-----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, OOtFTqktfRnIRN9Bv70zDaqkIdeG6iw96ETqxP41pzco9AR2UXaQv3icKpOA/8wW 4NuYj1WdJSDUD6+lQTDOkw== 0000950124-98-002149.txt : 19980415 0000950124-98-002149.hdr.sgml : 19980415 ACCESSION NUMBER: 0000950124-98-002149 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980128 FILED AS OF DATE: 19980414 SROS: CSX SROS: NYSE SROS: PCX 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: 98593210 BUSINESS ADDRESS: STREET 1: 3100 W BIG BEAVER RD CITY: TROY STATE: MI ZIP: 48084 BUSINESS PHONE: 8106431000 MAIL ADDRESS: STREET 1: 3100 W BIG BEAVER ROAD CITY: TROY STATE: MI ZIP: 48084 FORMER COMPANY: FORMER CONFORMED NAME: KRESGE S S CO DATE OF NAME CHANGE: 19770921 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 28, 1998 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 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 25, 1998 was $8,087,934,327. 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 25, 1998, 490,177,839 shares of Common Stock of the Registrant, held by approximately 86,682 shareholders, were outstanding. Portions of the Registrant's 1997 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 10, 1998 in connection with the 1998 Annual Meeting of Stockholders are incorporated by reference into Part III of this report. 2 PART I Item 1. Business History Kmart Corporation ("Kmart", or the "Registrant"), one of the world's largest mass merchandise retailers, 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. U.S. General Merchandise Operations The Registrant operates in the general merchandise retailing industry through 2,136 Kmart discount stores with locations in each of the 50 United States, Puerto Rico, the U.S. Virgin Islands and Guam, including 99 Super Kmart Centers, all located in the United States. Kmart's general merchandise retail operations are located in 311 of the 316 Metropolitan Statistical Areas (MSAs) in the United States. In addition, Kmart stores occupy each of the three MSAs in Puerto Rico. Kmart stores are generally one-floor, free-standing units. Traditional Kmart general merchandise stores range from 40,000 to 120,000 square feet with the majority of modernized stores ranging from 85,000 to 120,000 square feet. The Big Kmart format was rolled out to an additional 458 stores in 1997, bringing the total for the chain to 670. This format emphasizes consumables and convenience. It is the Registrant's plan, should performance continue meeting expectations, to convert as many as 500 stores per year over the next two years to this format. Super Kmart Centers range from 135,000 to 194,000 square feet and feature a full line of general merchandise and groceries as well as a variety of ancillary services including video rentals, dry cleaning, hair care, optical and floral shops. Full-size stores operate in the most densely populated urban areas and are geographically located to increase customer awareness and maximize customer convenience and accessibility. Information regarding the Registrant's analysis of consolidated operations appearing in the "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 18 through 20 of the Registrant's 1997 Annual Report to Shareholders, is incorporated herein by reference. Information regarding the Registrant's discontinued operations and dispositions appearing in Note 3 of the "Notes to Consolidated Financial Statements" on page 27 of the Registrant's 1997 Annual Report to Shareholders, is incorporated herein by reference. Competition Kmart has several major competitors on a national level, including Dayton-Hudson's Target stores, J.C. Penney, Sears and Wal-Mart, and many competitors on a local 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 In March 1996, the Registrant launched a new private label Kmart Credit Card, available in all Kmart Stores, through Beneficial National Bank USA ("BNB USA"), a unit of Beneficial Corporation. BNB USA owns the receivables and retains the credit risk associated with this program. All of the Registrant's stores accept major bank credit cards as payment for merchandise. Employees The Registrant employed approximately 261,000 persons as of January 28, 1998. 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 28, 1998, Kmart operated a total of 2,136 general merchandise stores which are located in the United States, Puerto Rico, the U.S. Virgin Islands and Guam. With the exception of 105 store facilities which are wholly owned, the Registrant leases its store facilities. 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 leases 18 United States distribution and port centers for initial terms of 10 to 30 years with options to renew for additional terms. In addition, the Registrant owns or leases 725 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 9 of the "Notes to Consolidated Financial Statements" on page 29 of the Registrant's 1997 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 materially affect 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 25, 1998. 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 their principal positions held by them 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, 59. 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. Andrew A. Giancamilli - President and General Merchandise Manager, U.S. Kmart, 47. Mr. Giancamilli has been in his current title 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. Warren Cooper - Executive Vice President, Human Resources & Administration, 53. 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. Laurence L. Anderson - Executive Vice President and President, Super Kmart, 56. Mr. Anderson joined the Registrant under his current title in July 1997. Prior thereto he was President and Chief Operating Officer, Retail Food, SuperValu Inc. from 1995 to 1997; and Executive Vice President, SuperValu Inc. from 1992 to 1995. Donald W. Keeble - Executive Vice President, Store Operations, 49. Mr. Keeble has served as an executive officer of the Registrant since 1989 and has served in his current position since February 1995. Prior thereto he held the following positions at the Registrant: Executive Vice President, Merchandising and Operations from 1994 to 1995; and Senior Vice President, General Merchandise Manager, Fashions from 1991 to 1994. Anthony N. Palizzi - Executive Vice President, General Counsel, 55. Mr. Palizzi has served as an executive officer of the Registrant since 1985 and has served in his current position since 1992. Marvin P. Rich - Executive Vice President, Strategic Planning, Finance and Administration, 52. Mr. Rich joined the Registrant under his current title in 1994. Prior thereto he was Executive Vice President, Specialty Companies, Wellpoint Health Networks/Blue Cross of California from 1992 to 1994. Mr. Rich resigned his position effective April 3, 1998. William N. Anderson - Senior Vice President and General Merchandise Manager - - Hardlines, 50. Mr. Anderson joined the Registrant under his current title in September 1996. Prior thereto he was President and Chief Operating Officer, Oshman's Sporting Goods, Inc. from 1994 to 1996; and Senior Vice President and General Manager, Ames Department Stores, Inc. from 1992 to 1994. Ernest L. Heether - Senior Vice President, Merchandise Planning and Replenishment, 52. 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, Sales and Operations, 49. 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. 4 5 Cecil B. Kearse - Senior Vice President and General Merchandise Manager - - Home, 45. Mr. Kearse has served in his current position since November 1997. Prior thereto he held the following positions with 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 Health and Beauty Care/ Pharmacy/Consumables, 46. Mr. Kuske has served in his current position since November 1997. Prior thereto he held the following positions with the Registrant: 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 from 1994 to 1995; and Senior Vice President, Operations, Payless Drug Stores, Inc. from 1992 to 1994. James Mixon - Senior Vice President, Logistics, 53. 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. Donald E. Norman - Senior Vice President, Chief Information Officer, 61. Mr. Norman joined the Registrant in 1995 as Divisional Vice President, Business Process Reengineering, Merchandise Inventory Controls and has served in his current position since December 1995. Prior thereto he was President, DNA, Inc. from 1994 to 1995; and Senior Vice President, Logistics, Ames Department Stores from 1990 to 1994. E.Jackson Smailes - Senior Vice President and General Merchandise Manager - Apparel, 55. 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. William D. Underwood - Senior Vice President, Global Sourcing, 57. Mr. Underwood has served as an executive officer of the Registrant since 1986 and has served in his current position since 1994. Prior thereto he was Senior Vice President, General Merchandise Manager - Hardlines from 1991 to 1994. Martin E. Welch III - Senior Vice President and Chief Financial Officer, 49. 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 Information as to the market for the Registrant's common stock and related stockholder matters, as set forth in Note 17 of the "Notes to Consolidated Financial Statements" on page 32 of the Registrant's 1997 Annual Report to Shareholders, is incorporated herein by reference. Item 6. Selected Financial Data The "Selected Financial Data" summary, insofar as it relates to the five fiscal years ended January 28, 1998, appearing on page 17 of the Registrant's 1997 Annual Report to Shareholders is incorporated herein by reference. Sales and comparable store statistics for the three fiscal years ended January 28, 1998, appearing in the "Management's Discussion and Analysis of Results of Operations and Financial Condition" on page 18 of the Registrant's 1997 Annual Report to Shareholders, are incorporated herein by reference. U.S. Kmart selling square footage for the five fiscal years ended January 28, 1998, appearing in the "Selected Financial Data" on page 17 of the Registrant's 1997 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 under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition", appearing on pages 18 through 20 of the Registrant's 1997 Annual Report to Shareholders, is incorporated herein by reference. 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 at January 28, 1998 and January 29, 1997 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period ended January 28, 1998, and the notes to consolidated financial statements, together with the report of Price Waterhouse LLP, appearing on pages 21 through 32 of the Registrant's 1997 Annual Report to Shareholders, are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 6 7 PART III Item 10. Directors of the Registrant The information set forth under the caption "Proposal 1 - Election of Directors" on page 5 of the Registrant's Proxy Statement dated April 10, 1998 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 7 and 9 through 14 of the Registrant's Proxy Statement dated April 10, 1998 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 of Executive Officers and Directors" on pages 3 through 5 of the Registrant's Proxy Statement dated April 10, 1998 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 "Executive Compensation" on pages 9 through 14 of the Registrant's Proxy Statement dated April 10, 1998 filed with the Securities and Exchange Commission pursuant to Regulation 14A is incorporated herein by reference. 7 8 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 1997 Annual Report to Shareholders: Page(s) in Registrant's Annual Report ------------- Report of Independent Accountants 21 Consolidated Statements of Operations for each of the three fiscal years in the period ended January 28, 1998 22 Consolidated Balance Sheets at January 28, 1998 and January 29, 1997 23 Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended January 28, 1998 24 Consolidated Statements of Shareholders' Equity for each of the three fiscal years in the period ended January 28, 1998 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 1997 Annual Report to Shareholders, which is incorporated herein by reference. 3. Exhibits See Exhibit Index included in this report. b) Reports On Form 8-K The Registrant did not file a report on Form 8-K during the last quarter of the fiscal year ended January 28, 1998.
8 9 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 14, 1998. 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 By: Martin E. Welch III --------------------------------------------- (Martin E. Welch III) Senior Vice President and Chief Financial Officer (Principal Financial Officer) By: William C. Najdecki --------------------------------------------- (William C. Najdecki) Vice President, Controller (Principal 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 14, 1998. 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, Chairman of the Board, Lilyan H. Affinito President and Chief Executive Officer --------------------------------------------- Lilyan H. Affinito, Director (Principal Executive Officer and Director) Stephen F. Bollenbach --------------------------------------------- Stephen F. Bollenbach, Director Robert D. Kennedy --------------------------------------------- Robert D. Kennedy, Director --------------------------------------------- Joseph A. Califano, Jr., Director J. Richard Munro --------------------------------------------- J. Richard Munro, Director Richard G. Cline --------------------------------------------- Richard G. Cline, Director Robin B. Smith --------------------------------------------- Robin B. Smith, Director Willie D. Davis --------------------------------------------- Willie D. Davis, Director William P. Weber --------------------------------------------- William P. Weber, Director Enrique C. Falla --------------------------------------------- Enrique C. Falla, Director James O. Welch, Jr. --------------------------------------------- James O. Welch, Jr., Director Joseph P. Flannery --------------------------------------------- Joseph P. Flannery, Director
9 10 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 [10f] [A] *** (10f) Kmart Corporation 1992 Stock Option Plan, as amended [10g] [A] **** (10g) Kmart Corporation Directors Stock Plan, as amended [10h] [A] ** (10h) Form of Employment Agreement with Executive Officers [10j] [A] *** (10i) Kmart Corporation Executive Deferred Compensation Plan [10j] [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) Agreement between Kmart Corporation and Executive [10n] [A] ***** (10n) Kmart Corporation 1997 Long-term Equity Compensation Plan (10o) Kmart Corporation 1998 Management Deferred Compensation and Restoration Plan (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 28, 1998 (23) Consent of Independent Accountants (27) Financial Data Schedules 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 part of the 1996 Proxy Statement, and is incorporated herein by reference [#] Exhibit numbers in the Form 10-K Reports for the fiscal years ended: January 27, 1993, January 26, 1994, January 25, 1995, and January 31, 1996, respectively. [A] This document is a management contract or compensatory plan.
