-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C4VmA3pqLPF+ZNYvQ+PZjLicTzggjikRSTT6O+TYVtxE6YNV9jE4vdLH1jRGJx5a RePTMIy03HrHQIuojwlCsw== 0000950124-00-002311.txt : 20000420 0000950124-00-002311.hdr.sgml : 20000420 ACCESSION NUMBER: 0000950124-00-002311 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000126 FILED AS OF DATE: 20000419 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KMART CORP CENTRAL INDEX KEY: 0000056824 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 380729500 STATE OF INCORPORATION: MI FISCAL YEAR END: 0129 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-00327 FILM NUMBER: 604969 BUSINESS ADDRESS: STREET 1: 3100 W BIG BEAVER RD CITY: TROY STATE: MI ZIP: 48084 BUSINESS PHONE: 2486431000 MAIL ADDRESS: STREET 1: 3100 W BIG BEAVER ROAD CITY: TROY STATE: MI ZIP: 48084 FORMER COMPANY: FORMER CONFORMED NAME: KRESGE S S CO DATE OF NAME CHANGE: 19770921 10-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 26, 2000 ---------------- or __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File No. 1-327 ----- KMART CORPORATION (Exact name of registrant as specified in its charter) Michigan 38-0729500 ------------------------------------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3100 West Big Beaver Road - Troy, Michigan 48084 ------------------------------------------------------------------------------ (Address of principal executive offices) (zip code) Registrant's telephone number, including area code (248) 643-1000 -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE SECURITIES EXCHANGE ACT OF 1934: Name of each Exchange Title of each class on which registered Common Stock, $1.00 par value New York, Pacific and Chicago Exchanges SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934: None 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock including Common Stock held by non-affiliates of the Registrant on March 22, 2000 was $4,844,341,860. The market value of the Common Stock is based on the closing price on the New York Stock Exchange on such date. As of March 22, 2000, 481,425,278 shares of Common Stock of the Registrant, held by approximately 76,644 shareholders, were outstanding. Portions of the Registrant's 1999 Annual Report to Shareholders are incorporated by reference into Parts I, II and IV of this report. Portions of the Registrant's Proxy Statement dated April 13, 2000 in connection with the 2000 Annual Meeting of Stockholders are incorporated by reference into Part III of this report. 2 PART I Item 1. Business History Kmart Corporation ("the Registrant" or "Kmart") is the nation's second largest discount retailer and the third largest general merchandise retailer. Kmart was incorporated under the laws of the State of Michigan on March 9, 1916, as the successor to the business developed by its founder, S. S. Kresge, who opened his first store in 1899. After operating Kresge department stores for over 45 years, the Kmart store program commenced with the opening of the first Kmart store in March 1962. The principal executive offices of Kmart are located at 3100 West Big Beaver Road, Troy, Michigan 48084, and its telephone number is (248) 643-1000. Operations The Registrant operates in the general merchandise retailing industry through 2,171 Kmart discount stores with locations in each of the 50 United States, Puerto Rico, the U.S. Virgin Islands and Guam. Kmart's general merchandise retail operations are located in 299 of the 316 Metropolitan Statistical Areas in the United States. Kmart stores are generally one-floor, free-standing units ranging in size from 40,000 to 180,000 square feet. In 1995, Kmart converted 29 of its traditional stores to feature a new, high-frequency format. In April 1997, this design was renamed Big Kmart. Big Kmart offers customers an increased mix of frequently-purchased, everyday basics and consumables in a "Kmart Pantry" area located near the front of each store. A total of 1,860 traditional Kmart stores had been converted to the Big Kmart format at year-end 1999, with another 156 stores scheduled for conversion during fiscal 2000. At year-end 2000, including new stores built in the Big Kmart format, it is expected that approximately 2,030 stores will be in the Big Kmart format. Super Kmart Centers represent the Registrant's supercenter concept. Super Kmart Centers combine a full grocery assortment, including fresh and frozen food, bakery, meats and other items, with a broad selection of general merchandise found at Big Kmart and traditional Kmart stores. The Registrant's 105 Super Kmart Centers are open 24 hours a day, seven days a week. Information regarding the Registrant's analysis of consolidated operations appearing in "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 18 through 20 of the Registrant's 1999 Annual Report to Shareholders, is incorporated herein by reference. Information regarding the Registrant's discontinued operations and dispositions appearing in Note 2 of the "Notes to Consolidated Financial Statements" on page 27 of the Registrant's 1999 Annual Report to Shareholders, is incorporated herein by reference. Competition Kmart has several major competitors on a national level, which include J.C. Penney, Sears, Target and Wal-Mart, and many competitors on a local and regional level which compete with Kmart's individual stores. Success in this competitive market is based on factors such as price, quality, service, product mix and convenience. Seasonality The Registrant's business is highly seasonal and depends to a significant extent on the results of operations for the last quarter of the fiscal year. Credit Sales The Registrant offers a private label Kmart Credit Card, available in all Kmart stores, through Household Bank (SB), N.A. ("Household"), a unit of Household International, Inc. Household owns the receivables and retains the credit risk associated with this program. In addition to the Kmart Credit Card program, all of the Registrant's stores accept major bank credit cards as payment for merchandise. Employees The Registrant employed approximately 271,000 persons as of January 26, 2000. 2 3 Effect of Compliance with Environmental Protection Provisions Compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, and is not expected to have, a material effect on capital expenditures, earnings or the competitive position of the Registrant and its subsidiaries. Item 2. Properties At January 26, 2000, Kmart operated a total of 2,171 general merchandise stores which are located in the United States, Puerto Rico, the U.S. Virgin Islands and Guam. Kmart leases its store facilities, with the exception of 120 stores that it owns. Kmart store leases are generally for terms of 25 years with multiple five-year renewal options which allow Kmart the option to extend the life of the lease up to 50 years beyond the initial noncancelable term. The Registrant owns its headquarters and one administrative building in Troy, Michigan and leases administrative buildings in Royal Oak, Michigan and North Bergen, New Jersey. The Registrant owns two United States distribution centers, and leases 16 United States distribution centers for initial terms of 10 to 30 years with options to renew for additional terms. In addition, the Registrant owns or leases 497 parcels not currently used for store operations, the majority of which are rented to others. A description of the Registrant's leasing arrangements, appearing in Note 7 of the "Notes to Consolidated Financial Statements" on page 29 of the Registrant's 1999 Annual Report to Shareholders, is incorporated herein by reference. Item 3. Legal Proceedings The Registrant is a party to a substantial number of legal proceedings, most of which are routine and all of which are incidental to its business. Some matters involve claims for large amounts of damages as well as other relief. Although the consequences of these proceedings are not presently determinable, in the opinion of management, they will not have a material adverse affect on the Registrant's liquidity, financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 3 4 Executive Officers of the Registrant The name, position, age and a description of the business experience for each of the executive officers of the Registrant is listed below as of March 22, 2000. There is no family relationship among the executive officers. Executive officers of the Registrant are elected each year at the Annual Meeting of the Board of Directors to serve for the ensuing year and until their successors are elected and qualified. The business experience for each of the executive officers described below includes principal positions held since 1992. None of the corporations or organizations listed below is a parent, subsidiary or other affiliate of the Registrant. Floyd Hall - Chairman of the Board, President and Chief Executive Officer, 61. Mr. Hall joined the Registrant under his current title in June 1995. Prior thereto he served concurrently as Chairman and Chief Executive Officer of The Museum Company, Alva Reproductions, Inc. and Glass Masters, Inc. from 1989 to 1995. Michael Bozic - Vice Chairman, 59. Mr. Bozic joined the Registrant under his current title in December 1998. Prior thereto he was Chairman and Chief Executive Officer, Levitz Furniture Corporation from 1995 to 1998 and President and Chief Executive Officer, Hills Department Stores, Inc. from 1991 to 1995. Mr. Bozic was also with Sears Roebuck & Company for 28 years, serving as Chairman and Chief Executive Officer, Sears Merchandise Group, from 1987 to 1991. Andrew A. Giancamilli - President and General Merchandise Manager, U.S. Kmart, 49. Mr. Giancamilli has been in his current position since January 1998. Prior thereto he held the following positions at the Registrant: Senior Vice President, General Merchandise Manager-Consumables and Commodities from 1996 to 1998; Vice President, Pharmacy Merchandising and Operations from 1995 to 1996. Prior to joining the Registrant in 1995, he was President, Chief Operating Officer, Perry Drug Stores, Inc. from 1993 to 1995; and Executive Vice President, Chief Operating Officer, Perry Drug Stores, Inc. from 1992 to 1993. Donald W. Keeble - President, Store Operations, U.S. Kmart, 51. Mr. Keeble has served as an executive officer of the Registrant since 1989 and has served in his current position since July 1999. Prior thereto he held the following positions at the Registrant: Executive Vice President, Store Operations from 1995 to 1999, Executive Vice President, Merchandising and Operations from 1994 to 1995; and Senior Vice President, General Merchandise Manager - Fashions from 1991 to 1994. Warren Cooper - Executive Vice President, Human Resources and Administration, 55. Mr. Cooper joined the Registrant under his current title in March 1996. Prior thereto he was Senior Vice President, Human Resources, General Cable from 1995 to 1996; Vice President, Human Resources, the Sears Merchandise Group, Sears, Roebuck & Co. from 1993 to 1995; and Vice President, Corporate Human Resources, Sears, Roebuck & Co. from 1987 to 1993. Ernest L. Heether - Senior Vice President, Merchandise Planning and Replenishment, 54. Mr. Heether joined the Registrant under his current title in April 1996. Prior thereto he served as Senior Vice President, Merchandise Operations, Bradlees, Inc. from 1993 to 1996; and Vice President, Merchandise Planning and Control, Caldor from 1990 to 1993. Paul J. Hueber - Senior Vice President, Store Operations, 51. Mr. Hueber has served as an executive officer of the Registrant since 1991 and has served in his current position since 1994. Prior thereto he was Vice President, West/Central Region from 1991 to 1994. Cecil B. Kearse - Senior Vice President and General Merchandise Manager - Home, 47. Mr. Kearse has served in his current position since November 1997. Prior thereto he held the following positions at the Registrant: Vice President, Merchandise Presentation and Communication from 1996 to 1997; Vice President and General Merchandise Manager - Men's and Children's from 1995 to 1996; Divisional Vice President, Merchandising Fashions from 1994 to 1995; and Senior Buyer - Bed, Bath & Kitchen from 1990 to 1994. Jerry J. Kuske - Senior Vice President and General Merchandise Manager - Hardlines, 48. Mr. Kuske has served in his current position since April 1999. Prior thereto he held the following positions at the Registrant: Senior Vice President and General Merchandise Manager - Health and Beauty Care, Pharmacy and Consumables from 1997 to 1999; Vice President, General Merchandise Manager - Health and Beauty Care/Pharmacy from 1996 to 1997; Divisional Vice President, Consumables and Commodities from 1995 to 1996. Prior to joining the Registrant, he served as Senior Vice President, Merchandising and Marketing, Perry Drug Stores, Inc. from 1994 to 1995; and Senior Vice President, Operations, Payless Drug Stores, Inc. from 1992 to 1994. 