the 13-weeks ended April 30, 2003.
Gross margin, as a percentage of sales, increased to 24.6% for the 13-weeks
ended April 28, 2004, from 23.0% for the 13-weeks ended April 30, 2003.
Favorably affecting the gross margin rate were fewer clearance markdowns and
reduced depreciation as a result of the write-off of long-lived assets in
conjunction with the application of Fresh-Start accounting.
SG&A decreased $417 million to $1.0 billion, or 21.8% of sales for the
13-weeks ended April 28, 2004, from $1.42 billion, or 23.0% of sales, for the
13-weeks ended April 30, 2003. The decrease in SG&A resulted from reduced
payroll and related expenses in our stores during the first quarter of the
current year, as well as the effect of store closings and corporate cost
reduction initiatives implemented in the first quarter of fiscal 2003. Also
affecting the decline was a reduction in advertising expenses and lower
depreciation as a result of the write-off of long-lived assets in conjunction
with the application of Fresh-Start accounting.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
Operating income for the 13-weeks ended April 28, 2004 was $165 million,
or 3.6% of sales, as compared to a loss of $39 million, or (0.6%) of sales, for
the same period in the prior year. The improvement was primarily due to the
decrease in SG&A and the improvement in our gross margin rate, as discussed
above, partially offset by an overall decline in gross margin dollars due to our
reduced store base. Operating income was also affected by net gains on sales of
assets of $32 million in the first quarter of the current year and
Restructuring, impairment and other charges of $37 million in the first quarter
of fiscal 2003.
Interest expense, net for the 13-weeks ended April 28, 2004 and April 30,
2003 was $26 million and $57 million, respectively. During the 13-weeks ended
April 28, 2004, $12 million of interest expense was recorded for the accretion
of obligations recorded at net present value. Included in interest expense for
the 13-weeks ended April 30, 2003 was $37 million of amortization of debt
issuance costs associated with the Predecessor Company's Court-approved $2
billion debtor-in-possession financing facility. Interest at the stated
contractual amount on unsecured debt that was not charged to earnings for the
13-weeks ended April 30, 2003 was $67 million. Interest expense is net of
interest income of $5 million and $1 million for the 13-weeks ended April 28,
2004 and April 30, 2003, respectively.
The effective income tax rate was 37.6% and (0.7%) for the 13-weeks ended
April 28, 2004 and April 30, 2003, respectively; see Note 7 - Income Taxes for
a more detailed discussion.
39-WEEKS ENDED OCTOBER 27, 2004 (SUCCESSOR COMPANY)
Due to the application of Fresh-Start accounting upon our emergence from
bankruptcy, the reported historical financial statements of the Predecessor
Company for periods prior to May 1, 2003 generally are not comparable to those
of the Successor Company.
Total sales were $13.79 billion for the 39-weeks ended October 27, 2004.
Same-store sales decreased 13.6%. Reductions in promotions and advertising,
including the frequency of mid-week circulars in the current year, have affected
same-store sales and total sales.
Gross margin for the 39-weeks ended October 27, 2004 was $3.52 billion or
25.6% of sales. A reduction in clearance markdowns and improvements in shrink
favorably affected gross margin in the current period. Included in gross margin
was a $22 million charge in conjunction with store closings inventory
liquidations.
SG&A was $3.09 billion or 22.4% of sales for the period. Reduced payroll
and related expenses at our stores, as well as a reduction in advertising
expenses favorably affected SG&A for the period.
Operating income for the 39-weeks ended October 27, 2004 was $1.35
billion, or 9.8% of sales. Operating income was favorably affected by the
improvements in gross margin and reductions in SG&A, as discussed above.
Adjusted operating income for the 39-weeks ended October 27, 2004 was $438
million, which excludes gains on sales of assets of $911 million, primarily
related to the previously announced transactions with Home Depot and Sears - see
Note 3 - Real Estate and Property Transactions. See below for a discussion of
adjusted operating income as a non-GAAP measure.
Interest expense, net for the 39-weeks ended October 27, 2004 was $79
million. To reduce the overall cost of the facility, we voluntarily reduced the
size of the Credit Facility from $1.5 billion to $1.0 billion in July 2004 and
we amended and restated the Credit Facility in October 2004 to eliminate the
synthetic term loan provisions, which reduced the size of the Credit Facility
from $1.0 billion to $800 million. We recognized $22 million of debt issuance
costs in Interest expense, net for the 39-weeks ended October 27, 2004, $12
million of which we accelerated in conjunction with the reduction to our Credit
Facility. During the 39-weeks ended October 27, 2004, $38 million of interest
expense was recorded for the accretion of obligations recorded at net present
value. Interest expense is net of interest income of $21 million.