10 11 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 8-1/8% 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) 11 EX-10.(O) 2 EXHIBIT-10.(O) 1 EXHIBIT 10(O) KMART CORPORATION 1998 MANAGEMENT DEFERRED COMPENSATION AND RESTORATION PLAN (Effective January 1, 1998) 2 CONTENTS - -------------------------------------------------------------------------------- Article 1. Establishment and Purpose 1 Article 2. Definitions 1 Article 3. Administration 6 Article 4. Eligibility and Participation 7 Article 5. Voluntary Deferrals 7 Article 6. Mandatory Deferrals 8 Article 7. Savings Plan Deferral Restoration 9 Article 8. Company 401(k) Match Restoration 9 Article 9. Company Profit Sharing Restoration 10 Article 10. Discretionary Company Credits 11 Article 11. Participant Accounts and the Rabbi Trust 12 Article 12. Allocation of Prior Deferrals and Company Credits 14 Article 13. Beneficiary Designation 15 Article 14. Withholding of Taxes 15 Article 15. Employment/Misconduct 15 Article 16. Amendment and Termination 16 Article 17. Miscellaneous 16 3 KMART CORPORATION 1998 MANAGEMENT DEFERRED COMPENSATION AND RESTORATION PLAN ARTICLE 1. ESTABLISHMENT AND PURPOSE 1.1 ESTABLISHMENT. Kmart Corporation, a Michigan corporation (together with its participating subsidiaries, the "Company"), hereby establishes, effective as of January 1, 1998 (the "Effective Date"), a deferred compensation and savings restoration plan for key management employees as described herein, which shall be known as the "Kmart Corporation 1998 Management Deferred Compensation and Restoration Plan" (the "Plan"). 1.2 PURPOSE. The primary purpose of the Plan is to provide key management employees of the Company with the opportunity to defer a portion of their compensation and to restore certain retirement benefits lost due to statutory limits imposed by the Code, subject to the terms of the Plan. By adopting the Plan, the Company desires to enhance its ability to attract and retain key management employees. ARTICLE 2. DEFINITIONS 2.1 DEFINITIONS. Whenever used herein, the following terms shall have the meanings set forth below, and when the meaning is intended, the term is capitalized: (a) "Accrued Account Balances" means the then current aggregate account balances of a Participant through a specific date in question, including Voluntary Deferrals (as described in Article 5 hereof), Mandatory Deferrals (as described in Article 6 hereof), Savings Plan Deferral Restoration (as described in Article 7 hereof), Company 401(k) Match Restoration (as described in Article 8 hereof), Company Profit Sharing Restoration (as described in Article 9 hereof), Discretionary Company Credits (as described in Article 10 hereof), and earnings thereon (as described in Article 11 hereof). (b) "Accrued Rabbi Trust Obligations" means the then current Accrued Account Balances of all Participants through a specific date in question, except for amounts credited to Treasury Note Accounts. (c) "Base Salary" means all regular basic wages earned by a Participant for services rendered during a Plan Year, before any deductions. (See Section 5.2 for an explanation of the amount of Base Salary that may be deferred by a Tier I Participant.) (d) "Beneficial Ownership" has the same meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. (e) "Board" or "Board of Directors" means the Board of Directors of Kmart Corporation. 1 4 (f) "Change in Control" of Kmart Corporation is deemed to have occurred as of the first day that any one or more of the following conditions shall have been satisfied: (i) The "Beneficial Ownership" of securities representing more than thirty-three percent (33%) of the combined voting power of Kmart Corporation is acquired by any "person" as defined in Sections 13(d) and 14(d) of the Exchange Act (other than Kmart Corporation, any trustee or other fiduciary holding securities under an employee benefit plan of Kmart Corporation, or any corporation owned, directly or indirectly, by the stockholders of Kmart Corporation in substantially the same proportions as their ownership of stock of Kmart Corporation); or (ii) The stockholders of Kmart Corporation approve a definitive agreement to merge or consolidate Kmart Corporation with or into another corporation or to sell or otherwise dispose of all or substantially all of its assets, or adopt a plan of liquidation; or (iii) During any period of three consecutive years, individuals who at the beginning of such period were members of the Board cease for any reason to constitute at least a majority thereof (unless the election, or the nomination for election by the stockholders of Kmart Corporation, of each new director was approved by a vote of at least a majority of the directors then still in office who were directors at the beginning of such period or whose election or nomination was previously so approved). (g) "Closing Price" means the last price at which the Common Stock shall have been sold on the specific date in question, or if no such sale was made on such date then on the next preceding day on which there was such a sale of Common Stock. The price shall be as reported on the Composite Transactions reporting system, or if not so reported, as reported by the New York Stock Exchange. (h) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (i) "Committee" means the Compensation and Incentives Committee of the Board (or such other committee as designated by the Board as a successor thereto) which has the authority to administer the Plan. (j) "Common Stock" means the common stock of Kmart Corporation. (k) "Company Stock Fund" has the same meaning ascribed to such term in the Retirement Savings Plan. (l) "Compensation" has the same meaning ascribed to such term in the Retirement Savings Plan. (See Section 7.2 for an explanation of the amount of Compensation that may be deferred by a Tier II Participant.) 2 5 (m) "Disability" has the same meaning ascribed to such term in Kmart Corporation's long-term disability plan. (n) "Discretionary Company Credits Account" has the meaning set forth in Section 10.2 hereof. (o) "Employee Directed Contributions" has the same meaning ascribed to such term in the Retirement Savings Plan. (p) "Employer Matching Contributions" has the same meaning ascribed to such term in the Retirement Savings Plan. (q) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor thereto. (r) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. (s) "Form of Payout" means a Participant's elected method of payout. A Participant may choose from either (i) a Lump-Sum Payment or (ii) Installment Payments. If no Form of Payout is elected, then payment will be made in a Lump-Sum Payment. A Participant may at any time at least twelve (12) months prior to a Payout Commencement Date, petition the Committee to change the Form of Payout previously elected by such Participant to a different Form of Payout otherwise available under the Plan (i.e., a Lump-Sum Payment or Installment Payments). If a Participant remains employed with the Company through a Payout Commencement Date, and if the Accrued Account Balances payable on such Payout Commencement Date are less than ten thousand dollars ($10,000), then, regardless of any Form of Payout election(s) made by a Participant to receive or continue to receive Installment Payments thereon, such Accrued Account Balances shall be paid on such Payout Commencement Date, or as soon as administratively practicable thereafter, in a Lump-Sum Payment. If a Participant's employment with the Company terminates for any reason and the Participant's Accrued Account Balances payable on any coincident or future Payout Commencement Date are individually less than ten thousand dollars ($10,000) at the time of such termination of employment, then all Accrued Account Balances payable on such Payout Commencement Date(s) shall be paid in a Lump-Sum Payment as soon as administratively practicable, regardless of the Participant's previous elections. If a Participant's employment with the Company terminates due to Disability or death, and the Participant's Accrued Account Balances payable on any coincident or future Payout Commencement Date are individually equal to or greater than ten thousand dollars ($10,000), such Participant, or such Participant's estate, as the 3 6 case may be, may petition the Committee to pay out all such Accrued Account Balances in a single Lump-Sum Payment as soon as administratively practicable regardless of the Participant's previous elections. In the case of employment termination due to Disability, the termination shall be deemed to have occurred on the day that the Committee, or the Committee's designee, determines the Disability to be total and permanent. The decision of whether to allow for an accelerated Lump-Sum Payment shall be at the discretion of the Committee. (t) "Installment Payments" means a series of payments, from two (2) up to twenty (20) approximately equal annual payments, as elected by the Participant, to be made in cash with the initial payment due within thirty (30) calendar days after the applicable Payout Commencement Date elected by the Participant. Each of the remaining Installment Payments shall be made in cash each year thereafter on the anniversary of such Payout Commencement Date, until all Accrued Account Balances deferred to such Payout Commencement Date have been paid in full. Earnings shall continue to accrue on any remaining Accrued Account Balances in the manner provided in Section 11.2 hereof until all Accrued Account Balances deferred to such Payout Commencement Date have been paid in full. The amount of each Installment Payment shall be equal to the applicable portion of the Accrued Account Balances remaining immediately prior to each such payment, multiplied by a fraction, the numerator of which is one (1), and the denominator of which is the number of Installment Payments remaining to be paid (including such payment). (u) "Investment Funds" has the same meaning ascribed to such term in the Retirement Savings Plan. (v) "Lump-Sum Payment" means a single payment to be made in cash within thirty (30) calendar days after the applicable Payout Commencement Date. (w) "Mandatory Deferral Account" has the meaning set forth in Section 6.1 hereof. (x) "Match Restoration Account" has the meaning set forth in Section 8.2 hereof. (y) "Participant" means any Tier I Participant or Tier II Participant. (z) "Payout Commencement Date" means a date irrevocably elected by a Participant, or as otherwise provided herein, upon which payment of Accrued Account Balances begins. A Payout Commencement Date shall be no earlier than one year following the end of the year in which amounts deferred hereunder are otherwise earned, and no later than the January following the Participant's sixty-fifth (65th) birthday. No limit exists on the number of different Payout Commencement Dates that can be elected by each Participant. 4 7 If no Payout Commencement Date is specified by a Participant for any Voluntary Deferrals or Savings Plan Deferral Restorations, then payout of these amounts shall occur in the January following the Participant's termination of employment. All Company Profit Sharing Restoration and Company 401(k) Match Restoration shall automatically be paid out beginning in the January following the Participant's termination of employment. (aa) "Plan Year" means the calendar year. (ab) "Predecessory Deferral/Restoration Arrangements" has the meaning set forth in Article 12 hereof. (ac) "Profit Sharing Contributions" has the same meaning ascribed to such term in the Retirement Savings Plan. (ad) "Profit Sharing Restoration Account" has the meaning set forth in Section 9.2 hereof. (ae) "Rabbi Trust" means a grantor trust, as intended by Sections 671-678 of the Code, established by Kmart Corporation for the benefit of Participants and their beneficiaries. (af) "Retirement Savings Plan" means the Kmart Corporation Retirement Savings Plan B. (ag) "Retirement Savings Plan Deferral Restoration Account" has the meaning set forth in Section 7.2 hereof. (ah) "Stock Unit" means a bookkeeping entry for the value of the Common Stock equal to the Closing Price of the Common Stock on a specific day. (ai) "Stock Unit Subaccount" means the bookkeeping account established for a Participant which is credited with Stock Units equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased with the corresponding amount of Company 401(k) Match Restoration (as provided under Article 8 hereof) at the Closing Price of the shares of Common Stock on the date as of which such Stock Unit Subaccount is so credited. The Stock Unit Subaccount shall be reduced in a similar manner as of the day that any amount is distributed, based on the Closing Price of the Common Stock on the date in question. As of the date any dividend is paid to holders of shares of Common Stock, a Participant's Stock Unit Subaccount shall be credited with additional Stock Units equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased, at the Closing Price of a share of Common Stock on such date, with the amount that would have been paid as dividends on that 5 8 number of shares of Common Stock (including fractions of a share) which is equal to the number of Stock Units attributable to the Participant's Stock Unit Subaccount as of the record date of such dividend. In the case of dividends paid in property, the amount of the dividend shall be deemed to be the fair market value of the property at the time of the payment thereof, as determined by the Committee. A distribution from the Stock Unit Subaccount shall be paid in an amount of cash equal to the product of (i) the number of Stock Units distributable and (ii) the Closing Price. (aj) "Tier I Participant" means each key management employee designated by the Board as a Senior Officer of the Company, each Divisional Vice President, each Operations Vice President, each Regional Vice President, and each other person so designated by the Committee. (ak) "Tier II Participant" means each key management employee of the Company, except for Tier I Participants, who (i) is qualified to participate in the Retirement Savings Plan; and (ii) experiences a cutback in Employee Directed Contributions, Employer Matching Contributions, and/or Profit Sharing Contributions due to the limitations imposed by the Code; and (iii) meets such other qualification standards (including pay level) as determined by the Committee from time to time, and who is thereby selected for participation in the Plan by the Committee. (al) "Treasury Note Account" means a separate bookkeeping account not funded by the Rabbi Trust, to be maintained by the Company, that shall offer a rate of return equal to the average ten (10) year U.S. Treasury Note rate for the most recently ended calendar quarter plus five percent (5%). (am) "Voluntary Deferral Account" has the same meaning set forth in Section 5.2 hereof. 2.2 GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein shall include the feminine, the plural shall include the singular, and the singular shall include the plural. ARTICLE 3. ADMINISTRATION 3.1 ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee except as limited by law or by the Articles of Incorporation or the Bylaws of Kmart Corporation. Subject to the terms hereof, the Committee shall have full power to (a) determine the terms and conditions of each Participant's participation in the Plan; (b) construe and interpret the Plan and any agreement or instrument entered into under the Plan; (c) establish, amend, or waive rules and regulations for the Plan's administration; (d) amend (subject to the provisions of Article 16 hereof) the terms and conditions of the Plan and any agreement or instrument entered into under the Plan; (e) designate one or more persons to administer the Plan; and (f) make other determinations which may be necessary or advisable for the administration of the Plan. 6 9 3.2 DECISIONS BINDING. All determinations and decisions of the Committee as to any disputed question arising under the Plan, including questions of construction and interpretation, shall be final, conclusive, and binding on all parties. ARTICLE 4. ELIGIBILITY AND PARTICIPATION 4.1 ELIGIBILITY. Eligibility to participate in the Plan will be limited to Tier I Participants and Tier II Participants. In the event a Participant no longer meets the requirements for eligibility to participate in the Plan, such Participant shall become an inactive Participant retaining all of the rights described under the Plan pertaining to such Participant's then Accrued Account Balances, except the right to make any further deferrals hereunder and the right to receive any further Company credits. An inactive Participant may become an active Participant again in the future. 