4 5 James Mixon - Senior Vice President, Logistics, 55. Mr. Mixon joined the Registrant in his current position in July 1997. Prior thereto he served as Senior Vice President, Logistics/Service, Best Buy Stores from 1994 to 1997; and Senior Vice President, Distribution/Transportation, Marshall Stores from 1987 to 1994. Joseph A. Osbourn - Senior Vice President and Chief Information Officer, 52. Mr. Osbourn joined the Registrant in his current position in October 1999. Prior thereto he served as Vice President, Information Services, Walt Disney World from 1989 to 1999. E. Jackson Smailes - Senior Vice President and General Merchandise Manager - Apparel, 57. Mr. Smailes joined the Registrant in his current position in July 1997. Prior thereto he served as President, Chief Executive Officer, Hills Department Stores from 1995 to 1997; and Executive Vice President, Merchandising and Marketing, Hills Department Stores from 1992 to 1995. Martin E. Welch III - Senior Vice President and Chief Financial Officer, 51. Mr. Welch joined the Registrant under his current title in December 1995. Prior thereto he was Senior Vice President, Chief Financial Officer, Federal-Mogul Corporation from 1991 to 1995. 5 6 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Registrant's common stock is listed on the New York, Pacific and Chicago Stock Exchanges. There were approximately 76,644 shareholders of the Registrant's common stock as of March 22, 2000. The quarterly high and low sales prices for Kmart's common stock for the two most recent fiscal years, as set forth in Note 14 of the "Notes to Consolidated Financial Statements" on page 32 of the Registrant's 1999 Annual Report to Shareholders, is incorporated herein by reference. Item 6. Selected Financial Data The "Consolidated Selected Financial Data" summary, insofar as it relates to the five fiscal years ended January 26, 2000, appearing on page 17 of the Registrant's 1999 Annual Report to Shareholders, is incorporated herein by reference. Sales and comparable store statistics for the three fiscal years ended January 26, 2000, appearing in "Management's Discussion and Analysis of Results of Operations and Financial Condition" on page 18 of the Registrant's 1999 Annual Report to Shareholders, are incorporated herein by reference. U.S. Kmart selling square footage for the five fiscal years ended January 26, 2000, appearing in the "Consolidated Selected Financial Data" on page 17 of the Registrant's 1999 Annual Report to Shareholders, is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition The information appearing in "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 18 through 20 of the Registrant's 1999 Annual Report to Shareholders, is incorporated herein by reference. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION Statements, other than those based on historical facts, including the Year 2000 statements, which address activities, events or developments that the Registrant expects or anticipates may occur in the future are forward-looking statements which are based upon a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Actual events and results may differ materially from anticipated results described in such statements. The Registrant's ability to achieve such results is subject to certain risks and uncertainties, including, but not limited to, economic and weather conditions which affect buying patterns of the Registrant's customers, changes in consumer spending and the Registrant's ability to anticipate buying patterns and implement appropriate inventory strategies, continued availability of capital and financing, competitive factors and other factors affecting business beyond the Registrant's control. Consequently, all of the forward-looking statements are qualified by these cautionary statements and there can be no assurance that the results or developments anticipated by the Registrant will be realized or that they will have the expected effects on the Registrant or its business or operations. STATEMENT REGARDING YEAR 2000 DISCLOSURE For purposes of any action brought under the securities laws, as that term is defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)), the Year 2000 Information and Readiness Disclosure Act does not apply to any statements contained in any documents or materials filed with the Securities and Exchange Commission, or with federal banking regulators, pursuant to section 12(i) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(i)), or disclosures or writing that when made accompanied the solicitation of an offer or sale of securities. Item 7a. Quantitative and Qualitative Disclosures about Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data The financial statements of the Registrant, consisting of the consolidated balance sheets as of January 26, 2000 and January 27, 1999 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three fiscal years ended January 26, 2000 and the notes to consolidated financial statements, together with the report of PricewaterhouseCoopers LLP, appearing on pages 21 through 32 of the Registrant's 1999 Annual Report to Shareholders, are incorporated herein by reference. 6 7 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 7 8 PART III Item 10. Directors of the Registrant The information set forth under the caption "Proposal 1 - Election of Directors" on pages 6 to 8 of the Registrant's Proxy Statement dated April 13, 2000 filed with the Securities and Exchange Commission pursuant to Regulation 14A is incorporated herein by reference. Item 11. Executive Compensation The information set forth on pages 8, 9 and 10 to 16 of the Registrant's Proxy Statement dated April 13, 2000 filed with the Securities and Exchange Commission pursuant to Regulation 14A is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information set forth under the caption "Stock Ownership" on pages 4 to 6 of the Registrant's Proxy Statement dated April 13, 2000 filed with the Securities and Exchange Commission pursuant to Regulation 14A is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information set forth under the caption "Legal Proceedings/Transactions with Management" on page 6 of the Registrant's Proxy Statement dated April 13, 2000 filed with the Securities and Exchange Commission pursuant to Regulation 14A is incorporated herein by reference. 8 9 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K a) The following documents are filed as part of this report: 1. Financial Statements The following consolidated financial statements of the Registrant are incorporated herein by reference from the Registrant's 1999 Annual Report to Shareholders:
Page(s) in Registrant's Annual Report ------------- Report of Independent Accountants 21 Consolidated Statements of Income for each of the three fiscal years ended January 26, 2000 22 Consolidated Balance Sheets as of January 26, 2000 and January 27, 1999 23 Consolidated Statements of Cash Flows for each of the three fiscal years ended January 26, 2000 24 Consolidated Statements of Shareholders' Equity for each of the three fiscal years ended January 26, 2000 25 Notes to Consolidated Financial Statements 26 through 32
2. Financial Statement Schedules The separate financial statements and summarized financial information of majority-owned subsidiaries not consolidated and of 50% or less owned persons of the Registrant have been omitted because they are not required pursuant to conditions set forth in Rules 3-09(a), 4-08(g) and 1-02(v) of Regulation S-X. All other schedules have been omitted because they are not applicable or the required information is shown in the Registrant's 1999 Annual Report to Shareholders, which is incorporated herein by reference. 3. Exhibits See Exhibit Index included in this report. 9 10 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (cont.) b) The Registrant filed the following Current Reports on Form 8-K during the fiscal quarter ended January 26, 2000:
Filing Date Date of Report Item Reported ----------- -------------- ------------- December 3, 1999 November 10, 1999 Item 5.1. Press release announcing earnings for the third quarter 1999. Item 5.2. Filing of Statement of Eligibility and Qualification on Form T-1 of the Bank of New York to act as trustee under the senior debt securities indenture in connection with the Registrant's Registration Statement on Form S-3 (Registration No. 333-74665). December 15, 1999 December 6, 1999 Item 5. Announcement of Registrant entering into a $1.1 Billion Three-Year Revolving Credit Agreement and a $600 Million 364-Day Revolving Credit Agreement on December 6, 1999; and the filing of the related agreements. December 17, 1999 December 8, 1999 Item 5. Filing of certain exhibits under Item 7 relating to the Registrant's offering of $300,000,000 principal amount of its 8 3/8% Notes due 2004, which have been registered under the Securities Act of 1933 on Form S-3 (Registration No. 333-74665).
10 11 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on April 18, 2000. Each signatory hereby acknowledges and adopts the typed form of his or her name in the electronic filing of this document with the Securities and Exchange Commission. Kmart Corporation By: Floyd Hall ----------------------------------------------- (Floyd Hall) Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) By: Martin E. Welch III ----------------------------------------------- (Martin E. Welch III) Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the Registrant and in the capacities indicated, on April 18, 2000. Each signatory hereby acknowledges and adopts the typed form of his or her name in the electronic filing of this document with the Securities and Exchange Commission. James B. Adamson Floyd Hall ----------------------------------------------- --------------------------------------------- James B. Adamson, Director Floyd Hall, Director Lilyan H. Affinito Robert D. Kennedy ----------------------------------------------- --------------------------------------------- Lilyan H. Affinito, Director Robert D. Kennedy, Director Stephen F. Bollenbach J. Richard Munro ----------------------------------------------- --------------------------------------------- Stephen F. Bollenbach, Director J. Richard Munro, Director Joseph A. Califano, Jr. Robin B. Smith ----------------------------------------------- --------------------------------------------- Joseph A. Califano, Jr., Director Robin B. Smith, Director Richard G. Cline Thomas T. Stallkamp ----------------------------------------------- --------------------------------------------- Richard G. Cline, Director Thomas T. Stallkamp, Director Willie D. Davis James O. Welch, Jr. ----------------------------------------------- --------------------------------------------- Willie D. Davis, Director James O. Welch, Jr., Director Joseph P. Flannery ----------------------------------------------- Joseph P. Flannery, Director
11 12 EXHIBIT INDEX
Exhibit Number Description ------ ----------- **** (3a) Restated Articles of Incorporation of Kmart Corporation **** (3b) Bylaws of Kmart Corporation, as amended * (10a) Kmart Corporation 1973 Stock Option Plan, as amended [10a][A] * (10b) Kmart Corporation 1981 Stock Option Plan, as amended[10b] [A] **** (10c) Kmart Corporation Directors Retirement Plan, as amended [10d] [A] ** (10d) Kmart Corporation Performance Restricted Stock Plan, as amended [10e] [A] ***** (10e) Kmart Corporation Deferred Compensation Plan for Non-Employee Directors, as amended [A] *** (10f) Kmart Corporation 1992 Stock Option Plan, as amended [10g] [A] ***** (10g) Kmart Corporation Amended and Restated Directors Stock Plan [A] ** (10h) Form of Employment Agreement with Executive Officers [10j] [A] * (10i) Kmart Corporation Supplemental Executive Retirement Plan [10c] [A] *** (10j) Amended and Restated Kmart Corporation Annual Incentive Bonus Plan [10k] [A] *** (10k) Amended and Restated Kmart Corporation Management Stock Purchase Plan [10l] [A] *** (10l) Supplemental Pension Benefit Plan [10m] [A] ******* (10m) Employment Agreement with Floyd Hall [10n] [A] ******** (10n) Amendment to Employment Agreement [99] [A] ****** (10o) Kmart Corporation 1997 Long-Term Equity Compensation Plan [10n] [A] ***** (10p) Amended and Restated Kmart Corporation 1998 Management Deferred Compensation and Restoration Plan [A] (11) Statement Regarding Computation of Per Share Earnings (12) Statement Regarding Computation of Ratios (13) Annual Report to Shareholders of Kmart Corporation for the Fiscal Year Ended January 26, 2000 (23) Consent of Independent Accountants (27) Financial Data Schedule
Notes: * Filed as Exhibits to the Form 10-K Report of the Registrant for the fiscal year ended January 27, 1993 (file number 1-327) and are incorporated herein by reference. ** Filed as Exhibits to the Form 10-K Report of the Registrant for the fiscal year ended January 26, 1994 (file number 1-327) and are incorporated herein by reference. *** Filed as Exhibits to the Form 10-K Report of the Registrant for the fiscal year ended January 25, 1995 (file number 1-327) and are incorporated herein by reference. **** Filed as Exhibits to the Form 10-K Report of the Registrant for the fiscal year ended January 31, 1996 (file number 1-327) and are incorporated herein by reference. ***** Filed as Exhibits to the Form 10-K Report of the Registrant for the fiscal year ended January 27, 1999 (file number 1-327) and are incorporated herein by reference. ****** Filed as part of the 1997 Proxy Statement and is incorporated herein by reference. ******* Filed as Form 8-K dated June 4, 1995 and is incorporated herein by reference. ******** Filed as Exhibit to the Form 10-Q Report of the Registrant for the fiscal quarter ended October 28, 1998 (file number 1-327) and is incorporated herein by reference. [ #] Exhibit numbers in the Form 10-K or 10-Q Reports for the periods indicated. [A] This document is a management contract or compensatory plan.