The effective income tax rate was 37.7% for the 39-weeks ended October 27,
2004; see Note 7 - Income Taxes for a more detailed discussion.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
NON-GAAP MEASURES
Adjusted operating income is a non-GAAP measure. The Company has provided
this adjusted figure to provide a more meaningful comparison of ongoing results
and analysis of the Company's operating performance, as it reflects core
operations excluding the significant gains realized on sales of assets. This
non-GAAP financial measure should be evaluated in conjunction with, and is not a
substitute for, GAAP financial measures. Following is a reconciliation of
adjusted results to GAAP results:
(dollars in millions) 13-WEEKS ENDED 26-WEEKS ENDED 39-WEEKS
- --------------------- ------------------------------- ------------------------------- -------------
OCT. 27, 2004 OCT. 29, 2003 OCT. 27, 2004 OCT. 29, 2003 OCT. 27, 2004
------------- ------------- ------------- ------------- -------------
Adjusted operating income (loss) $ 102 $ (12) $ 305 $ (4) $ 438
Gains on sales of assets 807 1 879 3 911
-------- --------- ------------- ------------ -----------
GAAP operating income (loss) $ 909 $ (11) $ 1,184 $ (1) $ 1,349
======== ========= ============= ============ ===========
LIQUIDITY AND FINANCIAL CONDITION
Kmart continued to maintain strong liquidity for the 39-weeks ended
October 27, 2004 with cash flow from operations of $171 million and $524 million
in proceeds from asset sales. Our principal cash needs are for our operations
and capital expenditures, which have been satisfied through our net earnings and
our existing $2.6 billion balance in cash and cash equivalents as of October 27,
2004. Working capital required for our business is significantly affected by our
level of sales, seasonality and the credit extended by our vendors. In
addition, we have funds available under our Credit Facility. From its
inception, we have only used the Credit Facility to support issuances of
letters of credit. However, should we experience significant negative sales
trends, a significant disruption of terms with our vendors, the Credit Facility
for any reason becomes unavailable and/or actual results differ materially
from those projected, our compliance with financial covenants and our cash
resources could be adversely affected. The Company continues to explore
various alternatives to reduce the cost and improve the terms of our Credit
Facility to reflect the improvement in the Company's financial condition.
In the normal course of business, the Company considers opportunities to
purchase leased operating properties, as well as offers to sell owned or if
leased, assign operating and non-operating properties. These transactions may,
individually or in the aggregate, result in material proceeds or outlays of
cash. In addition, the Company reviews leases that will expire in the short-term
in order to determine the appropriate action to take with respect to the lease.
CREDIT FACILITY
Our credit agreement (the "Credit Facility") is an $800 million revolving
credit facility with an equivalent letter of credit sub-limit under which Kmart
Corporation is the borrower. Availability under the Credit Facility is subject
to an inventory borrowing base formula. Since its issuance, we have only used
the Credit Facility to support outstanding letters of credit. To reduce the
overall cost of the facility, we voluntarily reduced the size of the Credit
Facility from $1.5 billion to $1.0 billion in July 2004 and we amended and
restated the Credit Facility in October 2004 to eliminate the synthetic term
loan provisions, which reduced the size of the Credit Facility from $1.0 billion
to $800 million. In conjunction with these reductions to our Credit Facility,
the accelerated amortization of the associated debt issuance costs totaled
$3 million for the 13-week period and $12 million for the 39-weeks ended
October 27, 2004, respectively. The Credit Facility is guaranteed by the
Successor Company, Kmart Management Corporation, Kmart Services Corporation (a
subsidiary of Kmart Management Corporation) and Kmart Corporation's direct and
indirect domestic subsidiaries. The Credit Facility is secured primarily by
first liens on inventory, the proceeds thereof and certain related assets of
Kmart Corporation and the guarantors.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
Borrowings under the Credit Facility are subject to a sliding pricing
scale based on our earnings before interest, taxes, depreciation, amortization
and other charges ("EBITDA") levels and such adjustments are implemented
quarterly. Utilization of the Credit Facility in support of trade and standby
letters of credit currently bears interest at 1.25% and 2.00% per annum,
respectively. In addition, we are required to pay a fee based on the unutilized
commitment under the Credit Facility equal to 0.375% per annum. The Credit
Facility gives the Company the ability to repurchase up to $500 million of the
Company's Common Stock, depending on our EBITDA levels and subject to the
approval of the Company's Board of Directors.