4.2 PARTICIPATION. When a Participant first becomes eligible to participate in the Plan, such Participant shall, as soon as practicable thereafter, be notified of his or her eligibility to participate. At such time, or as soon as administratively practicable thereafter, all Participants shall be provided with deferral and investment election form(s); such election forms must be completed and returned, within the time period specified, to the Company in order for the Participant to participate in the Plan. ARTICLE 5. VOLUNTARY DEFERRALS 5.1 PARTICIPATION. Eligibility to defer Base Salary pursuant to the terms of this Article 5 shall be limited to Tier I Participants. 5.2 DEFERRAL. Prior to the beginning of the Plan Year in which the Base Salary is otherwise earned, each Tier I Participant may voluntarily elect to defer up to one hundred percent (100%) of his or her Base Salary for that Plan Year. Subject to the terms hereof, such election shall be irrevocable for the Plan Year in question. Amounts deferred pursuant to this Section 5.2, and earnings thereon, shall be credited to such Participant's Voluntary Deferral Account. Each Participant shall be one hundred percent (100%) vested in amounts deferred pursuant to this Section 5.2, and earnings thereon, at all times. Notwithstanding anything herein to the contrary, the amount of Base Salary that a Tier I Participant may defer pursuant to this Section 5.2 shall be limited by (a) amounts deferred pursuant to the Retirement Savings Plan; (b) amounts withheld for applicable federal, state, and local taxes; (c) amounts deducted pursuant to any insurance or benefit program; (d) voluntary payroll deductions (e.g., United Way contributions); (e) involuntary payroll deductions (e.g., garnishments); and (f) all other proper deductions, as determined by the Committee. 5.3 PARTIAL PLAN YEAR PARTICIPATION. In the event a Tier I Participant first becomes eligible to participate in the Plan after the beginning of a Plan Year, the Committee may, in its discretion, allow such Participant to complete a deferral election form and investment election form within thirty (30) calendar days of becoming eligible to participate. 7 10 5.4 DEFERRAL ELECTION. Tier I Participants shall make elections to defer Base Salary prior to the beginning of the Plan Year in which the Base Salary is otherwise earned, or not later than thirty (30) calendar days following notification of initial eligibility to participate for a partial Plan Year, as applicable. The deferral election shall apply only to Base Salary earned subsequent to the first day of the month following the date on which a valid deferral election form is received by the Committee or the Committee's designee. Each such election shall indicate the following: (a) The amount of Base Salary earned during the Plan Year to be deferred, which shall be irrevocable pursuant to Section 5.2 hereof; (b) The Payout Commencement Date for the deferred Base Salary, and earnings thereon, which shall be irrevocable pursuant to Section 5.5 hereof; and (c) The Form of Payout pursuant to Section 2.1(s) hereof. 5.5 LENGTH OF DEFERRAL AND FORM OF PAYOUT. Subject to Section 2.1(z) hereof, each Tier I Participant may irrevocably elect the length of deferral of Base Salary deferred each Plan Year by designating a corresponding Payout Commencement Date for such deferral. The Form of Payout will be as elected by such Participant pursuant to Section 2.1(s) hereof. ARTICLE 6. MANDATORY DEFERRALS 6.1 DEFERRAL. If the Committee in its discretion determines that, with respect to any tax year, a Participant is a "covered employee" for purposes of Section 162(m) of the Code, the Committee shall impose a mandatory deferral of all amounts otherwise payable to such employee by the Company to the extent that such amounts meet the definition of "applicable employee remuneration" (as such term is defined in Section 162(m) of the Code) and such amounts exceed $1,000,000 (or such other amount as may be specified by Section 162(m) from time to time) as determined by the Committee. Amounts required to be deferred pursuant to this Section 6.1 shall be credited to such Participant's Mandatory Deferral Account. Each Participant shall be one hundred percent (100%) vested in amounts deferred pursuant to this Section 6.1, and earnings thereon, at all times. 6.2 LENGTH OF DEFERRAL. All amounts deferred pursuant to Section 6.1 hereof, and earnings thereon, shall be paid out to the Participant on the earliest date on which such amounts can be received by such Participant without subjecting the Company to a loss of deductibility (due to Section 162(m) of the Code) with respect to any part of such amounts. However, subject to Section 2.1(z) hereof, a Participant can make an irrevocable election to have these amounts deferred to a later Payout Commencement Date at which time no loss of the Company deduction would occur (due to Section 162(m)); such election must be made prior to lapse of the restriction set forth in this Section 6.2. 6.3 FORM OF PAYOUT. Subject to Sections 6.2 and 6.4 hereof, the payout of Mandatory Deferrals, and earnings thereon, will be in a Lump-Sum Payment to the extent not deferred by the Participant to a Payout Commencement Date. If deferred to a Payout Commencement Date, the Form of Payout will be as elected by such Participant pursuant to Section 2.1(s) hereof. 8 11 6.4 COMMITTEE DISCRETION. In the event that any payment under this Plan would cause the Company a loss of deductibility (due to Section 162(m)), the Committee reserves the right hereunder to (i) delay such payment; (ii) require additional mandatory deferrals to offset such payment; or (iii) to take any other action necessary and appropriate to avoid such loss of deductibility. ARTICLE 7. SAVINGS PLAN DEFERRAL RESTORATION 7.1 PARTICIPATION. Eligibility to defer Compensation pursuant to the terms of this Article 7 shall be limited to Tier II Participants. 7.2 DEFERRAL. Prior to the beginning of the Plan Year in which the Compensation is otherwise earned, each Tier II Participant may voluntarily elect to defer up to ten percent (10%) of his or her Compensation for that Plan Year. Subject to the terms hereof, such election shall be irrevocable for the Plan Year in question. Amounts deferred pursuant to this Section 7.2, and earnings thereon, shall be credited to such Participant's Retirement Savings Plan Deferral Restoration Account. Each Participant shall be one hundred percent (100%) vested in amounts deferred pursuant to this Section 7.2, and earnings thereon, at all times. 7.3 PARTIAL PLAN YEAR PARTICIPATION. In the event a Tier II Participant first becomes eligible to participate in the Plan after the beginning of a Plan Year, such Participant must wait until the following Plan Year to be eligible to make deferrals pursuant to this Article 7. 7.4 DEFERRAL ELECTION. Tier II Participants shall make elections to defer Compensation prior to the beginning of the Plan Year in which the Compensation is otherwise earned. Each such election shall indicate the following: (a) The amount of Compensation (up to ten percent (10%)) earned during the Plan Year to be deferred, which shall be irrevocable pursuant to Section 7.2 hereof; (b) The Payout Commencement Date for the deferred Compensation, and earnings thereon, which shall be irrevocable pursuant to Section 7.5 hereof; and (c) The Form of Payout, pursuant to Section 2.1(s) hereof. 7.5 LENGTH OF DEFERRAL AND FORM OF PAYOUT. Subject to Section 2.1(z) hereof, each Tier II Participant may irrevocably elect the length of deferral of Compensation deferred each Plan Year by designating a corresponding Payout Commencement Date for such deferral, and earnings thereon. The Form of Payout will be as elected by such Participant pursuant to Section 2.1(s) hereof. ARTICLE 8. COMPANY 401(K) MATCH RESTORATION 8.1 PARTICIPATION. Subject to Section 8.3 hereof, Tier I Participants, who are eligible to participate in the Retirement Savings Plan and experience a cutback in Employer Matching Contributions due to the limitations imposed by the Code, and Tier II Participants, who are employed with the Company at the beginning of a Plan Year, shall be eligible to receive Company credits pursuant to this Article 8 for such Plan Year. 9 12 8.2 COMPANY 401(K) MATCH RESTORATION. For each Plan Year in which an employee is eligible to receive Company credits pursuant to this Article 8, the Company will credit to such Participant's Match Restoration Account an amount equal to the excess of (a) over (b): (a) The Employer Matching Contribution that would have been credited to the Participant's account for that Plan Year under the Retirement Savings Plan had the contribution been based on the Participant's total Compensation for the Plan Year (including all deferred compensation), unreduced by tax-qualified plan limits of the Code, and increased by amounts deferred pursuant to the Retirement Savings Plan. (b) The actual Employer Matching Contribution credited to the Participant's account for that Plan Year under the Retirement Savings Plan. Each Participant hired before April 1, 1997 shall be one hundred percent (100%) vested in amounts credited to such Participant's Match Restoration Account pursuant to this Section 8.2, and earnings thereon, at all times; each Participant hired on or after April 1, 1997 shall become one hundred percent (100%) vested in amounts credited to such Participant's Match Restoration Account pursuant to this Section 8.2, and earnings thereon, upon the date such Participant becomes one hundred percent (100%) vested in Employer Matching Contributions credited to such Participant under the Retirement Savings Plan. Notwithstanding the immediately preceding sentence, a Participant, who is an active employee of the Company, automatically becomes one hundred percent (100%) vested in amounts credited to such Participant's Match Restoration Account pursuant to this Section 8.2, and earnings thereon, upon such Participant's sixty-fifth (65th) birthday or death. 8.3 PARTIAL PLAN YEAR PARTICIPATION. In the event a Participant first becomes eligible to participate in the Plan after the beginning of a Plan Year, such Participant must wait until the following Plan Year to be eligible to accrue Company credits pursuant to this Article 8. Notwithstanding the immediately preceding sentence, the Committee may, in its discretion, allow such Participant to participate during such partial Plan Year. 8.4 LENGTH OF DEFERRAL AND FORM OF PAYOUT. Subject to Section 2.1(z) hereof, any vested amounts credited to a Participant's Match Restoration Account pursuant to Section 8.2 hereof, and earnings thereon, shall be paid out to the Participant beginning in the January following such Participant's termination of employment with the Company. The Form of Payout will be as elected by such Participant pursuant to Section 2.1(s) hereof. ARTICLE 9. COMPANY PROFIT SHARING RESTORATION 9.1 PARTICIPATION. Subject to Section 9.3 hereof, Tier I Participants, who are eligible to participate in the Retirement Savings Plan and experience a cutback in Profit Sharing Contributions due to the limitations imposed by the Code, and Tier II Participants, who are employed with the Company on December 31 of a Plan Year, shall be eligible to receive Company credits pursuant to this Article 9 for such Plan Year. 10 13 9.2 COMPANY PROFIT SHARING RESTORATION. For each Plan Year in which an employee is eligible to receive Company credits pursuant to this Article 9, the Company will credit to such Participant's Profit Sharing Restoration Account an amount equal to the excess of (a) over (b): (a) The Profit Sharing Contribution that would have been credited to the Participant's account for the Plan Year under the Retirement Savings Plan had the contribution been based on the Participant's total Compensation for the Plan Year (including all deferred compensation), unreduced by tax-qualified plan limits of the Code, and increased by amounts deferred pursuant to the Retirement Savings Plan. (b) The actual Profit Sharing Contribution credited to the Participant's account for that Plan Year under the Retirement Savings Plan. Each Participant shall become one hundred percent (100%) vested in amounts credited to such Participant's Profit Sharing Restoration Account pursuant to this Section 9.2, and earnings thereon, automatically upon the first to occur of (a) five (5) years of service with the Company; (b) such Participant's sixty-fifth (65th) birthday; or (c) such Participant's death. Company credits credited to Participants pursuant to this Section 9.2 shall in no way reduce amounts available to the Company to make Profit Sharing Contributions under the Retirement Savings Plan. 9.3 PARTIAL PLAN YEAR PARTICIPATION. In the event a Participant first becomes eligible to participate in the Plan after the beginning of a Plan Year, such Participant must wait until the following Plan Year to be eligible to accrue Company credits pursuant to this Article 9. Notwithstanding the immediately preceding sentence, the Committee may, in its discretion, allow such Participant to participate during such partial Plan Year. 9.4 LENGTH OF DEFERRAL AND FORM OF PAYOUT. Subject to Section 2.1(z) hereof, any vested amounts credited to a Participant's Profit Sharing Restoration Account pursuant to Section 9.2 hereof, and earnings thereon, shall be paid out to the Participant beginning in the January following such Participant's termination of employment with the Company. The Form of Payout will be as elected by such Participant pursuant to Section 2.1(s) hereof. ARTICLE 10. DISCRETIONARY COMPANY CREDITS 10.1 PARTICIPATION. Employees designated by the Committee in its discretion are eligible to receive Company credits pursuant to this Article 10. 10.2 DISCRETIONARY COMPANY CREDITS. In addition to the Company 401(k) Match Restoration and Company Profit Sharing Restoration, as set forth in Sections 8.2 and 9.2 hereof, the Committee in its discretion may cause additional Company credits to be credited to the Discretionary Company Credits Account of any Participant, or group of Participants, for any reason whatsoever. The Committee shall establish rules and procedures for, and the terms of, such credits. 11 14 ARTICLE 11. PARTICIPANT ACCOUNTS AND THE RABBI TRUST 11.1 PARTICIPANT ACCOUNTS. The Company shall establish and maintain individual bookkeeping accounts for each Participant's Accrued Account Balances. Each component of a Participant's Accrued Account Balances shall be credited to such Participant's bookkeeping account as soon as administratively practicable following the date such credits can first be calculated. The establishment and maintenance of such accounts, however, shall not be construed as entitling any Participant to any specific asset of the Company. Each Participant who has a balance in any account will be furnished a statement of his or her Accrued Account Balances at least annually. 