12 13 In reliance upon Item 601(b)(4)(iii)(A) of Regulation S-K, various instruments defining the rights of holders of long-term debt of the Registrant are not being filed herewith because the total amount of securities authorized under each such instrument does not exceed 10% of the total assets of the Registrant. The Registrant agrees to furnish a copy to the Commission upon request of the following instruments defining the rights of holders of long-term debt: Indenture dated as of February 1, 1985, between Kmart Corporation and The Bank of New York, Trustee, as supplemented by the First Supplemental Indenture dated as of March 1, 1991 12-1/2% Debentures Due 2005 8-3/8% Notes Due 2004 8-1/8% Notes Due 2006 7-3/4% Debentures Due 2012 8-1/4% Notes Due 2022 8-3/8% Debentures Due 2022 7.95% Debentures Due 2023 Fixed-Rate Medium-Term Notes (Series A, B, C, D) 13 EX-11 2 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 - -------------------------------------------------------------------------------- KMART CORPORATION INFORMATION ON COMPUTATION OF PER SHARE EARNINGS
($ Millions) Fiscal Year Ended ----------------------------------------------------------------------- January 26, January 27, January 28, January 29, January 31, 2000 1999 1998 1997 1996* ----------- ----------- ----------- ----------- ----------- I. Basic earnings per common share Income (loss) from continuing operations before extraordinary item and the effect of accounting changes $ 633 $ 518 $ 249 $ 231 $ (230) Less: Series B and C convertible preferred shares dividend payment -- -- -- -- (6) ----------------------------------------------------------------------- (a) Income (loss) available to common shareholders from continuing operations before extraordinary item and the effect of accounting changes 633 518 249 231 (236) (b) Discontinued operations including the effect of accounting changes, net of income taxes (230) -- -- (5) (260) (c) Gain (loss) on disposal of discontinued operations, net of income taxes -- -- -- (446) (30) (d) Extraordinary item, net of income taxes -- -- -- -- (51) ----------------------------------------------------------------------- (e) Adjusted net income (loss) (1) $ 403 $ 518 $ 249 $ (220) $ (577) ======================================================================= (f) Weighted average common shares outstanding 491.7 492.1 487.1 483.6 459.8 ======================================================================= Basic earnings per common share: Income (loss) available to common shareholders from continuing operations before extraordinary item and the effect of accounting changes (a)/(f) $ 1.29 $ 1.05 $ 0.51 $ 0.48 $ (0.51) Discontinued operations including the effect of accounting changes, net of income taxes (b)/(f) (0.47) -- -- (0.01) (0.57) Gain (loss) on disposal of discontinued operations, net of income taxes (c)/(f) -- -- -- (0.92) (0.06) Extraordinary item, net of income taxes (d)/(f) -- -- -- -- (0.11) ----------------------------------------------------------------------- Net income (loss) (e)/(f) $ 0.82 $ 1.05 $ 0.51 $ (0.45) $ (1.25) =======================================================================
- ---------- * Prior year amounts have been restated for the effect of discontinued operations. (1) Adjusted net income (loss) included an after-tax provision of $13 million or $0.03 per share for fiscal 1998 and $81 million or $0.17 per share for fiscal 1997 related to non-recurring charges for voluntary early retirement programs and an after tax provision of $150 million or $0.33 per share for fiscal 1995 related to the adoption of Financial Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". 1 2 EXHIBIT 11
($ Millions) Fiscal Year Ended ----------------------------------------------------------------------- January 26, January 27, January 28, January 29, January 31, 2000 1999 1998 1997 1996* ----------- ----------- ----------- ----------- ----------- II. Earnings per common and common equivalent share assuming dilution: Income (loss) from continuing operations before extraordinary item and the effect of accounting changes $ 633 $ 518 $ 249 $ 231 $ (230) Add: Dividends trust convertible preferred, net 50 50 49 31 - ----------------------------------------------------------------------- (h) Adjusted income (loss) from continuing operations before extraordinary item and the effect of accounting changes 683 568 298 262 (230) (i) Discontinued operations including the effect of accounting changes, net of income taxes (230) - - (5) (260) (j) Gain (loss) on disposal of discontinued operations, net of income taxes - - - (446) (30) (k) Extraordinary item, net of income taxes - - - - (51) ----------------------------------------------------------------------- (l) Adjusted net income (loss) (1) $ 453 $ 568 $ 298 $ (189) $ (571) ======================================================================= Weighted average common shares outstanding 491.7 492.1 487.1 483.6 459.8 Weighted average trust convertible preferred 66.7 66.7 66.7 41.4 - Stock Options: Common shares assumed issued 17.5 21.2 16.3 13.0 1.6 Less: common shares assumed repurchased (14.2) (15.1) (11.7) (10.5) (1.5) ----------------------------------------------------------------------- 3.3 6.1 4.6 2.5 0.1 ----------------------------------------------------------------------- (m) Applicable common shares, as adjusted 561.7 564.9 558.4 527.5 459.9 ======================================================================= Diluted earnings per common and common equivalent share: Adjusted income (loss) from continuing operations before extraordinary item and the effect of accounting changes (h)/(m) $ 1.22 $ 1.01 $ 0.53 $ 0.50 $ (0.50) Discontinued operations including the effect of accounting changes, net of income taxes (i)/(m) (0.41) - - (0.01) (0.57) Gain (loss) on disposal of discontinued operations, net of income taxes (j)/(m) - - - (0.85) (0.06) Extraordinary item, net of income taxes (k)/(m) - - - - (0.11) ----------------------------------------------------------------------- Net income (loss) (l)/(m) $ 0.81 $ 1.01 $ 0.53 $ (0.36) $ (1.24) ======================================================================= (2) (2) (2)
- ---------- * Prior year amounts have been restated for the effect of discontinued operations. (1) Adjusted net income (loss) included an after tax provision of $13 million or $0.02 per share for fiscal 1998 and $81 million or $0.15 per share for fiscal 1997 related to non-recurring charges for voluntary early retirement programs and an after tax provision of $150 million or $0.33 per share for fiscal 1995 related to the adoption of Financial Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." (2) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although it is contrary to paragraph 13 of SFAS 128 because it produces an anti-dilutive result. 2 EX-12 3 STATEMENT REGARDING COMPUTATION OF RATIOS 1 EXHIBIT 12 KMART CORPORATION INFORMATION ON RATIO OF EARNINGS TO FIXED CHARGES COMPUTATION
Fiscal Year Ended ----------------------------------------- ($ Millions) January 26, January 27, January 28, 2000 1999 1998 ----------------------------------------- Net income from continuing retail operations $ 633 $ 518 $ 249 Dividends on trust convertible preferred, net 50 50 49 Income taxes 337 230 120 ----------------------------------------- Pretax income from continuing retail operations 1,020 798 418 Distributions from unconsolidated affiliated retail companies that exceed equity income (44) (42) 1 Fixed charges per below 585 579 660 Less: Interest capitalized during the period (16) (13) (8) Preferred dividends of wholly owned trust subsidiary not deducted in the determination of pre-tax income (78) (78) (75) ----------------------------------------- Earnings from continuing retail operations $ 1,467 $ 1,244 $ 996 ========================================= Fixed charges: Interest expense $ 263 $ 281 $ 378 Rent expense - portion of operating rentals representative of the interest factor 189 173 159 Preferred dividends of wholly owned trust subsidiary 78 78 75 Other 55 47 48 ----------------------------------------- Total fixed charges $ 585 $ 579 $ 660 ========================================= Ratio of income to fixed charges 2.5 2.1 1.5 =========================================
1 EX-13 4 ANNUAL REPORT TO SHAREHOLDERS OF KMART CORP. 1 EXHIBIT 13 CONSOLIDATED SELECTED FINANCIAL DATA (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS (1) Sales $ 35,925 $ 33,674 $ 32,183 $ 31,437 $ 31,713 Comparable sales % 4.8% 4.8% 4.8% 2.5% 5.5% Total sales % 6.6% 4.6% 2.4% (0.9%) 7.3% U.S. Kmart total sales % 6.6% 5.6% 5.0% (0.2%) 7.2% Cost of sales, buying and occupancy 28,102 26,319 25,152 24,390 24,675 Selling, general and administrative expenses 6,523 6,245 6,136 6,274 6,876 Interest expense, net 280 293 363 453 434 Continuing income (loss) before income taxes 1,020 798 418 330 (313) Net income (loss) from continuing operations(2) 633 518 249 231 (230) Net income (loss) 403 518 249 (220) (571) PER SHARE OF COMMON Basic continuing income (loss) $ 1.29 $ 1.05 $ 0.51 $ 0.48 $ (0.51) Diluted continuing income (loss)(3) $ 1.22 $ 1.01 $ 0.51 $ 0.48 $ (0.51) Book value $ 13.10 $ 12.12 $ 11.15 $ 10.51 $ 10.99 FINANCIAL DATA Working capital $ 4,084 $ 4,139 $ 4,202 $ 4,131 $ 5,558 Total assets 15,104 14,166 13,558 14,286 15,033 Long-term debt 1,759 1,538 1,725 2,121 3,922 Long-term capital lease obligations 1,014 1,091 1,179 1,478 1,586 Trust convertible preferred securities 986 984 981 980 -- Capital expenditures 1,277 981 678 343 540 Depreciation and amortization 770 671 660 654 685 Current ratio 2.0 2.1 2.3 2.1 2.9 Long-term debt to capitalization 28.6% 28.6% 32.4% 37.2% 51.1% Ratio of income from continuing operations to fixed charges(4) 2.5 2.1 1.5 1.4 -- Basic weighted average shares outstanding (millions) 492 492 487 484 460 Diluted weighted average shares outstanding (millions)(3) 562 565 492 486 460 Number of Stores United States 2,171 2,161 2,136 2,134 2,161 International and other -- -- -- 127 149 -------- -------- -------- -------- -------- Total Stores 2,171 2,161 2,136 2,261 2,310 U.S. Kmart store sales per comparable selling square foot $ 233 $ 222 $ 211 $ 201 $ 195 U.S. Kmart selling square footage (millions) 155 154 151 156 160 - -----------------------------------------------------------------------------------------------------------------------------
(1) Kmart Corporation and subsidiaries ("the Company" or "Kmart") fiscal year ends on the last Wednesday in January. Fiscal 1995 consisted of 53 weeks. (2) Net income from continuing operations in 1999 includes a one-time, non-cash earnings reduction of $11 million ($7 million net of tax) to reflect the cumulative effect of the change in accounting method for layaway sales. Net income from continuing operations in 1998 and 1997 includes non-recurring charges related to Voluntary Early Retirement Programs of $19 million ($13 million net of tax) and $114 million ($81 million net of tax), respectively. (3) Consistent with the requirements of Statement of Financial Accounting Standards No. 128, preferred securities were not included in the calculation of diluted earnings per share for 1997 and 1996 due to their anti-dilutive effect. Due to the Company's loss from continuing operations in 1995, diluted earnings per share is equivalent to basic earnings per share. (4) Fixed charges represent total interest charges, a portion of operating rentals representative of the interest factor, amortization of debt discount and expense and preferred dividends of majority owned subsidiaries. The deficiency of income from continuing retail operations versus fixed charges was $305 for 1995. Kmart Corporation 1999 Annual Report 17 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS
(Dollars in millions) 1999 1998 1997 - ------------------------------------------------------ Sales United States $35,925 $33,674 $31,884 International -- -- 299 ------- ------- ------- Total $35,925 $33,674 $32,183 ======= ======= ======= Operating Income (Loss) United States $ 1,300 $ 1,110 $ 898 International -- -- (3) ------- ------- ------- Total $ 1,300 $ 1,110 $ 895 ======= ======= ======= Comparable Sales % 4.8% 4.8% 4.8%
Operating income (loss) excludes the voluntary early retirement charges in 1998 and 1997 totaling $19 and $114, respectively, on a pretax basis. FISCAL 1999 COMPARED TO FISCAL 1998 SALES and comparable store sales for 1999 increased 6.6% and 4.8%, respectively, improving sales per square foot to $233 in 1999. The increased productivity is attributed to the continued successful rollout of the Big Kmart format into 587 additional locations during the year for a cumulative total of 1,860 locations or nearly 90% of the chain. In addition, the increased productivity was driven by increased promotional activity, continued execution of the Company's competitive pricing strategy and expansion of our exclusive brands such as Thom McAn, Route 66, Sesame Street and Martha Stewart Everyday home, baby and garden products. GROSS MARGIN, as a percentage of sales, was 21.8% in both 1999 and 1998. The impact of the Company's competitive pricing strategy and growth in lower margin sales categories, such as consumables, was offset by improved margins resulting from increased import and private label goods. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"), which includes advertising, declined for the fifth consecutive year as a percentage of sales improving to 18.2% in 1999 from 18.5% in 1998. This was the fourth consecutive year that SG&A as a percentage of sales was below 20%. The 0.3 percentage point reduction compared to 1998 was the result of the increased leverage from additional sales volume and the decrease in Year 2000 compliance expenses versus 1998, offset by the net addition of new stores. OPERATING INCOME increased $190 million in 1999 compared to 1998, excluding the 1998 charge for Voluntary Early Retirement Programs. This increase was the direct result of the 6.6% increase in sales over 1998 partially offset by the increase in SG&A expenses versus 1998. A Voluntary Early Retirement Program offered to certain hourly associates during the second quarter of 1998 resulted in a charge of $19 million based on actual acceptance. NET INTEREST EXPENSE was $280 million and $293 million in 1999 and 1998, respectively. The reduction in net interest expense was primarily due to lower outstanding debt balances in capitalized lease obligations, medium term notes and mortgages resulting from normal pay-down activity partially offset by an increase in interest associated with revolving credit borrowings. EFFECTIVE INCOME TAX RATE was 33.0% and 28.8% in 1999 and 1998, respectively. See Note 10 of the Notes to Consolidated Financial Statements. DISCONTINUED OPERATIONS relate to Hechinger Company ("Hechinger"), which had previously acquired substantially all of the operating assets of Builders Square, Inc. On June 11, 1999, Hechinger filed for Chapter 11 bankruptcy protection. As a result, Kmart recorded a non-cash charge of $354 million, $230 million after tax, which reflected Kmart's best estimate of the impact of Hechinger's default on lease obligations for up to 117 former Builders Square locations, which are guaranteed by Kmart. FISCAL 1998 COMPARED TO FISCAL 1997 SALES and comparable store sales for 1998 increased 4.6% and 4.8%, respectively, improving sales per square foot to a record $222 in 1998. The increased productivity can be attributed to the continued successful rollout of the Big Kmart format, which represented 58% of the chain, the strong performance of key brands, including Martha Stewart Everyday home fashions, Route 66 apparel and accessories, Sesame Street children's apparel and ladies' apparel, and the execution of the Company's competitive pricing strategy. GROSS MARGIN, as a percentage of sales, was 21.8% in both 1998 and 1997. The impact of the Company's competitive pricing strategy and growth in lower margin sales categories, such as consumables, was offset by improved margins resulting from increased import and private label goods. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"), which includes advertising, declined for the fourth consecutive year as a percentage of sales improving to 18.5% in 1998 from 19.1% in 1997. This was the third consecutive year that SG&A as a percentage of sales was below 20%. The 0.6 percentage point reduction compared to 1997 was the result of the sale of international operations and the increased leverage from additional sales volume, offset by increased Year 2000 compliance expenses and the addition of new stores. OPERATING INCOME increased $215 million in 1998 compared to 1997, excluding other gains and losses and the charges for Voluntary Early Retirement Programs. This increase was the direct result of the improved profitability of the apparel and consumables areas and the increased leverage of SG&A expenses from higher sales. A Voluntary Early Retirement Program offered to certain hourly associates during the second quarter of 1998 resulted in a charge of $19 million based on actual acceptance. Kmart Corporation 1999 Annual Report 18 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.) Net interest expense was $293 million and $363 million in 1998 and 1997, respectively. The reduction in net interest expense was due to increased cash flow from operations, resulting in lower borrowings and increased investment income. Effective income tax rate was 28.8% and 28.7% in 1998 and 1997, respectively. See Note 10 of the Notes to Consolidated Financial Statements. ANALYSIS OF FINANCIAL CONDITION Kmart's primary sources of working capital are cash flows from operations and borrowings under its credit facilities. The Company had working capital of $4,084 million and $4,139 million at year end 1999 and 1998, respectively. Working capital fluctuates in relation to profitability, seasonal inventory levels net of trade accounts payable, and the level of store openings and closings. On December 6, 1999, the Company entered into new financing agreements ("New Facilities") aggregating $1.7 billion with a group of financial institutions which replaced a $2.5 billion revolving credit facility. The New Facilities provide for a 3-year, $1.1 billion revolving credit facility and a 364-day $600 million revolving credit facility. The 3-year revolving credit facility matures in December 2002 and has a commitment fee of 25 basis points and interest rate of LIBOR plus 100 basis points during the first year. The 364-day revolving credit facility has a commitment fee of 20 basis points and interest rate of LIBOR plus 100 basis points. On January 12, 2000, the Company entered into an agreement for a $40.6 million revolving line of credit ("Minority Facility") with a consortium of 26 minority-owned banks in 20 states and the District of Columbia. The 364-day revolving credit facility has a commitment fee of 20 basis points and interest rate of LIBOR plus 100 basis points. The New Facilities and the Minority Facility contain certain affirmative and negative covenants customary to these types of agreements. At January 26, 2000, the Company was in compliance with all such covenants. The Company had no borrowings outstanding under any of these credit agreements as of year-ends 1999 and 1998. On December 8, 1999, the Company sold in an underwritten offering $300 million of 8 3/8% Notes due December 1, 2004 ("Notes"). Interest is payable semiannually on June 1 and December 1. The Company expects to use the net proceeds from the Notes for property acquisition and development, including the purchase of existing leased properties, and for other general corporate purposes. At the Company's peak borrowing level in 1999, over $264 million would have been available for borrowings under its New Facilities and Minority Facility compared to $1.4 billion in 1998. Management believes that its current financing arrangements will be sufficient to meet the Company's liquidity needs for operations and capital demands. Net cash provided by operating activities was $1,004 million versus $1,237 million in 1998. The decline resulted from an increase in inventory partially offset by an increase in income from continuing operations. Net cash used for investing was $1,363 million in 1999 compared to $795 million in 1998. Cash used for investing in 1999 was the result of $1,277 million in capital expenditures and $86 million for lease acquisitions. Cash used for investing in 1998 was the result of capital expenditures of $981 million partially offset by the proceeds from the sale of the company's remaining interest in Kmart Canada and proceeds from other property sales. Net cash used for financing was $7 million in 1999 compared to $230 million in 1998. Cash used for financing during 1999 was the result of repurchases of common stock of $200 million under the Company's stock repurchase program, payments on long-term debt and capital lease obligations offset by the proceeds from the issuance of long term debt and common shares. Cash used for financing during 1998 was the result of payments on long term debt and capital lease obligations offset by increased stock option activity. NEW STORE ACTIVITY For the second year in a row, Kmart ended the year with an increase in its number of stores. The Company ended 1999 with 2,171 U.S. Kmart stores versus 2,161 in 1998. During 1999, the Company opened 34 stores, 32 Big Kmarts and 2 Super Kmarts. Of the 32 Big Kmarts opened during the year, 16 were stores previously operated by Caldor, Inc. The Company expects to open 20 to 25 Big Kmarts and 5 Super Kmarts during 2000, and complete the conversions of approximately 150 smaller traditional Kmart stores to a new "Best of Big K" prototype. Capital expenditures relating to these projects will be funded through operating cash flows. YEAR 2000 The Company's Year 2000 Compliance Program consisted of four phases, (I) inventory and assessment, (II) remediation and unit testing, (III) return to production and (IV) integration testing, all of which were successfully completed. As of March 1, 2000, the Company concluded its Year 2000 Compliance Program, as no Year 2000 related events had occurred that materially affected either the Company's operations or its financial statements. The total cost of the Company's Year 2000 Compliance Program will approximate $80 million, with $29 million incurred in 1999, $46 million incurred in 1998 and $5 million incurred in 1997. Certain information technology projects were delayed as a result of the Company's Year 2000 compliance efforts, which is not expected to have a significant impact on the Company's financial position, results of operations or cash flows. Kmart Corporation 1999 Annual Report 19 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.) OTHER MATTERS In December 1999, BlueLight.com was formed as an independent e-commerce company, based in San Francisco, by a group of investors led by Kmart (59% ownership interest), SOFTBANK Venture Capital (18.5%), BlueLight.com management and employees (15%) and others, including Martha Stewart Living Omnimedia and Yahoo!. As Kmart's e-commerce venture, BlueLight.com's mission is to open the doors to the dynamic world of information, goods and services of the World Wide Web by providing easy-to-use, unlimited free Internet service to the world's shoppers. See Note 4 of the Notes to Consolidated