-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, fR9AHJMqSXxDyo4GXDw1iH1YOtfgDhF3hANiJTeSeSYbN5msA21zJAQqotCCEiyS gpR2xBWnjcq7q8TEiO66uw== 0000950124-95-001102.txt : 19950417 0000950124-95-001102.hdr.sgml : 19950417 ACCESSION NUMBER: 0000950124-95-001102 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19950125 FILED AS OF DATE: 19950413 SROS: MSE SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KMART CORP CENTRAL INDEX KEY: 0000056824 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 380729500 STATE OF INCORPORATION: MI FISCAL YEAR END: 0129 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-00327 FILM NUMBER: 95528790 BUSINESS ADDRESS: STREET 1: 3100 W BIG BEAVER RD CITY: TROY STATE: MI ZIP: 48084 BUSINESS PHONE: 3136431000 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-K405 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 25, 1995 or __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________. Commission File No. 1-327 KMART CORPORATION (Exact name of registrant as specified in its charter) Michigan 38-0729500 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3100 West Big Beaver Road - Troy, Michigan 48084 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code (810) 643-1000 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. [X] The aggregate market value of voting stock including common stock and Series C convertible preferred stock, held by non-affiliates of the registrant on March 24, 1995 was $6,087,285,088. The market value of the common stock is based on the closing price on the New York Stock Exchange on such date. The market value of the Series C convertible preferred stock is based on the current conversion formula for the stock. As of March 24, 1995, 458,698,719 shares of Common Stock of the Registrant, held by 95,191 shareholders, were outstanding. Portions of the Registrant's 1994 Annual Report to Shareholders are incorporated by reference into Parts I, II and IV of this report. Portions of the Registrant's Proxy Statement prepared for the 1995 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") 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 dominant portion of the Registrant's operations is in a single industry: general merchandise retailing through the operation of a chain of Kmart discount stores in all 50 states and Puerto Rico. At January 25, 1995, Kmart operated 2,316 Kmart stores including 67 Super Kmart Centers. In the United States, Kmart general merchandise retail operations are located in 50 states and in 246 of the country's 250 Metropolitan Statistical Areas (MSAs) as well as in 72 of the country's 73 Primary Metropolitan Statistical Areas (PMSAs). In addition, Kmart's stores are located in all of the 3 MSAs and 3 PMSAs in Puerto Rico. Kmart stores are generally one-floor, free-standing units. Kmart general merchandise stores range from 40,000 to 120,000 square feet with the majority of stores which have been modernized in the range of 85,000 to 120,000 square feet. Super Kmart Centers range from 135,000 to 185,000 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. International General Merchandise Operations Kmart Canada Limited - At January 25, 1995, Kmart Canada operated 128 Kmart stores and 1 Kresge store located in all ten provinces. The Kmart stores in Canada range in size from 45,000 to 97,000 square feet and offer a wide variety of general merchandise at discount prices. Czech Republic and Slovakia - In 1992, Kmart acquired over 93% of a Czech Republic company which operated one of the largest department stores in Prague, as well as two companies which operated 12 department stores located in the Czech Republic and Slovakia. These acquisitions marked Kmart's initial entry into the Central European retail market. Kmart is developing advanced distribution methods and merchandising skills to modernize, refurbish and streamline operations in these two Central European countries. Mexico - In 1993, Kmart entered into a joint venture with El Puerto de Liverpool, S.A. de C.V. to build and operate grocery and general merchandise stores in Mexico that are patterned after the Super Kmart Centers in the United States. At January 25, 1995, the joint venture company operated two stores in Mexico. The joint venture company opened two more stores in March 1995. Singapore - In 1993, Kmart entered into a joint venture with Metro (Private) Limited to open and operate Kmart stores in Singapore. At January 25, 1995, the joint venture company operated two stores in Singapore and currently anticipates opening one store in fiscal 1995. Current Specialty Retail Operations As of January 22, 1995, Borders Group, Inc. ("Borders Group"), through its primary subsidiaries Borders, Inc. ("Borders") and Walden Book Company, Inc. ("Walden"), operated 53 books and music superstores and 22 large format book superstores under the Borders name and 1,102 mall-based and other bookstores primarily under the Waldenbooks name. Borders Group is also expanding rapidly in the pre-recorded music business through the introduction of an extensive selection of pre-recorded music in its Borders books and music superstores, and the acquisition in 1994 of Planet Music, Inc., a music superstore chain currently operating 10 stores under the names of Planet Music and CD Superstore. At January 22, 1995, Builders Square, Inc. ("Builders Square") operated 166 home improvement stores in 24 states and Puerto Rico, of which 75 were Builders Square I stores and 91 were Builders Square II stores which have an easier-to-shop layout that utilizes a "store-within-a-store" format with substantially increased customer service levels over existing Builders Square I stores. Builders Square's large format superstores emphasize customer service and provide an extensive selection of quality products and services to repair, 2 3 remodel, redecorate and maintain both home and garden. Information regarding the Registrant's business description, consolidated operations and analysis of Kmart Group, U.S. General Merchandise, International General Merchandise and Current Specialty Retail operations appearing in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 9 through 28 of the Registrant's 1994 Annual Report to Shareholders, is incorporated herein by reference. Information regarding the Registrant's subsidiary public offerings, discontinued operations and dispositions, and acquisitions appearing in the "Notes to Consolidated Financial Statements" on pages 36 through 38 of the Registrant's 1994 Annual Report to Shareholders, is incorporated herein by reference. Information regarding the Registrant's business group information, appearing in the "Notes to Consolidated Financial Statements" on pages 48 through 49 of the Registrant's 1994 Annual Report to Shareholders, is incorporated herein by reference. Competition Kmart is one of the world's largest mass merchandise retailers and has several major competitors on a national level, including Dayton-Hudson, J.C. Penney, Sears and Wal-Mart, and many competitors on a local level which compete with Kmart's individual stores. Success in the competitive market is based on factors such as price, quality, service, product mix and convenience. Seasonality The Registrant's business is highly seasonal and depends to a significant extent on the results of operations for the last quarter of the fiscal year. Credit Sales The Registrant does not have a significant customer credit function of its own. However, substantially all the Registrant's stores accept major bank credit cards as payment for merchandise. Employees The Registrant employed approximately 348,000 persons as of January 25, 1995. 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 25, 1995, the Registrant, its subsidiaries and the joint ventures to which it is a party, operated a total of 2,481 general merchandise stores: 2,335 in the United States and Puerto Rico, 129 in Canada, 13 in the Czech Republic and Slovakia, and 2 in each of Mexico and Singapore, as well as 1,353 specialty retail units in the United States. With the exception of 65 store facilities which are either partially or wholly owned, the Registrant leases its store facilities. The Registrant owns its International Headquarters and one administrative building in Troy, Michigan and leases administrative buildings in Royal Oak, Michigan and North Bergen, New Jersey. The Registrant expects to relocate its North Bergen administrative operations to Troy during fiscal 1995. The Registrant leases 19 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 444 parcels not currently used for store operations, the majority of which are rented to others. Kmart Canada Limited owns its administrative facility in Brampton, Ontario, Canada and leases 126 of its 129 store locations. Kmart Canada Limited also leases four of its five distribution centers. 3 4 Three subsidiaries of the Registrant own 13 department stores and various other properties in the Czech Republic and Slovakia. Kmart Mexico S.A. de C.V. leases its administrative facility in Mexico City, Mexico and owns all four of its store locations, of which two were opened in March 1995. Kmart Mexico S.A. de C.V. also leases its distribution center located in Laredo, Texas. Kmart Metro (Private) Limited leases its administrative facility in Singapore and leases both of its store locations. Kmart Metro (Private) Limited also leases its distribution center. Builders Square, Inc. owns its administrative facility in San Antonio, Texas and leases 160 of its 166 store locations. Borders leases 71 of its 75 store locations. Borders also leases its main headquarters and owns a distribution facility located outside Ann Arbor, Michigan. Borders is currently building a new headquarters located in Ann Arbor, Michigan. Upon completion of construction, it intends to sell the facility and lease it back. Borders leases four other distribution centers. Walden leases all of its 1,102 store locations as well as two distribution facilities. Walden owns its corporate headquarters facility located in Stamford, Connecticut. Borders Group expects to relocate Walden's headquarters during 1995 in order to better coordinate its operations with Borders and allow for streamlining and combination of certain management and administrative functions. Planet Music, Inc. leases all of its 10 stores and its administrative facility located in Durham, North Carolina. The Registrant intends to sell and lease-back or mortgage the majority of its owned but unfinanced retail properties. A description of the Registrant's leasing arrangements, appearing in the "Notes to Consolidated Financial Statements" on pages 46 through 47 of the Registrant's 1994 Annual Report to Shareholders, is incorporated herein by reference. Item 3.Legal Proceedings The Registrant and its subsidiaries are parties to a substantial number of legal proceedings, most of which are routine and all of which are incidental to their 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. 4 5 Executive Officers of the Registrant The following table sets forth information concerning the executive officers of the Registrant as of March 28, 1995. 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.
Served In Position Name Position Age Since ----------------------------------- --------------------------------------- --- ----------- Anthony N. Palizzi Interim President/Executive Vice President, 52 3/95 General Counsel Charles Chinni Executive Vice President, Merchandising 51 2/95 Ronald J. Floto Executive Vice President and President, Super 52 10/94 Kmart Centers Donald W. Keeble Executive Vice President, Store Operations 46 2/95 Thomas F. Murasky Executive Vice President and Chief 49 12/91 Financial Officer Marvin P. Rich Executive Vice President, Strategic Planning, 49 10/94 Finance and Administration Joseph R. Thomas Executive Vice President, 59 3/95 Special Projects Kenneth W. Watson Executive Vice President, Marketing and Product 52 10/94 Development Frederic M. Comins, Jr. Senior Vice President, Executive and 46 11/92 Organization Resources Paul J. Hueber Senior Vice President, Sales and Operations 46 1/94 Anthony R. Mauro Senior Vice President, Distribution 60 2/91 and Transportation Virginia G. Rago Senior Vice President, Chief Information Officer 43 1/95 Michael L. Skiles Senior Vice President, Corporate Facilities 49 2/91 William D. Underwood Senior Vice President, Vendor and Product 54 5/94 Development Thomas W. Watkins Senior Vice President, International Operations 49 1/93 Ronald L. Buch Vice President, General Merchandise Manager - 60 1/95 Apparel and Accessories Dennis V. Carter Vice President, Food, Super Kmart Centers 47 2/95 James P. Churilla Vice President and Treasurer 53 7/87 James E. Ford Vice President, Eastern Region 52 2/91 Andrew A. Giancamilli Vice President, Pharmacy Operations and 44 3/95 Merchandise G. William Gryson, Jr. Vice President, Midwestern Region 53 1/94 Gerald K. Habeck Vice President, Advertising 52 6/91 Shawn M. Kahle Vice President, Corporate Affairs 37 1/95 Nancie W. LaDuke Vice President and Secretary 54 2/91 Michael T. Macik Vice President, Human Resources - 48 8/92 U.S. Kmart Stores David R. Marsico Vice President, Super Kmart Centers 46 2/93 Douglas M. Meissner Vice President, Western Region 46 1/94 Thomas M. Nielsen Vice President, Human Resources - International 51 6/94 Peter J. Palmer Vice President, Labor Relations and 54 2/88 Assistant General Counsel William H. Parker Vice President, General Merchandise Manager - 47 1/95 Home Decor Steven M. Szymanski Vice President, Finance and Accounting 32 3/95 John S. Valenti Vice President, Southern Region 54 2/91 Michael G. Wellman Vice President, Marketing 54 10/87
5 6 There is no family relationship between any of the foregoing persons. Each of the executive officers listed in the table above have served the Registrant in various executive capacities for the past five years, except for the following individuals: Charles Chinni joined the Registrant in February 1995 as Executive Vice President, Merchandising. Prior thereto, he was President, Merchandising of Macy's East in New York. Ronald J. Floto joined the Registrant in February 1995 as Executive Vice President and President, Super Kmart Centers. Prior thereto, he was Chairman, CEO, and President of Kash n' Karry Food Stores, Inc. Marvin P. Rich joined the Registrant in October 1994 as Executive Vice President, Strategic Planning, Finance and Administration. Prior thereto, he held the positions of Executive Vice President, Specialty Companies and Executive Vice President, Finance & Information Services at Wellpoint Health Networks/Blue Cross of California. Kenneth W. Watson joined the Registrant in October 1994 as Executive Vice President, Marketing and Product Development. Prior thereto, he held the positions of President and CEO at Little Switzerland, Inc., in St. Thomas, Virgin Islands. Prior to that, he was the CEO and President at Louis Vuitton Inc. in New York and CEO and Chairman at Gump's Inc. in San Francisco. Frederic M. Comins, Jr. was promoted to Senior Vice President, Executive and Organization Resources in November 1992. He joined the Registrant in July 1990 as Director, Executive Resources. Virginia G. Rago was promoted to Senior Vice President, Chief Information Officer in January 1995. Prior thereto, she held the positions of Vice President, Store Systems Development and Divisional Vice President, Information Systems, Kmart Fashions. Before that, she was Vice President, Software Development at PRJ&, Inc., and Senior Vice President, Logistics and Information Systems, Chief Information Officer at Hills Department Stores. Dennis V. Carter joined the Registrant in February 1995 as Vice President, Food, Super Kmart Centers. Prior thereto, he was an Executive Vice President at Kash n' Karry in Tampa, Florida. Andrew A. Giancamilli joined the Registrant in March 1995 as Vice President, Pharmacy Merchandising and Operations. Prior thereto, he was President and Chief Operating Officer at Perry Drug Stores, Inc. Before that, he also held the positions of Executive Vice President, Chief Operating Officer; Senior Vice President, Store Operations; and Vice President, Pharmacy Operations at Perry Drug Stores, Inc. Shawn M. Kahle was promoted to Vice President, Corporate Affairs in January 1995. Prior thereto, she held the positions of Divisional Vice President, Corporate and International Affairs and Director, Corporate Communications, and Manager, Executive Speeches. Before that, she worked as a Freelance Writer/Consultant in Detroit, Michigan. William H. Parker was promoted in January 1995 to Vice President, General Merchandise Manager - Home Decor. In August 1991, he was promoted to Vice President, Merchandising - Books and Sundries, and, prior to that, he held the newly created position of Vice President, Sales and Marketing. Steven M. Szymanski joined the Registrant in March 1995 as Vice President, Finance and Accounting. Prior thereto, he was Vice President, Finance and Controller at Perry Drug Stores, Inc. Before that, he was an Audit Manager at Arthur Andersen & Co. 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 the "Quarterly Stock Market Information and Dividend Highlights" appearing in the "Notes to Consolidated Financial Statements" on page 55 of the Registrant's 1994 Annual Report to Shareholders, is incorporated herein by reference. 6 7 Item 6.Selected Financial Data The "Selected Financial Data Summary" appearing on page 8 of the Registrant's 1994 Annual Report to Shareholders, insofar as it relates to the five years ended January 25, 1995, is incorporated herein by reference. Sales and store statistics for the three fiscal years ending January 25, 1995 appearing in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 9 through 28 of the Registrant's 1994 Annual Report to Shareholders, are incorporated herein by reference. Total square footage of General Merchandise retail selling area appearing in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 18 of the Registrant's 1994 Annual Report to Shareholders, is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In the first quarter of 1995, the Kmart Board of Directors approved a new profit sharing retirement program called "Partners Earning Profits" under which Kmart will make a minimum yearly profit sharing contribution of $30 million. If U.S. Kmart pre-tax profits exceed $750 million or 2.5% of sales, the company will make additional contributions to the program. Also, effective January 31, 1996, the Kmart Pension Plan will be frozen and associates will no longer earn additional benefits under this plan. However, all vested benefits will be preserved and paid out at the time associates become eligible to receive them under the plan. As a result of freezing the Pension Plan, the Registrant will record an estimated pretax curtailment gain of approximately $100 million in the first quarter of fiscal 1995. This curtailment gain is attributable to the change in liabilities resulting from the decision to freeze the plan. The gain is a preliminary estimate, subject to final determination of March pension plan investment performance and other reviews. The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on pages 9 through 28 of the Registrant's 1994 Annual Report to Shareholders, is incorporated herein by reference. Item 8.Financial Statements and Supplementary Data The financial statements of the Registrant consisting of the consolidated balance sheets at January 25, 1995 and January 26, 1994 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three fiscal years ended January 25, 1995, and the notes to consolidated financial statements, together with the report of Price Waterhouse LLP, appearing on pages 30 through 55 of the Registrant's 1994 Annual Report to Shareholders are incorporated herein by reference. Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors of the Registrant The information set forth under the caption "Election of Directors" on pages 2 through 7 of the Registrant's definitive Proxy Statement dated April 12, 1995 filed with the Securities and Exchange Commission pursuant to Regulation 14A is incorporated herein by reference. Item 11. Executive Compensation The information set forth on pages 8 through 14 of the Registrant's definitive Proxy Statement of the Registrant dated April 12, 1995 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 7 8 The information set forth on page 5 of the Registrant's definitive Proxy Statement dated April 12, 1995 filed with the Securities and Exchange Commission pursuant to Regulation 14A is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. Not applicable. 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 1994 Annual Report to Shareholders.