As of October 27, 2004, we had utilized $22 million of the Credit Facility
for letters of credit issued for ongoing import purchasing operations, and
contractual and regulatory purposes, including letters of credit utilized as
collateral to support our self-insurance programs. During fiscal 2004, we have
replaced letters of credit used as collateral for certain programs with cash
collateral which reduces fees paid by the Company with respect to the letters of
credit. We continue to classify the cash collateral as Cash and cash equivalents
due to our ability to convert the cash to letters of credit at any time at our
discretion. As of October 27, 2004, $221 million of cash was posted as
collateral.
Total availability under the Credit Facility as of October 27, 2004 was
approximately $750 million.
The Credit Facility financial covenants include a requirement that we
maintain certain availability minimums, and failure to do so triggers additional
required minimum levels of EBITDA. The Credit Facility also contains other
customary covenants, including certain reporting requirements and covenants that
restrict our ability to incur or create liens, indebtedness and guarantees, make
investments, pay dividends or make other equity distributions, sell or dispose
of stock or assets, change the nature of our business and enter into affiliate
transactions, mergers and consolidations. Failure to satisfy these covenants
would result in an event of default that could result in our inability to access
the funds. As of October 27, 2004, and in all periods since our emergence from
Chapter 11, we have been in compliance with all Credit Facility covenants.
Letter of Credit Agreement
On August 13, 2004, the Company entered into a letter of credit agreement
(the "LC Agreement") with a commitment amount of up to $200 million through
January 7, 2005 and increasing to $600 million thereafter. Standby letters of
credit issued under the LC Agreement bear interest at 0.20% per annum. No
interest is charged for trade letters of credit issued under the LC Agreement;
however, we are required to pay a fee based on the unutilized commitment, as
defined in the LC Agreement, equal to 0.125% per annum.
We amended the LC Agreement on October 4, 2004, primarily to provide Kmart
with an election to post either cash or inventory as collateral. Electing
inventory would result in incremental costs under the LC Agreement. As of
October 27, 2004, Kmart has posted cash collateral of $250 million to support
the LC Agreement. We classify the cash collateral as Cash and cash equivalents
due to our ability to post inventory as collateral at any time at our
discretion. The LC Agreement is subject to a pledge and security agreement
pursuant to which, after January 7, 2005, the Company must post as collateral
cash in an amount equal to 100.5% of the face value of letters of credit
outstanding under the LC Agreement or elect to post inventory as collateral,
subject to certain conditions. Prior to January 7, 2005, the collateral posted
by the Company is a leasehold mortgage on certain properties leased by the
Company.
The LC Agreement contains customary covenants, including covenants that
restrict our ability to incur or create liens on collateralized assets, and
sell, transfer, assign or otherwise dispose of any collateralized assets.
Failure to satisfy these covenants would result in an event of default that
could result in our inability to issue new letters of credit. Subject to these
covenants the Company is required to maintain in a deposit account $250 million
of cash invested with the issuing bank until such time that the cash collateral
is equal to the 100.5% of the face value of the letters of credit outstanding,
as discussed above. This cash is classified as Cash and cash equivalents as of
October 27, 2004. As of October 27, 2004, and in all periods since inception of
the LC Agreement, we have been in compliance with all covenants of the LC
Agreement.
As of October 27, 2004, we had utilized $197 million of the LC Agreement.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
CASH FLOWS
Operating activities provided net cash of $171 million and $576 million
for the 39-weeks ended October 27, 2004 and the 13-weeks ended April 30, 2003,
respectively. During the 26-weeks ended October 29, 2003, operating activities
used $396 million of net cash. Cash flow for the current 39-week period was
favorably affected by our strong net earnings which was partially offset by the
increase in our inventories, net of associated accounts payable, for the
upcoming holiday season and by funding $77 million for future associate medical
and dental expenses. For the 26-weeks ended October 29, 2003, the use of cash
was primarily due to payments of $470 million for exit costs and reorganization
items. For the 13-weeks ended April 30, 2003, a decrease in inventory due to
liquidation sales in conjunction with store closings and improved inventory
management, partially offset by a decrease in accounts payable, had a favorable
affect on operating cash flow.