Financial Statements. In the first quarter of 1999, the Company completed a year long program to repurchase an aggregate of 2 million shares of the Company's common stock to fund certain employee benefit plans. On May 18, 1999, the Board of Directors approved a common stock repurchase program to acquire up to $1 billion of the Company's common shares over a period of up to three years. For 1999, the Company repurchased 17 million shares of common stock at a cost of approximately $200 million. In addition, the Company received $8.7 million in proceeds from the sale of put options on its common stock. As of January 26, 2000, the Company had outstanding put options on 5 million shares of its common stock with an average strike price of $11 per share. The contracts are structured to ensure the options are recorded in shareholders' equity, with no income statement effect upon redemption. In February 2000, the Company announced plans to extend the scope of the repurchase program to include up to $200 million of Kmart Financing I Convertible Preferred Securities. During the third quarter of 1999, the Company signed agreements with SUPERVALU INC. and Fleming Companies Inc. under which they will assume responsibility for the distribution and the replenishment of $3.9 billion (annualized at cost) of grocery-related products to all of the Company's stores. The Company also created a Food and Consumables merchandising group. These initiatives are expected to improve operating efficiency, reduce working capital requirements and improve logistics capabilities. Forward looking statements contained herein should be read in conjunction with the Company's disclosures under the heading "Cautionary Statement Regarding Forward-looking Information" located on the back cover. In November 1995, Kmart sold its auto service center business to a new corporation controlled by Penske Corporation ("Penske"). In connection with the sale, Kmart and Penske entered into a multi-year master sublease agreement for the auto service center locations that are operated by Penske as Penske Auto Centers. To strengthen the auto center operation, Kmart and Penske entered into an agreement in January 2000 to restructure and recapitalize the Penske Auto Center business. As part of the recapitalization, Kmart received a 22% interest in a limited liability company that now owns and operates the Penske Auto Center business. The Company accounts for its investment in the Penske Auto Center business under the equity method and has recorded no initial investment. Kmart has guaranteed leases for properties operated by certain former subsidiaries including Borders Group, Inc., OfficeMax, Inc. and The Sports Authority, Inc. The present value of the lease obligations guaranteed by Kmart is approximately $418 million. The possibility of the Company having to honor its contingent obligations is dependent upon the future operating results of the former subsidiaries. See Note 5 of the Notes to Consolidated Financial Statements. The Sports Authority On April 13, 1999, The Sports Authority, Inc. ("TSA") replaced its existing revolving credit facility with a new three year, $200 million revolving credit agreement. The new agreement is secured by inventory and contains no financial covenants related to operating results. For its third quarter 1999, TSA announced a year-to-date same store sales decrease of 4.3% and a year-to-date operating loss of $9.9 million, as compared to an operating loss of $94.5 million for the same period of the prior year. On December 16, 1999, TSA announced that it expected to take a non-cash charge of approximately $130 million, net of taxes, in its fiscal fourth quarter as a result of the write-down of long-lived assets, including goodwill and deferred tax assets, and the closing of its Canadian subsidiary. TSA also announced that it had increased its revolving credit facility to $275 million and extended the maturity to 2003. The amendments to the facility required no changes in the collateralization. Kmart's rights and obligations with respect to its guarantee of TSA leases are governed by a Lease Guaranty, Indemnification and Reimbursement Agreement dated as of November 23, 1994. Other There are various claims, lawsuits and pending actions against Kmart incident to its operations. It is the opinion of management that the ultimate resolution of these matters will not have a material adverse effect on Kmart's liquidity, financial position, or results of operations. Kmart Corporation 1999 Annual Report 20 5 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS Management is responsible for the preparation of the Company's consolidated financial statements and related information appearing in this annual report. These financial statements have been prepared in conformity with generally accepted accounting principles on a consistent basis applying certain estimates and judgments based upon currently available information and management's view of current conditions and circumstances. On this basis, we believe that these financial statements reasonably present the Company's financial position and results of operations. To fulfill our responsibility, we maintain comprehensive systems of internal controls designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with established procedures. The concept of reasonable assurance is based upon a recognition that the cost of the controls should not exceed the benefit derived. We believe our systems of internal controls provide this reasonable assurance. The Company has adopted a code of conduct to guide our management in the continued observance of high ethical standards of honesty, integrity, and fairness in the conduct of the business and in accordance with the law. Compliance with the guidelines and standards is periodically reviewed and is acknowledged in writing by all management associates. The Board of Directors of the Company has an Audit Committee, consisting solely of outside directors. The duties of the Committee include keeping informed of the financial condition of the Company and reviewing its financial policies and procedures, its internal accounting controls and the objectivity of its financial reporting. Both the Company's independent accountants and the internal auditors have free access to the Audit Committee and meet with the Committee periodically, with and without management present. /s/ Floyd Hall - ------------------------------------- Floyd Hall Chairman of the Board, President and Chief Executive Officer /s/ Martin E. Welch - ------------------------------------- Martin E. Welch III Senior Vice President and Chief Financial Officer REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF KMART CORPORATION In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Kmart Corporation and its subsidiaries at January 26, 2000 and January 27, 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 26, 2000, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Detroit, Michigan March 6, 2000 Kmart Corporation 1999 Annual Report 21 6 CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
YEARS ENDED JANUARY 26, 2000, JANUARY 27, 1999 AND JANUARY 28, 1998 1999 1998 1997 - ---------------------------------------------------------------------------------------------------- Sales $ 35,925 $ 33,674 $ 32,183 Cost of sales, buying and occupancy 28,102 26,319 25,152 -------- -------- -------- Gross margin 7,823 7,355 7,031 Selling, general and administrative expenses 6,523 6,245 6,136 Voluntary early retirement programs -- 19 114 -------- -------- -------- Continuing income before interest, income taxes and dividends on convertible preferred securities of subsidiary trust 1,300 1,091 781 Interest expense, net 280 293 363 Income tax provision 337 230 120 Dividends on convertible preferred securities of subsidiary trust, net of income taxes of $27, $27 and $26 50 50 49 -------- -------- -------- Net income from continuing operations 633 518 249 Discontinued operations, net of income taxes of $(124) (230) -- -- -------- -------- -------- Net income $ 403 $ 518 $ 249 ======== ======== ======== Basic earnings per common share Net income from continuing operations $ 1.29 $ 1.05 $ .51 Discontinued operations (.47) -- -- -------- -------- -------- Net income $ .82 $ 1.05 $ .51 ======== ======== ======== Diluted earnings per common share Net income from continuing operations $ 1.22 $ 1.01 $ .51 Discontinued operations (.41) -- -- -------- -------- -------- Net income $ .81 $ 1.01 $ .51 ======== ======== ======== Basic weighted average shares (millions) 491.7 492.1 487.1 Diluted weighted average shares (millions) 561.7 564.9 491.7
See accompanying Notes to Consolidated Financial Statements. Kmart Corporation 1999 Annual Report 22 7 CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS)
AS OF JANUARY 26, 2000 AND JANUARY 27, 1999 1999 1998 - -------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents $ 344 $ 710 Merchandise inventories 7,101 6,536 Other current assets 715 584 ------- ------- Total current assets 8,160 7,830 Property and equipment, net 6,410 5,914 Other assets and deferred charges 534 422 ------- ------- Total Assets $15,104 $14,166 ======= ======= Current Liabilities Long-term debt due within one year $ 66 $ 77 Trade accounts payable 2,204 2,047 Accrued payroll and other liabilities 1,574 1,359 Taxes other than income taxes 232 208 ------- ------- Total current liabilities 4,076 3,691 Long-term debt and notes payable 1,759 1,538 Capital lease obligations 1,014 1,091 Other long-term liabilities 965 883 Company obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely 7-3/4% convertible junior subordinated debentures of Kmart (redemption value of $1,000) 986 984 Common stock, $1 par value, 1,500,000,000 shares authorized; 481,383,569 and 493,358,504 shares issued, respectively 481 493 Capital in excess of par value 1,555 1,667 Retained earnings 4,268 3,819 ------- ------- Total Liabilities and Shareholders' Equity $15,104 $14,166 ======= =======
See accompanying Notes to Consolidated Financial Statements. Kmart Corporation 1999 Annual Report 23 8 CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
YEARS ENDED JANUARY 26, 2000, JANUARY 27, 1999 AND JANUARY 28, 1998 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Cash Flow From Operating Activities Net income from continuing operations $ 633 $ 518 $ 249 Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: Depreciation and amortization 770 671 660 Cash used for store restructuring and other charges (80) (94) (105) Increase in inventories (565) (169) (31) (Increase) decrease in accounts receivable (62) (76) 18 Increase (decrease) in trade accounts payable 157 124 (86) Deferred income taxes and taxes payable 258 308 72 Decrease in other long-term liabilities (116) (64) (27) Changes in other assets and liabilities 92 60 15 Voluntary early retirement programs -- 19 114 ------- ------- ------- Net cash provided by continuing operations 1,087 1,297 879 Net cash used for discontinued operations (83) (60) (38) ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,004 1,237 841 ------- ------- ------- Cash Flow From Investing Activities Capital expenditures (1,277) (981) (678) Acquisition of Caldor leases (86) -- -- Proceeds from divestitures -- 87 133 Decrease in property held for sale or financing and other -- 99 420 Other, net -- -- (60) ------- ------- ------- NET CASH USED FOR INVESTING ACTIVITIES (1,363) (795) (185) ------- ------- ------- Cash Flow From Financing Activities Proceeds from issuance of long-term debt and notes payable 297 -- 337 Purchase of common shares (200) (30) -- Issuance of common shares 63 76 37 Payments on long-term debt (90) (188) (811) Payments on capital lease obligations (77) (88) (112) Refinancing costs related to long-term debt and notes payable -- -- (15) ------- ------- ------- NET CASH USED FOR FINANCING ACTIVITIES (7) (230) (564) ------- ------- ------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (366) 212 92 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 710 498 406 ------- ------- ------- Cash and cash equivalents, end of year $ 344 $ 710 $ 498 ======= ======= =======