Page(s) in Registrant's Annual Report ------------- Report of Independent Accountants 30 Consolidated Statements of Income for each of the three fiscal years ended January 25, 1995 31 Consolidated Balance Sheets at January 25, 1995 and January 26, 1994 32 Consolidated Statements of Cash Flows for each of the three fiscal years ended January 25, 1995 33 Consolidated Statements of Shareholders' Equity for each of the three fiscal years ended January 25, 1995 34 Notes to Consolidated Financial Statements 35 through 55
The individual financial statements of the Registrant and of 50% or less owned persons have been omitted because they are not required. The condensed individual financial statements of 50% of less owned persons are included in the "Notes to Consolidated Financial Statements" appearing on pages 40 through 42 of the Registrant's 1994 Annual Report to Shareholders, which is incorporated herein by reference. 2. FINANCIAL STATEMENT SCHEDULE Report of Independent Accountants on Financial Statement Schedule For each of the three fiscal years ended January 25, 1995: X - Supplementary Income Statement Information All other schedules are omitted because they are not applicable or the required information is shown in the Registrant's 1994 Annual Report to Shareholders, which is incorporated herein by reference. 3. EXHIBITS 8 9 See Exhibit Index included in this report. b) REPORTS ON FORM 8-K The Registrant has filed one report on Form 8-K during the thirteen weeks ended January 25, 1995. The purpose of the report, dated November 4, 1994, was disclosure in connection with the sale of Series 1994A-5 Certificates. 9 10 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 10, 1995. 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 Anthony N. Palizzi ---------------------- (Anthony N. Palizzi) President By Thomas F. Murasky ----------------------- (Thomas F. Murasky) Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the Registrant and in the capacities indicated, on April 10, 1995. 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. Lilyan H. Affinito David B. Harper - --------------------------------------- ---------------------------------- Lilyan H. Affinito, Director David B. Harper, Director Joseph A. Califano, Jr. F. James McDonald - --------------------------------------- ---------------------------------- Joseph A. Califano, Jr., Director F. James McDonald, Director Willie D. Davis J. Richard Munro - --------------------------------------- ---------------------------------- Willie D. Davis, Director J. Richard Munro, Director Enrique C. Falla Donald S. Perkins - --------------------------------------- ---------------------------------- Enrique C. Falla, Director Donald S. Perkins, Director and Chairman of the Board Joseph P. Flannery - --------------------------------------- Joseph P. Flannery, Director Gloria M. Shatto ---------------------------------- Gloria M. Shatto, Director 10 11 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE TO THE BOARD OF DIRECTORS OF KMART CORPORATION Our audits of the consolidated financial statements referred to in our report dated February 27, 1995 appearing on page 30 of the 1994 Annual Report to Shareholders of Kmart Corporation (which reported and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K), also included an audit of the Financial Statement Schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Price Waterhouse LLP Detroit, Michigan February 27, 1995 11 12 KMART CORPORATION AND SUBSIDIARY COMPANIES SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
(MILLIONS) FISCAL YEAR ENDED ----------------------------------------- JANUARY 25, JANUARY 26, JANUARY 27, CHARGED TO COSTS AND EXPENSES 1995 1994 1993 - ----------------------------- ----------- ----------- ----------- ADVERTISING $458 $515 $506 ==== ==== ====
Advertising expense for the prior periods has been restated for discontinued operations. 12 13 EXHIBIT INDEX
Exhibit Number Description -------- ----------- (3a) Restated Articles of Incorporation of Kmart Corporation, as amended (3b) Restated Bylaws of Kmart Corporation, as amended **** (4) Certificate of Designation, Preferences and Rights Providing for an Issue of Preferred Stock Designated "Series C Convertible Preferred Stock"[4] ** (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 Supplemental Executive Retirement Plan [10c] [A] (10d) Kmart Corporation Directors Retirement Plan, as amended [A] *** (10e) Kmart Corporation Performance Restricted Stock Plan [10e] [A] (10f) Deferred Compensation Plan for Non-Employee Directors, as amended [A] (10g) Kmart Corporation 1992 Stock Option Plan, as amended [A] (10h) Kmart Corporation Directors Stock Option Plan, as amended [A] *** (10i) Form of Employment Agreement with Executive Officers [10j] [A] (10j) Kmart Corporation Executive Deferred Compensation Plan [A] (10k) Amended and Restated Kmart Corporation Annual Incentive Bonus Plan [A] (10l) Amended and Restated Kmart Corporation Management Stock Purchase Plan [A] (10m) Supplemental Pension Benefit Plan [A] (11) Statement Regarding Computation of Per Share Earnings (12) Statement Regarding Computation of Ratios (13) Annual Report to Shareholders of Kmart Corporation for the Fiscal Year Ended January 25, 1995 (21) List of Significant Subsidiaries of Kmart Corporation (23) Consent of Independent Accountants (27) Financial Data Schedules Notes: ----- * Filed as an Exhibit to the Form 10-K Report of the Registrant for the fiscal year ended January 29, 1992 (file number 1-327) and is incorporated herein by reference. ** 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 an Exhibit to the Form 10-Q Report of the Registrant for the quarter ended July 27, 1994 (file number 1-327) and is incorporated herein by reference. ["#"] Exhibit numbers in the Form 10-Q Report for the quarter ended July 27, 1994 and the Form 10-K Reports for the fiscal years ended; January 29, 1992, January 27, 1993, and January 26, 1994, respectively. [A] This document is a management contract or compensatory plan.
13 14 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: Kmart Corporation and The Bank of New York, Trustee Indenture dated as of February 1, 1985 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) 14 EX-3.(A) 2 EXHIBIT 3(A) 1 EXHIBIT 3(a) RESTATED ARTICLES OF INCORPORATION OF KMART CORPORATION A MICHIGAN CORPORATION December, 1994 2 KMART CORPORATION A MICHIGAN CORPORATION (INC., MARCH 9, 1916) I, , Secretary of Kmart Corporation, certify that the following is a true and complete copy of the Restated Articles of Incorporation of said Corporation as amended to the date of this certificate. In witness whereof, I have hereunto set my hand and affixed the seal of the Corporation at the City of Troy, Michigan this _____ day of ______, A.D. 19____. __________________________ Secretary 3 RESTATED ARTICLES OF INCORPORATION OF KMART CORPORATION 1. The present name of the corporation is Kmart Corporation. 2. All of the former names of the corporation are as follows: S. S. Kresge Company 3. The date of filing the original Articles of Incorporation was March 9, 1916. ARTICLE I The name of the corporation is Kmart Corporation. ARTICLE II The purpose or purposes for which the corporation is organized are: 1. To acquire, establish and conduct in the State of Michigan and in any part of the world stores for the purchase, sale and distribution of goods, wares and merchandise and to manufacture, buy, sell or deal in goods, wares and merchandise in the State of Michigan and in any part of the world; 2. To purchase, or otherwise acquire, own, mortgage, pledge, sell, assign and transfer, or otherwise dispose of, invest, trade in, deal in and deal with, real and personal property of every class and description and wheresoever located; to borrow money, with or without security, and to make, accept, endorse, execute and issue bonds, debentures, notes and other obligations from time to time, for any of the objects or purposes of the corporation, and to secure the same by mortgage, pledge, deed of trust or otherwise, and to mortgage, pledge, lend and hypothecate any stocks, bonds or other evidences of indebtedness and any other property, real or personal, held by it; and to lend money either without any collateral security or on the security of real or personal property, and to enter into contracts of all kinds pertaining to the business of the corporation; 3. To make, execute, endorse and accept promissory notes, bills of exchange and other negotiable instruments, and to redeem any debt or other obligation before the same shall fall due, on any terms or at any advance or premium; 4. To apply for, obtain, register, purchase, lease or otherwise acquire, hold, own, use, borrow, introduce, develop or control, sell, assign or otherwise dispose of, take or grant licenses or other rights with respect to, and in any and all ways exploit or turn to account inventions, improvements, processes, copyrights, patents, trademarks, formulae, trade names or distinctive marks of any and all kinds, whether granted, registered or established by or under the laws of the United States or of any state thereof or of any other country or place; 1 4 5. To institute, enter into, assist, promote, conduct, perform or participate in every kind of commercial, mercantile or industrial enterprise, business or work, contract, undertaking, venture or operation in the United States or in any foreign country or countries; and for any such purpose to purchase or otherwise acquire, take over, hold, sell, liquidate or otherwise dispose of, the real estate, plants, equipment, inventory, merchandise, materials and other assets, stock, good will, rights, franchises, patents, trademarks and trade names and other properties of domestic or foreign corporations, firms, associations, syndicates, individuals and others; to continue, alter, extend and develop their business, assume their liabilities, guarantee or become surety for the performance of their obligations, reorganize their capital and participate in any way in their affairs; to take over as a going concern and continue in its own name any business so acquired and to pay for any such business or properties in money, stock, bonds, debentures or obligations of this corporation, or in any other lawful manner; 6. To promote, finance, aid and assist, financially or otherwise, any corporation or association formed under the laws of the United States or any state, territory, colony or possession thereof, or the District of Columbia, or any foreign country or subdivision thereof, any shares of stock which, or any bonds, debentures, notes, securities, evidences of indebtedness, contracts or obligations of which or of whom, are held by or for this corporation, directly or indirectly, or in the business, financing or welfare of which or of whom this corporation shall have any interest, and in connection therewith to guarantee or become surety for the performance of any undertaking or obligation or the payment of principal or interest on obligations and dividends on stock or any other payments whatsoever, and by endorsement or otherwise to guarantee the payment of principal and interest of bonds, notes, debentures, drafts and other securities or evidences of security; 7. To pay for any property, rights or interests acquired by this corporation in money or other property, rights or interests held by this corporation, or by assigning and delivering in exchange therefor (in any manner permitted by law) its own stock, bonds, debentures, notes, certificates of indebtedness or other obligations or any of them however evidenced; to purchase or otherwise acquire, hold, sell, pledge, transfer or otherwise dispose of, and to reissue any shares of its own capital stock (so far as may be permitted by law) and its bonds, debentures, notes or other securities or evidences of indebtedness; 8. To do all and everything necessary and proper for the accomplishment of the objects and purposes herein enumerated, or necessary or incidental to the protection and benefit of this corporation, and in general to carry on any lawful business necessary or incidental to the attainment of the purposes of this corporation, whether such business is similar in nature to the objects and purposes hereinabove set forth or otherwise, insofar as the same may be permitted by law; 9. The foregoing clauses shall be construed as purposes, objects and powers, and the matters expressed in each clause shall, except as otherwise expressly provided, be in no wise limited by reference to or inference from the terms of any other clause, and shall be regarded as independent purposes, objects and powers, and the enumeration of specific purposes, objects and powers shall not be construed to limit or restrict in any manner the meaning of general terms or the general purposes, objects or powers of the corporation, nor shall the expression of one such be deemed to exclude another, although it be of like nature and not expressed. 2 5 In general, to carry on any business in connection therewith and incident thereto not forbidden by the laws of the State of Michigan and with all the powers conferred upon corporations by the laws of the State of Michigan. ARTICLE III The total authorized capital stock is 1,500,000,000 shares of Common Stock of the par value of $1.00 per share (hereinafter called the "Common Stock"), and 10,000,000 shares of Preferred Stock of no par value per share, issuable in series (hereinafter called the "Preferred Stock"). A statement of all or any of the designations and the powers, privileges and rights and the qualifications, limitations or restrictions of the Common Stock and the Preferred Stock of the Company is as follows: A. COMMON STOCK 1. DIVIDENDS. The holders of Common Stock shall be entitled to receive when and as declared by the Board of Directors, out of the assets of the Company which by law are available therefor, dividends payable either in cash, in property or in Common Stock. No dividends (other than dividends payable in Common Stock) shall be paid on Common Stock if cash dividends in full on all outstanding Preferred Stock to which the holders thereof are entitled shall not have been paid or declared and set apart for payment or any sinking fund for the Preferred Stock is in arrears. 2. VOTING RIGHTS. At every meeting of stockholders the holders of Common Stock shall have the right with the holders of Preferred Stock to vote in the election of directors and upon each other matter coming before any meeting of the stockholders on the basis of one vote for each share of Common Stock held. Subject to the provisions of paragraphs 3 and 5 of Section B below and except as otherwise provided by law, the holders of Common Stock and the holders of Preferred Stock shall vote together as one class. 3. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or winding up of the Company, the holders of Common Stock shall be entitled, after payment or provisions for payment of the debts and other liabilities of the Company and the amounts to which the holders of the Preferred Stock shall be entitled, to share ratably in the remaining net assets of the Company. 4. PREEMPTIVE RIGHTS. The holders of shares of Common Stock shall have no preemptive right to subscribe for any additional shares of capital stock or other obligations convertible into shares of capital stock which may hereafter be issued by the Company. 3 6 B. PREFERRED STOCK 1. ISSUANCE OF PREFERRED STOCK IN SERIES. The Board of Directors shall have authority to divide and issue shares of Preferred Stock into series and, within the limitations set forth in Section 17 of Act No. 327 of the Public Acts of 1931, as amended, and the Company's Restated Articles of Incorporation, to fix and determine the relative rights and preferences of the shares of any series so established. Each series of Preferred Stock shall be designated by the Board of Directors as to distinguish the shares thereof from the shares of all other series of Preferred Stock and other classes of stock of the Company. All shares of Preferred Stock will be identical except as to the following rights and preferences as to which there may be variations between different series as fixed and determined by the Board of Directors: (a) the rate of dividend and the extent of further participation in dividend distribution, if any; (b) the price and the terms and conditions on which the shares are redeemable; (c) the amount payable upon shares in event of voluntary or involuntary liquidation; (d) sinking fund provisions for the redemption or purchase of shares and (e) the terms and conditions on which shares are convertible. The Board of Directors shall not create a sinking fund for the redemption or purchase of shares of any series of Preferred Stock unless provision for a sinking fund at least as beneficial to all issued and outstanding shares of Preferred Stock shall either then exist or be at the same time created. 2. DIVIDENDS. The holders of Preferred Stock of each series shall be entitled to receive out of any funds legally available therefor, when and as declared by the Board of Directors, cash dividends in such amount as may be fixed by the Board of Directors in accordance with the resolution adopted providing for the issue of such series before any dividend (other than dividends payable in Common Stock) shall be paid on the Common Stock or other stock ranking junior to the Preferred Stock. Such dividends shall be cumulative from the date or dates fixed in the resolution adopted by the Board of Directors providing for the issue of such series. Dividends in full shall not be declared or paid or set apart for payment on the Preferred Stock of any one series for any dividend period unless dividends in full have been declared or paid or set apart for payment on the Preferred Stock of all series for all dividend periods terminating on the same or an earlier date. When the dividends are not paid in full on all series of the Preferred Stock, the shares of all series shall share ratably in the payment of dividends, including accumulations, if any, in accordance with sums which would be payable on said shares if all dividends were declared and paid in full. A "dividend period" is the period between any two consecutive payment dates (or, when shares are originally issued, the period from the date from which dividends are cumulative to the first dividend payment date) as fixed for a particular series. Accumulations shall not bear interest. 3. VOTING RIGHTS. Except as provided in this paragraph 3 and in paragraph 5 below, at every meeting of stockholders, the holders of Preferred Stock shall have the right with the holders of Common Stock to vote in the election of directors and upon each other matter coming before any meeting of the stockholders on the basis of one vote for each share of Preferred Stock held, the holders of Preferred Stock and the holders of Common Stock voting together as one class. Whenever dividends on all series of Preferred Stock shall be in arrears in an aggregate amount equivalent to six quarterly dividends on all shares of all series of Preferred Stock at the time outstanding, then and in such event the shares of all series of Preferred Stock then outstanding, voting separately as a class, shall be entitled at each meeting of stockholders thereafter held for the election of directors to elect two of the total number of directors to be elected at such meeting. 4 7 Such right shall continue until such time as all accumulated dividends on all series of Preferred Stock at the time outstanding have been paid or declared and set aside for payment. While holders of Preferred Stock voting as a class are entitled to elect two directors, they shall not be entitled to participate with the holders of Common Stock in the election of any other directors. In the event any vacancy shall occur in the case of a director elected by holders of Preferred Stock voting as a class (unless at the time such vacancy occurs all accumulated dividends on the Preferred Stock shall have been paid or declared and set aside for payment), a special meeting of the holders of shares of all series of Preferred Stock shall be called promptly to fill any such vacancy. Such meeting shall be held within 40 days after such call at a place and upon notice as provided for the holding of meetings of stockholders, except that no such special meeting shall be required to be called if any such vacancy shall occur less than 90 days before the date fixed for the Annual Meeting of Stockholders. The directors elected by the class vote of holders of Preferred Stock shall serve until the next Annual Meeting of Stockholders or until their successors shall be elected and shall qualify; provided, however, that whenever during the term of office of the directors so elected, all accumulated dividends shall have been paid or declared and set aside for payment, the term of office of such directors shall forthwith terminate. 4. PREEMPTIVE RIGHTS. The holders of shares of Preferred Stock shall have no preemptive right to subscribe for any additional shares of capital stock or other obligations convertible into shares of capital stock which may hereafter be issued by the Company. 5. LIMITATIONS ON CERTAIN CORPORATE ACTION. So long as shares of Preferred Stock of any series shall be outstanding the Company shall not (a) without the affirmative vote or written consent of the holders of at least 66-2/3% of the shares of all such series at the time outstanding (i) authorize any class of stock ranking prior to the Preferred Stock either in the payment of dividends or in the distribution of assets, or (ii) alter or change the preference or limitations with respect to the Preferred Stock in any material respect prejudicial to the holders thereof; provided, however, that any such alteration or change affecting a particular series of Preferred Stock which does not adversely affect the holders of any other series may be effected by the affirmative vote or written consent of the holders of record of 66-2/3% of the shares of the particular series affected by such alteration or change without the necessity of the vote or written consent of the holders of shares of all other series; and provided further, that no such vote or written consent of the holders of shares of the Preferred Stock or any series thereof shall be required if, at or prior to the time the issuance of any such prior ranking stock is to be made or any such change is to take effect, provision is made for the redemption of all shares of Preferred Stock at the time outstanding; or (b) without the affirmative vote or written consent of the holders of record of at least a majority of the shares of all such series at the time outstanding (i) increase the total number of authorized shares of Preferred Stock, or (ii) authorize or increase any class of stock ranking on a parity with the Preferred Stock; provided, however, that nothing herein contained shall require such vote or consent of the holders of the Preferred Stock in connection with (i) any increase in the total number of authorized shares of Common Stock, or (ii) the fixing of any of the specific rights, preferences and limitations of other series of Preferred Stock that may be fixed by the Board of Directors. C. SERIES A JUNIOR PARTICIPATING PREFERRED STOCK 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as Series A Junior Participating Preferred Stock (hereinafter called the "Series A Junior Participating Preferred Stock"), and the number of shares constituting such series shall be 500,000. Such number may, 5 8 from time to time, be increased or decreased (but not decreased below the number of shares of the series then outstanding) by the Board of Directors of the Company. 2. DIVIDENDS AND DISTRIBUTIONS. (a) The holders of shares of Series A Junior Participating Preferred stock shall be entitled to receive, when and as declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being hereinafter called a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $5.00 or (b) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. In the event the Company shall at any time after May 27, 1988 (hereinafter called the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) The Company shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in subparagraph (a) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $5.00 per share on the Series A Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend 6 9 Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 45 days prior to the date fixed for the payment thereof. 3. VOTING RIGHTS. The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights: (a) Each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to one vote on all matters submitted to a vote of the stockholders of the Company. (b) Except as otherwise provided herein or by law, the holders of shares of Series A Junior Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of the stockholders of the Company. (c) As set forth in Section B of this Article, whenever dividends on all series of Preferred Stock shall be in arrears in an aggregate amount equivalent to six quarterly dividends on all shares of all series of Preferred Stock at the time outstanding, then and in such event the shares of all series of Preferred Stock then outstanding, voting separately as a class, shall be entitled at each meeting of stockholders thereafter held for the election of directors to elect two of the total number of directors to be elected at such meeting. Such right shall continue until such time as all accumulated dividends on all series of Preferred Stock at the time outstanding have been paid or declared and set aside for payment. While holders of Preferred Stock voting as a class are entitled to elect two directors, they shall not be entitled to participate with the holders of Common Stock in the election of any other directors. In the event any vacancy shall occur in the case of a director elected by holders of Preferred Stock voting as a class (unless at the time such vacancy occurs all accumulated dividends on the Preferred Stock shall have been paid or declared and set aside for payment), a special meeting of the holders of shares of all series of Preferred Stock shall be called promptly to fill any such vacancy. Such meeting shall be held within 40 days after such call at a place and upon notice as provided for the holding of meetings of stockholders, except that no such special meeting shall be required to be called if any such vacancy shall occur less than 90 days before the date fixed for the Annual Meeting of Stockholders. The directors elected by the class vote of holders of Preferred Stock shall serve until the next Annual Meeting of Stockholders or until their successors shall be elected and shall qualify; provided, however, that whenever during the term of office of the directors so elected, all accumulated dividends shall have been paid or declared and set aside for payment, the term of office of such directors shall forthwith terminate. (d) Except as set forth herein, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 7 10 4. CERTAIN RESTRICTIONS. If, and so long as, all cumulative dividends on all outstanding shares of Series A Junior Participating Preferred Stock for all past dividend periods shall not have been paid, or declared and a sum sufficient for the payment thereof set apart, the Company shall not redeem any shares of Preferred Stock of any other series at the time outstanding, and neither the Company nor any subsidiary shall purchase or otherwise acquire for any consideration (except solely by conversion into or exchange for Common Stock) any shares of Preferred Stock of any other series at the time outstanding, unless all of the Series A Junior Participating Preferred Stock at the time outstanding shall have been called for redemption as herein provided. 