Investing activities generated $345 million, $32 million and $60 million
for the 39-weeks ended October 27, 2004, the 26-weeks ended October 29, 2003 and
the 13-weeks ended April 30, 2003, respectively. During the current year, we
received proceeds of $524 million from sales of real and personal property,
including $432 million from the sale of owned and assignment of leased
properties to Sears and Home Depot. See Note 3 - Real Estate and Property
Transactions and Note 11 - Property Held for Sale for a more detailed
discussion of these transactions. During the 39-weeks ended October 27, 2004 and
the 26-weeks ended October 26, 2003, we purchased 28 and eight previously-leased
operating properties for $103 million and $61 million, respectively.
Additionally, we received proceeds of $92 million from the sale of property held
for sale during the 26-weeks ended October 29, 2003. Proceeds of $64 million
were received during the 13-weeks ended April 30, 2003, from the sale of four
owned Kmart store locations and the sale of furniture and fixtures from closed
store locations.
Payments on capital lease obligations and mortgages of $40 million and $17
million were the uses of cash for financing activities during the 39-weeks ended
October 27, 2004 and the 13-weeks ended April 30, 2003, respectively. Financing
activities provided $73 million in cash for the 26-weeks ended October 29, 2003.
Upon emergence from bankruptcy in May, 2003, the Company received net proceeds
of $127 million from the issuance of Common Stock to the Plan Investors and
proceeds of $60 million from the issuance of the convertible note to affiliates
of ESL. The positive effect of these items was partially offset by payments made
for other financing arrangements. See Note 2 - Emergence from Chapter 11
Bankruptcy Protection and Fresh-Start Accounting for a more detailed discussion.
The Company has a share repurchase program with authorization to
repurchase $100 million in Common Stock. As of October 27, 2004, we had
repurchased approximately $4 million of Common Stock.
FUTURE LIQUIDITY ITEMS
PENSION PLAN
Prior to 1996, the Predecessor Company maintained defined benefit pension
plans covering eligible associates. Effective January 31, 1996, the pension
plans were frozen, and associates no longer earn additional benefits under the
plans (except for purposes of the subsidized early retirement program provided
by the plan). The plans' assets consist primarily of equity and fixed income
securities. Prior to 2004, no contributions had been made to the plans for the
past eight years.
During the 39-weeks ended October 27, 2004 contributions to the plans were
approximately $10 million. The minimum required contribution for fiscal 2004
and fiscal 2005 is approximately $11 million and $4 million, respectively.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
REAL ESTATE TRANSACTIONS
Home Depot U.S.A., Inc.
On June 3, 2004, the Company entered into multiple agreements with Home
Depot U.S.A., Inc. (a subsidiary of The Home Depot, Inc.) ("Home Depot") to sell
owned properties and assign leased properties for a maximum purchase price of
$365 million in cash. These agreements were later amended to reflect that the
Company would sell four properties and assign 14 properties for an aggregate
purchase price of $271 million. Pursuant to these agreements, on June 15, 2004,
the Company completed the sale of four owned properties to Home Depot for $59
million in cash, resulting in a net gain of $43 million. The Company completed
the assignment of 13 of the remaining properties in the third quarter of fiscal
2004, resulting in proceeds to the Company of $200 million in cash, and a net
gain of $198 million. We anticipate closing on the final property during the
fourth quarter, resulting in additional proceeds of $12 million.
Sears, Roebuck and Co.
On June 29, 2004, the Company entered into an agreement with Sears,
Roebuck and Co. ("Sears") to sell owned properties and assign leased properties
for a maximum purchase price of $621 million in cash. On September 29, 2004, the
Company agreed to sell four owned properties, assign 45 leased properties and
lease one owned store to Sears for a total purchase price of approximately $576
million. The Company received 30% of the purchase price in September, 2004 upon
closing, and recognized a gain on the transaction of $599 million. The remaining
70% of the purchase price will be received when Sears occupies the properties,
which shall take place no later than April 15, 2005. The receivable for the
remaining purchase price of $403 million is included in Accounts receivable, net
in our Unaudited Condensed Consolidated Balance Sheet as of October 27, 2004.
ESL and its affiliates own over 10 percent of both Sears and the Company.
OTHER
In light of the Company's liquidity position and subject to compliance
with our Credit Facility, we may consider various uses of cash and other
resources in the future which could include investments in various forms of
securities, share repurchases, the acquisition of related or unrelated
businesses, and the payment of dividends.
STORE ACTIVITY
During the 39-weeks ended October 27, 2004, the Company purchased 28
previously leased store locations; sold 17 stores; closed four stores; and
allowed leases to expire on four stores. As of October 27, 2004, we operated
1,486 stores.