11.2 INVESTMENT ELECTIONS. All Accrued Account Balances shall be credited with earnings based upon the rate of return actually achieved by the underlying investments, as described in this Section 11.2. (a) Amounts credited to a Participant's Voluntary Deferral Account shall be invested as elected by such Participant in one or more Investment Funds, except the Company Stock Fund and other investment choices excluded due to applicable law or regulation or by action of the Committee. (b) Amounts credited to a Participant's Mandatory Deferral Account shall be invested as elected by the Participant in one or more Investment Funds, except the Company Stock Fund and other investment choices excluded due to applicable law or regulation or by action of the Committee. Notwithstanding the immediately preceding sentence, amounts credited to the Mandatory Deferral Account of a Participant who has a preexisting Treasury Note Account balance, due to credits to such Treasury Note Account pursuant to Section 12(b) hereof, shall continue to be invested in such Participant's Treasury Note Account, unless the Participant elects to voluntarily have such amounts invested in one or more Investment Funds, except the Company Stock Fund and other investment choices excluded due to applicable law or regulation or by action of the Committee. Amounts deferred into the Treasury Note Account shall be general asset obligations of the Company, and shall not be eligible for payment out of Rabbi Trust assets. Once a Participant who has a balance in his or her Treasury Note Account elects to have amounts deferred pursuant to Section 6.1 hereof invested in anything other than the Treasury Note Account, then such Participant may never again elect to have amounts deferred pursuant to Section 6.1 hereof invested in the Treasury Note Account. Notwithstanding anything herein to the contrary, once the restriction set forth in Section 6.2 hereof is no longer applicable to a Participant, any amounts invested in the Treasury Note Account shall thereafter be invested as elected by such Participant in one or more Investment Funds, except the Company Stock Fund and other investment choices excluded due to applicable law or regulation or by action of the Committee. (c) Amounts credited to a Participant's Match Restoration Account shall be automatically invested in the Stock Unit Subaccount. Once a Participant reaches age fifty-five (55), all or any part of amounts credited both before or after age fifty-five (55), to such Participant's Match Restoration Account shall be invested as elected by each Participant in either (i) the Stock Unit Subaccount; or (ii) one or more Investment Funds, except the Company Stock 12 15 Fund and other investment choices excluded due to applicable law or regulation or by action of the Committee. No such transfer is allowed prior to a Participant's fifty-fifth (55th) birthday. A Participant may not transfer amounts into the Stock Unit Subaccount from any other account. Once amounts are transferred out of the Stock Unit Subaccount, they cannot be transferred back into this investment choice. (d) Amounts credited to a Participant's Profit Sharing Restoration Account shall be invested as elected by such Participant in one or more Investment Funds, except the Company Stock Fund and other investment choices excluded due to applicable law or regulation or by action of the Committee. (e) Amounts credited to a Participant's Retirement Savings Plan Deferral Restoration Account shall be invested as elected by such Participant in one or more Investment Funds, except the Company Stock Fund and other investment choices excluded due to applicable law or regulation or by action of the Committee. (f) Amounts credited to a Participant's Discretionary Company Credits Account shall be invested pursuant to the rules and procedures determined by the Committee in its discretion. Participants shall be permitted to change their investment elections in the same frequency as participants under the Retirement Savings Plan. Notwithstanding anything herein to the contrary, the Committee reserves the right to (a) change the number and availability of the investment alternatives at any time; and (b) not actually invest deferrals and/or Company credits into the investment alternatives elected by each Participant. 11.3 CHARGES AGAINST ACCOUNTS. There shall be charged against each Participant's Accrued Account Balances any payments made thereunder to the Participant or to his or her beneficiary. 11.4 ESTABLISHMENT OF A RABBI TRUST. As soon as administratively practicable following the Effective Date, Kmart Corporation shall establish an irrevocable Rabbi Trust, governed by a Rabbi Trust Agreement (which shall be a grantor trust within the meaning of Code Sections 671-678) for the benefit of Participants and beneficiaries of Participants, as appropriate and applicable. The Rabbi Trust shall have an independent Trustee (such Trustee to have a fiduciary duty to carry out the terms and conditions of the Trust) as selected by the Company, and shall have restrictions as to the Company's ability to amend the Trust or to cancel benefits provided thereunder. Assets contained in the Rabbi Trust shall at all times be specifically subject to the claims of Kmart Corporation's general creditors in the event of insolvency; such term shall be specifically defined within the provisions of the Rabbi Trust, along with a required procedure for notifying the Trustee of any such insolvency. All benefits hereunder, except for benefits associated with the Treasury Note Account, shall be paid first from the Rabbi Trust, to the extent assets exist in the Rabbi Trust and then, as necessary, by Kmart Corporation from general assets. All amounts payable pursuant to the Treasury Note Account shall be paid by Kmart Corporation from general assets. 13 16 11.5 FUNDING OF THE RABBI TRUST. At the discretion of the Committee, Kmart Corporation may contribute cash, cash equivalents, and/or Kmart Stock to the Rabbi Trust, for the benefit of Participants and beneficiaries of Participants, as the Committee deems appropriate. It is intended that the Rabbi Trust will be fully funded at all times to cover the Accrued Rabbi Trust Obligations of Kmart Corporation. Upon a Change in Control, Kmart Corporation shall be required to make an immediate contribution to the Rabbi Trust to cause all Accrued Rabbi Trust Obligations to be fully or overfunded as of that date. ARTICLE 12. ALLOCATION OF PRIOR DEFERRALS AND COMPANY CREDITS Any outstanding Participant deferrals and Company 401(k) match or profit sharing restoration amounts, and earnings thereon, credited to any Participant account under either the Kmart Corporation Supplemental Savings Plan or the Kmart Corporation Executive Deferred Compensation Plan (together the "Predecessory Deferral/Restoration Arrangements"), as of the Effective Date of this Plan, shall be withdrawn and automatically transferred to such Participant's account under this Plan within ninety (90) calendar days from the Effective Date, or as soon as otherwise administratively practicable. Amounts transferred pursuant to this Article 12 shall be invested as follows: (a) Amounts transferred, and earnings thereon, that meet the definition of Employer Matching Contributions and that were originally credited to a Participant under the Kmart Corporation Supplemental Savings Plan shall be invested pursuant to Section 11.2(c) hereof; (b) Amounts transferred, and earnings thereon, that meet the definition of Mandatory Deferrals and that were originally credited to a Participant pursuant to Section 2(b) of the Kmart Corporation Executive Deferred Compensation Plan shall be invested as elected by the Participant either (i) solely in the Treasury Note Account; or (ii) in one or more Investment Funds, except the Company Stock Fund and other investment choices excluded due to applicable law or regulation or by action of the Committee; and (c) All other amounts transferred, and earnings thereon, shall be invested as elected by the Participant in one or more Investment Funds, except the Company Stock Fund and other investment choices excluded due to applicable law or regulation or by action of the Committee. By no later than the end of the first Plan Year, Kmart Corporation shall contribute cash, cash equivalents, and/or Common Stock of Kmart Corporation to the Rabbi Trust for the benefit of Participants in an amount equal to the amount of all deferrals and Company credits, and earnings thereon, accrued in prior years under Predecessory Deferral/Restoration Arrangements except outstanding credits to the Treasury Note Account. It is intended that this Plan replace the PredecessoryDeferral/Restoration Arrangements. No Participant will be allowed to defer any amounts or accrue any benefits under the Predecessory Deferral/Restoration Arrangements after the Effective Date hereof. 14 17 ARTICLE 13. BENEFICIARY DESIGNATION 13.1 DESIGNATION OF BENEFICIARY. Each Participant may designate or change a beneficiary or beneficiaries who, upon the Participant's death, will receive the amounts that otherwise would have been paid to the Participant under the Plan. All such designations and any changes thereto shall be signed by the Participant, and shall be in such form as prescribed by the Committee. Each designation shall be effective as of the date delivered to a Company employee so designated by the Committee. The payment of an amount equal to the amount that otherwise would have been paid to the Participant shall be paid in accordance with the last unrevoked written designation of beneficiary that has been signed by the Participant and delivered by the Participant to the Company's designee prior to the Participant's death. 13.2 DEATH OF BENEFICIARY. In the event that all the beneficiaries named by a Participant, pursuant to Section 13.1 hereof, predecease the Participant, the amount that otherwise would have been paid to the Participant or the Participant's beneficiaries under the Plan shall be paid to the Participant's estate or the person designated by the Participant's estate. 13.3 INEFFECTIVE DESIGNATION. In the event a Participant does not designate a beneficiary, or for any reason such designation is ineffective, in whole or in part, the amounts that otherwise would have been paid to the Participant or the Participant's beneficiaries under the Plan shall be paid to the person or persons the Participant designated as the beneficiary or beneficiaries under the Retirement Savings Plan, and if no such designation was made, then to the Participant's estate or the person designated by the Participant's estate. 13.4 INDEMNITY. The Company may require an indemnity and/or evidence or other assurances as it deems necessary in connection with any payment hereunder to a Participant's beneficiary, estate, legal representative, or guardian. ARTICLE 14. WITHHOLDING OF TAXES The Company shall have the right to require Participants to remit to the Company, or any person or entity designated by the Committee to administer the Plan, an amount sufficient to satisfy federal, state, and local tax withholding requirements, or to deduct from all payments made pursuant to the Plan amounts sufficient to satisfy such withholding requirements. ARTICLE 15. EMPLOYMENT/MISCONDUCT 15.1 EMPLOYMENT. No provision of the Plan, nor any action taken by the Committee or the Company pursuant to the Plan, shall give or be construed as giving a Participant any right to be retained in the employ of the Company, or affect or limit in any way the right of the Company to terminate his or her employment. 15.2 MISCONDUCT. Notwithstanding anything hereof to the contrary, all rights with respect to the Accrued Account Balances of a Participant are subject to the conditions that the Participant not engage or have engaged (a) in fraud, dishonesty, conduct in violation of Company policy, or similar acts at any time while an employee of the Company; or (b) in activity directly or indirectly in competition with any business of the Company, or in other conduct inimical to the best interests of the Company during or following the Participant's employment with the Company. If it is determined 15 18 by the Committee, either before or after termination of employment of a Participant, that there has been a failure of any such conditions, the Committee shall: (a) Withhold, and such Participant shall forfeit all rights with respect to, all amounts then remaining in such Participant's Match Restoration Account, Profit Sharing Restoration Account, and/or Discretionary Company Credits Account; and (b) Accelerate the payout of all amounts then remaining in such Participant's Mandatory Deferral Account, Voluntary Deferral Account, and/or the Retirement Savings Plan Deferral Restoration Account to a date to be determined by the Committee in its discretion. ARTICLE 16. AMENDMENT AND TERMINATION The Company hereby reserves the right to amend, suspend, or terminate the Plan at any time by action of the Board, in its sole discretion. No such amendment, suspension, or termination shall in any material manner adversely affect any Participant's rights to amounts theretofore accrued and payable hereunder, without the written consent of the Participant. ARTICLE 17. MISCELLANEOUS 17.1 FINANCIAL OR MEDICAL HARDSHIP. The Committee shall have the authority to alter the timing or manner of payment of Accrued Account Balances in the event that the Participant establishes, to the satisfaction of the Committee, severe financial or medical hardship. In such event, the Committee may, in its discretion: (a) Authorize the cessation of Voluntary Deferrals pursuant to Section 5.2 hereof, and Savings Plan Deferral Restoration amounts pursuant to Section 7.2 hereof; (b) Provide that all, or a portion, of the Accrued Account Balances shall immediately be paid in cash in a Lump-Sum Payment; and/or (c) Provide that all, or a portion of, Installment Payments payable over a period of time shall instead be paid immediately in cash in a Lump-Sum Payment; and/or (d) Provide for such other payment schedule as deemed appropriate by the Committee under the circumstances. However, the amount paid pursuant to this Section 17.1 shall not exceed that amount which the Committee determines to be reasonably necessary for the Participant to meet the financial or medical hardships at the time of such payment. The severity of the financial or medical hardship shall be judged by the Committee. Severe financial or medical hardship will be deemed to exist in the event of the Participant's long and serious illness, impending bankruptcy, or similar unforeseeable and extraordinary circumstances arising as a result of events beyond the control of the Participant. The Committee's decision with respect to the severity of financial or medical hardship and the manner in which, if at all, the Participant's future deferral opportunities hereunder shall cease, and/or the manner in which, if at all, the payment of Accrued Account Balances to the Participant shall be altered or modified, shall be final, conclusive, and not subject to appeal. 16 19 17.2 NOTICE. Any notice or filing required or permitted to be given to the Company under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail to the Chairman of the Committee or the Committee's designee. Such notice, if mailed, shall be addressed to the principal executive offices of Kmart Corporation. Notice mailed to a Participant shall be at the last known address as is given in the records of Kmart Corporation. Notices shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. 17.3 UNFUNDED PLAN. This Plan is intended to be an unfunded plan maintained primarily to provide deferred compensation benefits for "a select group of management or highly compensated employees" within the meaning of Sections 201, 301, and 401 of ERISA, and therefore is further intended to be exempt from the provisions of Parts 2, 3, and 4 of Title I of ERISA. Accordingly, the Committee may terminate the Plan for any or all Participants, subject to Article 16 hereof, in order to achieve and maintain this intended result. 17.4 SUCCESSORS. All obligations of Kmart Corporation under the Plan shall be binding on any successor to Kmart Corporation, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of Kmart Corporation. 17.5 NONTRANSFERABILITY. Participants' rights to Accrued Account Balances under the Plan may not be sold, transferred, assigned, or otherwise alienated or hypothecated, other than pursuant to Article 13 hereof or by will or by the laws of descent and distribution. In no event shall Kmart Corporation make any payment under the Plan to any assignee or creditor of a Participant. 17.6 SEVERABILITY. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 17.7 COSTS OF THE PLAN. All costs of implementing and administering the Plan shall be borne by Kmart Corporation. 17.8 OTHER PERMITTED DEFERRAL OPPORTUNITIES. The Committee may, in its discretion, permit a Participant to defer such Participant's receipt, if any, of the payment of cash or the delivery of capital stock of Kmart Corporation that would otherwise be due to such Participant pursuant to the terms of the 1997 Kmart Corporation Long-Term Equity Compensation Plan, or any other stock plan of the Company, and any successor plans thereto. If any such deferral is permitted, the Committee shall establish rules and procedures for such deferrals. 17.9 GOVERNING LAW. The Plan shall be governed by and construed in accordance with the laws of the State of Michigan without giving effect to any choice or conflict of law provision or rule. Effective Date: January 1, 1998 17 EX-11 3 EXHIBIT 11 1 EXHIBIT 11 KMART CORPORATION INFORMATION ON COMPUTATION OF PER SHARE EARNINGS