5. REACQUIRED SHARES. Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation (and upon compliance with any applicable provisions of the laws of the State of Michigan) become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. 6. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Company, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (hereinafter called the "Series A Liquidation Preference"). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (hereinafter called the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 1,000 (as appropriately adjusted as set forth in subparagraph (c) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), hereinafter called the "Adjustment Number"). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Junior Participating Preferred Stock and Common Stock, respectively, holders of Series A Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. (b) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the Liquidation Preferences of all other series of Preferred Stock, if any, which rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common 8 11 Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (c) In the event the Company shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 7. CONSOLIDATION, MERGER, ETC. In case the Company shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Company shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 8. OPTIONAL REDEMPTION. (a) The Company shall have the option to redeem the whole or any part of the Series A Junior Participating Preferred Stock at any time at a redemption price equal to, subject to the provision for adjustment hereinafter set forth, 1,000 times the "current per share market price" of the Common Stock on the date of the mailing of the notice of redemption, together with unpaid accumulated dividends to the date of such redemption. In the event the Company shall at any time after May 27, 1988 (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Participating Preferred Stock were otherwise entitled immediately prior to such event under the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. The "current per share market price" on any date shall be deemed to be the average of the closing price per share of such Common Stock for the 10 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the 9 12 average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System (hereinafter called "NASDAQ") or such other system then in use or, if on any such date the Common Stock is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Stock selected by the Board of Directors of the Company. If on such date no such market maker is making a market in the Common Stock, the fair value of the Common Stock on such date as determined in good faith by the Board of Directors of the Company shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Common Stock is listed or admitted to trading is open for the transaction of business or, if the Common Stock is not listed or admitted to trading on any national securities exchange, a Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in the State of New York are not authorized or obligated by law or executive order to close. (b) Notice of any such redemption shall be given by mailing to the holders of the Series A Junior Participating Preferred Stock a notice of such redemption, first class postage prepaid, not later than the thirtieth day and not earlier than the sixtieth day before the date fixed for redemption, at their last address as they shall appear upon the books of the Company. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the stockholder received such notice, and failure duly to give such notice by mail, or any defect in such notice, to any holder of Series A Junior Participating Preferred Stock shall not affect the validity of the proceedings for the redemption of such Series A Junior Participating Preferred Stock. If less than all of the outstanding shares of Series A Junior Participating Preferred Stock are to be redeemed, the redemption shall be made by lot as determined by the Board of Directors. (c) The notice of redemption to each holder of Series A Junior Participating Preferred Stock shall specify (a) the number of shares of Series A Junior Participating Preferred Stock of such holder to be redeemed, (b) the date fixed for redemption, (c) the redemption price and (d) the place of payment of the redemption price. (d) If any such notice of redemption shall have been duly given or if the Company shall have given to the bank or trust company hereinafter referred to irrevocable written authorization promptly to give or complete such notice, and if on or before the redemption date specified therein the funds necessary for such redemption shall have been deposited by the Company with the bank or trust company designated in such notice, doing business in the Borough of Manhattan, the City of New York, State of New York, or the City of Detroit, State of Michigan and having a capital, surplus and undivided profits aggregating at least $25,000,000 according to its last published statement of condition, in trust for the benefit of the holders 10 13 of Series A Junior Participating Preferred Stock called for redemption, then, notwithstanding that any certificate for such shares so called for redemption shall not have been surrendered for cancellation, from and after the time of such deposit all such shares called for redemption shall no longer be deemed outstanding and all rights with respect to such shares shall forthwith cease and terminate, except the right of the holders thereof to receive from such bank or trust company at any time after the time of such deposit the funds so deposited, without interest, and the right to exercise, up to the close of business on the fifth day before the date fixed for redemption, all privileges of conversion or exchange if any. In case less than all the shares represented by any surrendered certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. Any interest accrued on such funds shall be paid to the Company from time to time. Any funds so deposited and unclaimed at the end of six years from such redemption date shall be repaid to the Company, after which the holders of shares of Series A Junior Participating Preferred Stock called for redemption shall look only to the Company for payment thereof; provided that any funds so deposited which shall not be required for redemption because of the exercise of any privilege of conversion or exchange subsequent to the date of deposit shall be repaid to the Company forthwith. 9. FRACTIONAL SHARES. Series A Junior Participating Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock. D. SERIES C CONVERTIBLE PREFERRED STOCK 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as Series C Convertible Preferred Stock, no par value (hereinafter called the "Series C Preferred Stock"), and the authorized number of shares constituting such series shall be 796,827 shares. 2. DIVIDENDS. From the date of issuance of the Series C Preferred Stock, the holders of outstanding shares of the Series C Preferred Stock will be entitled to receive, when and as declared by the Board of Directors out of funds legally available therefor, cumulative preferential cash dividends at the per share rate of $2.875 per quarter for each of the quarters ending on March 14, June 14, September 14 and December 14, and no more (hereinafter called "Preferential Dividends"), payable in arrears on each succeeding March 15, June 15, September 15 and December 15, respectively (each such date being hereinafter referred to as a "Preferential Dividend Payment Date"), commencing September 15, 1994. If as of any Preferential Dividend Payment Date between November 1, 1996 and October 31, 1998, the average of the daily Closing Prices of the Common Stock for the 90 Trading Dates ending on the second Trading Date prior to such Preferential Dividend Payment Date (with such Closing Prices appropriately adjusted to take into account the occurrence during such 90-day period of any stock splits, combinations, stock dividends and the like) is 25 percent or more above the amount obtained by dividing $200 by the Conversion Rate then in effect, the dividend payable on that Preferential Dividend Payment Date only shall be reduced to an amount equal to the product of the dividend paid per share on the Common Stock during the immediately preceding three months period multiplied by the number of shares of Common Stock which a holder of Series C Preferred Stock would have been entitled to receive if his or her shares of such stock had been converted at the Conversion Rate in effect immediately prior to the record date for the Series C Preferred Stock dividend. If any Preferential 11 14 Dividend Payment Date shall be or be declared a national or New York state holiday or if New York money center banks shall be closed because of a banking moratorium or otherwise on such date, then the Preferential Dividend Payment Date shall be on the next succeeding day on which such banks shall be open. Each such dividend will be payable to holders of record as they appear on the stock books of the Company on such record dates, not less than 10 nor more than 50 days preceding the payment dates thereof, as shall be fixed by the Board of Directors. Dividends on the Series C Preferred Stock shall accrue on a daily basis commencing on the date of issuance of the Series C Preferred Stock and accrued dividends for each quarterly dividend period shall accumulate, to the extent not paid, on the Preferential Dividend Payment Date first following the quarter for which they accrue. Preferential Dividends shall accrue whether or not the Company shall have earnings, whether or not there shall be funds legally available for the payment of such dividends and whether or not such dividends are declared. Accumulated dividends shall not bear interest. Dividends (or cash amounts equal to accrued and unpaid dividends) payable on the Series C Preferred Stock for any period longer or shorter than a quarterly dividend period shall be computed on the basis of a 360-day year or twelve 30-day months. 3. CONVERSION INTO COMMON STOCK. (a) GENERAL; CONVERSION RATE. Each holder of shares of Series C Preferred Stock shall have the right, at such holder's option, at any time (but not later than the close of business on the date fixed for the redemption thereof in any notice of redemption given pursuant to the provisions of Section 4 (b) hereof if there is no default in redemption payments) in whole or in part, upon written notice to the Company to convert all or a portion of such shares into fully paid and non-assessable shares of Common Stock. A holder of shares of Series C Preferred Stock, upon conversion of each such share, shall: (i) receive 6.4872 shares of Common Stock for each share of Series C Preferred Stock being converted by such holder (subject to adjustment as set forth below, hereinafter called the "Conversion Rate"); and (ii) be entitled to receive an amount in cash equal to all accrued and unpaid dividends on such share to and including the date of conversion, whether or not earned or declared, out of funds legally available therefor. (b) NOTICE OF CONVERSION. Each share of Series C Preferred Stock shall be convertible at the office of the Company or at such other office or offices, if any, as the Company may designate. The right of the holders of Series C Preferred Stock to convert their shares shall be exercised by surrendering for such purpose to the Company or other designated office, as provided above, certificates representing shares to be converted, duly endorsed in blank or accompanied by proper instruments of transfer. (c) ADJUSTMENTS TO CONVERSION RATE. The Conversion Rate to be used to determine the number of shares of Common Stock to be delivered on conversion of the Series C Preferred Stock into shares of Common Stock shall be subject to adjustment from time to time as provided below in this subparagraph (c). All adjustments to the Conversion Rate shall be calculated to the nearest 1/100th of a share of Common Stock. Such rate in effect at any time is hereinafter called the "Conversion Rate". 12 15 (i) If the Company shall at any time on or after June 3, 1994 either (1) pay a dividend or make a distribution with respect to Common Stock in shares of Common Stock, (2) subdivide or split its outstanding shares of Common Stock, (3) combine its outstanding shares of Common Stock into a smaller number of shares, or (4) issue by reclassification of its shares of Common Stock any shares of Common Stock of the Company, then, in any such event, the Conversion Rate in effect immediately prior thereto shall be adjusted so that the holder of a share of Series C Preferred Stock shall be entitled to receive on the conversion of such share of Series C Preferred Stock, the number of shares of Common Stock which such holder would have owned or been entitled to receive after the happening of any of the events described above had such share of the Series C Preferred Stock been surrendered for conversion at the Conversion Rate in effect immediately prior to such time. Such adjustment shall become effective at the opening of business on the business day next following the record date for determination of stockholders entitled to receive such dividend or distribution in the case of a dividend or distribution and shall become effective immediately after the effective date in case of a subdivision, split, combination or reclassification; and any shares of Common Stock issuable in payment of a dividend shall be deemed to have been issued immediately prior to the close of business on the record date for such dividend for purposes of calculating the number of outstanding shares of Common Stock under clauses (ii) and (iii) below. (ii) If the Company shall at any time on or after June 3, 1994 issue Common Stock (or rights or warrants or other securities convertible into or exchangeable or exercisable for shares of Common Stock, collectively hereinafter called "Derivative Securities"), to all holders of its Common Stock at a price per share less than the Current Market Price per share (determined pursuant to clause (vi) below) of the Common Stock on the record date for the determination of stockholders entitled to receive such Derivative Securities, then in each case the Conversion Rate shall be adjusted by multiplying the Conversion Rate in effect immediately prior thereto by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding on the date of issuance of such Derivative Securities, immediately prior to such issuance, plus the number of additional shares of Common Stock offered for subscription or purchase, and the denominator of which shall be the number of shares of Common Stock outstanding on the date of issuance of such Derivative Securities, immediately prior to such issuance, plus the number of shares which the aggregate offering price of the total number of shares so offered for subscription or purchase would purchase at such Current Market Price (determined by multiplying such total number of shares by the exercise price of such Derivative Securities and dividing the product so obtained by such Current Market Price). Shares of Common Stock owned by the Company or by another company of which 13 16 a majority of the shares entitled to vote in the election of directors are held, directly or indirectly, by the Company shall not be deemed to be outstanding for purposes of such computation. Such adjustment shall become effective at the opening of business on the business day next following the record date for the determination of stockholders entitled to receive such Derivative Securities. In the case of the issuance of Derivative Securities, to the extent that shares of Common Stock are not delivered after the expiration of such Derivative Securities, the Conversion Rate shall be readjusted to the Conversion Rate which would then be in effect had the adjustments made upon the issuance of such Derivative Securities been made upon the basis of delivery of only the number of shares of Common Stock actually delivered. (iii) If the Company shall at any time on or after June 3, 1994 pay a dividend or make a distribution to all holders of its Common Stock of evidence of its indebtedness, securities or other assets (excluding any cash dividends or distributions and dividends referred to in clause (i) above or securities referred to in clause (ii) above), then in each such case the Conversion Rate shall be adjusted by multiplying the Conversion Rate in effect immediately prior to the date of such distribution by a fraction, of which the numerator shall be the Current Market Price per share of Common Stock (determined pursuant to clause (vi) below) on the record date mentioned below, and of which the denominator shall be such Current Market Price per share of Common Stock less the fair market value (as determined by the Board of Directors of the Company, whose determination shall be conclusive) as of such record date of the portion of the assets or evidences of indebtedness so distributed, or of such subscription rights or warrants, applicable to one share of Common Stock. Such adjustments shall become effective on the opening of business on the business day next following the record date for the determination of stockholders entitled to receive such distribution. (iv) Anything in this Section 3 notwithstanding, the Company shall be entitled to make such upward adjustments in the Conversion Rate, in addition to those required by this Section 3, as it in its discretion shall determine to be advisable, in order that any stock dividends, subdivision of shares, distribution of rights to purchase stock or securities, or a distribution of securities convertible into or exchangeable for stock (or any transaction which could be treated as any of the foregoing transactions pursuant to Section 305 of the Internal Revenue Code of 1986, as amended) hereafter made by the Company to its stockholders shall not be taxable. (v) Anything in this Section 3 notwithstanding, no adjustment in the Conversion Rate shall be made as a result of any issuance of certificates representing, or otherwise as a result of, the rights issued in connection with the Rights Agreement dated as of May 17, 1988, as amended as of May 29, 1991 between the Company and NBD Bank, N.A., and as the same may be further amended (hereinafter called the "Rights Agreement"). (vi) As used in this Section 3, the Current Market Price per share of Common Stock on any date shall be the average of the daily Closing Prices for the five consecutive Trading Dates ending on and including the date of determination of the Current Market Price (appropriately adjusted to take into account the occurrence during such five-day period of any event that results in an adjustment of the Conversion Rate); provided, however, 14 17 that if the Closing Price for the Trading Date next following such five-day period (hereinafter called the "next-day closing price") is less than 95% of such average, then the Current Market Price per share of Common Stock on such date of determination shall be the next-day closing price. (vii) Whenever the Company shall propose to take any of the actions specified in Section 5 or in paragraphs (i), (ii) or (iii) of this Section 3, the Company shall cause a notice to be mailed at least 15 days prior to the date on which the books of the Company will close or on which a record will be taken for such action, to the holders of record of the outstanding Series C Preferred Stock on the date of such notice. Such notice shall specify the action proposed to be taken by the Company and the date as of which holders of record of the Common Stock shall participate in any such action or be entitled to exchange their Common Stock for securities or other property, as the case may be. The Company will also notify the holders of record of the outstanding Series C Preferred Stock of the occurrence of any event that would cause a Distribution Date (as defined in the Rights Agreement) to occur; and such notification shall be by personal delivery, facsimile or reliable overnight courier, in each case delivered as soon as possible but at least 5 business days prior to the Distribution Date. (c) NOTICE OF ADJUSTMENTS. Whenever the Conversion Rate is adjusted as herein provided, the Company shall forthwith compute the adjusted Conversion Rate in accordance with this Section 3 and prepare a certificate signed by the Chairman, the President, any Vice President or the Treasurer of the Company setting forth the adjusted Conversion Rate, the facts requiring such adjustment and the method of calculation thereof and mail such certificate to the holders of record of the outstanding shares of Series C Preferred Stock. (d) RESERVATION OF SHARES OF COMMON STOCK. A number of shares of the authorized but unissued Common Stock sufficient to provide for the conversion or redemption of the Series C Preferred Stock outstanding upon the basis herein provided shall be reserved by the Company, free from preemptive rights, for such conversion or redemption. 4. REDEMPTION. (a) COMPANY'S RIGHT TO CALL FOR REDEMPTION. The Series C Preferred Stock may not be redeemed by the Company pursuant to this Section 4 prior to November 1, 1999. Thereafter the Company shall have the right to call, in whole or in part, the outstanding shares of Series C Preferred Stock for redemption. Upon such call, the Company shall deliver to the holders thereof in exchange for each such share called for redemption, (A) a number of shares of Common Stock equal to one times a fraction, the numerator of which is $200 and the denominator of which is the 20-Day Market Price of the Common Stock on the second Trading Date prior to the Redemption Date, and (B) an amount in cash equal to all accrued and unpaid dividends on such share to the Redemption Date. Notwithstanding the above, a holder of Series C Preferred Stock shall have the right to convert such stock pursuant to Section 3 at any time prior to the Redemption Date (as defined below). If less than all outstanding shares of Series C Preferred Stock are called for redemption, the shares to be redeemed shall be selected by the Company on a pro rata basis among all the holders of outstanding shares of Series C Preferred Stock. 15 18 (b) NOTICE OF CALL FOR REDEMPTION BY COMPANY. The Company will provide notice of any call for redemption of shares of Series C Preferred Stock to holders of record of the Series C Preferred Stock to be redeemed not less than 30 nor more than 60 days prior to the date fixed for redemption (hereinafter called the "Redemption Date"). Such notice may be provided by mailing notice of such redemption first class postage prepaid, to the holders of record of the Series C Preferred Stock to be redeemed, at such holder's address as it appears on the stock register of the Company. Each such notice shall state: (i) the Redemption Date; (ii) the number of shares of Series C Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the number of shares of Common Stock deliverable upon redemption; (iv) the place or places where certificates for such shares are to be surrendered; and (v) that dividends on the shares to be redeemed will cease to accrue on such Redemption Date unless the Company shall default in providing the shares of Common Stock at the time and place specified in such notice. (c) HOLDER(S) RIGHT TO COMPEL THE COMPANY TO CALL FOR REDEMPTION. At any time and from time to time after the date of issuance of the Series C Preferred Stock and until December 15, 1995, the holder(s) of shares of Series C Preferred Stock shall have the right to require the Company to call for redemption up to twenty-five percent (25%) of the outstanding shares of Series C Preferred Stock, and at any time and from time to time after December 15, 1995 and until November 1, 1997, the holder(s) of shares of Series C Preferred Stock shall have the right to require the Company to call for redemption up to twenty-five percent (25%) of the outstanding shares of Series C Preferred Stock plus such number of the outstanding shares of Series C Preferred Stock which the holders thereof had the right to require the Company to call for redemption as provided above prior to December 15, 1995 but which were not redeemed as provided above prior to December 15, 1995. Provided, however, each redemption provided above must be for a minimum of 36,678 shares of Series C Preferred Stock or, if less, all of the Series C Preferred Stock owned by the holder requesting redemption. After November 1, 1997, the holder(s) of shares of Series C Preferred Stock shall have the right to require the Company to call up to all of the outstanding shares of Series C Preferred Stock for redemption. If holder(s) of Series C Preferred Stock request redemption of their shares into a greater percentage than permitted above, the shares of Series C Preferred Stock to be redeemed shall be selected by the Company on a pro-rata basis among those holders requesting redemption based upon the number of shares of Series C Preferred Stock owned by such holders. Such right on the part of the holder(s) of the Series C Preferred Stock shall expire on October 30, 2017. Upon such call, the Company shall deliver to the holders thereof in exchange for each such share called for redemption, (A) a number of shares of Common Stock equal to one times a fraction, the numerator of which is $200 and the denominator of which is the 20-Day Market Price of the Common Stock on the second Trading Date prior to the Holder's Redemption Date (defined below), and (B) an amount in cash equal to all accrued and unpaid dividends on such share to the Holder's Redemption Date. Notwithstanding the above, a holder of Series C Preferred Stock shall have the right to convert such stock pursuant to Section 3 at any time prior to the Holder's Redemption Date. (d) NOTICE OF CALL FOR REDEMPTION BY HOLDER(S). The holder(s) of Series C Preferred Stock shall provide notice to the Company not less than 30 nor more than 60 days prior to the date the holder(s) exercise the right to compel redemption as set forth in subparagraph (c) above. 