In the second and third quarters of fiscal 2003, we closed one store and
purchased seven previously leased store locations and one previously leased
distribution center. In the first quarter of fiscal 2003, the Predecessor
Company closed 316 stores.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our financial statements, certain of our accounting policies
require considerable judgment to select the appropriate assumptions to calculate
financial estimates. By their nature, these estimates are complex and subject to
an inherent degree of uncertainty. We base our estimates on historical
experience, terms of existing contracts, our evaluation of trends and other
assumptions that we believe to be reasonable under the circumstances. We
continually evaluate the information used to make these estimates as our
business and the economic environment change.
Management believes the current assumptions and other considerations used
to estimate amounts reflected in our financial statements are appropriate.
However, if actual experience differs from the assumptions and other
considerations used in estimating amounts, the resulting changes could have a
material adverse effect on our consolidated results of operations, and in
certain situations, could have a material adverse effect on our financial
condition. We have disclosed our critical accounting policies and estimates,
which include inventory valuation, self-insurance reserves, pension accounting
and deferred taxes, in our Annual Report on Form 10-K for the year ended January
28, 2004.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
DISCONTINUED OPERATIONS
During the 39-weeks ended October 27, 2004, the Company applied the
provisions of SFAS No. 144 to the stores sold to Home Depot and Sears and
determined that none of the stores met the criteria to be accounted for as
discontinued operations.
During the first quarter of fiscal 2003, the Predecessor Company closed
316 stores. Of the total stores closed, 66 met the criteria for discontinued
operations. For a comprehensive discussion, see Note 16 - Discontinued
Operations.
For the 13-weeks ended April 30, 2003, 250 of the 316 stores closed were
accounted for in continuing operations as they did not meet the criteria for
discontinued operations. Total sales, gross margin and SG&A for these 250 stores
were $854 million, $301 million and $146 million, respectively.
SPECIAL CHARGES
Special charges are transactions which, in management's judgment, may make
meaningful comparisons of operating results between reporting periods difficult.
In determining what amounts constitute a special charge, management considers
the nature, magnitude and frequency of their occurrence. For the 13-weeks ended
April 30, 2003, the Predecessor Company recorded special charges of $42 million.
For a comprehensive discussion, see Note 17 - Special Charges.
REORGANIZATION ITEMS, NET
Reorganization items represent amounts the Predecessor Company incurred as
a result of Chapter 11, and are presented separately in the Unaudited Condensed
Consolidated Statements of Operations as required by SOP 90-7. The Predecessor
Company recorded $813 million for the 13-weeks ended April 30, 2003 for
reorganization items. For a comprehensive discussion, see Note 18 -
Reorganization Items, net.
OTHER MATTERS
The Martha Stewart Everyday brand is considered a distinctive brand for
Kmart and we currently sell Martha Stewart Everyday home, garden, colors, baby,
kitchen, keeping and decorating product lines, along with candles and
accessories. To date, we have not experienced any significant adverse impact
from Ms. Stewart's recent conviction and incarceration on the sales of Martha
Stewart Everyday brand products. Although product sales have not been
significantly affected by past events, the Company is not able to determine the
potential effects that these events may have on the future sales of its Martha
Stewart Everyday brand products.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At October 27, 2004, we did not have any derivative instruments that
increased our exposure to market risks for interest rates, foreign currency
rates, commodity prices or other market price risks. We do not use derivatives
for speculative purposes. Currently, our exposure to market risks results
primarily from changes in interest rates, principally with respect to the Credit
Facility, which is a variable rate financing agreement. We do not use swaps or
other interest rate protection agreements to hedge this risk.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision of, and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end
of the period covered by this report (the "Evaluation Date"). Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that, as of the Evaluation Date, our disclosure controls and procedures were
effective in alerting them on a timely basis to material information relating to
the Company (including its consolidated subsidiaries) required to be included in
the Company's periodic filings under the Exchange Act.
No changes in the Company's internal controls have come to management's
attention that occurred during the Company's last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
31
PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
See Note 19 of the Notes to Unaudited Condensed Consolidated Financial
Statements for information concerning legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The Company has a share repurchase program with authorization to
repurchase $100 million of Common Stock. As of October 27, 2004, we had
repurchased approximately $4 million of Common Stock.