See accompanying Notes to Consolidated Financial Statements. Kmart Corporation 1999 Annual Report 24 9 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN MILLIONS)
CAPITAL ACCUMULATED IN EXCESS OTHER COMMON OF PAR RETAINED COMPREHENSIVE STOCK VALUE EARNINGS INCOME - ----------------------------------------------------------------------------------------- Balance at January 29, 1997 $ 486 $ 1,571 $ 3,115 $ (80) Net income for the year -- -- 249 -- Shares reissued to retirement savings plan -- 19 -- -- Foreign currency translation adjustment -- -- -- 67 Additional minimum pension liability -- -- -- (10) Common stock issued for stock option plans 3 13 -- -- Other -- 2 (1) -- ------- ------- ------- ------- Balance at January 28, 1998 489 1,605 3,363 (23) Net income for the year -- -- 518 -- Shares reissued to retirement savings plan 2 (9) -- -- Repurchased shares (2) -- -- -- Common stock issued for stock option plans 4 73 -- -- Additional minimum pension liability -- -- -- (37) Other -- (2) (2) -- ------- ------- ------- ------- Balance at January 27, 1999 493 1,667 3,879 (60) Net income for the year -- -- 403 -- Shares reissued to retirement savings plan 3 40 -- -- Repurchased shares (17) (174) -- -- Common stock issued for stock option plans 2 18 -- -- Reduction of minimum pension liability -- -- -- 47 Other -- 4 (1) -- ------- ------- ------- ------- Balance at January 26, 2000 $ 481 $ 1,555 $ 4,281 $ (13) ======= ======= ======= =======
See accompanying Notes to Consolidated Financial Statements. Kmart Corporation 1999 Annual Report 25 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 1) Summary of Significant Accounting Policies The significant accounting policies followed by Kmart Corporation and subsidiaries ("the Company" or "Kmart") in the preparation of these financial statements are summarized below. Nature of Operations: The Company's operations consist principally of discount department stores located in all 50 states, Puerto Rico, the U.S. Virgin Islands, and Guam. Kmart's equity investments consist of its 59% interest in BlueLight.com and its 49% interest in substantially all of the Meldisco subsidiaries of Footstar, Inc. ("FTS"), which operate the footwear departments in Kmart stores. Basis of Consolidation: Kmart includes all majority owned subsidiaries in the consolidated financial statements, except for BlueLight.com, which is accounted for under the equity method. Investments in affiliated retail companies owned 20% or more are accounted for under the equity method. Intercompany transactions and accounts have been eliminated in consolidation. Fiscal Year: The Company's fiscal year ends on the last Wednesday in January. Fiscal years 1999, 1998 and 1997 each consisted of 52 weeks and ended on January 26, 2000, January 27, 1999 and January 28, 1998, respectively. Cash: Cash and cash equivalents include all highly liquid investments with maturities of three months or less. Included are temporary investments of $50 and $437, at year end 1999 and 1998, respectively. Inventories: Inventories are stated at the lower of cost or market, primarily using the retail method. The last-in, first-out (LIFO) method, utilizing internal inflation indices, was used to determine the cost for $6,690, $6,148 and $5,990 of inventory as of year end 1999, 1998 and 1997, respectively. Inventories valued on LIFO were $360, $407 and $457 lower than amounts that would have been reported using the first-in, first-out (FIFO) method at year end 1999, 1998 and 1997, respectively. Property and Equipment: Property and equipment are recorded at cost, less any impairment losses. Capitalized amounts include expenditures which, materially extend the useful lives of existing facilities and equipment. Expenditures for owned properties, which Kmart intends to sell and lease back within one year, are included in other current assets, and those with expected transaction dates extending beyond one year are included in other assets and deferred charges. Capitalized Software Costs: Costs associated with the acquisition or development of software for internal use are capitalized in accordance with the provisions of AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," and amortized using the straight-line method over the expected useful life of the software, which ranges from 3 to 7 years. Depreciation and Amortization: Depreciation and amortization, including amortization of property held under capital leases, are computed based upon the estimated useful lives of the respective assets using the straight-line method for financial statement purposes and accelerated methods for tax purposes. The general range of lives are 25 to 50 years for buildings, 5 to 25 years for leasehold improvements, 3 to 5 years for computer systems and equipment and 3 to 17 years for furniture and fixtures. Financial Instruments: Cash and cash equivalents, trade accounts payable and accrued liabilities are reflected in the financial statements at cost, which approximates fair value. The fair value of the Company's debt and other financial instruments are discussed in Notes 6 and 8. Foreign Currency Translations: Foreign currency assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date, and revenue and expenses are translated at average exchange rates during the period. Layaway Sales: In consideration of guidance issued by the Securities and Exchange Commission under Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), the Company has retroactively changed its method of accounting for layaway sales effective January 28, 1999. Based upon the new guidance, the Company defers recognition of layaway sales and profit to the accounting period when the merchandise is delivered to the customer. Under the prior method of accounting, sales and profits were recognized at the time the customer put the merchandise into layaway, with a reserve for anticipated merchandise to be returned to stock. The Company has recorded a one-time, non-cash after-tax earnings reduction of $7, or $0.01 per share, in the fourth quarter of 1999 to reflect the cumulative effect of the accounting change. Stock-Based Compensation: The Company has elected under the provisions of Statement of Financial Accounting Standards No. 123 ("FAS 123") to continue using the intrinsic value method of accounting for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Pre-Opening and Closing Costs: Effective for fiscal 1999, Kmart expensed pre-opening costs in the period in which they occurred in conformity with Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities". In prior years, costs associated with the opening of a new store were expensed during the first full month of operations. When the decision to close a retail unit is made, any future net lease obligation and non-recoverable investment in fixed assets directly related to discontinuance of operations are expensed. Advertising Costs: Advertising costs, net of co-op recoveries from vendors, are expensed the first time the advertising occurs and amounted to $453, $443 and $420 in 1999, 1998 and 1997, respectively. Income Taxes: Deferred income taxes are provided for temporary differences between financial statement and taxable income. Kmart accrues U.S. and foreign taxes payable on its pro rata share of the earnings of subsidiaries, except with respect to earnings that are intended to be permanently reinvested, or are expected to be distributed free of additional tax by operation of relevant statutes currently in effect and by utilization of available tax credits and deductions. Kmart Corporation 1999 Annual Report 26 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: Certain reclassifications of prior year amounts have been made to conform to the 1999 presentation. 2) Discontinued Operations and Dispositions Discontinued operations relate to Builders Square, Inc. ("Builders Square"). 1999 Activity On June 11, 1999, Hechinger Company ("Hechinger"), which had previously acquired substantially all of the operating assets of Builders Square, filed for Chapter 11 bankruptcy protection. In the second quarter of 1999, the Company recorded a non-cash charge of $354, $230 after tax, which reflected Kmart's best estimate of the impact of Hechinger's default on lease obligations for up to 117 former Builders Square locations which are guaranteed by Kmart. The foregoing non-cash charge does not reflect an amount, if any, which Kmart may ultimately recover on account of any claims previously filed by Kmart or an amount, if any, which may be sought by others against Kmart. On September 9, 1999, Hechinger announced that it would liquidate its stores. During the third and fourth quarters of 1999, certain locations with leases guaranteed by Kmart were auctioned by Hechinger as part of its liquidation. As of January 26, 2000, the Company had new lease agreements for 38 locations and planned to convert approximately 6 locations to Big Kmarts or Super Kmarts, leaving approximately 73 vacant locations to be remarketed. The Company is currently assessing its remarketing efforts for these vacant stores and believes its reserve to be adequate. 1997 Activity During the first and second quarters of 1997, the Company completed the sale of its interests in the Mexico and Canada operations, respectively. Under the terms of the Mexico agreement, the Company received $74, which approximated the book value of its interest. Under the terms of the Canada agreement, the Company received $54 in cash, a $76 note receivable and retained a 12.5% non-voting equity interest. The net proceeds from the sale approximated book value. During the first quarter of 1998, the note receivable was collected and the equity interest was sold at a gain of $7. In the third quarter of 1997, the Company completed the sale of substantially all of the operating assets of its subsidiary, Builders Square, to Hechinger, an affiliate of Leonard Green and Partners, LP. The net proceeds from the sale approximated book value. 3) Property and Equipment
YEAR END ------------------- 1999 1998 - ---------------------------------------------------------------- Land $ 374 $ 334 Buildings 1,008 944 Leasehold improvements 2,502 2,156 Furniture and fixtures 5,509 5,142 Construction in progress 123 62 -------- -------- 9,516 8,638 Property under capital leases 2,038 2,140 -------- -------- 11,554 10,778 Less: Accumulated depreciation and amortization (3,977) (3,674) Accumulated depreciation- capital leases (1,167) (1,190) -------- -------- Total $ 6,410 $ 5,914 ======== ========
The following table provides a breakdown of the number of stores leased compared to owned:
YEAR END ------------- 1999 1998 - ------------------------------------------------- Number of U.S.Kmart Stores Owned 120 110 Number of U.S.Kmart Stores Leased 2,051 2,051
4) Investments in Affiliated Retail Companies Meldisco All Kmart footwear departments are operated under license agreements with the Meldisco subsidiaries of FTS, substantially all of which are 49% owned by Kmart and 51% owned by FTS. Income earned under various agreements was $245, $225 and $210 in 1999, 1998 and 1997, respectively. The Company received dividends from Meldisco in 1999, 1998 and 1997 of $38, $36 and $36, respectively.