16 19 Such notice may be provided by mailing notice of such required redemption first class postage prepaid to the Company. Such notice shall specify the date fixed for redemption (hereinafter called the "Holder's Redemption Date"). (e) STATUS OF SHARES. Provided that the Company has (i) in the case of a redemption at the option of the Company, given the redemption notice described in subparagraph (b) above, and (ii) in the case of any redemption delivered all shares of Common Stock and amounts owing for fractional shares upon such redemption, then all shares to be so redeemed shall be deemed to have been redeemed as of the close of business of the Company on the Redemption Date. 5. RECAPITALIZATION, CONSOLIDATION, MERGER OR SALE OF ASSETS. In the event that the Company shall be a party to any transaction including without limitation any (i) recapitalization or reclassification of the Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination of the Common Stock), (ii) any consolidation or merger of the Company with or into any other person or any merger of another person into the Company (other than a merger which does not result in a reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of the Company, (iii) any sale or transfer of all or substantially all of the assets of the Company, or (iv) any compulsory share exchange pursuant to which the Common Stock shall be exchanged for, converted into, acquired for or constitute solely the right to receive other securities, cash or other property, then appropriate provision shall be made as part of the terms of such transaction whereby the holder of each share of Series C Preferred Stock then outstanding shall thereafter have the right to convert such shares only into the kind and amount of securities, cash and other property receivable upon such recapitalization, reclassification, consolidation, merger, sale, transfer or share exchange by a holder of the number of shares of Common Stock into which such share of Series C Preferred Stock might have been converted immediately prior to such transaction. The corporation or the person formed by such consolidation or resulting from such merger or which acquired such assets or which acquired the Company's shares, as the case may be, shall make provisions in its certificate or articles of incorporation or other constituent document to establish such right. Such certificate or articles of incorporation or other constituent document shall provide for adjustments which, for events subsequent to the effective date of such certificate or articles of incorporation or other constituent document, shall be nearly equivalent as may be practicable to the adjustments provided for in this Section 5. The above provisions shall similarly apply to successive transactions of the type described in this Section. 6. NO FRACTIONAL SHARES. No fractional shares of Common Stock shall be issued upon conversion or redemption of shares of the Series C Preferred Stock but, in lieu of any fraction of a share of Common Stock which would otherwise be issuable in respect of the aggregate number of shares of the Series C Preferred Stock surrendered by the same holder for conversion or redemption on any conversion or redemption date, the holders shall have the right to receive in lieu of such fraction an amount in cash equal to the same fraction of the Current Market Price of the Common Stock (determined pursuant to Section 3 (c) (vi)) determined, in the case of any conversion or redemption, as of the second Trading Date immediately preceding the relevant Notice Date. 17 20 7. LIQUIDATION RIGHTS. (a) The amount which the holders of Series C Preferred Stock shall be entitled to receive in the event of any dissolution, liquidation or winding up of the affairs of the Company, whether voluntary or involuntary (collectively, hereinafter called a "Liquidation") out of the net assets of the Company, shall be $200 per share plus an amount equal to all Preferential Dividends accrued and unpaid thereon (including dividends accumulated and unpaid) to the date of Liquidation, and no more. After such amount is paid in full, no further distributions or payment shall be made in respect of shares of Series C Preferred Stock, such shares of Series C Preferred Stock shall no longer be deemed to be outstanding or be entitled to any privilege of exchange or conversion or to any other powers, preferences, rights or privileges, including voting rights, and such shares of Series C Preferred Stock shall be surrendered for cancellation to the Company. (b) The full amount payable to the holders of the Series C Preferred Stock shall be paid before any distribution shall be made to the holders of Common Stock or any other class of stock or series thereof ranking junior to the Series C Preferred Stock with respect to the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Company. No payment on account of any Liquidation shall be made to the holders of any class or series of stock ranking on a parity with the Series C Preferred Stock in respect of the distribution of assets upon dissolution, liquidation or winding up unless there shall likewise be paid at the same time to the holders of the Series C Preferred Stock like proportionate amounts determined ratably in proportion to the full amounts to which the holders of all outstanding shares of Series C Preferred Stock and the holders of all outstanding shares of such parity stock are respectively entitled with respect to such distribution. (c) If the assets distributable to the holders of Series C Preferred Stock on any Liquidation shall be insufficient to permit the payment to such holders of the full amounts to which they are entitled in such circumstances, then such assets or the proceeds thereof shall be distributed among such holders ratably in proportion to the sums which would be payable to such holders if all such sums were paid in full. (d) Neither the merger nor consolidation of the Company into or with any other corporation, nor the merger or consolidation of any other corporation into or with the Company, nor a sale, transfer or lease of all or any part of the assets of the Company, shall be deemed to be a Liquidation for purposes of this Section 7. 8. VOTING RIGHTS. The holders of shares of Series C Preferred Stock shall have such voting rights as provided in Section B of Article III of the Articles of Incorporation. 9. DEFINITIONS. As used herein: (i) the term "business day" shall have the same meaning set forth in the Rights Agreement (as defined in Section 3 (c) (v)); (ii) the term "Closing Price" on any day shall mean the closing sale price regular way on such 18 21 day or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices regular way, in each case on the New York Stock Exchange, or, if the Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices of the Common Stock on the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similarly generally accepted reporting service, or if not so available in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors of the Company for that purpose; (iii) the term "Common Stock" shall mean the Company's Common Stock, $1.00 par value per share; (iv) the term "Notice Date" with respect to any notice given by the Company in connection with a conversion or redemption or with respect to any notice given by a holder of the Series C Preferred Stock in connection with a conversion or required redemption, of any of the Series C Preferred Stock shall be the date of the mailing of such notice; (v) the term "Trading Date" shall mean a date on which the New York Stock Exchange (or any successor to such Exchange) is open for the transaction of business. (vi) the term "20-Day Market Price of the Common Stock" shall mean on any date the average of the daily Closing Prices of the Common Stock for the twenty consecutive Trading Dates ending on and including the date of determination of the 20-Day Market Price of the Common Stock (appropriately adjusted to take into account the occurrence during such twenty-day period of any stock splits, combinations, stock dividends and the like); provided, however, that if the Closing Price for the Trading Date next following such twenty-day period (hereinafter called the "next-day closing price") is less than 95% of such average, then the 20-Day Market Price of the Common Stock on such date of determination shall be the next-day closing price. 10. CANCELLATION. All shares of Series C Preferred Stock which shall have been converted or redeemed for shares of Common Stock or which shall have been purchased or otherwise acquired by the Company shall assume the status of authorized but unissued shares of Preferred Stock undesignated as to series. 11. INCREASE IN SHAREs. The number of shares of Series C Preferred Stock may, to the extent of the Company's authorized and unissued Preferred Stock, be increased by further resolution duly adopted by the Board of Directors and the filing of an amendment to the Articles of Incorporation of the Company. 19 22 ARTICLE IV The address of the current registered office is: 3100 West Big Beaver Road Troy, Michigan 48084-3163 The name of the current resident agent is Anthony N. Palizzi. ARTICLE V The duration of the corporation is perpetual. ARTICLE VI The Board of Directors shall have power and authority, from time to time, to borrow money and contract indebtedness for the lawful purposes of the Company, to issue and dispose of its obligations for any amount so borrowed and to secure the payment of the same by mortgage, pledge or other encumbrance on all or any part of the property, assets, effects, business and good will of the Company, and the income thereof. ARTICLE VII The business and affairs of the Company shall be managed by or under the direction of a Board of Directors consisting of not less than seven or more than twenty-one directors, the exact number of directors to be determined from time to time solely by a resolution adopted by an affirmative vote of a majority of the entire Board of Directors. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. At the 1986 Annual Meeting of Stockholders, Class I directors shall be elected for a one-year term, Class II directors for a two-year term and Class III directors for a three-year term. At each succeeding Annual Meeting of Stockholders commencing in 1987, successors to the class of directors whose terms expire at that annual meeting shall be elected or reelected for a three-year term. Any vacancy on the Board of Directors through death, resignation, retirement, disqualification, removal or other cause, or resulting from an increase in the number of directors, may be filled by the affirmative vote of a majority of the remaining directors, though less than a quorum, for a term of office continuing only until the next election of directors by the stockholders. If the number of directors is changed, any increase or decrease shall be apportioned among the classes of directors so as to maintain the number of directors in each class as nearly equal as possible, but in no case will a decrease in the number of directors shorten the term of any incumbent director. When the number of directors is increased by the Board of Directors and any newly created directorships are filled by the Board, there shall be no classification of the additional directors until the next election of directors by the stockholders. 20 23 Any director may be removed from office at any time either (a) by vote of the holders of a majority of the shares entitled to vote at an election of directors, but only for cause or (b) by vote of a majority of the other directors, with or without cause. Notwithstanding the foregoing, whenever the holders of any one or more classes of Preferred Stock or series thereof issued by the Company shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorship shall be governed by the terms of these Restated Articles of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article. Notwithstanding anything contained in these Restated Articles of Incorporation or the By-Laws of the Company to the contrary, the affirmative vote of at least 58% of the outstanding shares entitled to vote, voting as a single class, shall be required to amend, repeal or adopt any provision inconsistent with this Article VII. ARTICLE VIII A director of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for (i) any breach of the director's duty of loyalty to the Company or its stockholders, (ii) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) a violation of Section 551 (1) of the Michigan Business Corporation Act or (iv) any transaction from which the director derived any improper personal benefit. Any repeal or modification of the foregoing paragraph by the stockholders of the Company shall not adversely affect any right or protection of a director of the Company existing at the time of such repeal or modification. These Restated Articles of Incorporation, consisting of Articles I through VIII, were duly adopted by the Board of Directors on the 20th day of December, 1994, in accordance with the provisions of Section 642, Act 284, Public Acts of 1972, as amended. These Restated Articles of Incorporation only restate and integrate and do not further amend the Articles of Incorporation as heretofore amended and there is no material discrepancy between those provisions and the provisions of these Restated Articles of Incorporation. Signed this 20th day of December, 1994 By: /s/ Nancie W. LaDuke, Vice President and Secretary 21 EX-3.(B) 3 EXHIBIT 3(B) 1 EXHIBIT 3(b) BY-LAWS OF KMART CORPORATION A MICHIGAN CORPORATION (Inc. Mar. 9, 1916) MAY 1993 2 I, , Secretary of Kmart Corporation, a Michigan corporation, hereby certify that the following is a true and complete copy of the By-Laws of said Corporation as amended to the date of this certificate and now in force. In witness whereof, I have hereunto set my hand and affixed the seal of the Corporation at the City of Troy, Michigan, this _____________________ day of ________________ A.D. 19 _______ . ____________________________________ Secretary 3 BY-LAWS OF KMART CORPORATION A MICHIGAN CORPORATION (Inc. Mar. 9, 1916) ARTICLE I STOCKHOLDERS' MEETINGS SECTION 1. ANNUAL MEETING. The annual meeting of stockholders for the election of directors and for the transaction of any other business authorized or required to be transacted by the stockholders, shall be held at the principal office of the Company on the fourth Tuesday in May in each year at nine o'clock A.M., or at such other place and time as the Board of Directors may designate. Any annual meeting not held at the time prescribed therefor may be held at any time thereafter to which said meeting may be adjourned or for which it may be called. SECTION 2. SPECIAL STOCKHOLDERS' MEETINGS. Special meetings of stockholders other than those regulated by statute may be called by the Chairman or Vice Chairman of the Board, or by the Board of Directors, either by a Directors' resolution or a written instrument signed by a majority of the Directors. SECTION 3. NOTICE OF MEETINGS. Written notice of the time, place and purposes of a meeting of stockholders shall be given not less than twenty (20) nor more than sixty (60) days before 1 4 the date of the meeting, either personally or by mail, to each stockholder of record entitled to vote at the meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, addressed to the stockholder at his or her address as it appears on the stock transfer books of the Company, with postage prepaid. SECTION 4. QUORUM. At all meetings of stockholders, except where it is otherwise provided by law, the holders of a majority of the outstanding shares entitled to vote, being present in person or represented by proxy, shall constitute a quorum for all purposes. SECTION 5. INSPECTORS OF ELECTION. Prior to the annual meeting of stockholders, the Chairman or Vice Chairman of the Board or the President shall appoint at least two Inspectors of Election to act as inspectors at such meeting and at any meeting of stockholders which may be held during the ensuing year. It shall be the duty of Inspectors of Election to receive and classify all proxies as received, and check same with the record of stockholders entitled to vote at such meetings, to tabulate votes, and to report to the chairman of the meeting the total number of shares represented at the meeting in person or by proxy, and the result of the voting. SECTION 6. VOTING. At all meetings of stockholders, every stockholder of record as of the applicable record date shall be entitled to vote, either in person or by proxy appointed by instrument in writing, subscribed by such stockholder or by his authorized agent. Each outstanding share of capital stock is entitled to one vote on each matter submitted to a vote, except as otherwise provided in the Articles of Incorporation. A vote may be cast either orally or in writing, at the discretion of the chirman of the meeting. 2 5 SECTION 7. ADJOURNMENTS. Any annual or special meeting of stockholders, whether or not a quorum is present, may be adjourned from time to time by a majority vote of the shares present in person or by proxy. Unless the Board of Directors fixes a new record date for the adjourned meeting, it is not necessary to give notice of the adjourned meeting if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken and at the adjourned meeting only such business is transacted as might have been transacted at the original meeting. SECTION 8. CONDUCT OF BUSINESS. Only such business shall be conducted at a meeting of stockholders as is specified in the notice of meeting (or any supplement thereto) or as may be properly brought before the meeting by or at the direction of the Board of Directors or by a stockholder entitled to vote at such meeting. In addition to any other applicable requirements and limitations (including requirements of the Securities Exchange Act of 1934, as amended, and rules and regulations thereunder with respect to inclusion of proposals in the Company's proxy solicitation materials), for business to be properly brought before a meeting by a stockholder (other than the nomination of candidates for election as directors as provided in Article II, Section 2), notice thereof in writing must be delivered to the Secretary of the Company not later than (a) with respect to an annual meeting of stockholders, ninety (90) days in advance of such meeting, provided, however, if the annual meeting is not held on or within eight (8) days of the date set forth in Article I, Section 1 and if less than one hundred (100) days notice or public disclosure of the date of the meeting is given to stockholders, such notice by a stockholder must be not later than the tenth day following the day on which notice or public disclosure of the date of the meeting was first given the stockholders and (b) with respect to a special meeting of stockholders, such notice by a stockholder must be not later than the tenth day following the date on which notice or public disclosure of the date of the meeting was first given the stockholders. A stockholder's notice to the Secretary shall set forth as to any matter the stockholder proposes to bring before the meeting (a) the name and address of the stockholder, (b) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, and (c) any material interest of the stockholder in such business. The chairman of the meeting may rule out of order any business not properly brought before the meeting in compliance with the foregoing procedures. 3 6 ARTICLE II DIRECTORS SECTION 1. NUMBER AND TERM OF OFFICE. The number of directors constituting the entire Board of Directors of the Company shall be not less than seven (7) nor more than twenty-one (21) and shall be determined in the manner set forth in the Articles of Incorporation. Classifications of directors pursuant to the Articles of Incorporation shall be by the Board of Directors. All directors shall be stockholders in the Company. At each annual meeting of stockholders, directors shall be elected by a plurality of the votes cast, to hold office as provided in the Articles of Incorporation and until their successors are elected and qualified. SECTION 2. NOMINATIONS OF DIRECTOR CANDIDATES. Nominations of candidates for election as directors may be made by the Board of Directors or by any stockholder entitled to vote for the election of directors. Nominations by a stockholder must be made by notice in writing delivered to the Secretary of the Company not later than (a) with respect to an election to be held at an annual meeting of stockholders, ninety (90) days in advance of such meeting, provided, however, if the annual meeting is not held on or within eight (8) days of the date set forth in Article I, Section 1 and if less than one hundred (100) days notice or public disclosure of the date of the meeting is given to stockholders, such notice by a stockholder must be not later than the tenth day following the date on which notice or public disclosure of the date of the meeting was first given the stockholders and (b) with respect to an election to be held at a special meeting of stockholders, such notice by a stockholder must be not later than the tenth day following the date on which notice or public disclosure of the date of the meeting was first given the stockholders. A stockholder's notice to the Secretary shall set forth: (a) the name and address of the stockholder, (b) the name, age and business address of each nominee proposed in such notice, (c) such other information concerning each nominee as must be disclosed of nominees in proxy solicitations pursuant to proxy rules of the Securities and Exchange Commission, and (d) the written consent of each nominee to serve as a director if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedures. A stockholder's compliance with the foregoing procedures shall not require the Company to include a proposed nominee in the Company's proxy solicitation materials. 4 7 SECTION 3. REMOVAL OF DIRECTORS. Subject to the rights of holders of any series of preferred stock then outstanding, any director may be removed from office at any time either (a) by vote of the holders of a majority of the shares entitled to vote at an election of directors, but only for cause, or (b) by vote of a majority of the other directors, with or without cause. SECTION 4. VACANCIES. Any vacancy in the Board of Directors through death, resignation, disqualification or other cause, or because of an increase in the number of directors, may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum, for a term of office continuing only until the next election of directors by the stockholders. SECTION 5. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at the principal office of the Company on the third Tuesday of the month at nine A.M., unless otherwise specified (1) by the Chairman or Vice Chairman of the Board or the President, provided that notice is given personally or by mail or telegram to the last known address of 5 8 each director at least three (3) days before such meeting, or (2) by resolution of the Board of Directors. No notice shall be required to be given of any regular meeting, except as provided above. SECTION 6. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held whenever called by the Chairman or Vice Chairman of the Board, or the President, or a Vice President or the Secretary of the Company, or pursuant to resolution of the Board of Directors. Notice thereof shall be given personally or by mail or telegram to the last known address of each director at least three (3) days before such meeting. Any director may waive notice of any meeting. Neither the business to be transacted at, nor the purpose of, a special meeting need be specified in the notice or waiver of notice of the meeting. SECTION 7. QUORUM AND VOTING. A majority of the members of the Board then in office shall constitute a quorum for the transaction of business, except where otherwise provided by law or the Articles of Incorporation or the By-Laws; but a majority of members present at any regular or special meeting, although less than a quorum, may adjourn the meeting from time to time, without notice. The vote of the majority of members present at a meeting at which a quorum is present constitutes the action of the Board, unless the vote of a larger number is required by law or the Articles of Incorporation or the By-Laws. SECTION 8. ACTION OF DIRECTORS WITHOUT A MEETING. Except as otherwise provided by law, action required or permitted to be taken pursuant to authorization voted at a meeting of the Board or a committee thereof may be taken without a meeting if, before or after the action, all members of the Board or of the committee consent thereto in writing. The written consents 6 9 shall be filed with the minutes of the proceedings of the Board or committee. The consent has the same effect as a vote of the Board or committee for all purposes. ARTICLE III OFFICERS SECTION 1. OFFICERS. The officers of the Company shall be a President, one or more Vice Presidents, a Secretary and a Treasurer. The Board of Directors shall have power to add designations to the aforesaid offices and to create such other offices as it may from time to time deem expedient, and shall, at some convenient time after each annual meeting, elect officers of the Company for the ensuing year. 7 10 SECTION 2. THE PRESIDENT. The President shall perform such duties as may be designated by the Board of Directors, and shall have authority to execute on behalf of the Company any and all contracts, agreements, bonds, deeds, mortgages, leases or other obligations of the Company. In the absence or incapacity of the President, the Board of Directors shall determine which other officer shall perform the duties of that office. SECTION 3. THE VICE PRESIDENTS. The Vice Presidents shall perform such duties as may be designated by the Chairman of the Board or the President, subject to the direction of the Board of Directors. Any Vice President shall have authority to execute on behalf of the Company any and all contracts, agreements, bonds, deeds, mortgages, leases or other obligations of the Company. SECTION 4. THE TREASURER. The Treasurer shall have the custody of and be responsible for all funds and securities of the Company, subject to the control of the Board of Directors. The Treasurer shall keep bank accounts in the name of the Company and shall exhibit the books and accounts to any director upon application at the principal office of the Company during ordinary business hours. The Treasurer shall perform all duties incident to the position of Treasurer, subject to the control of the Board of Directors, and shall have authority to sign and endorse all notes, checks, drafts and other obligations of the Company. SECTION 5. THE SECRETARY. The Secretary shall keep a record in proper books provided for that purpose of all the meetings and proceedings of the Board of Directors and the minutes of the stockholders' meetings, and shall keep such other records and shall perform such other duties as the Board of Directors or Chairman of the Board shall designate. The Secretary shall notify the directors and stockholders of their respective meetings, shall attend to the 8 11 giving and serving of all notices of the Company, and shall in general do and perform all the duties pertaining to the office, subject to the control of the Board of Directors. The Secretary shall keep a stock certificate book and transfer book at the office of the Company, or at such other place or places as may be chosen by the Board of Directors. The Secretary shall keep careful data from which a list of stockholders can be compiled, and shall furnish such list upon order of the Board of Directors. The Secretary shall have the custody of the seal of the Company, and shall attach the same to instruments required to be executed under the seal of the Company. SECTION 6. DIVISIONAL VICE PRESIDENTS AND JUNIOR OFFICERS. The Board of Directors may elect such junior officers as may from time to time be deemed expedient. In addition, the Chairman of the Board, the President or the Board of Directors may elect such Divisional Vice Presidents as may from time to time be deemed by any such person to be necessary or desirable in the conduct of the Company's business. The Divisional Vice Presidents and junior officers shall have such powers and authority and shall perform such duties as may be assigned to them by the Chairman of the Board, the President, the Board of Directors or the senior officer to whom they report. SECTION 7. REMOVAL. Any officer elected or appointed by the Board of Directors may be removed at any time with or without cause by the Board of Directors. SECTION 8. VACANCIES. Vacancies among officers of the Company during the year may be filled by the Board of Directors for the unexpired portion of the term. SECTION 9. CHAIRMAN OF THE BOARD. The Board of Directors may elect a Chairman of the Board from among the members of the Board. If the Board of Directors has elected a Chairman of the Board, the Chairman shall preside at all meetings of stockholders and of the Board of Directors and shall perform such duties as may be designated by the Board of Directors. SECTION 10. VICE CHAIRMAN OF THE BOARD. The Board of Directors may elect a Vice Chairman of the Board from among the members of the Board. If the Board of Directors has elected a Vice Chairman of the Board, the Vice Chairman shall perform such duties as may be designated by the Chairman of the Board, subject to the direction of the Board of Directors. ARTICLE IV COMMITTEES SECTION 1. EXECUTIVE/FINANCE COMMITTEE. There shall be an Executive and Finance Committee chosen by the Board of Directors at its first meeting after this By-Law is adopted and 9 12 thereafter at its first meeting following the annual meeting of stockholders of the Company each year. The Executive and Finance Committee shall consist of not less than three members of the Board, one of whom shall be the Chairman of the Board. One member shall be designated as chairman by the Board. During the intervals between meetings of the Board of Directors and subject to such limitations as provided by law or by resolution of the Board, the Committee shall possess and may exercise all powers and authority of the Board of Directors in the management and direction of the affairs of the Company and shall be responsible for review of corporate financial policies and procedures and shall recommend to the Board dividend policy, corporate financing, the issuance and sale of company securities and investment of funds, and shall perform such other duties as the Board may prescribe. The Committee shall keep minutes of its proceedings, and all action by the Committee shall be reported at the next meeting of the Board of Directors. SECTION 2. AUDIT COMMITTEE. There shall be an Audit Committee chosen by the Board of Directors at its first meeting after this By-Law is adopted and thereafter at its first meeting following the annual meeting of stockholders each year. The Audit Committee shall consist of not less than three members of the Board, none of whom shall be an officer of the Company or any of its subsidiaries. One member shall be designated as chairman by the Board. The Committee shall recommend to the Board the conditions, compensation and term of appointment of independent certified public accountants for the auditing of the books and accounts of the Company and its subsidiaries. From time to time, as considered necessary and desirable, the Committee shall confer with such accountants for the exchanging of views relating to the scope and results of the auditing books and accounts of the Company and its subsidiaries and shall provide to the Board such assistance as may be required with respect to the corporate and reporting practices of the Company. The Committee shall perform such other duties as the Board may prescribe. 10 13 SECTION 3. COMPENSATION AND INCENTIVES COMMITTEE. There shall be a Compensation and Incentives Committee chosen by the Board of Directors at its first meeting after this By-Law is adopted and thereafter at its first meeting following the annual meeting of stockholders each year. The Committee shall consist of not less than three members of the Board, none of whom shall be an officer of the Company or any of its subsidiaries. No person may be a member of this Committee who is, or within one year prior to his appointment to the Committee was, eligible for selection as a person to whom rights or benefits may be granted pursuant to any stock option or other long term incentive plan of the Company or any of its subsidiaries. One member shall be designated as chairman by the Board. The Committee shall determine the nature and amount of compensation of all senior officers of the Company. As may be prescribed by the Board of Directors, the Committee shall administer any stock option or other long term incentive plan of the Company and perform other prescribed duties. SECTION 4. NOMINATING COMMITTEE. There shall be a Nominating Committee chosen by the Board of Directors at its first meeting following the annual meeting of stockholders each year. The Nominating Committee shall consist of not less than three members of the Board, none of whom shall be an officer of the Company or any of its subsidiaries. One member shall be designated as chairman by the Board. The Committee shall recommend to the Board nominees for election as directors, and shall perform such other duties as the Board may prescribe. SECTION 5. PUBLIC ISSUES COMMITTEE. There shall be a Public Issues Committee chosen by the Board of Directors at its first meeting after this By-Law is adopted and thereafter at its first meeting following the annual meeting of stockholders each year. The Committee shall consist of not lss than three members of the Board. One member shall be designated as chairman 11 14 by the Board. The Committee shall consider the extent to which Company policies and activities relate to and are in proper accord with public interest, shall make appropriate recommendations in that regard to management or the Board, and shall perform such other duties as the Board may prescribe. SECTION 6. HEALTH CARE COMMITTEE. There shall be a Health Care Committee chosen by the Board of Directors at its meeting at which this By-Law is adopted and thereafter at its first meeting following the annual meeting of stockholders of the Company each year. The Health Care Committee shall consist of not less than three persons, a majority of whom shall be members of the Board. One member shall be designated as chair by the Board. The Committee shall review and monitor the Company's health care programs, their adequacy and cost effectiveness, shall make recommendations in that regard to management or the Board, and shall perform such other duties as the Board may prescribe. SECTION 7. COMMITTEE VACANCIES; QUORUM, VOTING AND PROCEDURES. Each member of a committee shall serve at the pleasure of the Board of Directors, and vacancies on a committee may be filled by the Board at any time. The Board may also increase the number of members of a committee at any time. A majority of all members of a committee shall constitute a quorum, and the affirmative vote of a majority of all the members of a committee shall constitute the action of the committee. Each committee shall determine its own rules of procedure and shall meet as provided by such rules, or by resolution of the Board, or on the call of the committee chairman or any member thereof. SECTION 8. OTHER COMMITTEES. The Board of Directors may by resolution establish such other committees as may be desirable, the responsibilities and duties of which may be prescribed by the Board, subject to such limitations as provided by law. 12 15 ARTICLE V CAPITAL STOCK SECTION 1. CERTIFICATES. Certificates of shares of the capital stock of the Company shall be in such form as shall be approved by the Board of Directors, signed by the Chairman or Vice Chairman of the Board, the President or a Vice President and also by the Secretary or an Assistant Secretary or by the Treasurer or an Assistant Treasurer. The seal of the Company may be engraved on the certificates instead of being manually affixed, and the signatures of officers may be facsimile signatures if the certificate is countersigned by a transfer agent or registered by a registrar other than the Company itself or its employee. All certificates of stock shall be consecutively numbered, and the name(s) and address of the person(s) to whom issued, the number of shares and date of issue, shall be entered on the stock transfer books of the Company. All certificates of stock surrendered to the Company for transfer shall be cancelled and, except in the case of lost or destroyed certificates as hereinafter provided, no new certificate shall be issued until the former certificate or certificates for the shares represented thereby shall have been surrendered and cancelled. SECTION 2. LOST CERTIFICATES. When a certificate of stock previously issued is alleged to have been lost or destroyed, a new certificate may be issued therefor upon such terms and indemnity to the Company as the Board of Directors may prescribe. SECTION 3. TRANSFER OF SHARES. Transfer of shares of stock of the Company shall be made only on the stock transfer books of the Company, and the Company may decline to recognize the holder of any certificate of stock of the Company as a stockholder until the shares represented by such certificate are transferred into his or her name on the stock transfer 13 16 books of the Company. The Company shall be entitled to treat the holder of record of any shares of stock as the absolute owner thereof, and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provide by law. The Board of Directors may appoint one or more stock transfer agents and registrars (which functions may be combined), and may require all stock certificates to bear the signature of such transfer agent and such registrar. SECTION 4. FIXING OF RECORD DATE. For the purpose of determining stockholders entitled to notice of and to vote at a meeting of stockholders or an adjournment thereof, or for the purpose of determining stockholders entitled to receive payment of a dividend or allotment of a right, or for the purpose of any other action, the Board of Directors may fix in advance a date as the record date for any such determination of stockholders. The date shall not be more than sixty (60) nor less than ten (10) days before the date of the meeting, nor more than sixty (60) days before any other action. ARTICLE VI SALE OF THE ASSETS OF THE COMPANY SECTION 1. The entire assets, business and good will of the Company may be sold to any person, firm or corporation, either within or without the State of Michigan, upon such terms and conditions, and for such lawful consideration, as may be authorized by vote of majority of the whole Board of Directors, and approved by vote in person or by proxy, of the holders of not less than three-fourths (3/4) of the outstanding capital stock of the Company, given at an annual or at a special meeting of the stockholders called and held for that purpose. 14 17 ARTICLE VII MISCELLANEOUS SECTION 1. SEAL. The seal of the Company shall be circular in form, with the words "Kmart Corporation, Michigan" on the circumference, and shall be kept in the charge and custody of the Secretary, to be affixed to all instruments requiring a seal. SECTION 2. FISCAL YEAR. The fiscal year of the Company shall end on the last Wednesday in January in each year. SECTION 3. INDEMNIFICATION. Any director or officer of the Company who is or was a party or is threatened to be made a party or is otherwise involved in any threatened, pending or completed action (including any civil, criminal, administrative or investigative suit or proceeding) by reason of the fact that he or she is or was a director or officer of the Company or is or was serving another corporation, partnership, joint venture, trust or other enterprise at the request of the Company, including service with respect to employee benefit plans, shall be indemnified by the Company against expenses, including attorneys' fees, judgments, penalties, fines and amounts paid or to be paid in settlement reasonably incurred by such person in connection with the action. Such indemnification shall include the right to be paid by the Company any reasonable expenses incurred by such person in defending such action in advance of its final disposition. Indemnification hereunder shall be to the fullest extent now or hereafter authorized by the Michigan Business Corporation Act, and shall be determined in the manner provided therein; provided, however, that the Company shall indemnify any person seeking indemnity in 15 18 connection with an action (or part thereof) initiated by such person only if the action (or part thereof) was authorized by the Board of Directors. It shall be a defense to any claim for indemnity hereunder that the claimant has not met the applicable standard of conduct for which indemnification is permitted under the Michigan Business Corporation Act. The Company may, by action of its Board of Directors, provide indemnification to employees and agents to the same or a lesser extent as the foregoing indemnification of directors and officers. Indemnification provided hereunder shall be a contract right between the Company and each director or officer of the Company who serves in such capacity at any time while this Section 3 is in effect; shall continue to a person who has ceased to serve in such capacity and shall inure to the benefit of the heirs, executors and administrators of such person; and shall not be exclusive of any other right which an person may have or hereafter acquire under any other written contractual agreement. Neither the Company nor its directors or officers nor any person acting on its behalf shall be liable to anyone for any determination as to the existence or absence of conduct which would provide a basis for making or refusing to make any payment hereunder or for taking or omitting to take any other action hereunder, in reliance upon advice of counsel. SECTION 4. CONTROL SHARE ACQUISITIONS. Chapter 7B of the Michigan Business Corporation Act (being Sections 450.1790 through 450.1799 of Michigan Compiled Laws) shall not apply to control share acquisitions of shares of the Company's capital stock. 16 19 ARTICLE VIII AMENDMENTS SECTION 1. BY DIRECTORS. These By-Laws may be amended, altered or repealed and new By-Laws may be adopted, at any meeting of the Board of Directors by a majority vote of the members of the Board then in office; provided, however, that the Board of Directors shall not amend, alter or repeal Article VI of these By-Laws. SECTION 2. BY STOCKHOLDERS. These By-Laws may also be amended, altered or repealed and new By-Laws may be adopted at any meeting of stockholders, if such purpose is contained in the notice of meeting (pursuant to Article 1, Section 3), by a majority of the votes cast by the holders of shares entitled to vote thereon; provided, however, that Article VI of these By-Laws shall not be amended, altered or repealed without the consent of the holders of at least two-thirds (2/3) of the issued and outstanding capital stock of the Company, given in person or by proxy, at an annual or special meeting of the stockholders called and held for the purpose. 17 EX-10.(D) 4 EXHIBIT 10(D) 1 EXHIBIT 10(d) K MART CORPORATION DIRECTORS RETIREMENT PLAN Section 1. Purpose This Plan, which shall be known as the K mart Corporation Directors Retirement Plan, is designed to provide retirement benefits to non-employee directors who have rendered service to K mart Corporation (the "Company") as members of its Board of Directors (the "Board"), and to attract and retain as directors persons of substantial ability and experience who can contribute their knowledge and judgment to the business of the Company. Section 2. Eligibility Any person who is neither an employee, nor entitled to any pension earned as an employee, of the Company (or any of its subsidiaries) and who is a member of the Board at or after the effective date of this Plan shall be eligible for benefits hereunder after retirement from the Board if such director has served on the Board: (a) until the time specified in the Company's policy regarding tenure of non-employee Board members based upon age; or (b) at least 10 years. Section 3. Benefit Amount The annual amount of benefits to be paid hereunder to a retired director shall be a sum equal to the amount of the annual retainer fee in effect for non-employee directors at the time of the director's retirement from the Board. Section 4. Payment and Duration of Benefits Benefits hereunder shall become payable as of the director's retirement from the Board or attainment of age 65, whichever is later, and shall be paid to the retired director on a quarterly basis on the last day of each calendar quarter. Payment to a retired director shall continue until the earlier of: (a) the death of the retired director, (b) the expiration of 10 years, or (c) the expiration of a period equivalent to the retired director's period of service as a member of the Board. Payment shall be pro-rated for any period less than a full calendar quarter. 2 Section 5. Surviving Spouse Benefit In the event of the death of a retired director to whom benefits hereunder are then payable or would become payable upon attainment of age 65, or of a director who has served on the Board at least 10 years, the benefits which would otherwise have been payable to such retired director, or to such director if he or she had retired from the Board as of the date of death, shall be paid to his or her surviving spouse as hereinafter provided. Payments to a surviving spouse shall commence as of the date of death of a retired director or director who had attained age 65; otherwise, payments shall commence as of the date the retired director or director would have attained age 65. Payments to a surviving spouse shall continue until the earlier of the death of the surviving spouse or the date on which benefit payments to such director would have ceased had such director not died. Section 6. Conditions The Company shall not be liable to make any payments hereunder if, as determined by the Board in its sole discretion, the director (during or following his or her membership on the Board) engaged in any activity or association in competition with or adverse or detrimental to the interests of the Company. Section 7. Miscellaneous The right to receive benefits hereunder shall be non-assignable and shall not be subject in any manner to the debts or other obligations of the director or his or her surviving spouse. The Company shall not be required to reserve or otherwise set aside funds to meet any obligations of this Plan. Nothing in this Plan shall be construed as conferring any right upon any director to continuance as a member of the Board. Section 8. Amendment and Termination This Plan may be amended or discontinued by the Board at any time in its sole judgment. No such amendment or termination shall reduce the benefit to which any person shall have become entitled hereunder prior to such amendment or termination. Section 9. Effective Date This Plan shall be effective as of May 1, 1984. -2- EX-10.(F) 5 EXHIBIT 10(F) 1 EXHIBIT 10(f) KMART CORPORATION DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS Section 1. Eligibility Each member of the Board of Directors (the "Board") of Kmart Corporation (the "Company") who is not an employee of the Company or any of its subsidiaries (an "Eligible Director") is eligible to participate in the Kmart Corporation Deferred Compensation Plan for Non-Employee Directors (the "Plan"). Section 2. Participation (a) Prior to the beginning of any calendar year, commencing with the calendar year 1991, each Eligible Director may elect to participate in the Plan by directing that all or any part of the compensation otherwise payable in cash for services as an Eligible Director (including services as non-executive Chairman or Vice-Chairman of the Board) during such calendar year and subsequent calendar years shall be credited to a deferred compensation account subject to the terms of the Plan. (b) An election to participate in the Plan shall be in the form of a document executed by the director and filed with the Secretary of the Company. An election related to cash compensation otherwise payable currently in any calendar year shall become irrevocable on the last day prior to the beginning of such calendar year. An election shall continue until the director ceases to be a director of the Company or until he or she terminates or modifies such election by written notice. Any such termination or modification shall become effective as of the end of the calendar year in which such notice is given with respect to all cash compensation otherwise payable in subsequent calendar years. (c) A director who has filed a termination of election may thereafter again file an election to participate for any calendar year or years subsequent to the filing of such election. Section 3. Deferred Cash Compensation Accounts All deferred cash compensation shall be held in the general funds of the Company and shall be credited to the director's account and shall bear interest from the date such cash compensation would otherwise be payable. The interest credited to the account shall be compounded quarterly at the end of each calendar quarter. For all amounts whenever credited, the rate of interest credited thereon shall be equal to the average ten-year U.S. Treasury note rate for the previous calendar quarter plus 5%. 