($ Millions) Fiscal Year Ended ------------------------------------------------------------------ January 28, January 29, January 31, January 25, January 26, 1998 1997 1996* 1995* 1994* ------------------------------------------------------------------ I. Basic earnings per common share: Income (loss) from continuing operations before extraordinary item and the effect of accounting changes $ 249 $ 231 $(230) $ 96 $(179) Less: Series B and C convertible preferred shares dividend -- -- (6) (9) (9) payment ------------------------------------------------------------------ (a) Income (loss) available to common shareholders from continuing operations before extraordinary item 249 231 (236) 87 (188) and the effect of accounting changes (b) Discontinued operations including the effect of accounting changes, net of income taxes -- (5) (260) 83 (234) (c) Gain (loss) on disposal of discontinued operations, net of income taxes -- (446) (30) 117 (520) (d) Extraordinary item, net of income taxes -- -- (51) -- (10) (e) Effect of accounting changes, net of income taxes -- -- -- -- (31) ------------------------------------------------------------------ (f) Adjusted net income (loss) (1) $ 249 $ (220) $(577) $ 287 $(983) ================================================================== (g) Weighted average common shares outstanding 487.1 483.6 459.8 427.2 408.1 ================================================================== Basic earnings per common share: Income (loss) available to common shareholders from continuing operations before extraordinary item and the $ 0.51 $ 0.48 $(0.51) $0.20 $(0.46) effect of accounting changes (a)/(g) Discontinued operations including the effect of accounting changes, net of income taxes (b)/(g) -- (0.01) (0.57) 0.20 (0.57) Gain (loss) on disposal of discontinued operations, net of income taxes (c)/(g) -- (0.92) (0.06) 0.27 (1.27) Extraordinary item, net of income taxes (d)/(g) -- -- (0.11) -- (0.02) Effect of accounting changes, net of income taxes (e)/(g) -- -- -- -- (0.08) ------------------------------------------------------------------ Net income (loss) (f)/(g) $ 0.51 $ (0.45) $(1.25) $ 0.67 $(2.40) ==================================================================
* Prior year amounts have been restated for the effect of discontinued operations. (1) Adjusted net income (loss) included an after-tax provision of $81 million or $0.17 per share for fiscal 1997 related to the non recurring charge for the voluntary early retirement program, $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" and an after-tax provision of $579 million or $1.27 per share for fiscal 1993 for store restructuring and other charges. 1 2 KMART CORPORATION INFORMATION ON COMPUTATION OF PER SHARE EARNINGS
($ Millions) Fiscal Year Ended --------------------------------------------------------------- January 28, January 29, January 31, January 25, January 26, 1998 1997 1996* 1995* 1994* --------------------------------------------------------------- II Earnings per common and common equivalent share assuming dilution: Income (loss) from continuing operations before extraordinary item and the effect of accounting changes $ 249 $ 231 $ (230) $ 96 $ (179) Add: Dividends Preferred Stock, Net 49 31 -- -- -- --------------------------------------------------------------- (h) Adjusted Income (loss) from continuing operations before extraordinary item and the effect of accounting changes 298 262 (230) 96 (179) (i) Discontinued operations including the effect of accounting changes, net of income taxes -- (5) (260) 83 (234) (j) Gain (loss) on disposal of discontinued operations, net of income taxes -- (446) (30) 117 (520) (k) Extraordinary item, net of income taxes -- -- (51) -- (10) (l) Effect of accounting changes, net of income taxes -- -- -- -- (31) --------------------------------------------------------------- (m) Adjusted net income (loss)(1) $ 298 $ (189) $ (571) $ 296 $ (974) =============================================================== Weighted average common shares outstanding 487.1 483.6 459.8 427.2 408.1 Weighted average $3.41 Depository Shares outstanding (each representing 1/4 share Series A conversion preferred) -- -- -- 29.2 46.0 Weighted average Series B and C convertible preferred shares outstanding -- -- -- 9.7 8.0 Weighted Average Trust Convertible Preferred 66.7 41.4 -- -- -- Stock Options: Common shares assumed issued 16.3 13.0 1.6 2.2 16.1 Less: common shares assumed repurchased (11.7) (10.5) (1.5) (2.0) (13.5) --------------------------------------------------------------- 4.6 2.5 0.1 0.2 2.6 --------------------------------------------------------------- (n) Applicable common shares, as adjusted 558.4 527.5 459.9 466.3 464.7 =============================================================== Diluted earnings per common and common equivalent share: Adjusted income (loss) from continuing operations before extraordinary item and the effect of accounting changes (h)/(n) $ 0.53 $ 0.50 $ (0.50) $ 0.21 $(0.39) Discontinued operations including the effect of accounting changes, net of income taxes (i)/(n) -- (0.01) (0.57) 0.17 (0.50) Gain (loss) on disposal of discontinued operations, net of income taxes (j)/(n) -- (0.85) (0.06) 0.25 (1.12) Extraordinary item, net of income taxes (k)/(n) -- -- (0.11) -- (0.02) Effect of accounting changes, net of income taxes (l)/(n) -- -- -- -- (0.07) --------------------------------------------------------------- Net income (loss) (m)/(n) $ 0.53 $ $ (0.36) $ (1.24) $ 0.63 $(2.10) =============================================================== (2) (2) (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 $81 million or $0.15 per share for fiscal 1997 related to the charge for the voluntary early retirement program, 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" and an after tax provision of $579 million or $1.25 per share for fiscal 1993 for store restructing and other charges. 2) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although it is contrary to paragraph 13 of SFAS 128 because it produces an anti-dilutive result. 2 EX-12 4 EXHIBIT 12 1 EXHIBIT 12 KMART CORPORATION INFORMATION ON RATIO OF EARNINGS TO FIXED CHARGES COMPUTATION
Fiscal Year Ended ----------------------------------- ($ Millions) January 29, January 29, January 31, 1997 1997 1996* ----------------------------------- Net income (loss) from continuing retail operations before extraordinary items and the effect of accounting changes $ 249 $ 231 $ (230) Dividends on Convertible Preferred, Net 49 31 - Income taxes 120 68 (83) ----------------------------------- Pretax income (loss) from continuing retail operations 418 330 (313) Distributions from unconsolidated affiliated retail companies that exceed equity income 1 28 14 Fixed charges per below 660 733 641 Less: interest capitalized during the period (8) (9) (6) Preferred Dividends of Majority owned subsidiaries not deducted in the determination of pre-tax (75) (47) - income ----------------------------------- Earnings (loss) from continuing retail operations $ 996 $ 1,035 $ 336 =================================== Fixed Charges: Interest expense 378 498 483 Rent expense - portion of operating rentals representative of the interest factor 159 146 151 Preferred Dividend requirements of Majority owned subsidiaries 75 47 - Other 48 42 7 ----------------------------------- Total Fixed Charges $ 660 $ 733 $ 641 =================================== Ratio of income to fixed charges (1) 1.5 1.4 - ===================================
*Prior year amounts have been restated for the effect of discontinued operations. (1) The deficiency of earnings from continuing retail operations versus fixed charges was $305 million for the fiscal year ended January 31, 1996. 1 EX-13 5 EXHIBIT 13 1 CONSOLIDATED SELECTED FINANCIAL DATA
DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- SUMMARY OF OPERATIONS(1) Sales $ 32,183 $ 31,437 $ 31,713 $ 29,563 $ 28,039 Cost of sales, buying and occupancy 25,152 24,390 24,675 22,331 20,732 Selling, general and administrative expenses 6,136 6,274 6,876 6,651 6,241 Interest expense, net 363 453 434 479 467 Continuing income (loss) before income taxes 418 330 (313) 102 (306) Net income (loss) from continuing operations(2) 249 231 (230) 96 (179) Net income (loss) 249 (220) (571) 296 (974) PER SHARE OF COMMON Basic continuing income (loss) $ 0.51 $ 0.48 $ (0.51) $ 0.20 $ (0.46) Diluted continuing income (loss)(3) 0.51 0.48 (0.51) 0.19 (0.46) Dividends declared -- -- 0.36 0.96 0.96 Book value 11.15 10.51 10.99 13.15 13.39 FINANCIAL DATA Working capital $ 4,202 $ 4,131 $ 5,558 $ 3,562 $ 3,793 Total assets 13,558 14,286 15,033 16,085 15,875 Long-term debt 1,725 2,121 3,922 1,989 2,209 Long-term capital lease obligations 1,179 1,478 1,586 1,666 1,609 Trust convertible preferred securities 981 980 -- -- -- Capital expenditures 678 343 540 1,021 793 Depreciation and amortization 660 654 685 639 650 Ending market capitalization - common stock 5,469 5,418 2,858 6,345 9,333 Inventory turnover 3.5 3.5 3.4 3.2 2.9 Current ratio 2.3 2.1 2.9 1.7 1.9 Long-term debt to capitalization 32.4% 37.2% 51.1% 37.7% 38.5% Ratio of income from continuing operations to fixed charges(4) 1.5 1.4 -- 1.1 -- Basic weighted average shares outstanding (millions) 487 484 460 427 408 Diluted weighted average shares outstanding (millions)(3) 492 486 460 456 408 NUMBER OF STORES United States 2,136 2,134 2,161 2,316 2,323 International and other -- 127 149 165 163 -------- -------- -------- -------- -------- Total stores 2,136 2,261 2,310 2,481 2,486 U.S. Kmart store sales per comparable selling square foot $ 211 $ 201 $ 195 $ 181 $ 182 U.S. Kmart selling square footage (millions) 151 156 160 166 160 - -----------------------------------------------------------------------------------------------------------------------------
(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 1997 includes a $114 million ($81 million net of tax) non-recurring charge related to the Voluntary Early Retirement Program. The net loss from continuing operations in 1993 included a pretax provision of $904 million ($579 million net of tax) for store restructuring and other charges. (3) Consistent with the requirements of Financial Accounting Standards No. 128, preferred securities were not included in the calculation of diluted earnings per share for 1997, 1996 and 1994 due to their anti-dilutive effect. Due to the Company's loss from continuing operations in 1995 and 1993, 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 and $315 million for 1995 and 1993, respectively. Kmart Corporation 1997 Annual Report 17 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS
($ Millions) 1997 1996 1995 - ----------------------------------------------------------- SALES United States $31,884 $30,378 $30,429 International 299 1,059 1,284 ------- ------- ------- Total $32,183 $31,437 $31,713 ======= ======= ======= OPERATING INCOME (LOSS) United States $ 898 $ 780 $ 179 International (3) (7) (17) ------- ------- ------- Total $ 895 $ 773 $ 162 ======= ======= ======= COMPARABLE SALES % United States 4.8% 2.6% 5.6% International -- (2.8%) 3.0% Total 4.8% 2.5% 5.5%
OPERATING INCOME (LOSS) EXCLUDES THE VOLUNTARY EARLY RETIREMENT CHARGE IN 1997 TOTALING $114 MILLION ON A PRETAX BASIS, AND OTHER GAINS AND (LOSSES) OF $10 AND ($41) IN 1996 AND 1995, RESPECTIVELY. FISCAL 1997 COMPARED TO FISCAL 1996 Sales and comparable store sales increased 2.4% and 4.8%, respectively, for 1997. Sales per square foot also continued its upward trend in 1997 to $211 from $201. The increases were primarily due to the successful conversion of an additional 458 traditional Kmart locations to the Big Kmart format, increased promotional activity, as well as the overall success of unique product offerings such as Martha Stewart Everyday home fashions and Sesame Street children's apparel, partially offset by soft performance in the women's apparel segment and in the case of consolidated sales, the sale of all remaining international operations. Gross margin, as a percentage of sales, was 21.8% and 22.4% in 1997 and 1996, respectively. The decrease in the percentage reflects increased promotional activity, growth in consumables sales, the soft performance of women's apparel, and increased distribution, buying and occupancy costs. Selling, general and administrative expenses ("SG&A"), which includes advertising, as a percentage of sales were 19.1% and 19.9% in 1997 and 1996, respectively. This was the second consecutive year that SG&A as a percentage of sales was below 20%. The 0.8 percentage point reduction compared to 1996, or $138 million, was the result of the sale of certain international operations, increased leverage given additional sales volume, and the Company's continuing focus on its core business units. Operating income increased $122 million in 1997 compared to 1996, excluding other gains and losses and the charge for the Voluntary Early Retirement Program. This increase was the direct result of the 2.4% increase in sales during the year along with the $138 million savings in SG&A. These amounts were partially offset by the 60 basis point decline in gross margin percentage. The Voluntary Early Retirement Program offered to certain of the Company's hourly associates during the fourth quarter of 1997 resulted in a charge of $114 million in the quarter based on actual acceptance. Other gains and losses in 1996 included a $108 million gain on the sale of Rite Aid stock and a charge of $98 million related to the valuation of certain international operations. Net interest expense was $363 and $453 million in 1997 and 1996, respectively. The reduction in net interest expense was due to reduced borrowings including the paydown of the remaining balance of the term loan in the first quarter of 1997. Effective income tax rates were 28.7% and 20.5% in 1997 and 1996, respectively. The increase in the effective tax rate during 1997 was due to the impact in 1996 of tax benefits resulting from foreign losses and basis differences. See Note 11 of the Notes to Consolidated Financial Statements. FISCAL 1996 COMPARED TO FISCAL 1995 Sales decreased 0.9% during 1996 primarily due to one less week in fiscal 1996 compared to 1995, the sale of certain international operations and the closing of 48 U.S. Kmart stores during the year, partially offset by the opening of 21 new U.S. Kmart stores. Comparable sales per square foot in U.S.Kmart stores reached $201, exceeding $200 for the first time in the Company's history. Comparable store sales increased 2.5% as a result of continued promotional activity, a