FISCAL YEAR ----------------------- MELDISCO INFORMATION 1999 1998 1997 - ----------------------------------------------- Net sales $1,212 $1,139 $1,142 Gross profit 544 499 491 Net income 91 78 74 Inventory $ 138 $ 147 $ 142 Other current assets 63 22 17 Non-current assets -- -- -- ------ ------ ------ Total assets 201 169 159 Current liabilities 47 29 24 ------ ------ ------ Net assets $ 154 $ 140 $ 135 ====== ====== ====== Equity of Kmart $ 74 $ 68 $ 65 ====== ====== ======
Unremitted earnings included in consolidated retained earnings were $44, $38 and $42 at year end 1999, 1998 and 1997, respectively. BlueLight.com In December 1999, BlueLight.com was formed as an independent e-commerce company, based in San Francisco, by a group of investors led by Kmart (59% ownership interest), SOFTBANK Venture Capital (18.5%), BlueLight.com management and employees Kmart Corporation 1999 Annual Report 27 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) (15%) and others, including Martha Stewart Living Omnimedia and Yahoo!. For its capital, BlueLight.com issued $62.5 of Series A Preferred shares for cash to SOFTBANK and other investors. Kmart issued return of capital puts relating to the initial cash paid for the Series A Preferred stock. The puts are payable in cash, expire in December 2002, and are exercisable in the nine-month period prior to expiration. Kmart did not make an initial cash investment in BlueLight.com. Kmart also issued 4.4 million warrants for Kmart common stock to SOFTBANK and other investors. The warrants have a strike price of $14.32, expire in December 2002, and are exercisable at any time prior to expiration provided that SOFTBANK has cancelled the Company's return of capital puts. Kmart accounts for its investment in BlueLight.com under the equity method. As of January 26, 2000, the Company's investment in BlueLight.com amounted to $62.8, including the issuance of return of capital puts and direct acquisition costs. Kmart's portion of BlueLight.com's 1999 loss was insignificant. Penske In November 1995, Kmart sold its auto service center business to a new corporation controlled by Penske Corporation ("Penske"). In connection with the sale, Kmart and Penske entered into a multi-year master sublease agreement for the auto service center locations that are operated by Penske as Penske Auto Centers. To strengthen the auto center operation, Kmart and Penske entered into an agreement in January 2000 to restructure and recapitalize the Penske Auto Center business. As part of the recapitalization, Kmart received a 22 percent interest in a limited liability company that now owns and operates the Penske Auto Center business. The Company accounts for its investment in the Penske Auto Center business under the equity method and has recorded no initial investment. 5) Other Commitments and Contingencies Kmart has outstanding guarantees for property leased by certain former subsidiaries as follows:
Present Value Gross at 7% Lease ------------- ------------ 1999 1999 1998 - ----------------------------------------------- The Sports Authority $218 $369 $397 Borders Group 104 176 194 OfficeMax 96 141 156 ---- ---- ---- Total $418 $686 $747 ==== ==== ====
The possibility of the Company having to honor its contingent obligations is dependent upon the future operating results of the former subsidiaries. Should a reserve be required, it would be recorded at the time the obligation was determined to be probable. The Sports Authority - -------------------- On April 13, 1999, The Sports Authority, Inc. ("TSA") replaced its existing revolving credit facility with a new three year, $200 revolving credit agreement. The new agreement is secured by inventory and contains no financial covenants related to operating results. For its third quarter 1999, TSA announced a year-to-date same store sales decrease of 4.3 percent, and a year-to-date operating loss of $9.9, as compared to an operating loss of $94.5 for the same period of the prior year. On December 16, 1999, TSA announced that it expected to take a non-cash charge of approximately $130, net of taxes, in its fiscal fourth quarter as a result of the write-down of long-lived assets, including goodwill and deferred tax assets, and the closing of its Canadian subsidiary. TSA also announced that it had increased its revolving credit facility to $275 and extended the maturity to 2003. The amendments to the facility required no changes in the collateralization. Kmart's rights and obligations with respect to its guarantee of TSA leases are governed by a Lease Guaranty, Indemnification and Reimbursement Agreement dated as of November 23, 1994. Other - ----- As of January 26, 2000, Kmart had guaranteed $93 of indebtedness of other parties related to certain of its leased properties financed by industrial revenue bonds. These agreements expire from 2004 through 2009. There are various claims, lawsuits and pending actions against Kmart incident to its operations. It is the opinion of management that the ultimate resolution of these matters will not have a material adverse effect on Kmart's liquidity, financial position or results of operations. 6) Long-Term Debt and Notes Payable
YEAR END FISCAL YEAR INTEREST -------------------- TYPE MATURITY RATES 1999 1998 - --------------------------------------------------------------- Debentures 2005-2023 7.8%-12.5% $ 1,166 $ 867 Medium-term notes 2000-2020 7%-9% 371 438 CMBS 2002 Floating 288 310 --------- ------- Total 1,825 1,615 Current portion (66) (77) --------- ------- Long-term debt $ 1,759 $ 1,538 ========= =======
The Commercial Mortgage Pass Through Certificates ("CMBS") mortgage loan is subject to monthly payments of interest and principal, according to a schedule which amortizes the initial outstanding principal amount of $335 over approximately 15 years with a balloon payment of approximately $253 on the scheduled maturity date in February 2002. The CMBS weighted average interest rate is 1 month LIBOR plus 47 basis points. Kmart Corporation 1999 Annual Report 28 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) On December 6, 1999, the Company entered into new financing agreements aggregating $1.7 billion with a group of financial institutions ("New Facilities") which replaced a $2.5 billion revolving credit facility. The New Facilities provide for a 3-year, $1.1 billion revolving credit facility and a 364-day $600 revolving credit facility. The 3-year revolving credit facility matures in December 2002 and has a commitment fee of 25 basis points and interest rate of LIBOR plus 100 basis points during the first year. The 364-day revolving credit facility has a commitment fee of 20 basis points and interest rate of LIBOR plus 100 basis points. On January 12, 2000, the Company entered into an agreement for a $40.6 revolving line of credit ("Minority Facility") with a consortium of 26 minority-owned banks in 20 states and the District of Columbia. The 364-day revolving credit facility has a commitment fee of 20 basis points and interest rate of LIBOR plus 100 basis points. The New Facilities and the Minority Facility contain certain affirmative and negative covenants customary to these types of agreements. The Company is in compliance with all such covenants. As of January 26, 2000 and January 27, 1999, there were no outstanding amounts under any of these credit agreements. On December 8, 1999, the Company sold in an underwritten offering $300 of 8 3/8% Notes due December 1, 2004 ("Notes"). Interest is payable semiannually on June 1 and December 1. The Company expects to use the net proceeds from the Notes for property acquisition and development, including the purchase of existing leased properties, and for other general corporate purposes. Based on the quoted market prices for the same or similar issues or on the current rates offered to Kmart for debt of the same remaining maturities, the fair value of long-term debt was approximately $1,752 and $1,664 at year end 1999 and 1998, respectively. The principal maturities of long-term debt for the five years subsequent to 1999 are: 2000-$66; 2001-$68; 2002-$343; 2003-$350; 2004-$27 and 2005 and later-$971. Cash paid for interest was $262, $278 and $333 in 1999, 1998 and 1997, respectively. 7) Leases Kmart conducts operations primarily in leased facilities. Kmart store leases are generally for terms of 25 years with multiple five-year renewal options which allow the Company the option to extend the life of the lease up to 50 years beyond the initial noncancelable term. In certain Kmart leased facilities, selling space has been sublet to other retailers, including Olan Mills, Inc. and the Meldisco subsidiaries of FTS.
MINIMUM LEASE COMMITMENTS -------------------------- AS OF JANUARY 26, 2000 CAPITAL OPERATING - ----------------------------------------------------------- Fiscal Year: 2000 $ 254 $ 627 2001 243 623 2002 235 606 2003 225 578 2004 210 552 Later years 1,624 6,928 --------- --------- Total minimum lease payments 2,791 9,914 Less-minimum sublease income -- (2,654) --------- --------- Net minimum lease payments 2,791 $ 7,260 Less: ========= ========= Estimated executory costs (773) Amount representing interest (923) --------- 1,095 Current (81) --------- Long-term $ 1,014 =========
RENT EXPENSE 1999 1998 1997 - ------------------------------------------------------------- Minimum rentals $ 784 $ 711 $ 673 Percentage rentals 41 40 39 Less-sublease rentals (253) (227) (234) -------- -------- -------- Total $ 572 $ 524 $ 478 ======== ======== ========
8) Convertible Preferred Securities In June 1996, a trust sponsored and wholly owned by the Company issued 20,000,000 shares of trust convertible preferred securities ("Preferred Securities"). The Preferred Securities accrue and pay cash distributions quarterly at a rate of 7-3/4% per annum. Kmart has guaranteed, on a subordinated basis, distributions and other payments due on the Preferred Securities. The Preferred Securities are convertible at the option of the holder at any time at the rate of 3.3333 shares of Kmart common stock for each Preferred Security, and are mandatorily redeemable upon the maturity of the Debentures on June 15, 2016, or to the extent of any earlier redemption of any Debentures by Kmart and were callable beginning June 15, 1999. Based on the quoted market prices, the fair value of the Preferred Securities was approximately $844 and $1,199 as of the years ended 1999 and 1998, respectively. 9) Share Repurchase Programs In the first quarter of 1999, the Company completed a year-long program to repurchase an aggregate of 2,000,000 shares of the Company's common stock to fund certain employee benefit plans. On May 18, 1999, the Board of Directors approved a common stock repurchase program to acquire up to $1 billion of the Company's common shares over a period of up to three years. For 1999, the Company repurchased 17 million shares of common stock at a cost of approximately $200. In addition, the Company received $8.7 in proceeds from the sale of put options on its common stock. As of January 26, 2000, Kmart Corporation 1999 Annual Report 29 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) the Company had outstanding put options on 5 million shares of its common stock. In February 2000, the Company announced plans to extend its repurchase program to include up to $200 of its Preferred Securities. 10) Income Taxes
INCOME BEFORE INCOME TAXES 1999 1998 1997 - ------------------------------------------------------------ U.S. $ 992 $ 766 $ 390 Foreign 28 32 28 -------- -------- ------- Total $ 1,020 $ 798 $ 418 ======== ======== =======
INCOME TAX PROVISION (CREDIT) 1999 1998 1997 - -------------------------------------------------------------- Current: Federal $ 133 $ 70 $ (126) State and local 17 21 (5) Foreign 11 12 11 -------- --------- ------- 161 103 (120) Deferred: Federal 169 124 240 State 7 3 -- -------- --------- ------- Total $ 337 $ 230 $ 120 ======== ========= =======
EFFECTIVE TAX RATE RECONCILIATION 1999 1998 1997 - ---------------------------------------------------------------- Federal income tax rate 35.0% 35.0% 35.0% State and local taxes, net of federal tax benefit 1.5 1.9 (0.8) Tax credits (0.7) (0.7) (1.9) Equity in net income of affiliated companies (1.2) (1.4) (2.3) Adjustments to prior year's accruals -- (6.0) -- Other (1.6) -- (1.3) ---- ---- ---- 33.0% 28.8% 28.7% ==== ==== ====
YEAR END DEFERRED TAX -------------- ASSETS AND LIABILITIES 1999 1998 - ------------------------------------------------- Deferred tax assets: Federal benefit for state and foreign taxes $ 44 $ 36 Discontinued operations 239 129 Accruals and other liabilities 176 197 Capital leases 86 98 Store restructuring 48 69 Other 14 84 ----- ----- Total deferred tax assets 607 613 ----- ----- Deferred tax liabilities: Inventory 336 279 Property and equipment 389 367 Other 19 24 ----- ----- Total deferred tax liabilities 744 670 ----- ----- Net deferred tax liabilities $(137) $ (57) ===== =====
In 1998, the Internal Revenue Service completed its examination of the Company's federal income tax returns through 1994. The Company believes that adequate tax accruals have been provided for all years. Cash paid (received) for income taxes was $59, $(99) and $7 in 1999, 1998 and 1997, respectively. 11) Earnings Per Share
1999 1998 1997 - -------------------------------------------------------------------- Continuing net income $ 633 $ 518 $ 249 Discontinued operations (230) -- -- -------- --------- ------- Net income $ 403 $ 518 $ 249 ======== ========= ======= Preferred dividends $ 50 $ 50 $ -- ======== ========= ======= Basic weighted average shares 491.7 492.1 487.1 Dilutive effect of stock options 3.3 6.1 4.6 Convertible preferred securities 66.7 66.7 -- -------- --------- ------- Diluted weighted average shares 561.7 564.9 491.7 ======== ========= ======= Basic earnings per share: Continuing net income $ 1.29 $ 1.05 $ .51 Discontinued operations (.47) -- -- -------- --------- ------- Net income $ .82 $ 1.05 $ .51 ======== ========= ======= Diluted earnings per share: Continuing net income $ 1.22 $ 1.01 $ .51 Discontinued operations (.41) -- -- -------- --------- ------- Net income $ .81 $ 1.01 $ .51 ======== ========= =======
The Preferred Securities and preferred dividends were not included in the calculation of diluted EPS for 1997 due to the anti-dilutive effect on EPS if converted. Had the Preferred Securities been included in the calculation, diluted EPS would have been higher by $0.02 for fiscal 1997. 12) Pension Plans and Other Post-Retirement Benefits In the second quarter of 1998, the Company announced a Voluntary Early Retirement Program for certain Kmart distribution center associates over 45 years of age with at least 10 years of service by May 31, 1998. Of the 1,050 Kmart associates eligible for this program, 456 accepted the early retirement offer, and the Company recorded a charge of $19 ($13 after tax). Payouts under this program will be fully funded through existing pension plan assets. In the fourth quarter of 1997, the Company announced a Voluntary Early Retirement Program for certain Kmart hourly associates over 45 years of age with at least 10 years of service by December 31, 1997. Of the 28,785 Kmart associates eligible for this program, 11,587 accepted the early retirement offer, and the Company recorded a charge of $114 ($81 after tax). Payouts under this program will be fully funded through existing pension plan assets. Prior to 1996, U.S. Kmart had defined benefit pension plans covering eligible associates who met certain requirements of age, length of service, and hours worked per year. Effective January 31, 1996, the pension plans were frozen, and associates no longer earn additional benefits under the plans. Kmart Corporation 1999 Annual Report 30 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) The plans' assets consist primarily of equity and fixed income securities. No contributions were made in fiscal 1999, 1998, or 1997. The total consolidated pension income was $68, $63 and $63 in 1999, 1998 and 1997, respectively. The following tables summarize the change in benefit obligation, change in plan assets, funded status, amounts recognized and actuarial assumptions for Kmart's employee pension plans.