2 Section 4. Distribution (a) At the time of election to participate in the Plan, a director shall also make an election with respect to the distribution (during the director's lifetime or in the event of the director's death) of amounts deferred under the Plan plus accumulated interest. Such an election shall be contained in the document referred to in Section 2(b) hereof, executed by the director and filed with the Secretary of the Company. Such an election related to cash compensation otherwise payable currently in any calendar year shall become irrevocable on the last day prior to the beginning of such calendar year. (b) A director may elect to receive amounts credited to his or her account in one payment or in some other number of equal annual installments (not exceeding ten). The election shall direct that the first installment (or the lump sum payment if the director has so elected) be paid on the tenth day of the calendar year immediately following either (1) the year in which the director ceases to be a director of the Company, or (2) the earlier of the year in which the director ceases to be a director of the Company or a date designated by the director. (c) Notwithstanding an election pursuant to Section 4(b) hereof: (i) if, as determined by the Board in its sole discretion, the director (during or following his or her membership on the Board) engaged in any activity or association in competition with or adverse or detrimental to the interest of the Company, the entire balance of the director's deferred cash compensation hereunder, including interest, shall be distributed immediately in a lump sum payment; (ii) upon the occurrence of a Change in Control (as defined below), the entire balance of all deferred cash compensation hereunder, including interest, shall be distributed immediately in a lump sum payment. A Change in Control shall have occurred if (i) the "beneficial ownership" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934 as amended (the "Exchange Act")) of securities representing more than 50% of the combined voting power of the Company is acquired by any "person" as defined in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), or (ii) the stockholders of the Company approve a definitive agreement to merge or consolidate the Company with or into another corporation or to sell or otherwise dispose of all or substantially all of its assets, or adopt a plan of liquidation, or (iii) during any period of two consecutive years, individuals who at the beginning of such period were members of the Board cease for any reason to constitute at least a majority thereof (unless the election or the nomination for election by the Company's stockholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period). -2- 3 (d) Installments subsequent to the first installment to the director shall be distributed on the tenth day of each succeeding calendar year until the entire amount credited to the director's deferred account shall have been distributed. Deferred amounts held pending distribution shall continue to be credited with interest, determined in accordance with Section 3 hereof. (e) In the event the director should die before full distribution of all amounts credited to the director's account, the balance of the deferred amounts shall be distributed in a lump sum payment to the beneficiary or beneficiaries designated in writing by the director, or if no designation has been made, to the estate of the director. Section 5. Miscellaneous (a) The right of a director to any deferred cash compensation and/or interest thereon shall be non-assignable and shall not be subject in any manner to the debts or other obligations of the director or any other person. (b) The Company shall not be required to reserve or otherwise set aside funds to meet any obligations of the Plan. (c) The Plan shall remain in effect until the earlier to occur of a Change in Control or the termination of the Plan by the Board; provided, however, that, except as provided in Section 4(c)(ii) hereof, distribution may be made pursuant to a deferral election after such date. (d) The Plan may be amended or discontinued by the Board at any time in its sole judgment. In the event the Plan is terminated, amounts credited to directors' accounts shall be distributed at such time and in such manner as the Board shall determine, no later than they would have been made as elected under Section 4 hereof. (e) Nothing in the Plan shall be construed as conferring any right upon any director to continuance as a member of the Board. (f) The Plan and all rights hereunder shall be construed in accordance with and governed by the laws of the State of Michigan. Dated: December 18, 1990 (Amended December 16, 1991 and March 28, 1995) -3- EX-10.(G) 6 EXHIBIT 10(G) 1 EXHIBIT 10(g) KMART CORPORATION 1992 Stock Option Plan 1. Purpose. The Kmart Corporation 1992 Stock Option Plan (the "Plan") is intended as an incentive and to encourage ownership of the Company's Common Stock (the "Stock") by certain key employees of Kmart Corporation (the "Company") and its Subsidiaries (corporations of which a majority of the stock is owned directly or indirectly by the Company and other business entities, a majority of which is owned directly or indirectly by the Company) in order to increase their proprietary interest in the Company's success and to assure their continuation as employees. 2. Administration. The Plan shall be administered by the Compensation and Incentives Committee (the "Committee") consisting of not less than two directors of the Company appointed by its Board of Directors. Members of the Committee shall serve at the pleasure of, and vacancies occurring in the membership of the Committee shall be filled through appointment by, the Board of Directors. No person may be a member of the Committee if he or she has been, within one year prior to his or her appointment to the Committee, or at any time during his or her service on the Committee, allocated Stock or granted Stock options or Stock appreciation rights pursuant to the Plan or any other plan of the Company or any of its Subsidiaries to the extent such allocation or grant would cause such person to fail to be a "disinterested person" under subsection (c)(2) of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, as such Rule may be amended from time to time ("Rule 16b-3"); provided, however, that membership on the Committee shall not affect or impair any rights of a member with respect to any Stock allocated or Stock options or Stock appreciation rights granted to him or her when he or she was not a member of the Committee. The Committee shall keep minutes of its meetings. A majority of the Committee shall constitute a quorum thereof and the acts of a majority of the members present at any meeting of the Committee at which a quorum is present, or acts approved in writing by the entire Committee, shall be the acts of the Committee. 2 The Committee may make such rules and regulations and establish such procedures for the administration of the Plan as it deems appropriate. The interpretation and application of the Plan or of any term or condition of an option granted under the Plan or of any rule, regulation or procedure, and any other matter relating to or necessary to the administration of the Plan, shall be determined by the Committee, and any such determination shall be final and binding upon all persons. 3. Stock. Shares of Stock to be optioned or issued under the Plan may be either authorized and unissued shares or issued shares which shall have been reacquired by the Company, provided that the total amount of Stock on which options may be granted or which may be issued under the Plan shall not exceed 10,000,000 shares. Such number of shares is subject to adjustment in accordance with the provisions of Section 6 hereof. No option may be granted under the Plan to an employee who owns more than five percent of the outstanding Stock. In the event that any outstanding option or portion thereof expires or is cancelled, surrendered or terminated for any reason, the shares of Stock allocable to the unexercised portion of such option may again be subjected to an option or be issued under the Plan. 4. Award of Options. The Committee may grant options to purchase Stock to officers and other key employees of the Company or its Subsidiaries, including directors who are full time employees. The Committee shall have the discretion, in accordance with the provisions of the Plan, to determine to whom an option is granted, the number of shares of Stock optioned and the terms and conditions of the option. In making such determinations, the Committee shall consider the position and responsibilities of the employee, the nature and value to the Company of his or her services and accomplishments, his or her present and potential contribution to the success of the Company, and such other factors as the Committee may deem relevant. Each option granted under the Plan shall be designated by the Committee at the time of grant as either an incentive stock option (an "Incentive" option) or a non-qualified stock option (a "Non-Qualified" option). An Incentive option is intended to meet the requirements of Section 422 of the Internal Revenue Code. The aggregate Fair Market Value (determined at the time the option 2 3 is granted) of the Stock as to which Icentive options are exercisable for the first time by the optionee during any calendar year shall not exceed $100,000 (as determined in accordance with the rules set forth in Section 422 of the Internal Revenue Code). Options granted under the Plan shall be subject to and governed by the provisions of the Plan and by the terms and conditions set forth in Section 5 hereof and by such other terms and conditions, not inconsistent with the Plan, as shall be determined by the Committee. The date on which an option shall be granted shall be the date that the optionee, the number of shares of Stock optioned and the terms and conditions of the option are determined by the Committee, provided, however, that if an option or any term or condition of an option is rejected or not accepted by an optionee or if an option is not granted in accordance with the provisions of the Plan, such option shall be deemed to have not been granted and shall be of no effect. Each option shall be evidenced by a Stock Option Agreement in such form as the Committee may from time to time approve. 5. Terms and Conditions of Options. A. Option Price. In the case of each option granted under the Plan, the option price shall not be less than the Fair Market Value of the Stock on the date of grant of such option. (Fair Market Value for purposes of the Plan shall be deemed to be the mean of the highest price and lowest price at which the Stock shall have been sold, regular way, on the date in question or on the next preceding day on which there were such sales of Stock if no such sales shall have been made on the date in question, as reported on the Composite Transactions reporting system.) B. Period of Option and When Exercisable. (i) An option granted under the Plan may not be exercised after the earlier of (a) the date specified by the Committee, which shall be a maximum of ten years from date of grant as to an Incentive option and a maximum of ten years and two days from date of grant as to a Non-Qualified option, or (b) the applicable time limit specified in paragraph (iii) of this Section 5B. Any option not excercised within the aforementioned time 3 4 periods shall automatically terminate at the expiration of such period. (ii) An option granted with a maximum exercise period of more than three years may not be exercised prior to three years from the date of grant (or such other period as determined by the Committee in its sole discretion), except that this limitation shall be removed if termination of employment of the optionee results from death or total and permanent disability as defined in the Company's Employee Pension Plan, or if termination of employment of the optionee occurs at or after age 65 and the optionee has ten or more years of full-time service with the Company or a Subsidiary, or in the event of a Change of Control of the Company, or if and to the extent the Committee may so determine in its sole discretion. An option granted with a maximum exercise period of three years or less is not subject to the limitation contained in this paragraph (ii) unless otherwise specified by the Committee. A Change of Control shall be deemed to have occurred if: (a) the "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act) of securities representing more than 33% of the combined voting power of the Company is acquired by any "person" as defined in sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee of other fiduciary holding securities under an employee benefit plan or the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, or (b) the stockholders of the Company approve a definitive agreement to merge or consolidate the Company with or into another corporation or to sell or otherwise dispose of all or substantially all of its assets, or adopt a plan of liquidation, or (c) during any period of three consecutive years, individuals who at the beginning of such period were members of the Board cease for any reason to constitute at least a majority thereof (unless the election, or the nomination for election by the Company's stockholders, of each new director 4 5 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). (iii) An option may be exercised by an optionee only while such optionee is in the employ of the Company or a Subsidiary or within three months thereafter, and only if any limitation upon the right to exercise such option under paragraph (ii) of this Section 5B has been removed or has expired prior to termination of employment and exercise is not otherwise precluded hereunder; provided, however, if at the date of termination of employment the optionee has ten or more years of full-time service with the Company or a Subsidiary or if termination of employment results from death or total and permanent disability as defined in the Company's Employee Pension Plan, such three-month period shall be extended to three years. Employment with a Subsidiary shall be deemed terminated on the date a former Subsidiary ceases to be a Subsidiary of the Company. (iv) In the event of the disability of an optionee, an option which is otherwise exercisable may be exercised by the optionee's legal representative or guardian. In the event of the death of an optionee, either before or after termination of employment, an option which is otherwise exercisable may be exercised by the person or persons whom the optionee shall have designated in writing on forms prescribed by and filed with the Committee ("Beneficiaries"), or, if no such designation has been made, by the person or persons to whom the optionee's rights shall have passed by Will or the laws of descent and distribution ("Successor(s)"). The Committee may require an indemnity and/or such evidence or other assurances as it may deem necessary in connection with an exercise by a legal representative, guardian, Beneficiary or Successor. (v) Notwithstanding anything contained herein to the contrary, all rights with respect to all options of an optionee are subject to the conditions that the optionee not engage or have engaged (a) in fraud, dishonesty, conduct in violation of Company policy or similar acts at any time while in the employ of the Company or a Subsidiary, or (b) in activity directly or indirectly in competition with any business of the Company or a Subsidiary, or in other conduct inimical to the best interests of the Company or a Subsidiary, following 5 6 the optionee's termination of employment. If it is determined by the Committee or the Committee's designee (which determination of such designee shall be subject to ratification by the Committee), either before or after termination of employment of an optionee, that there has been a failure of any such condition, all options and all rights with respect to all options granted to such optionee shall immediately terminate and be null and void. C. Exercise and Payment. (i) Subject to the provisions of Section 5B, an option may be exercised by notice (in the form prescribed by the Committee) to the Company specifying the number of shares to be purchased. Payment for the number of shares of Stock purchased upon the exercise of an option shall be made in full at the price provided for in the applicable Stock Option Agreement. Such purchase price shall be paid by the delivery to the Company of cash (including check or similar draft) in United States dollars or whole shares of Stock that have been held by the optionee for at least six months prior to the date the option is exercised, or a combination thereof. Shares of Stock used in payment of the purchase price shall be valued at their Fair Market Value as of the date notice of exercise is received by the Company. Any shares of Stock delivered to the Company shall be in such form as is acceptable to the Company. (ii) The Company may defer making payment or delivery of Stock under the Plan until satisfactory arrangements have been made for the payment of any tax attributable to exercise of the option. The Committee may, in its sole discretion, permit an optionee to elect, in such form and at such time as the Committee may prescribe, to pay all or a portion of all taxes arising in connection with the exercise of an option by electing to (a) have the Company withhold whole shares of Stock, or (b) deliver other whole shares of Stock previously owned by the optionee having a Fair Market Value not greater than the amount to be withheld; provided, however, that the amount to be withheld shall not exceed the optionee's estimated total Federal, State and local tax obligations associated with the transaction. D. Nontransferability. No option or any rights with respect thereto shall be subject to any debts or liabilities of an optionee, nor be assignable or 6 7 transferable except by Will or the laws of descent and distribution, nor be exercisable during the optionee's lifetime other than by him or her, nor shall Stock be issued to or in the name of one other than the optionee; provided, however, that an option may after the death or disability of an optionee be exercised pursuant to paragraph (iv) of Section 5B; and provided further that any Stock issued to an optionee hereunder may at the request of the optionee be issued in the name of the optionee and one other person, as joint tenants with right of survivorship and not as tenants in common, or in the name of a trust for the benefit of the optionee or for the benefit of the optionee and others. E. Employment. No provision of the Plan, nor any term or condition of any option, nor any action taken by the Committee, the Company or a Subsidiary pursuant to the Plan, shall give or be construed as giving an optionee any right to be retained in the employ of the Company or of any Subsidiary, or affect or limit in any way the right of the Company or any Subsidiary to terminate the employment of any optionee. F. Termination of Option by Optionee. An optionee may at any time elect, in a written notice filed with the Committee, to terminate a Non-Qualified option with respect to any number of shares as to which such option shall not have been exercised. 6. Adjustments. If there is any change in the number or class of shares of Stock through the declaration of stock dividends, or recapitalization resulting in stock splits, or combinations or exchanges of such shares or similar corporate transactions, or if the Committee otherwise determines that, as a result of a corporate transaction involving a change in the Company's capitalization, it is appropriate to effect the adjustments described in this section, the aggregate number or class of shares of Stock on which options may be granted or which may be issued under the Plan, the number or class of shares covered by each outstanding option, and the price per share in each option, shall all be proportionately adjusted by the Committee; provided, however, that any fractional shares resulting from such adjustment shall be eliminated. Subject to any required action by stockholders, if a new option is substituted for the option granted hereunder, or an assumption of the option granted hereunder is made, by reason of a corporate merg- 7 8 er, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the option granted hereunder shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to the option would have been entitled. 7. Term of Plan. No Stock option shall be granted under the Plan after January 20, 2002. Options granted prior thereto, however, may extend beyond such date and the provisions of the Plan shall continue to apply thereto. 8. Application of Funds. The proceeds received by the Company from the sale of Stock pursuant to options granted under the Plan will be used for general corporate purposes. 9. No Obligation to Exercise Option. The granting or acceptance of an option shall impose no obligation upon the optionee to exercise such an option. 10. Rights as a Stockholder. An optionee shall have no rights as a stockholder with respect to shares of Stock covered by his or her option until the date of issuance to him or her of a certificate evidencing such shares of Stock after the exercise of such option and payment in full of the purchase price. No adjustment will be made for dividends or other rights for which the record date is prior to the date such certificate is issued. 11. Amendments. The Board of Directors of the Company may from time to time alter, amend, suspend or discontinue the Plan; provided, however, that no amendment which requires stockholder approval in order for the exemptions available under Rule 16b-3 to be applicable to the Plan shall be effective unless the same shall be approved by the stockholders of the Company entitled to vote thereon. Any such amendment may be effective in respect of all past and future options granted hereunder in sole discretion of the Board of Directors of the Company. The Plan, each option under the Plan and the grant and exercise thereof, and the obligation of the Company to sell and issue shares under the Plan shall be subject to all applicable laws, rules, regulations and governmental and stockholder approvals, and the Committee 8 9 may make such amendment or modification thereto as it shall deem necessary to comply with any such laws, rules and regulations or to obtain any such approvals. 12. Effectiveness of Plan. The Plan, which was adopted by the Board of Directors on January 21, 1992, is subject to approval by the stockholders of the Company on May 27, 1992. 13. Severability. If any provision of the Plan, or any term or condition of any option granted or Stock Option Agreement or form executed or to be executed thereunder, or any application thereof to any person or circumstance is invalid or would result in an Incentive option failing to meet the requirements of Section 422 of the Internal Revenue Code, such provision, term, condition or application shall to that extent be void (or, in the discretion of the Committee, such provision, term or condition may be amended so as to avoid such invalidity or failure), and shall not affect other provisions, terms or conditions or applications thereof, and to this extent such provision, term or condition is severable. 14. Limitation on Size of Grants. Effective as of January 1, 1994, no employee of the Company shall be granted options in any calendar year which are in excess of 10 percent of the total number of options granted in such calendar year with respect to all series of Stock. Additionally, no employee of the Company or its Subsidiaries shall be granted options in any calendar year with respect to any series of Specialty Retail Stock which are in excess of 25 percent of the total number of options granted in such calendar year with respect to such series of Specialty Retail Stock. 9 EX-10.(H) 7 EXHIBIT 10(H) 1 EXHIBIT 10(h) KMART CORPORATION DIRECTORS STOCK PLAN 1. PURPOSE 1.1 The Kmart Corporation Directors Stock Plan (the "Plan") is intended to increase the proprietary interest of nonemployee members of the Board of Directors (the "Board") of Kmart Corporation (the "Company") by providing further opportunity for ownership of the Company's common stock ("Stock"), and to increase their incentive to contribute to the success of the Company's business. 1.2 The Plan is intended to comply with Rule 16b-3 under the Securities Exchange Act of 1934 as amended (the "Exchange Act"), as such Rule may be amended from time to time ("Rule 16b-3") and shall be construed to so comply. In particular, the provisions of Section 4.1 hereof are intended to comply with the provisions of Section (c)(2)(ii) of Rule 16b-3, and the provisions of Section 4.2 hereof are intended to comply with the provisions of Section (d)(1)(i) of Rule 16b-3, and each such Section shall be construed to so comply. 2. ADMINISTRATION 2.1 The Plan shall be administered by the Compensation and Incentives Committee (the "Committee") of the Board. 2.2 The Committee may make such rules and establish such procedures for the administration of the Plan as it deems appropriate to carry out the purpose of the Plan. The interpretation and application of the Plan or of any rule or procedure, and any other matter relating to or necessary to the administration of the Plan, shall be determined by the Committee, and any such determination shall be final and binding on all persons. 3. SHARES OF STOCK 3.1 Shares Reserved. Shares of Stock which may be issued under the Plan may either be authorized and unissued shares or issued shares which have been reacquired by the Company, provided that the total amount of Stock which may be issued under the Plan shall not exceed 400,000 shares. 3.2 Capital Adjustments. In the event of a change in the number or class of shares of Stock as a result of reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation or a similar corporate transaction, the maximum number or class of shares available under the Plan, and the number or class of shares of Stock to be delivered hereunder shall be proportionately adjusted to reflect any such change. 4. DELIVERY OF SHARES OF STOCK 4.1 Mandatory Portion. For each calendar year commencing with the calendar year beginning January 1, 1995, each member of the Board who is not an employee of the Company or any of its subsidiaries (an "Eligible Director") shall receive a whole number of shares of Stock equal in value to 20% of any cash compensation payable for services as an Eligible Director (including services as non-executive Chairman or Vice-Chairman of the Board) during each such calendar year in lieu of payment of such percentage of such cash compensation. Such shares shall be delivered to each such director, in substantially equal installments, on the last business day of each calendar quarter of each such calendar year (the "Normal Stock Payment Date"), except to the extent that a Deferral Election (as defined in Section 4.3 hereof) shall be in effect with respect to such shares or that Section 4.6 hereof applies. Each such share shall be valued at the closing price per share of Stock as reported on the Composite Transactions reporting system, or if not so reported, as reported by the New York Stock Exchange (the "Closing Price") on the last business day preceding each Normal Stock Payment Date (the "Share Value Price"). The value of fractional shares shall be paid to the director in cash. 2 -2- 4.2 Elective Portion. For each calendar year commencing with the calendar year beginning January 1, 1995, each Eligible Director may elect to receive a whole number of shares of Stock equal in value (based on the Share Value Price) to up to 30% of his or her cash compensation payable for services as an Eligible Director during each such calendar year in lieu of payment of such percentage of such cash compensation. Such shares shall be delivered to each such director, in substantially equal installments, on the Normal Stock Payment Dates, except to the extent that a Deferral Election (as defined in Section 4.3 hereof) shall be in effect with respect to such shares or that Section 4.6 hereof applies. Provided, however, no shares shall be delivered to an Eligible Director pursuant to the director's election hereunder for a period of six months following the director's initial election hereunder, or any subsequent change of such election hereunder, and the shares accrued during such six month period shall be delivered on the Normal Stock Payment Date next following expiration of the six month period and shall be valued at the Closing Price on the last business day preceding such date. The value of fractional shares shall be paid to the director in cash. 4.3 Deferral Election. For cash compensation payable for services as an Eligible Director during calendar years beginning on or after January 1, 1992, each Eligible Director may elect to defer the receipt (a "Deferral Election") of all or a portion of the shares of Stock otherwise deliverable on a Normal Stock Payment Date ("Deferred Shares"). The director shall elect (a) that Deferred Shares be distributed in a lump sum or in equal annual installments (not exceeding ten), and (b) that the lump sum or first installment be distributed on the tenth day of the calendar year immediately following either (i) the year in which the director ceases to be a director of the Company, or (ii) the earlier of the year in which the director ceases to be a director of the Company or a date designated by the director; provided, however, that any such election shall be subject to Section 4.6 hereof. Installments subsequent to the first installment shall be distributed on the tenth day of each succeeding calendar year until all of the director's Deferred Shares shall have been distributed. In the event the director should die before all of the director's Deferred Shares have been distributed, the balance of the Deferred Shares shall be distributed in a lump sum to the beneficiary or beneficiaries designated in writing by the director, or if no designation has been made, to the estate of the director. 