larger average transaction size, improved in-stock percentages, and the conversion of 152 stores to the Big Kmart format. Gross margin, as a percentage of sales, was 22.4% and 22.2% in 1996 and 1995, respectively. The percentage increase reflected significantly lower levels of markdowns related to clearance of discontinued merchandise and closure of stores. Additionally, lower levels of buying and occupancy costs together with an improved sales mix towards higher margin departments contributed to the increase. This increase was partially offset by the effect of the sale of the auto service business to Penske Auto Centers, Inc. in late 1995. Selling, general and administrative expenses, which include advertising, as a percentage of sales were 19.9% and 21.7% in 1996 and 1995, respectively. In 1996, SG&A as a percentage of sales was below 20% for the first time in the past 25 years. The 1.8 percentage point reduction compared to 1995, or $602 million, was a direct result of the Company's continuing focus on its core business units, expense controls, one less week in fiscal 1996 and the sale of certain international operations. Kmart Corporation 1997 Annual Report 18 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.) Operating income increased $611 million in 1996 compared to 1995, excluding other gains and losses. Other gains and losses in 1996 included a $108 million gain on the sale of Rite Aid stock and a charge of $98 million related to the valuation of international operations in Mexico and Canada. In 1995, other gains and losses included a charge of $162 million 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" ("FAS 121") and a pension curtailment gain of $121 million. Net interest expense was $453 and $434 million in 1996 and 1995, respectively. The increase was a result of restrictions on the repayment of certain indebtedness in the first half of 1996, prior to the Company's refinancing of its bank lines and issuance of trust convertible preferred securities in June 1996. Additionally, the Company's inability to borrow in commercial paper markets beginning in the fall of 1995, as a result of its lower corporate debt ratings, contributed to higher interest rates. This higher level of interest was partially offset by higher levels of investment income from accumulated cash balances prior to the refinancing and a significant improvement in cash flow from operations. Effective income tax rates were 20.5% and 26.6% in 1996 and 1995, respectively. The 1996 rate was favorably impacted by recognition of tax benefits related to foreign losses and basis differences. The 1995 rate reflected the recognition of refundable taxes, at statutory rates, plus tax credits partially offset by valuation allowances against certain deferred tax assets. See Note 11 of the Notes to Consolidated Financial Statements. Discontinued operations, net of taxes, represented losses of $451 and $290 million in 1996 and 1995, respectively. The 1996 loss was comprised of an estimated loss of $385 million related to the Company's decision to sell the operations of its Builders Square subsidiary, $5 million of current year net losses of Builders Square and a loss of $61 million related to the sale of a portion of its investment in Thrifty PayLess Holdings, Inc. ("TPH") in the first quarter together with a revaluation of its remaining holdings at that time. The 1995 loss included a $260 million loss from Builders Square, including a charge of $240 million related to the adoption of FAS 121, and a $30 million loss related to the disposal of Borders Group, Inc. and remaining equity interests in OfficeMax, Inc. and The Sports Authority, Inc. See Note 3 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 $4,202 and $4,131 million at year end 1997 and 1996, respectively. Working capital fluctuates in relation to profitability, seasonal inventory levels net of trade accounts payable and the level of store openings and closings. In June 1996, the Company restructured its credit facilities to enhance its liquidity and financial flexibility. This restructuring consisted of a secured three year $2.5 billion revolving credit facility ("Revolver") and a secured three year $1.2 billion term loan facility ("Term Loan") (collectively, the "Credit Agreement"). Additionally, in June 1996, the Company issued $1 billion of 7-3/4% Trust Convertible Preferred Securities ("TCPS") through a wholly owned subsidiary trust. The net proceeds from these transactions were used to retire existing indebtedness, including certain obligations related to real estate. In May of 1997, the Revolving Credit Agreement was amended. Under the terms of the amended agreement, the maturity was extended to June 2000 and the commitment fee and interest rate spreads were reduced. The Company has met the financial requirements to release collateral under the Revolving Credit Agreement upon delivery of the 1997 audited financial statements. The Credit Agreement contains several affirmative and negative covenants, regarding, among other items: the granting of liens, loans and guarantees; mergers and sales of certain assets; dividends and other payments in respect of capital stock; the maintenance of certain leverage and coverage ratios; and limitations on indebtedness and capital expenditures. The Company was in compliance with all covenants throughout 1997. The Company had no borrowings outstanding on its Revolver as of year ends 1997 and 1996 and the Term Loan was repaid during 1997. In March 1997, the Company issued, through a subsidiary, $335 million in Commercial Mortgage Pass Through Certificates ("CMBS"). The CMBS weighted average floating interest rate was LIBOR plus 47 basis points. Net proceeds were used to repay a portion of the Term Loan. In 1997, the Company continued to achieve significant improvement in liquidity and operating cash flow performance. At the Company's peak borrowing level in 1997, over $1.5 billion remained available for borrowings under its Revolver. In addition, cash flow from continuing operations improved by $141 million. 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 from continuing operations was $879 million in 1997 compared to $738 million in 1996. Kmart Corporation 1997 Annual Report 19 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.) Net cash used for investing was $185 million in 1997 compared to $471 million in 1996. Cash used for investing in 1997 was primarily the result of $678 million in capital expenditures partially offset by the proceeds from sale leaseback transactions which occurred during the year, as well as proceeds from the sale of the Company's Canadian, Mexican and Builders Square operations. The Company continues to maintain property held for sale with a net book value of $307 million as of January 28, 1998. Cash used for investing in 1996 was the result of an increase in property held for sale of $632 million as a result of refinancing certain real estate debt and capital additions of $343 million. These items were partially offset by the receipt of proceeds from the sale of the Company's investment in Rite Aid common stock, the sale of its Czech and Slovak Republics operations and the IPO of TPH. Net cash used for financing was $564 million in 1997 compared to $974 million in 1996. Cash used for financing during 1997 was the result of paying down the Company's remaining balance on the Term Loan as well as payments on certain mortgages and medium term notes. These amounts were partially offset by the issuance of $335 million in CMBS securities. Cash used for financing in 1996 was the result of the refinancing of the Company's former credit facilities and certain real estate debt with net proceeds from the Term Loan, TCPS and Revolver. RESTRUCTURING RESERVE STATUS In 1993, Kmart recorded a pretax charge of $904 million, $579 million after tax, primarily for anticipated costs associated with Kmart stores which were to be closed or relocated, enlarged or refurbished in the U.S. and Canada. The restructuring program was completed during fiscal 1997 with the cost of completing the plan approximating the original estimate. The following summarizes the reserve balance as of January 28, 1998.
1997 Activity ---------------- Original Net Change in ($ Millions) Reserve 1995 1996 Charges Estimate 1997 - ------------------------------------------------------------- Lease costs $479 $397 $297 $(35) $ (33) $229 Asset writedowns 148 23 5 (23) 18 -- Inventory 201 79 12 (17) 15 10 Other charges 76 9 4 (2) -- 2 ---- ---- ---- ---- ----- ---- $904 $508 $318 $(77) $ -- $241 ==== ==== ==== ==== ===== ====
NET CHARGES DURING 1997, 1996 AND 1995 INCLUDED $19, $25 AND $32 MILLION FOR INTEREST EXPENSE ACCRETED, RESPECTIVELY. The primary components of the reserve consist of: cash outlays for future lease obligations once a store is closed until it can be assigned, bought-out or terminated, offset by any sublease income; asset writedowns relating to furniture and fixtures and leasehold improvements and inventory disposition costs. Changes in estimates are representative of management's assessments in the fourth quarters of 1997, 1996 and 1995 that based on actual experiences to date, certain charges would be higher than originally planned while others would be less than planned. Due to favorable sublease and termination experience for stores closed to date, Kmart lowered the estimate of net lease obligation costs for domestic and Canadian stores by $33 million in 1997. These favorable results have been offset by increased fixed asset disposition costs for domestic stores. Kmart anticipates that pretax cash outflows will approximate $70, $50 and $30 million in 1998 through 2000, respectively. At January 28, 1998, the total remaining gross lease obligations related to the U.S. Kmart 1993 restructuring plan aggregated approximately $1.1 billion, of which it is management's estimate, based upon historical results, approximately $800 million will be recovered primarily through subleasing. Kmart has discounted the future net cash flow using a 7% discount rate which resulted in an aggregate remaining effect of discounting of approximately $60 million. Future cash outlays are based upon management's estimate of the period of time between store closing and the ultimate disposition of the lease obligation, the remaining charge being substantially noncash in nature. Other Matters The Company is currently working to resolve the potential impact of the Year 2000 on the processing of date-sensitive information by the Company's computerized information systems. The Year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. Costs of addressing potential problems are estimated to be approximately $50 million and are not expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in future periods. However, if the Company or its vendors are unable to resolve such processing issues in a timely manner, it could result in a material financial risk. Accordingly, the Company plans to devote the necessary resources to resolve all significant Year 2000 issues in a timely manner. Kmart Corporation 1997 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. Floyd Hall Floyd Hall Chairman of the Board, President and Chief Executive Officer Martin E. Welch III 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 operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Kmart Corporation and its subsidiaries at January 28, 1998 and January 29, 1997, and the results of their operations and their cash flows for each of the three years in the period ended January 28, 1998, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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. Price Waterhouse LLP Price Waterhouse LLP Detroit, Michigan March 3, 1998 Kmart Corporation 1997 Annual Report 21 6 CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 28, 1998, JANUARY 29, 1997 AND JANUARY 31, 1996 DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- SALES $ 32,183 $ 31,437 $ 31,713 Cost of sales, buying and occupancy 25,152 24,390 24,675 --------- --------- --------- Gross margin 7,031 7,047 7,038 Selling, general and administrative expenses 6,136 6,274 6,876 Voluntary early retirement program 114 -- -- Other (gains) losses -- (10) 41 --------- --------- --------- Continuing income before interest, income taxes and dividends on convertible preferred securities of subsidiary 781 783 121 Interest expense, net 363 453 434 Income tax provision (credit) 120 68 (83) Dividends on convertible preferred securities of subsidiary, net of income taxes of $26 and $16 49 31 -- --------- --------- --------- NET INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM 249 231 (230) Loss from discontinued operations, net of income taxes of $(3) and $(139) -- (5) (260) Loss on disposal of discontinued operations, net of income taxes of $(240) and $88 -- (446) (30) Extraordinary loss, net of income taxes of $(27) -- -- (51) --------- --------- --------- Net income (loss) $ 249 $ (220) $ (571) ========= ========= ========= BASIC/DILUTED INCOME (LOSS) PER COMMON SHARE Continuing operations $ .51 $ .48 $ (.51) Discontinued operations -- (.01) (.57) Loss on disposal of discontinued operations -- (.92) (.06) Extraordinary item -- -- (.11) --------- --------- --------- Net income (loss) $ .51 $ (.45) $ (1.25) ========= ========= ========= Basic weighted average shares (millions) 487.1 483.6 459.8 Diluted weighted average shares (millions) 491.7 486.1 459.9
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Kmart Corporation 1997 Annual Report 22 7
CONSOLIDATED BALANCE SHEETS AS OF JANUARY 28, 1998 AND JANUARY 29, 1997 DOLLARS IN MILLIONS 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 498 $ 406 Merchandise inventories 6,367 6,354 Other current assets 611 973 Total current assets 7,476 7,733 ------- ------- Property and equipment, net 5,472 5,740 Property held for sale or financing 271 200 Other assets and deferred charges 339 613 ------- ------- Total Assets $13,558 $14,286 ======= ======= CURRENT LIABILITIES Long-term debt due within one year $ 78 $ 156 Trade accounts payable 1,923 2,009 Accrued payroll and other liabilities 1,064 1,298 Taxes other than income taxes 209 139 ------- ------- Total current liabilities 3,274 3,602 Long-term debt and notes payable 1,725 2,121 Capital lease obligations 1,179 1,478 Other long-term liabilities 965 1,013 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) 981 980 Common stock, $1 par value, 1,500,000,000 shares authorized; 488,811,271 and 486,996,145 shares issued, respectively 489 486 Capital in excess of par value 1,620 1,608 Retained earnings 3,343 3,105 Treasury shares and restricted stock (15) (37) Foreign currency translation adjustment (3) (70) ------- ------- Total Liabilities and Shareholders' Equity $13,558 $14,286 ======= =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Kmart Corporation 1997 Annual Report 23 8 CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) from continuing operations $ 249 $ 231 $ (230) Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used for) operating activities: Depreciation and amortization 660 654 685 Voluntary early retirement program 114 -- -- Cash used for store restructuring and other charges (105) (129) (171) (Increase) decrease in inventories (31) (349) 222 Increase (decrease) in trade accounts payable (86) 215 (609) Deferred income taxes and taxes payable 72 228 (296) Increase (decrease) in other long-term liabilities (27) (194) 9 Changes in certain assets, liabilities and other items 33 82 293 --------- ---------- --------- Net cash provided by (used for) continuing operations 879 738 (97) Net cash provided by (used for) discontinued operations (38) 30 (92) --------- ---------- --------- NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 841 768 (189) --------- ---------- --------- Cash Flows From Investing Activities Decrease (increase) in property held for sale or financing 262 (632) (474) Proceeds from divestitures 133 434 1,479 Proceeds from real estate