Total Approximate
Number of Shares Dollar Value
Average Purchased as Part of Shares that
Total Price of Publicly May Yet Be
Number of Shares Paid per Announced Purchased Under
Period Purchased Share Program the Program
- -------------------------------------- ---------------- ------------- --------------- ---------------
July 29, 2004 to August 25, 2004 - - - $ 96,000,000
August 26, 2004 to September 22, 2004 496,211(1) $ 76.09 - $ 96,000,000
September 23, 2004 to October 27, 2004 5,276(2) $ 85.85 - $ 96,000,000
(1) The Company was assigned 494,481 shares (weighted-average price of $76.06
per share) of Common Stock as part of a settlement agreement reached with a
Class 5 claimholder; in addition the Company was assigned 1,730 shares
(weighted-average price of $83.37 per share) of Common Stock for payment of
withholding taxes related to the vesting of restricted stock.
(2) The Company was assigned 5,276 shares of Common Stock as part of a
settlement agreement reached with a critical vendor.
ITEM 6. EXHIBITS
Exhibit 10.1 Employment Agreement, dated as of October 18, 2004, between
Kmart Holding Corporation and Aylwin B. Lewis
Exhibit 10.2 Julian C. Day Separation Agreement, dated as of October 18,
2004
Exhibit 10.3 First Amendment to Letter of Credit Agreement, dated as
of August 13, 2004 among Kmart Corporation, Bank of America,
National Association and Fleet National Bank as issuing banks
Exhibit 10.4 Credit Agreement, dated as of May 6, 2003, as amended and
restated as of October 7, 2004, among Kmart Corporation as
Borrower, the other Credit Parties signatory thereto, as
Credit Parties, the Lenders signatory thereto, from time to
time, as Lenders, and General Electric Capital Corporation,
as Administrative Agent, Co-Collateral Agent and Lender, GECC
Capital Markets Group, Inc., as Co-Lead Arranger and Co-Book
Runner, Fleet Retail Finance Inc., as Syndication Agent,
Co-Collateral Agent and Lender, Fleet Securities, Inc., as
Co-Lead Arranger and Co-Book Runner, GMAC Commercial Finance
LLC, as Co-Documentation Agent and Wells Fargo Foothill Inc.
as Co-Documentation Agent
Exhibit 31.1 Chief Executive Officer Certification pursuant to Rule 13a-14
(a)/15d-14(a) of the Securities Exchange Act of 1934, as
Amended
Exhibit 31.2 Chief Financial Officer Certification pursuant to Rule 13a-14
(a)/15d-14(a) of the Securities Exchange Act of 1934, as
Amended
Exhibit 32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
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 17, 2004
Kmart Holding Corporation
-----------------------------------------
(Registrant)
By: /s/ Aylwin B. Lewis
-----------------------------------------
Aylwin B. Lewis
President and Chief Executive Officer
(Principal Executive Officer)
/s/ James D. Donlon, III
-----------------------------------------
James D. Donlon, III
Senior Vice President, Chief Financial
Officer
(Principal Financial Officer)
/s/ James F. Gooch
-----------------------------------------
James F. Gooch
Vice President, Controller
(Principal Accounting Officer)
33
EXHIBIT INDEX
Exhibit
Number Description
- -------- --------------------------------------------------------------------
10.1 Employment Agreement, dated as of October 18, 2004, between Kmart
Holding Corporation and Aylwin B. Lewis
10.2 Julian C. Day Separation Agreement, dated as of October 18, 2004
10.3 First Amendment to Letter of Credit Agreement, dated as of August
13, 2004 among Kmart Corporation, Bank of America, National
Association and Fleet National Bank as issuing banks
10.4 Credit Agreement, dated as of May 6, 2003, as amended and restated
as of October 7, 2004, among Kmart Corporation as Borrower, the
other Credit Parties signatory thereto, as Credit Parties, the
Lenders signatory thereto, from time to time, as Lenders, and
General Electric Capital Corporation, as Administrative Agent,
Co-Collateral Agent and Lender, GECC Capital Markets Group, Inc., as
Co-Lead Arranger and Co-Book Runner, Fleet Retail Finance Inc., as
Syndication Agent, Co-Collateral Agent and Lender, Fleet Securities,
Inc., as Co-Lead Arranger and Co-Book Runner, GMAC Commercial
Finance LLC, as Co-Documentation Agent and Wells Fargo Foothill Inc.
as Co-Documentation Agent
31.1 Chief Executive Officer Certification pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
Amended
31.2 Chief Financial Officer Certification pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
Amended
32.1 Certifications pursuant to 18 U. S. C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002