4.4 Dividend Equivalents. Deferred Shares shall be credited with an amount equivalent to the dividends which would have been paid on an equal number of outstanding shares of Stock ("Dividend Equivalents"). Dividend Equivalents shall be credited (i) as of the payment date of such dividends, and (ii) only with respect to Deferred Shares which were otherwise deliverable as of a Normal Stock Payment Date, or into which Dividend Equivalents were converted pursuant to the second paragraph of this Section 4.4, prior to the record date of the dividend. Deferred Shares held pending distribution shall continue to be credited with Dividend Equivalents. Dividend Equivalents so credited shall be converted into an additional whole number of Deferred Shares as of the payment date of the dividend (based on the Closing Price on such payment date). Such Deferred Shares shall thereafter be treated in the same manner as any other Deferred Shares under the Plan. Dividend Equivalents resulting in fractional shares shall be held for the credit of the director until the next dividend payment date and shall be converted into Deferred Shares on such date. Any Dividend Equivalents not converted into Deferred Shares shall be paid in cash upon the final distribution of the director's Deferred Shares. 4.5 Timing and Form of Elections. Any election described in Sections 4.2 and 4.3 hereof: (a) shall be in the form of a document executed by the director and filed with the Secretary of the Company, 3 -3- (b) shall be made before the first day of the calendar year in which the applicable cash compensation is earned and shall become irrevocable on the last day prior to the beginning of such calendar year, and (c) shall continue until a director ceases to be a director of the Company or until he or she terminates or modifies such election by written notice, any such termination or modification to be effective, except as otherwise provided in the second paragraph of paragraph 4.2 hereof, as of the end of the calendar year in which such notice is given with respect to cash compensation otherwise payable in subsequent calendar years. 4.6 Effect of Certain Events. Notwithstanding an election pursuant to Section 4.2 or Section 4.3 hereof: (a) If, as determined by the Board in its sole discretion, the director (during or following his or her membership on the Board) engaged in any activity or association in competition with or adverse or detrimental to the interest of the Company (i) all of such director's Deferred Shares shall be distributed immediately in the form of shares of Stock, (ii) all of such director's Dividend Equivalents not yet converted into Deferred Shares shall be distributed immediately in cash, and (ii) all of such director's cash compensation earned and not yet converted into shares of Stock or Deferred Shares under the terms of this Plan shall be distributed in the form of shares of Stock as soon as practicable after the next Normal Stock Payment Date. (b) Upon the occurrence of a Change in Control (as defined below), (i) all Deferred Shares to the extent credited prior to the Change in Control shall be distributed immediately in the form of shares of Stock, and (ii) all Dividend Equivalents not yet converted into Deferred Shares and all cash compensation earned and not yet converted into shares of Stock or Deferred Shares under the terms of this Plan shall be distributed immediately in cash. A Change in Control shall have occurred if (i) the "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act) of securities representing more than 50% of the combined voting power of the Company is acquired by any "person" as defined in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), or (ii) the stockholders of the Company approve a definitive agreement to merge or consolidate the Company with or into another corporation or to sell or otherwise dispose of all or substantially all of its assets, or adopt a plan of liquidation, or (iii) during any period of two consecutive years, individuals who at the beginning of such period were members of the Board cease for any reason to constitute at least a majority thereof (unless the election or the nomination for election by the Company's stockholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period). The provisions of this Section 4.6 shall not apply to the extent inconsistent with the requirements of Rule 16b-3, as the same may be interpreted from time to time. 4 -4- 5. TERM OF PLAN 5.1 The Plan, which was adopted by the Board on December 16, 1991, is subject to approval by the stockholders of the Company on May 27, 1992; provided, however, that if the Plan is approved by stockholders, any election described in Sections 4.2 and 4.3 hereof which was made prior to such approval shall be deemed to be effective as of the date such election was made. In no event shall any delivery of shares of Stock be made to any director or other person under the Plan until such time as stockholder approval of the Plan is obtained. 5.2 The Plan shall remain in effect until the earlier to occur of a Change in Control or December 15, 2006, unless sooner terminated by the Board; provided, however, that, except as provided in Section 4.6(b) hereof, shares of Stock and Dividend Equivalents may be delivered pursuant to a Deferral Election after such date. 6. AMENDMENT; TERMINATION 6.1 The Board may at any time and from time to time alter, amend, suspend or terminate the Plan in whole or in part; provided, however, that the provisions of Section 4.1 hereof shall not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act or the rules thereunder. 6.2 Except as provided in Section 4.6 hereof, in the event the Plan is terminated, Deferred Shares and Dividend Equivalents shall be distributed at such time and in such manner as the Board shall determine, no later than they would have been distributed pursuant to the Deferral Election applicable thereto. 7. MISCELLANEOUS 7.1 The right of a director to Deferred Shares and/or Dividend Equivalents shall be non-assignable and shall not be subject in any manner to the debts or other obligations of the director or any other person. 7.2 The Company shall not be required to reserve or otherwise set aside funds to meet any obligations under this Plan. 7.3 Nothing in this Plan shall be construed as conferring any right upon any director to continuance as a member of the Board. 7.4 This Plan and all rights hereunder shall be construed in accordance with and governed by the laws of the State of Michigan. Dated: December 16, 1991 (Amended June 3, 1994 and March 28, 1995) EX-10.(J) 8 EXHIBIT 10(J) 1 EXHIBIT 10(J) KMART CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN Section 1. Eligibility for Voluntary Deferrals Executives of Kmart Corporation and its subsidiaries (the "Company"), including corporate officers, group and divisional vice presidents, subsidiary officers and such other key executives as may be designated (the "Executives") by the Compensation and Incentives Committee (the "Committee") of the Board of Directors of Kmart Corporation (the "Board") in its sole discretion shall be eligible to make voluntary deferrals under the Kmart Corporation Executive Deferred Compensation Plan (the "Plan"). Section 2. Participation (a) Voluntary Deferral Elections. Within 30 days after an Executive first becomes eligible to make voluntary deferrals under the Plan, and, thereafter, prior to the beginning of any calendar year, each Executive who has been designated by the Committee as eligible to make voluntary deferrals may elect to participate in the Plan by directing that all or any part of the cash compensation otherwise currently payable to such Executive for employment during such calendar year and subsequent calendar years shall be credited to a deferred compensation account (a "deferral account") subject to the terms of the Plan. Such an election shall be in the form of a document executed by the Executive and filed with the senior officer of the Company responsible for executive compensation. An election related to cash compensation otherwise payable currently in any calendar year shall become irrevocable on the last day prior to the beginning of such calendar year (or, with respect to the calendar year in which an Executive first becomes eligible to make voluntary deferrals, on the 30th day after such initial eligibility). An election shall continue until an Executive ceases to be employed by the Company or until he or she terminates or modifies such election by written notice filed with the senior officer of the Company responsible for executive compensation. Any such termination or modification shall become effective as of the end of the calendar year in which such notice is given with respect to cash compensation otherwise payable in 2 subsequent calendar years. An Executive who has filed such a termination of election may thereafter again file, prior to the beginning of any calendar year, an election to make voluntary deferrals under the Plan with respect to cash compensation otherwise payable in such calendar year and subsequent calendar years. (b) Mandatory Deferrals. If the Committee in its sole discretion determines that, with respect to any fiscal year of the Company, an Executive is likely to be a "covered employee" for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended from time to time (the "Code"), the Committee shall require the Executive to participate in the Plan during such fiscal year (or the balance thereof remaining after the Committee's determination). For any such fiscal year (or remaining balance thereof), if the aggregate "applicable employee remuneration" (within the meaning of Section 162(m) of the Code) payable to the Executive by the Company would otherwise exceed $1,000,000 or such other amount as may be specified under Section 162(m) from time to time (as determined by the Committee), the Committee shall impose a mandatory deferral of all cash compensation otherwise payable to such Executive by the Company to the extent that such compensation would constitute part of such excess. Section 3. Deferral Accounts All deferred amounts shall be held in the general funds of the Company and shall be credited to the Executive's deferral account and shall bear interest from the date such compensation would otherwise be payable. The interest credited to the account shall be compounded quarterly at the end of each calendar quarter. For any amount credited to an Executive's deferral account as a result of voluntary deferrals pursuant to Section 2(a) hereof, the rate of interest credited thereon shall be equal to the average ten-year U.S. Treasury note rate for the previous calendar quarter. For any amount credited to an Executive's deferral account as a result of mandatory deferrals pursuant to Section 2(b) hereof, the rate of interest credited thereon shall be equal to the average ten-year U.S. Treasury note rate for the previous calendar quarter plus 5%. 2 3 Section 4. Normal Distribution of Voluntary Deferrals (a) At the time of an Executive's first election to participate in the Plan with respect to voluntary deferrals pursuant to Section 2(a) hereof, an Executive shall also make an election with respect to the manner of distribution (during the Executive's lifetime or in the event of the Executive's death) of amounts credited to the Executive's account as a result of voluntary deferrals, including credited interest. Such an election shall be contained in the document referred to in Section 2(b) hereof, executed by the Executive and filed with the senior officer of the Company responsible for executive compensation. Such an election related to cash compensation otherwise payable currently in any calendar year shall become irrevocable on the last day prior to the beginning of such calendar year (or, with respect to the calendar year in which an Executive first becomes eligible to make voluntary deferrals, on the 30th day after such initial eligibility), unless the existing election is replaced by another election prior to the date on which the existing election would otherwise become irrevocable as to the particular calendar year (in which event the replacement election shall so become irrevocable on such date. (b) An Executive may elect to receive amounts credited to his or her deferral account in a single payment or in some other number of equal annual installments (not exceeding ten). With respect to the voluntary deferrals covered by a particular election, the election shall direct that the first installment (or the single payment if the Executive has so elected) be distributed on the tenth day of the calendar year immediately following either (i) the year in which the Executive ceases to be employed by the Company, or (ii) the earlier of the year in which the Executive ceases to be employed by the Company or a date designated by the Executive. (c) Installments subsequent to the first installment payment to an Executive shall be paid on the tenth day of each succeeding calendar year until the entire amount credited to the Executive's deferral account, including credited interest, shall have been distributed. The deferred amount held pending distribution shall continue to be credited with interest, determined in accordance with Section 3 hereof. 3 4 (d) In the event that an Executive should die before full distribution of the entire amount credited to the Executive's deferral account has been made, the balance of the deferred amount, including credited interest, shall be distributed in a single payment to the beneficiary or beneficiaries designated in writing by the Executive, or if no designation has been made, to the estate of the Executive. Section 5. Restrictions on Distribution of Mandatory Deferrals Notwithstanding any other provision of this Section or Section 4 hereof, any amount credited to an Executive's deferral account as the result of mandatory deferrals pursuant to Section 2(b) hereof, including credited interest, shall not be distributed to the Executive until after the earlier to occur of (i) the 30th day following the termination of the Executive's employment with the Company, or (ii) the earliest date on which such amount can be received by the Executive without subjecting the Company to a loss of deductibility with respect to any part of such amount pursuant to Section 162(m) of the Code. Subject to the immediately preceding sentence, if such Executive has made any distribution election as to the Executive's voluntary deferrals under the Plan prior to the imposition of a particular mandatory deferral pursuant to Section 2(b) hereof, the entire amount credited to the Executive's deferral account with respect to such mandatory deferral, including credited interest, shall be distributed as directed by the Executive's distribution election filed most immediately prior to such mandatory deferral (except that the distribution or the first installment thereof, as applicable, shall not in any event be made until such distribution is permissible pursuant to the first sentence of this Section 5). If such Executive has not filed such a distribution election, any amount distributable in accordance with the first sentence of this Section 5 shall be distributed in a single payment as soon as such distribution becomes permissible. Section 6. Other Distributions of Deferrals in Certain Circumstances Notwithstanding Sections 4 and 5 hereof: (i) if, as determined by the Board in its sole discretion, the 4 5 Executive (during or following his or her employment by the Company) engages in any activity or association in competition with or adverse or detrimental to the interest of the Company, the entire balance of such Executive's deferral account, including credited interest, shall be distributed in a single payment on a date chosen by the Board in its sole discretion which falls between the date of the Board's determination as to such activity or association and the date on which final distribution of the Executive's deferred amount would otherwise be made pursuant to Section 4 or 5 hereof; and (ii) upon the occurrence of a Change in Control (as defined below), the entire balance of each Executive's deferral account, including credited interest, shall be distributed immediately in a single payment. A Change in Control shall have occurred if (i) the "beneficial ownership" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934 as amended (the "Exchange Act")) of securities representing more than 33% of the combined voting power of the Company is acquired by any "person" as defined in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), or (ii) the stockholders of the Company approve a definitive agreement to merge or consolidate the Company with or into another corporation or to sell or otherwise dispose of all or substantially all of its assets, or adopt a plan of liquidation, or (iii) during any period of two consecutive years, individuals who at the beginning of such period were members of the Board cease for any reason to constitute at least a majority thereof (unless the election or the nomination for election by the Company's stockholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period or whose election or nomination was previously so approved). Section 7. Miscellaneous (a) The right of an Executive to any deferred compensation and/or interest thereon shall be non-assignable and shall not be subject in any manner to the debts 5 6 or other obligations of the Executive or any other person. (b) The Company shall not be required to reserve or otherwise set aside funds for the satisfaction of any obligations under the Plan. (c) The Plan shall remain in effect until the earlier to occur of a Change in Control or the termination of the Plan by the Board; provided, however, that, except as provided in Section 6 hereof, funds may be distributed after such date pursuant to Section 4 or 5 hereof. (d) The Plan may be amended or discontinued by the Board at any time in its sole discretion. In the event the Plan is terminated, amounts credited to Executives' deferral accounts, including credited interest, shall be distributed at such time and in such manner as the Board shall determine, but no later than such amounts would have been distributed in accordance with Section 4 or 5 hereof. 6 EX-10.(K) 9 EXHIBIT 10(K) 1 EXHIBIT 10(k) AMENDED AND RESTATED KMART CORPORATION ANNUAL INCENTIVE BONUS PLAN I. PURPOSES; CONSTRUCTION. The purposes of the Kmart Corporation Annual Incentive Bonus Plan (the "Plan") are to attract and retain highly-qualified executives by providing appropriate performance-based short-term incentive awards, to align executive and stockholder interests by creating a direct link between executive compensation and stockholder return and to enable executives, through the mandatory and optional stock purchase features of the Management Stock Purchase Plan, to develop and maintain a substantial stock ownership position in the Company and to provide incentives to executives to contribute to the success of the Company. An additional purpose of the Plan is to serve as a qualified performance-based compensation program under Section 162(m) of the Internal Revenue Code of 1986, as amended, in order to preserve the Company's tax deduction for compensation paid under the Plan to Covered Employees. 2. DEFINITIONS. As used in this Plan, the following words and phrases shall have the following meanings: (a) "Board" shall mean the Board of Directors of the Company. (b) "Bonus" shall mean any annual incentive bonus award granted pursuant to this Plan; the payment of any such award shall be contingent upon the attainment of Performance Goals with respect to a Plan Year. (c) "Change in Control" shall mean the occurrence of an event described in Section 6(e) hereof. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (e) "Committee" shall mean the Compensation and Incentives Committee of the Board. (f) "Company" shall mean Kmart Corporation, a corporation organized under the laws of the State of Michigan, or any successor corporation. (g) "Covered Employee" shall have the meaning set forth in Section 162(m) (3) of the Code (or any successor provision). (h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time, and as now or hereafter construed, interpreted and applied by regulations, rulings and cases. 2 (i) "Management Stock Purchase Plan" shall mean the Kmart Corporation Management Stock Purchase Plan, as amended from time to time. (j) "Participant" shall mean an officer or other employee of the Company or one of its Subsidiaries who is eligible to participate herein pursuant to Article 3 hereof and for whom a target Bonus is established with respect to the relevant Plan Year. (k) "Performance Goal(s)" shall mean the criteria and objectives which must be met during a Plan Year as a condition of the Participant's receipt of payment with respect to a Bonus, as described in Article 5 hereof. (l) "Plan" shall mean this Kmart Corporation Annual Incentive Bonus Plan, as amended from time to time. (m) "Plan Year" shall mean the Company's fiscal year. (n) "Restricted Shares" shall mean the shares of Stock in which a Bonus is partially or wholly payable pursuant to Section 6(d) hereof; such Restricted Shares are issuable pursuant to the Management Stock Purchase Plan. (o) "Stock" shall mean shares of common stock of the Company issued and outstanding at the time of the Board's adoption of the Plan, par value $1.00 per share. (p) "Subsidiary" shall mean any subsidiary of the Company which is designated by the Board or the Committee to have any one or more of its officers or employees participate in the Plan. 3. ELIGIBILITY. All senior officers and divisional vice presidents of the Company shall participate in the Plan. Bonuses may also be granted hereunder to such key employees of the Company and any of its Subsidiaries as are designated by the Committee. In determining the persons to whom Bonuses shall be granted, the Committee shall take into account such factors as the Committee shall deem relevant in connection with accomplishing the purposes of the Plan. 4. NO STOCK SUBJECT TO PLAN. No shares of any Stock shall be reserved for, or issued under, the Plan. To the extent that annual Bonuses are paid in Restricted Shares, such Restricted Shares shall be issued under, and subject to the terms and conditions of, the Management Stock Purchase Plan. 5. PERFORMANCE GOALS. Performance Goals may be expressed in terms of (i) the Company's return on equity, assets, capital or investment (ii) pre-tax or after-tax profit levels of the Company, the Subsidiaries, subdivisions thereof, or any combination of the foregoing, (iii) expense reduction levels; (iv) 2 3 implementation of critical projects or processes and/or (v) changes in market price of the Stock. To the extent applicable, any such Performance Goal shall be determined in accordance with generally accepted accounting principles and reported upon by the Company's independent accountants. Performance Goals shall include a threshold level of performance below which no Bonus payment shall be made, levels of performance at which specified percentages of the target Bonus shall be paid, and a maximum level of performance above which no additional Bonus shall be paid. The Performance Goals established by the Committee may be (but need not be) different each Plan Year and different goals may be applicable to different Participants. 