financing and other 158 27 179 Other, net (60) 43 (244) Capital expenditures (678) (343) (540) --------- ---------- --------- NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (185) (471) 400 --------- ---------- --------- Cash Flows From Financing Activities Proceeds from issuance of long-term debt and notes payable 337 1,202 1,948 Change in common stock 37 34 3 Proceeds from issuance of convertible preferred securities -- 971 -- Dividends paid -- -- (283) Refinancing costs related to long-term debt and notes payable (15) (212) -- Payments on capital lease obligations (112) (114) (160) Payments on long-term debt (811) (2,855) (983) --------- ---------- --------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (564) (974) 525 --------- ---------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 92 (677) 736 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 406 1,083 347 --------- ---------- --------- Cash and cash equivalents, end of year $ 498 $ 406 $ 1,083 ========= ========== =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Kmart Corporation 1997 Annual Report 24 9 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SERIES B, C TREASURY SHARES AND D CAPITAL AND PERFORMANCE FOREIGN CONVERTIBLE IN EXCESS RESTRICTED STOCK CURRENCY PREFERRED COMMON OF PAR RETAINED DEFERRED TRANSLATION DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA STOCK STOCK VALUE EARNINGS COMPENSATION ADJUSTMENT - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 25, 1995 $ 132 $ 465 $ 1,505 $ 4,074 $ (86) $ (58) Net loss for the year (571) Cash dividends declared: Common, $.36 per share (165) Series C convertible preferred (6) Common issued from redemption of Series C and D convertible preferred (132) 20 112 Foreign currency translation adjustment (6) Other 1 7 (6) (6) ------- ------- ------- ------- ------- --------- Balance at January 31, 1996 -- 486 1,624 3,326 (92) (64) Net loss for the year (220) Treasury shares reissued to retirement savings plan (19) 53 Foreign currency translation adjustment (6) Other 3 (1) 2 ------- ------- ------- ------- ------- --------- Balance at January 29, 1997 -- 486 1,608 3,105 (37) (70) Net income for the year 249 Treasury shares reissued to retirement savings plan (4) 23 Foreign currency translation adjustment 67 Other 3 16 (11) (1) ------- ------- ------- ------- ------- --------- Balance at January 28, 1998 $ -- $ 489 $ 1,620 $ 3,343 $ (15) $ (3) ======= ======= ======= ======= ======= =========
PREFERRED STOCK, AUTHORIZED 10,000,000 SHARES, NO PAR VALUE. SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Kmart Corporation 1997 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 investment consists of 49% of 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. Investments in affiliated retail companies owned 20% or more are accounted for by 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 1997 and 1996 each consisted of 52 weeks and ended on January 28, 1998 and January 29, 1997, respectively. Fiscal year 1995 consisted of 53 weeks and ended on January 31, 1996. Cash: Cash and cash equivalents include all highly liquid investments with maturities of three months or less. Included in cash and cash equivalents are temporary investments of $241 and $131, at year end 1997 and 1996, 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 $5,990, $5,883 and $5,518 of inventory as of year end 1997, 1996 and 1995, respectively. Inventories valued on LIFO were $457, $440 and $485 lower than amounts that would have been reported using the first-in, first-out (FIFO) method at year end 1997, 1996 and 1995, 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 property held for sale or financing. 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, and 3 to 17 years for furniture and fixtures. Financial Instruments: Cash and cash equivalents, accounts receivable, 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 8 and 10. 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. 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". Pre-Opening and Closing Costs: Costs associated with the opening of a new store are expensed during the first full month of operations. When the decision to close a retail unit is made, any future net lease obligation and nonrecoverable 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 $420, $385 and $459 in 1997, 1996 and 1995, 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 all 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. Earnings (Loss) Per Common Share: Effective for its January 28, 1998 consolidated financial statements, Kmart adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share," ("FAS 128"). FAS 128 replaces the presentation of primary earnings per share ("EPS") and fully diluted EPS with a presentation of basic EPS and diluted EPS, respectively. 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 1997 presentation. Kmart Corporation 1997 Annual Report 26 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 2) Subsequent Events In February 1998, the Company's minority interest in Kmart Canada Co. was purchased by Hudson's Bay Co. Under the terms of the purchase, Kmart will receive approximately $8 for its remaining equity interest in Kmart Canada Co., along with $79 for repayment of its note and debentures. In the first quarter of 1998, the Company's requirement to maintain collateral under the revolving credit facility will be eliminated. 3) Discontinued Operations and Dispositions Discontinued operations for 1997 include Builders Square, Inc. ("Builders Square"). Discontinued operations for 1996 and prior, include Builders Square, Borders Group, Inc. ("Borders Group"), OfficeMax, Inc. ("OfficeMax"), The Sports Authority, Inc. ("The Sports Authority"), Thrifty PayLess Holdings, Inc. ("TPH"), Coles Myer, Ltd. ("Coles Myer"), and Furr's/Bishop's, Inc. ("Furr's"). 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. In the third quarter of 1997, the Company completed the sale of substantially all of the assets of its subsidiary, Builders Square, to an affiliate of Leonard Green & Partners, L.P. The net proceeds from the sale approximated book value. 1996 Activity During the first half of 1996, the Company received $70 from the sale of approximately 33% of its investment in the common stock of TPH and revalued its remaining investment by recording a $61 loss from discontinued operations, net of income taxes. In the fourth quarter, Rite Aid Corporation ("Rite Aid") merged TPH into Rite Aid and exchanged 0.65 of its shares for each share of TPH. Kmart sold its Rite Aid shares received resulting in net proceeds of approximately $257 and a pretax gain of $108, which was included in other gains and losses. In the first quarter, the Company completed the sale of its store operations in the Czech and Slovak Republics and received net proceeds of $115. In the fourth quarter of 1996, the Company recorded a $385 after tax charge as a result of its plan to dispose of Builders Square. This charge was included in loss on disposal of discontinued operations. The Company also recorded a pretax charge of $98, relating to the anticipated losses on the disposal of its international operations. This charge was included in other gains and losses. 1995 Activity Borders Group's initial public offering ("IPO") was completed in the second quarter of 1995. In this IPO, Kmart sold 87% of its equity interest in Borders Group for net proceeds of approximately $493. Borders Group purchased Kmart's remaining 13% interest in the second quarter which resulted in net proceeds of approximately $73. The effect of these transactions was an after tax loss of $185. OfficeMax completed the public offering of Kmart's remaining equity interest in the second quarter. Kmart received net proceeds of approximately $360 and recorded an after tax gain of $107. The Sports Authority completed the public offering of Kmart's remaining equity interest in the third quarter. Kmart received approximately $151 in net proceeds and recorded an after tax gain of $48. In the fourth quarter, Kmart sold the assets of its automotive service centers to Penske Auto Centers, Inc. for $84. Under the terms of the agreement, the centers continue to operate at Kmart locations in exchange for various rents and fees for services provided by Kmart. The Company also sold certain senior notes of TPH acquired in 1993 in connection with the sale of PayLess Drug Stores Northwest, Inc., for approximately $102. In the fourth quarter of 1995, the Company and its subsidiaries adopted Financial Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"). Based on management's considerations of the current and expected operating cash flow together with a judgment as to the fair value the Company could receive upon the sale of its investments in certain international operations, the Company recorded a $162 pretax charge, $150 after tax, which was included in other gains and losses. In addition, Builders Square recorded an after tax charge of $240 related to its adoption of FAS 121. Kmart Corporation 1997 Annual Report 27 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 4) Restructuring and Other Charges In 1993, the Board of Directors approved a restructuring plan. The restructuring provision of $904 included anticipated costs associated with Kmart stores which were to be closed and relocated, enlarged or refurbished in the U.S. and Canada. These costs included lease obligations for store closings as well as fixed asset writedowns and inventory dispositions. Cash costs related to the 1993 restructuring reserve amounted to $105, $129 and $117 for 1997, 1996 and 1995, respectively. Noncash charges were $28, $61 and $134 for the same periods, respectively. The remaining restructuring obligation is included primarily in "other long-term liabilities" in the consolidated balance sheets. In 1995, the Company entered into agreements whereby holders of approximately $550 of certain real estate related debt agreed to eliminate put features which would have required Kmart to purchase the debt from the holders if Kmart's long-term debt rating was lowered to non-investment grade. In the fourth quarter of 1995, the Company recorded an extraordinary noncash charge of $51, net of income taxes, relating to various expenses and make whole premiums payable under such agreements. 5) Property and Equipment
YEAR END ---------------------- 1997 1996 - -------------------------------------------------------------- Property owned: Land $ 319 $ 346 Buildings 822 995 Leasehold improvements 1,834 1,470 Furniture and fixtures 4,832 5,050 Construction in progress 60 87 ------- ------- Total owned 7,867 7,948 Property under capital leases 2,264 2,820 ------- ------- 10,131 10,768 Less-accumulated depreciation and amortization: Property owned (3,427) (3,487) Property under capital leases (1,232) (1,541) ------- ------- Total $ 5,472 $ 5,740 ======= =======
The following table provides a breakdown of the number of stores leased compared to owned:
YEAR END --------------------- 1997 1996 - --------------------------------------------------------------- Number of U.S.Kmart Stores Owned 105 118 Number of U.S.Kmart Stores Leased 2,031 2,016
6) Investments in Affiliated Retail Companies 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 $210, $211 and $220, in 1997, 1996 and 1995, respectively. The Company received dividends from Meldisco in 1997, 1996 and 1995 of $36, $64 and $52, respectively.
FISCAL YEAR ----------------------------------- MELDISCO INFORMATION 1997 1996 1995 - ----------------------------------------------------------------- Net sales $ 1,142 $ 1,109 $ 1,141 Gross profit 491 476 487 Net income 74 74 79 Inventory $ 142 $ 134 $ 135 Other current assets 17 24 74 Non-current assets -- 1 1 --------- -------- --------- Total assets 159 159 210 Current liabilities 24 25 15 --------- -------- --------- Net assets $ 135 $ 134 $ 195 ========= ======== ========= Equity of Kmart $ 65 $ 65 $ 94 ========= ======== =========
Unremitted earnings included in consolidated retained earnings were $42, $41 and $72 at year end 1997, 1996 and 1995, respectively. 7) Other Commitments and Contingencies Kmart has outstanding guarantees for property leased by certain formerly owned subsidiaries as follows:
Gross Present Value Lease at 7% -------------------- 1997 1997 1996 - -------------------------------------------------------------- Furr's $ 134 $ 193 $ 199 Borders Group 114 205 218 Office Max 111 168 186 The Sports Authority 250 424 453 Builders Square 849 1,568 1,655 --------- --------- --------- Total $ 1,458 $ 2,558 $ 2,711 ========= ========= =========
As of January 28, 1998, Kmart has guaranteed $139 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. Kmart Corporation 1997 Annual Report 28 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 8) LONG-TERM DEBT AND NOTES PAYABLE
YEAR END FISCAL YEAR INTEREST ------------------- TYPE MATURITY RATES 1997 1996 - ---------------------------------------------------------------------------- Term loan 1997 7.8% $ -- $ 600 Debentures 2005-2023 7.8%-12.5% 967 995 Medium-term notes 1998-2020 6.8%-9.8% 512 682 CMBS 2002 Floating 324 -- --------- -------- Total 1,803 2,277 Current portion (78) (156) --------- -------- Long-term debt $ 1,725 $ 2,121 ========= ========
In the first quarter of 1997, the Company transferred to Troy CMBSProperty, L.L.C., an affiliated Delaware limited liability company, 81 store properties (the "Properties") with a net book value of $964 which were then leased back to the Company. Simultaneously with such transfer of the Properties, Troy CMBS Property, L.L.C. completed a $335 offering of commercial mortgage pass through certificates, secured by mortgages on the Properties. The mortgages and the mortgage notes have been purchased by Kmart CMBS Financing, Inc., a Delaware corporation wholly owned by the Company, and assigned to the trustee of the security holders. The mortgage loan is subject to monthly payments of interest and principal, according to a schedule which amortizes the initial outstanding principal amount over approximately 15 years with a balloon payment of approximately $261 on the scheduled maturity date in February 2002. The CMBSweighted average interest rate is 1 month LIBOR plus 47 basis points. In the second quarter of 1996, the Company entered into a $3.7 billion credit agreement with a group of financial institutions which provides for (i) a three year $2.5 billion secured revolving credit facility ("Revolver") and (ii) a three year $1.2 billion secured term loan ("Term Loan"). The Term Loan was repaid in full in March 1997. In the second quarter of 1997, the revolving credit agreement was amended to extend the maturity to June 2000, and reduce the commitment fee and interest rate spreads to 0.3% and LIBORplus 125 basis points, respectively. Based on the Company's continued improved performance during 1997, the commitment fee and interest rate spreads were further reduced to 0.25% and LIBORplus 100 basis points. The Company has met the financial requirements to release collateral under the revolving credit agreement upon delivery of the 1997 audited annual financial statements. The Revolver contains certain affirmative and negative covenants customary to these types of agreements. The Company is in compliance with all such covenants. As of January 28, 1998 and January 29, 1997, there were no outstanding amounts under the Revolver. 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 $1,817 at year end 1997, and approximated book value at year end 1996. The principal maturities of long-term debt for the five years subsequent to 1997 are: 1998-$78, 1999-$77, 2000-$73, 2001-$68, 2002-$357 and 2003 and later-$1,150. Cash paid for interest was $333, $459 and $467 in 1997, 1996 and 1995, respectively. 9) 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. Selling space has been sublet to other retailers, including Penske Auto Centers, Inc. and the Meldisco subsidiaries of FTS, in certain of Kmart's leased facilities.