Year End ------------------ 1999 1998 - ----------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year $ 2,208 $ 2,055 Interest costs 141 139 Voluntary early retirement program(VERP) -- 19 Actuarial (gain)/loss (300) 131 Benefits paid including VERP (105) (136) ------- ------- Benefit obligation at end of year $ 1,944 $ 2,208 ======= ======= Change in plan assets: Fair value of plan assets at beginning of year $ 2,098 $ 1,942 Actual return on plan assets 145 292 Benefits paid including VERP (138) (136) ------- ------- Fair value of plan assets at end of year $ 2,105 $ 2,098 ======= =======
Year End ---------------- 1999 1998 - ---------------------------------------------------------------------------------------- Funded status $ 161 $(110) Unrecognized net (gain)/loss (110) 99 Unrecognized transition asset (48) (54) ----- ----- Net recognized prepaid benefit/(liability) $ 3 $ (65) ===== ===== Amounts recognized in the statement of financial position consist of: Prepaid benefit cost/ (Accrued benefit liability) $ 3 $(109) Accumulated other comprehensive income -- 44 ----- ----- Net amount recognized $ 3 $ (65) ===== ===== Weighted-average assumptions as of January 31 Discount rate 7.5% 6.5% Expected return on plan assets 10% 10%
Year End ------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------ Components of Net Periodic Benefit (Income)/Expense Interest costs $ 141 $ 139 $ 139 Expected return on plan assets (202) (195) (193) Amortization of unrecognized transition asset (7) (7) (9) ----- ----- ----- Net periodic benefit $ (68) $ (63) $ (63) ===== ===== =====
The Company has non-qualified plans for directors and officers which were partially funded as of years ended 1999 and 1998 and were unfunded as of year end 1997. Benefits under the plans totaled $34 and $37 at the end of 1999 and 1998, respectively, which have been accrued in the accompanying balance sheets. Plan assets totaled $13 and $11 as of year end 1999 and 1998, respectively. Full-time associates who have worked 10 years and who have retired after age 55, have the option of participation in Kmart's medical plan until age 65. The plan is contributory, with retiree contributions adjusted annually. The accounting for the plan anticipates future cost-sharing changes that are consistent with Kmart's expressed intent to increase the retiree contribution rate annually. The accrued post-retirement benefit costs were $54 and $62 at the end of 1999 and 1998, respectively. 13) Retirement Savings Plan The Retirement Savings Plan provides that associates of Kmart who have completed 1,000 hours of service within a twelve month period can invest from 1% to 16% of their earnings in the associate's choice of various investments. For each dollar the participant contributes, up to 6% of earnings, Kmart will contribute an additional 50 cents which is invested in the Employee Stock Ownership Plan. The Retirement Savings Plan also has a profit sharing feature whereby the Company makes contributions based on profits, with minimum yearly contributions required of $30. Kmart's total expense related to the Retirement Savings Plan was $94, $68 and $69 in 1999, 1998 and 1997, respectively. 14) Stock Option Plans The Company applies APB 25 and related interpretations in accounting for its stock option and restricted stock plans. Since stock options were granted at exercise prices equal to the stock price on the grant date, under APB 25, no compensation cost has been recognized for stock options granted under the Company's stock based compensation plans. Had the compensation cost for the Company's stock based compensation plans been determined based on the fair value at the grant dates consistent with the method of FAS 123, net earnings would have been the pro forma amounts shown below.
Pro Forma Income 1999 1998 1997 - -------------------------------------------------------------- Net income - as reported $ 403 $ 518 $ 249 EPS - as reported .81 1.01 .51 Net income - pro forma 376 496 222 EPS - pro forma .76 .97 .45
To determine these amounts, the fair value of each stock option has been estimated on the date of the grant using a Black-Scholes option-pricing model with a dividend yield of 0%. Options vest over 3 years on a straight-line basis with a term of 10 years. Kmart Corporation 1999 Annual Report 31 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1999 1998 1997 - -------------------------------------------------------------- Expected volatility .4506 .4230 .3902 Risk-free interest rates 4.93 5.32 6.47 Expected life in years 5 5 5 Weighted-average fair value per share $ 7.90 $ 7.11 $ 5.37
STOCK OPTION PLANS (000'S) SHARES OPTION PRICE - --------------------------------------------------------- January 28, 1998: Outstanding 20,988 $ 6.31 - $26.03 Granted 10,495 $ 11.29 - $20.34 Exercised (4,679) $ 6.31 - $18.88 Forfeited (2,182) $ 7.81 - $26.03 ------ January 27, 1999: Outstanding 24,622 $ 7.00 - $26.03 Granted 6,376 $ 9.78 - $17.56 Exercised (1,723) $ 7.81 - $16.28 Forfeited (1,382) $ 7.81 - $26.03 ------ January 26, 2000: Outstanding 27,893 $ 7.00 - $26.03 Exercisable 15,638 $ 7.00 - $26.03 Available for grant 11,671
The following table summarizes information about stock options outstanding as of January 26, 2000.
Options Outstanding Options Exercisable ------------------------ --------------------- Number Weighted Number Weighted Range of of Shares Average Weighted of Shares Average Exercise Outstanding Remaining Average Exercisable Exercise Price (000's) Life Price (000's) Price - ------------------------------------------------------------------------- $ 7.00 to $10.00 4,541 5.7 $ 7.86 4,533 $ 7.86 $ 10.01 to $15.00 11,847 6.6 $ 12.29 8,566 $ 12.18 $ 15.01 to $26.03 11,505 8.2 $ 17.12 2,539 $ 17.52 - ------------------------------------------------------------------------- $ 7.00 to $26.03 27,893 7.1 $ 13.56 15,638 $ 11.80
15) Quarterly Financial Information (Unaudited) Earnings per share amounts for each quarter are required to be computed independently and may not equal the amount computed for the total year.
- ---------------------------------------------------------------------------------- 1999 Restated (A) First Second Third Fourth - ---------------------------------------------------------------------------------- Sales $ 8,078 $ 8,781 $ 7,962 $11,104 Cost of sales 6,368 6,851 6,246 8,637 Continuing net income 56 138 27 412 Discontinued operations -- (230) -- -- Net income (loss) 56 (92) 27 412 Basic earnings (loss) per share: Continuing net income .11 .28 .05 .85 Discontinued operations -- (.47) -- -- --------------------------------------------- Net income (loss) .11 (.19) .05 .85 ============================================= Diluted earnings (loss) per share: Continuing net income .11 .26 .05 .77 Discontinued operations -- (.41) -- -- --------------------------------------------- Net income (loss) .11 (.15) .05 .77 =============================================
First Second Third Fourth (B) 1999 Reported Pro forma - -------------------------------------------------------------------------------- Sales $ 8,144 $ 8,757 $ 8,057 $ 10,955 Cost of sales 6,417 6,835 6,317 8,510 Continuing net income 67 134 43 396 Discontinued operations - (230) - - Net income (loss) 67 (96) 43 396 Basic earnings (loss) per share: Continuing net income .14 .27 .09 .82 Discontinued operations - (.47) - - ------------------------------------ Net income (loss) .14 (.20) .09 .82 ==================================== Diluted earnings (loss) per share: Continuing net income .14 .26 .09 .74 Discontinued operations - (.41) - - ------------------------------------ Net income (loss) .14 (.15) .09 .74 ==================================== Common stock price High $ 17-7/8 $ 17-5/8 $14-15/16 $ 12-1/4 Low 16-1/16 14-7/8 9-3/8 9
- -------------------------------------------------------------------- 1998 Pro forma (C) First Second Third Fourth - -------------------------------------------------------------------- Sales $ 7,458 $ 8,125 $ 7,539 $10,565 Cost of sales 5,868 6,341 5,876 8,245 Continuing net income 34 83 20 382 Net income 34 83 20 382 Basic earnings per share: .07 .17 .04 .77 Diluted earnings per share: .07 .17 .04 .70
- ------------------------------------------------------------------ 1998 Reported First Second Third Fourth - ------------------------------------------------------------------ Sales $ 7,515 $ 8,116 $ 7,642 $ 10,401 Cost of sales 5,908 6,336 5,954 8,121 Continuing net income 47 80 38 353 Net income 47 80 38 353 Basic earnings per share: .10 .16 .08 .72 Diluted earnings per share: .10 .16 .08 .65 Common stock price High $18-11/16 $20-9/16 $18-11/16 $16-11/16 Low 11 16-7/16 11-1/16 13-12/16
(A) In consideration of SAB 101, the Company has restated its first three quarters of 1999. (B) For comparability, pro forma results for the fourth quarter of 1999 exclude the effects of SAB 101 and represent results as if the change in accounting policy had not occurred. (C) For informational purposes only, 1998 quarterly results have been presented on a pro forma basis as if SAB 101 had been applied to 1998 quarterly results. Kmart Corporation 1999 Annual Report 32 EX-23 5 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Registration Statement Nos. 33-54879, 33-48490, 33-48673, 33-52797, 33-52799, 33-61351, 33-28621, and 33-93023) and the Prospectus constituting part of the Registration Statement on Form S-3 (Registration Statement No. 33-74665) of Kmart Corporation of our report dated March 6, 2000 relating to the financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP Detroit, Michigan April 19, 2000 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS. YEAR JAN-26-2000 JAN-28-1999 JAN-26-2000 344 0 0 0 7,101 8,160 11,554 5,144 15,104 4,076 1,759 986 0 481 5,823 15,104 35,925 35,925 28,102 28,102 0 0 280 1,020 337 633 230 0 0 403 .82 .81
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