Minimum Lease Commitments ------------------------- As of January 28, 1998 Capital Operating - ---------------------------------------------------------------------------- Fiscal Year: 1998 $ 286 $ 528 1999 274 516 2000 258 505 2001 247 499 2002 238 486 Later years 2,052 6,232 --------- --------- Total minimum lease payments 3,355 8,766 Less-minimum sublease income -- (3,631) --------- --------- Net minimum lease payments 3,355 $ 5,135 ========= Less: Estimated executory costs (926) Amount representing interest (1,163) --------- 1,266 Current (87) --------- Long-term $ 1,179 ========= RENT EXPENSE 1997 1996 1995 - ---------------------------------------------------------------------------- Minimum rentals $ 673 $ 642 $ 649 Percentage rentals 39 36 35 Less-sublease rentals (234) (236) (232) ----- ----- ----- Total $ 478 $ 442 $ 452 ===== ===== =====
Kmart incurred capital lease obligations to obtain store facilities and equipment of $9 and $21 in 1997 and 1995, respectively. There were no capital lease obligations incurred in 1996. Kmart Corporation 1997 Annual Report 29 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 10) 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 proceeds of which were invested by the trust in $1 billion aggregate principal amount of the Company's newly issued 7-3/4% Convertible Junior Subordinated Debentures ("Debentures"). The Preferred Securities accrue and pay cash distributions quarterly at a rate of 7-3/4% per annum of the stated liquidation amount of $50 per Preferred Security. Kmart has guaranteed, on a subordinated basis, distributions and other payments due on the Preferred Securities. The 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 are callable beginning June 15, 1999. Based on the quoted market prices, the fair value of the Preferred Securities was approximately $1,040 as of year end 1997, and approximated book value at year end 1996. 11) Income Taxes
INCOME (LOSS) BEFORE INCOME TAXES 1997 1996 1995 - --------------------------------------------------------------- U.S. $ 390 $ 351 $ (114) Foreign 28 (21) (199) ------ ------ ------- Total $ 418 $ 330 $ (313) ====== ====== ======= INCOME TAX PROVISION (CREDIT) 1997 1996 1995 - --------------------------------------------------------------- Current: Federal $ (126) $ 54 $ (164) State and local (5) 5 -- Foreign 11 17 (3) ------- ------ ------- (120) 76 (167) Deferred: Federal 240 (7) 96 Foreign -- (1) (12) ------- ------ ------- Total $ 120 $ 68 $ (83) ======= ======= ======= EFFECTIVE TAX RATE RECONCILIATION 1997 1996 1995 - --------------------------------------------------------------- Federal income tax rate 35.0% 35.0% (35.0%) State and local taxes, net of federal tax benefit (0.8) 0.9 -- Tax credits (1.9) -- (2.5) Equity in net income of affiliated companies (2.3) (3.1) (3.4) Valuation allowance -- -- 18.4 International tax rate and basis differential -- (13.9) (4.2) Other (1.3) 1.6 0.1 ----- ----- ------ 28.7% 20.5% (26.6%) ===== ===== ======
YEAR END DEFERRED TAX -------------------- ASSETS AND LIABILITIES 1997 1996 - ------------------------------------------------------------- Deferred tax assets: Federal benefit for state and foreign taxes $ 27 $ 28 Discontinued operations 135 413 Accruals and other liabilities 258 174 Capital leases 101 132 Store restructuring 94 136 Other 182 129 ------ ------ Total deferred tax assets 797 1,012 ------ ------ Deferred tax liabilities: Inventory 272 281 Property and equipment 417 455 Valuation allowance -- 50 Other 23 9 ------ ------ Total deferred tax liabilities 712 795 ------ ------ Net deferred tax assets $ 85 $ 217 ====== ======
The Company has available alternative minimum tax credit carryforwards of approximately $137 which may be carried forward indefinitely. Cash paid (received) for income taxes was $7, $(238), and $80 in 1997, 1996 and 1995, respectively. 12) Common and Treasury Stock
SHARES (000's) 1997 1996 1995 - ----------------------------------------------------------------- Common Shares: Beginning of the year 486,996 486,511 464,550 Sold under stock option plan 1,469 49 171 Issued under performance restricted stock plan 1,220 420 504 Issued under directors stock plan 5 21 9 Issued from redemption of Series C and D convertible preferred -- -- 21,314 Forfeited or withheld under performance restricted stock plan (879) (5) (37) ------- ------- ------- End of the year 488,811 486,996 486,511 ======= ======= ======= Treasury Shares: Beginning of the year 2,261 5,883 5,883 Reissued shares for the retirement savings plan (1,635) (3,622) -- ------- ------- ------- End of the year 626 2,261 5,883 ======= ======= =======
As of the end of 1997, the Board of Directors has approved the repurchase of 2,000,000 shares of Kmart common stock to be used to fund the Retirement Savings Plan and other employee benefit plans or trusts. Kmart Corporation 1997 Annual Report 30 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 13) Pension Plans 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. As a result of freezing the plans, the Company recorded a pretax curtailment gain of $121, included in other gains and losses, in the first quarter of 1995. Benefits paid to retirees are based upon age at retirement and years of credited service and earnings as of January 31, 1996. Kmart's policy is to fund at least the minimum amounts required by the Employee Retirement Income Security Act of 1974. The plans' assets consist primarily of equity securities, fixed income securities and real estate. Kmart contributed $6 to its principal pension plan during fiscal 1995. No contributions were made in fiscal 1997 or 1996. The total consolidated pension expense (income) was $(63), $(32) and $42 in 1997, 1996 and 1995, respectively. The following tables summarize the funded status, components of pension cost and actuarial assumptions for Kmart's employee pension plans.
YEAR END --------------------------------- 1997 1996 - ---------------------------------------------------------------------------- Actuarial value of benefit obligations: Present value of vested benefits $ (1,927) $ (1,699) Present value of non-vested benefits (128) (92) -------- -------- Projected benefit obligation (PBO) (2,055) (1,791) Market value of assets 2,219 1,974 Voluntary early retirement lump sum payout (277) -- -------- -------- Plan assets over (under) PBO (113) 183 Unrecognized transition asset (63) (80) Unrecognized (gain) loss 72 (157) -------- -------- Accrued pension costs $ (104) $ (54) ======== ======== PENSION COST (INCOME) 1997 1996 1995 - ---------------------------------------------------------------------------- Normal service cost $ -- $ -- $ 51 Interest cost on PBO 139 132 133 Return on assets (334) (273) (378) Net amortization and deferral 132 100 232 -------- -------- ------- Total $ (63) $ (41) $ 38 ======== ======== ======= Actuarial assumptions: Discount rates 6.75% 7.75% 7.25% Expected return 10.00% 9.50% 9.50% Salary increases -- -- 4.50%
The Company has a non-qualified plan for directors and officers which was unfunded as of year end 1997 and 1996. Total benefits under the plan totaled $36 and $35, at the end of 1997 and 1996, respectively. 14) Other Postretirement and Postemployment Benefit Plans 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 postretirement benefit costs were $70 and $78 at the end of 1997 and 1996, respectively. 15) Retirement Savings Plan The Retirement Savings Plan provides that associates of Kmart who have completed six months of service 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 has a profit sharing feature whereby the Company makes contributions based on profits, with minimum yearly contributions required of $30. Kmart's expense related to the Retirement Savings Plan was $69 in 1997 and $71 in both 1996 and 1995. Kmart Corporation 1997 Annual Report 31 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 16) Stock Option Plans The Company applies APB Opinion 25 and related interpretations in accounting for its stock option and restricted stock plans. Accordingly, no compensation cost has been recognized for its 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 for awards under those plans consistent with the method of FAS 123, the Company's net income would have been reduced by $27, $22 and $3 for 1997, 1996 and 1995, respectively, and earnings per share would have been reduced by $0.06, $0.05 and $0.01 for 1997, 1996 and 1995, respectively. 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 the following weighted-average assumptions used for grants in 1997, 1996 and 1995, respectively: expected volatility of .3902, .3788 and .2980, dividend yield of 0%, risk-free interest rates of 6.47%, 6.05% and 5.98%; and expected lives of 5 years. The weighted-average fair value per share of options granted in 1997, 1996 and 1995 were $5.37, $3.37 and $4.52, respectively. Options vest over 3 years on a graduated basis with a term of 10 years. Under the Performance Restricted Stock Plan, the Board of Directors may grant awards of common stock to officers and other key employees of Kmart and its subsidiaries. As of January 28, 1998, there were awards for 3,240,000 shares outstanding and shares available for grant of 155,278.
STOCK OPTION PLANS (000'S) SHARES OPTION PRICE - ---------------------------------------------------------------- January 31, 1996 Outstanding 26,466 $6.31 - $26.03 Granted 14,303 7.00 - 12.50 Exercised (49) 7.81 Forfeited (23,753) 6.31 - 26.03 -------- January 29, 1997 Outstanding 16,967 6.31 - 26.03 Granted 7,233 10.79 - 14.85 Exercised (1,507) 7.81 - 12.38 Forfeited (1,705) 7.81 - 21.94 -------- January 28, 1998 Outstanding 20,988 6.31 - 26.03 Exercisable 5,539 7.81 - 26.03 Available for grant 22,903
17) 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.
- -------------------------------------------------------------------------- 1997 First Second Third Fourth - -------------------------------------------------------------------------- Sales $ 7,263 $ 7,846 $ 7,315 $ 9,759 Cost of sales 5,637 6,197 5,683 7,635 Net income from continuing operations 14 31 18 186 Net income 14 31 18 186 Basic Earnings per share Continuing $ .03 $ .06 $ .04 $ .38 Net .03 .06 .04 .38 Diluted Earnings per share Continuing $ .03 $ .06 $ .04 $ .35 Net .03 .06 .04 .35 Common stock price High $ 13-5/8 $ 14-1/2 $ 15-1/16 $ 13-13/16 Low 10-5/8 10-3/8 11-3/8 10-5/8
- ------------------------------------------------------------------------------ 1996 FIRST SECOND THIRD FOURTH - ------------------------------------------------------------------------------ Sales $ 6,975 $ 7,566 $ 7,212 $ 9,684 Cost of sales 5,398 5,875 5,528 7,589 Net income (loss) from continuing operations (36) 23 8 236 Net income (loss) (99) 34 9 (164) Basic Earnings (loss) per share Continuing $ (.08) $ .05 $ .02 $ .49 Net (.21) .07 .02 (.34) Diluted Earnings (loss) per share Continuing $ (.08) $ .05 $ .02 $ .45 Net (.21) .07 .02 (.27) Common stock price High $ 10-5/8 $ 14 $ 11-1/8 $ 11-3/8 Low 6-5/8 9-3/4 9-1/4 9-1/2
The Preferred Securities were not included in the calculation of diluted EPS for the first, second and third quarters of 1997, and for the second and third quarters of 1996 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 all respective quarters except the second quarter of 1996 which would have been $0.01 higher and would have been $0.02 higher for fiscal 1997 and 1996. As of January 28, 1998, there were approximately 90,000 Kmart common shareholders of record. In addition, there were approximately 365,000 street name holders of Kmart common stock. Kmart common stock is listed on the New York, Pacific and Chicago stock exchanges (trading symbol KM). Kmart Corporation 1997 Annual Report 32 EX-23 6 EXHIBIT 23 1 EXHIBIT 23 KMART CORPORATION AND SUBSIDIARY COMPANIES EXHIBIT 23-CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Registration Statement Nos. 33-54879, 33-48490, 33-48673, 33-52797, and 33-52799) of Kmart Corporation of our report dated March 3, 1998 appearing on page 22 of the Annual Report to Shareholders which is incorporated by reference in this Annual Report on Form 10-K for the year ended January 28, 1998. /s/ Price Waterhouse LLP Price Waterhouse LLP Bloomfield Hills, Michigan April 13, 1998 EX-27.1 7 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR JAN-28-1998 JAN-30-1997 JAN-28-1998 257 241 441 0 6,367 7,476 10,131 4,659 13,558 3,274 1,725 981 0 489 4,945 13,558 32,183 32,183 25,152 25,152 0 0 363 418 120 249 0 0 0 249 (.51) (.51)
EX-27.2 8 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR JAN-29-1997 FEB-01-1996 JAN-29-1997 381 25 441 0 6,354 7,733 10,768 5,028 14,286 3,602 2,121 980 0 486 4,606 14,286 31,437 31,437 24,390 24,390 0 0 453 330 68 231 (451) 0 0 (220) (.45) (.45)
EX-27.3 9 EXHIBIT 27.3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR JAN-31-1996 JAN-26-1995 JAN-31-1996 1,076 7 335 0 6,022 8,553 10,116 4,751 15,033 2,995 3,922 0 0 486 4,794 15,033 31,713 31,713 24,675 24,675 0 0 434 (313) (83) (230) (290) (51) 0 (571) (1.25) (1.25)
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