6. BONUSES. (a) In General. For each Plan Year, the Committee shall specify the Performance Goal(s) applicable to each Participant for such Plan Year and the amount of, or the formula for determining, the target Bonus for each Participant with respect to such Plan Year. A Participant's target Bonus for each Plan Year shall be expressed as either a dollar amount or as a percentage of the salary midpoint for the Participant's salary grade. Unless otherwise provided by the Committee in its discretion in connection with terminations of employment, or except as set forth in Section 6(e) hereof, payment of a Bonus for a particular Plan Year shall be made only if and to the extent the Performance Goal(s) with respect to such Plan Year are attained and only if the Participant is employed by the Company or a Subsidiary on the last day of the Plan Year. The actual amount of Bonus payable under the Plan shall be determined as a percentage of the Participant's target Bonus, which percentage shall vary depending upon the extent to which the Performance Goal(s) have been attained. The Committee may, in its discretion, reduce or eliminate the amount payable to any Participant (including a Covered Employee), in each case based upon such factors as the Committee may deem relevant, but shall not increase the amount payable to any Covered Employee. (b) Special Limitation on Certain Bonuses. Notwithstanding anything to the contrary contained in this Article 6, the actual Bonus paid to the Company's Chief Executive Officer under the Plan for any Plan Year may not exceed three times the salary midpoint for the salary grade of the Chief Executive Officer, as determined by the Committee prior to the beginning of such Plan Year based on competitive data, including a survey of comparable companies; and the Bonus for each other Covered Employee under the Plan may not exceed two times the salary midpoint (as of the beginning of such Plan Year) for such Covered Employee's salary grade, as so determined by the Committee prior to the beginning of such Plan Year. (c) Time of Payment. Unless otherwise determined by the Committee, or except as provided in Section 6(e) hereof, all payments in respect of Bonuses granted under this Article 6 shall be made within a reasonable period after the end of the Plan Year. In the case of Participants who are Covered Employees, unless otherwise determined by the Committee in connection with terminations of employment and except as provided in Section 6(e) hereof, such payments shall be made only after achievement of the Performance Goal(s) has been certified by the Committee. (d) Form of Payment. Except as provided in Section 6(e) hereof, payment of at least 20 percent of each Participant's Bonus for any Plan Year (less applicable payroll deductions) shall be made in Restricted Shares pursuant to, and subject to the terms and conditions of, the Management 3 4 Stock Purchase Plan. At the election of each Participant (made in accordance with the terms and conditions of the Management Stock Purchase Plan), up to 100 percent of the Participant's Bonus for any Plan Year (less applicable payroll deductions) shall be paid in Restricted Shares pursuant to, and subject to the terms and conditions of, the Management Stock Purchase Plan. The number of Restricted Shares to be paid shall be calculated in accordance with the Management Stock Purchase Plan. Payment of the balance of the Participant's Bonus for any Plan Year shall be made in cash. Payments of portions of any Bonuses made in Restricted Shares pursuant to the Management Stock Purchase Plan may be referred to therein as "purchases" of such Shares. (e) Change in Control. Notwithstanding any other provision of the Plan to the contrary, (i) if a "Change in Control" of the Company (as defined in this Section 6(e)) shall occur following a Plan Year as to which the Committee has determined the actual Bonuses to be paid (but such Bonuses have not yet been paid), such Bonuses shall be paid immediately in cash, (ii) if a Change in Control shall occur following a Plan Year as to which the Committee has not yet determined the actual Bonuses to be paid, such Bonuses shall be immediately determined and paid in cash, and (iii) if a Change in Control shall occur during a Plan Year as to which target Bonuses have been established (but the actual Bonuses to be paid have not yet been determined), such Plan Year shall be deemed to have been completed, the target levels of performance set forth under the respective Performance Goals shall be deemed to have been attained and a pro rata portion of the Bonus so determined for each Participant for such partial Plan Year (based on the number of full and partial months which have elapsed with respect to such Plan Year) shall be paid immediately in cash to each Participant for whom a target Bonus for such Plan Year was established. For purposes of this Article 6, the first to occur of any of the following events shall be deemed to be a Change in Control of the Company: (i) the "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act) of securities representing more than 33% of the combined voting power of the Company is acquired by any "person," as defined in sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), or (ii) the stockholders of the Company approve a definitive agreement to merge or consolidate the Company with or into another corporation or to sell or otherwise dispose of all or substantially all of its assets, or adopt a plan of liquidation, or (iii) during any period of three consecutive years, individuals who at the beginning of such period were members of the Board cease for any reason to constitute at least a majority thereof (unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least a majority of the directors then still in office who were directors at the beginning of such period or whose election or nomination was previously so approved). 7. ADMINISTRATION. 4 5 The Plan shall be administered by the Committee. The Committee shall have the authority in its sole discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority: to grant Bonuses; to determine the persons to whom and the time or times at which Bonuses shall be granted; to determine the terms, conditions, restrictions and performance criteria relating to any Bonus; to make adjustments in Performance Goals in response to changes in applicable laws, regulations or accounting principles except as otherwise provided in Section 6(a) hereof; to adjust compensation payable upon attainment of Performance Goals; to construe and interpret the Plan and any Bonus; to prescribe, amend and rescind rules and regulations relating to the Plan; and to make all other determinations deemed necessary or advisable for the administration of the Plan. The Committee shall consist of two or more persons each of whom is an "outside director" within the meaning of Section 162(m) of the Code. The Board shall fill all vacancies, however caused, in the Committee. The Board may from time to time appoint additional members to the Committee, and may remove one or more Committee members at such times and places as it shall deem advisable. The Committee shall hold its meetings at such times and places as it shall deem advisable. The Committee may appoint a chairperson and a secretary and may make such rules and regulations for the conduct of its business as it shall deem advisable, and shall keep minutes of its meetings. All determinations of the Committee shall be made by a majority of its members either present in person or participating by conference telephone at a meeting or by unanimous written consent. The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all persons, including the Company, a Subsidiary, a Participant (or any person claiming any rights under the Plan from or through any Participant) and any stockholder. No member of the Board or the Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Bonus granted hereunder. 8. GENERAL PROVISIONS. (a) Compliance with Legal Requirements. The Plan and the granting of Bonuses, and the other obligations of the Company under the Plan shall be subject to all applicable federal and state laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may be required. (b) No Right To Continued Employment. Nothing in the Plan or in any Bonus granted pursuant hereto shall confer upon any Participant the right to continue in the employ of the Company or any of its Subsidiaries or to be entitled to any remuneration or benefits not set forth in the Plan or to interfere with or limit in any way the right of the Company or any of its Subsidiaries to terminate such Participant's employment. 5 6 (c) Withholding Taxes. The Company or Subsidiary employing any Participant shall deduct from all payments and distributions under the Plan any taxes required to be withheld by federal, state or local governments. (d) Amendment and Discontinuance of the Plan. The Board may at any time and from time to time alter, amend, suspend or discontinue the Plan in whole or in part; provided, however, that no amendment which requires stockholder approval in order for the Plan to continue to comply with Code Section 162(m) shall be effective unless the same shall be approved by the requisite vote of the stockholders of the Company. The Committee may also make such amendments as it deems necessary to comply with other applicable laws, rules and regulations. Notwithstanding the foregoing, no amendment, suspension or discontinuance of the Plan shall affect adversely any of the rights of any Participant under any Bonus theretofore granted hereunder without the consent of such Participant. (e) Participant Rights. No Participant shall have any claim to be granted any Bonus under the Plan, and there is no obligation for uniformity of treatment of Participants. (f) Unfunded Status of Bonuses. The Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any payments which at any time are not yet made to a Participant pursuant to a Bonus, nothing contained in the Plan or any Bonus shall give any such Participant any rights that are greater than those of a general creditor of the Company. (g) Governing Law. The Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the State of Michigan without giving effect to the choice of law principles thereof, except to the extent that such law is preempted by federal law. (h) Effective Date; Approval of Stockholders. The Plan shall take effect upon its adoption by the Board, but the Plan (and any grants of Bonuses made prior to the stockholder approval described in this Section 8(h)) shall be subject to the requisite approval of the stockholders of the Company. In the absence of such approval, any such Bonuses shall be null and void. (i) Interpretation. The Plan is designed and intended to comply with Section 162(m) of the Code, to the extent applicable, and all provisions hereof shall be construed in a manner to so comply. April 22, 1994 6 EX-10.(L) 10 EXHIBIT 10(L) 1 EXHIBIT 10(l) AMENDED AND RESTATED KMART CORPORATION MANAGEMENT STOCK PURCHASE PLAN 1. PURPOSES; CONSTRUCTION. The purposes of the Kmart Corporation Management Stock Purchase Plan are to attract and retain highly-qualified executives, to align executive and stockholder interests by creating a direct link between executive compensation and stockholder return and to enable executives to develop and maintain a substantial stock ownership position in the Company and to provide incentives to executives to contribute to the success of the Company. The provisions of the Plan are intended to satisfy the requirements of Section 16(b) of the Securities Exchange Act of 1934, and shall be interpreted in a manner consistent with the requirements thereof, as now or hereafter construed, interpreted and applied by regulations, rulings and cases. 2. DEFINITIONS. As used in this Plan, the following words and phrases shall have the following meanings: (a) "Agreement" shall mean an agreement entered into between the Company and a Participant in connection with participation in the Plan. (b) "Board" shall mean the Board of Directors of the Company. (c) "Annual Bonus" shall mean the bonus earned by a Participant under the Annual Bonus Plan. (d) "Annual Bonus Plan" shall mean the Kmart Corporation Annual Incentive Bonus Plan, as amended from time to time. (e) "Cause" shall mean the Participant's fraud, dishonesty, conduct in violation of Company or Subsidiary policy, willful and continued failure to substantially perform his or her duties with the Company or a Subsidiary or willful engaging in conduct which is demonstrably and materially injurious to the Company or a Subsidiary monetarily or otherwise. (f) "Change in Control" shall mean the occurrence of an event described in Article 6 hereof. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (h) "Committee" shall mean the Compensation and Incentives Committee of the Board. (i) "Common Stock" shall mean shares of common stock of the Company issued and outstanding at the time of the Board's adoption of the Plan, par value $1.00 per share. (j) "Company" shall mean Kmart Corporation, a corporation organized under the laws of the State of Michigan, or any successor corporation. 2 (k) "Disability" shall mean a Participant's total and permanent disability as defined in the Company's Employee Pension Plan. (l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time, and as now or hereafter construed, interpreted and applied by regulations, rulings and cases. (m) "Fair Market Value" per share of Common Stock as of any date shall mean the average of the closing prices per share of such Common Stock for the five trading days immediately preceding such date, as reported by the Composite Tape reporting system, or if not so reported, as reported by the New York Stock Exchange, or if not so reported, as reported by any national securities exchange on which the Common Stock is listed. (n) "Participant" shall mean an officer or other employee of the Company or one of its Subsidiaries who receives a grant of Restricted Shares under the Plan; all such grants are sometimes referred to herein as purchases. (o) "Plan" shall mean this Kmart Corporation Management Stock Purchase Plan, as amended from time to time. (p) "Restricted Period" shall have the meaning given in Section 5(d) hereof. (q) "Restricted Shares" shall mean the shares of Common Stock purchased hereunder subject to restrictions. (r) "Rule 16b-3" shall mean Rule 16b-3, as in effect from time to time, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, including any successor to such Rule. (s) "Section 16 Person" shall mean a Participant who is subject to the reporting and short-swing liability provisions of Section 16 of the Exchange Act. (t) "1992 Stock Option Plan" shall mean the Kmart Corporation 1992 Stock Option Plan, as amended from time to time. (u) "Subsidiary" shall mean any subsidiary of the Company (whether or not a subsidiary at the date the Plan is adopted) which is designated by the Committee or the Board to have any one or more of its officers or employees participate in the Plan. 3. COMMON STOCK RESERVED FOR PLAN. The number of shares of Common Stock which shall be reserved for the purchase of Restricted Shares under the Plan shall be 4,000,000. Such number of shares of Common Stock shall be subject to adjustment as provided in Article 7 hereof. Such shares may be either authorized but unissued shares or shares that shall have been or may be reacquired by the Company. 2 3 If any outstanding Restricted Shares should be forfeited and reacquired by the Company, the shares of Common Stock so forfeited shall (unless the Plan shall have been terminated) again become available for use under the Plan, to the extent permitted by Rule 16b-3. 4. ELIGIBILITY; MANDATORY AND OPTIONAL RESTRICTED SHARE PURCHASES. All senior officers and divisional vice presidents of the Company and each other key employee of the Company or any of its Subsidiaries as is designated by the Committee shall be required to use 20 percent of his or her Annual Bonus (less applicable payroll deductions) to purchase Restricted Shares granted pursuant to, and subject to the terms and conditions of, this Plan. At the election of any Annual Bonus Plan Participant, the Participant may use up to 100 percent of his or her Annual Bonus (less applicable payroll deductions) to purchase Restricted Shares granted pursuant to, and subject to the terms and conditions of, this Plan. Any such election shall be made in accordance with rules established by the Committee; provided, however, that any such election by a Section 16 Person must be made at least six months prior to the day the amount of the Section 16 Person's Annual Bonus is finally determined under the Annual Bonus Plan. Since the Restricted Shares are purchased with part or all of the Annual Bonus, Restricted Share grants under this Plan are sometimes referred to herein as "purchases." 5. RESTRICTED SHARES. Each purchase of Restricted Shares under the Plan shall be evidenced by a written Agreement between the Company and the Participant, in such form as the Committee shall from time to time approve, and shall comply with the following terms and conditions (and with such other terms and conditions not inconsistent with the terms of this Plan as the Committee, in its discretion, shall establish): (a) NUMBER OF SHARES. Each Agreement shall state the number of Restricted Shares to be purchased. Each Agreement shall also state whether the shares subject thereto are a mandatory purchase or optional purchase under Article 4 hereof. (b) PRICE. The price of each Restricted Share purchased under Article 4 of the Plan shall be its Fair Market Value. Notwithstanding any other provision of the Plan, in no event shall the price per Restricted Share be less than the par value per share of the Common Stock. (c) RESTRICTIONS. Restricted Shares may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of (except by will or the applicable laws of descent and distribution) during the Restricted Period. The Committee may also impose such other restrictions and conditions on the Restricted Shares as it deems appropriate. Upon the issuance of Restricted Shares, either (i) a stock certificate or certificates representing such shares shall be registered in the Participant's name, shall bear an appropriate legend referring to the restrictions applicable thereto and shall be held in custody by an escrow agent appointed by the Committee for the account of the Participant, or (ii) the Company's stock transfer agent or other designee shall credit such shares to the Participant's Restricted Share account, which shares shall be subject to the restrictions applicable thereto under the Plan. Any attempt to dispose of any such shares in contravention of such restrictions shall be null and void and without effect. 3 4 (d) RESTRICTED PERIOD. Subject to such exceptions as may be determined by the Committee in its discretion, the Restricted Period for Restricted Shares purchased under the Plan shall be three years from the date of purchase. (e) TERMINATION OF EMPLOYMENT DURING RESTRICTED PERIOD. Except as provided in this paragraph or in Section 5(g) hereof, if during the Restricted Period a Participant's employment terminates, the Participant shall receive unrestricted shares of Common Stock (or cash, in the discretion of the Committee) equal to the lesser in value of (i) the Restricted Shares at their then-current Fair Market Value or (ii) 80 percent of the Fair Market Value of such Restricted Shares on the date of purchase. Any additional value shall be forfeited. If, during the Restricted Period, a Participant's employment is terminated by the Company or Subsidiary without Cause, the Participant shall receive unrestricted shares of Common Stock (or cash, in the discretion of the Committee) equal in value to (i) the then-current Fair Market Value of a percentage of the Restricted Shares, such percentage to be based on the number of months of employment completed during the Restricted Period, plus (ii) as to the balance of the Restricted Shares, the lesser in value of (x) such Restricted Shares at their then-current Fair Market Value or (y) 80 percent of the Fair Market Value of such Restricted Shares on the date of purchase. Any additional value shall be forfeited. (f) OWNERSHIP. During the Restricted Period, the Participant shall possess all incidents of ownership of such shares, including the right to vote and to receive dividends with respect to such shares, subject to the restrictions and limitations described in this Article. (g) ACCELERATED LAPSE OF RESTRICTIONS. Upon the termination of a Participant's employment which either (i) occurs after the Participant has attained the age of 65 years with at least ten years of full-time service or (ii) results from the Participant's death or Disability, or upon the occurrence of a Change in Control, all restrictions then outstanding with respect to Restricted Shares purchased hereunder shall automatically expire and be of no further force or effect. Additionally, the Committee shall have the authority (and the Agreement may so provide) to cancel all or any portion of any outstanding restrictions prior to the expiration of the Restricted Period with respect to any or all Restricted Shares purchased hereunder on such terms and conditions as the Committee shall deem appropriate. 4 5 6. CHANGE IN CONTROL OF THE COMPANY. For purposes of this Article 6, the first to occur of any of the following events shall be deemed a Change in Control of the Company: (i) the "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act) of securities representing more than 33% of the combined voting power of the Company is acquired by any "person," as defined in sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), or (ii) the stockholders of the Company approve a definitive agreement to merge or consolidate the Company with or into another corporation or to sell or otherwise dispose of all or substantially all of its assets, or adopt a plan of liquidation, or (iii) during any period of three consecutive years, individuals who at the beginning of such period were members of the Board cease for any reason to constitute at least a majority thereof (unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least a majority of the directors then still in office who were directors at the beginning of such period or whose election or nomination was previously so approved). 7. EFFECT OF CERTAIN CHANGES. In the event of any extraordinary dividend, stock dividend, recapitalization, merger, consolidation, stock split, warrant or rights issuance, or combination or exchange of such shares, or other similar transactions, the number of shares of Common Stock available for purchase and the number of outstanding Restricted Shares shall be equitably adjusted by the Committee to reflect such event and preserve the value of such purchases and the Committee may make such other adjustments to the terms of outstanding Restricted Shares as it may deem equitable under the circumstances; provided, however, that any fractional shares resulting from such adjustment shall be disregarded. 8. PAYMENT OF WITHHOLDING TAXES. The Committee shall have discretion to permit or require a Participant, on such terms and conditions as it determines, to pay all or a portion of any taxes arising in connection with a purchase of Restricted Shares hereunder or the lapse of restrictions with respect thereto by having the Company withhold shares of Common Stock or by the Participant's delivering other shares of Common Stock having a then-current Fair Market Value equal to the amount of taxes to be withheld. 5 6 9. RIGHTS AS A STOCKHOLDER. Except as provided in Section 5(f) hereof, a Participant shall have no rights as a stockholder with respect to any Restricted Shares until the date of the issuance of a stock certificate to him or her for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distribution of other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Article 7 hereof. 10. NO RIGHT TO CONTINUED EMPLOYMENT. Nothing in the Plan or in any grant or purchase made or Agreement entered into pursuant hereto shall confer upon any Participant the right to continue in the employ of the Company or any of its Subsidiaries or to be entitled to any remuneration or benefits not set forth in the Plan or such Agreement or to interfere with or limit in any way the right of the Company or any of its Subsidiaries to terminate such Participant's employment. Purchases made under the Plan shall not be affected by any change in duties or position of a Participant as long as such Participant continues to be employed by the Company or any Subsidiary. 11. ADMINISTRATION. The Plan shall be administered by the Committee. The Committee shall have the authority in its sole discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority: to construe and interpret the Plan; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the Agreements (which need not be identical); and to make all other determinations deemed necessary or advisable for the administration of the Plan. The Committee shall consist of two or more persons each of whom is a "disinterested person" within the meaning of Rule 16b-3 under the Exchange Act. The Board shall fill all vacancies, however caused, in the Committee. The Board may from time to time appoint additional members to the Committee, and may at any time remove one or more Committee members and substitute others. The Committee shall hold its meetings at such times and places as it shall deem advisable. The Committee may appoint a chairperson and a secretary and make such rules and regulations for the conduct of its business as it shall deem advisable, and shall keep minutes of its meetings. All determinations of the Committee shall be made by a majority of its members either present in person or participating by conference telephone at a meeting or by unanimous written consent. The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all persons, including the Company, a Subsidiary, a Participant (or any person claiming any rights under the Plan from or through any Participant) and any stockholder. 6 7 No member of the Board or the Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any grant or purchase hereunder. 12. AMENDMENT TO AND DISCONTINUANCE OF PLAN. The Board at any time and from time to time may amend, suspend or discontinue the Plan in whole or in part; provided, however, that no amendment which requires stockholder approval in order for the Plan to continue to comply with Rule 16b-3 or any other law, regulation or stock exchange requirement shall be effective unless the same shall be approved by the requisite vote of the stockholders of the Company. The Committee may also make such amendments as it deems necessary to comply with other applicable laws, rules and regulations. Notwithstanding the foregoing, except as provided in Article 5 hereof, no amendment, suspension or discontinuance of the Plan may adversely affect any purchase previously made by any Participant without the consent of such Participant. 13. GOVERNING LAW. The Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the State of Michigan without giving effect to the choice of law principles thereof, except to the extent that such law is preempted by federal law. 14. EFFECTIVE DATE; APPROVAL OF STOCKHOLDERS. The Plan shall take effect upon its adoption by the Board but the Plan (and any grants made prior to the stockholder approval described in this Article 14) shall be subject to the approval of the holders of a majority of the securities of the Company present, or represented, and entitled to vote at a meeting of stockholders held in accordance with applicable law, which approval must occur within twelve months of the date that the Plan is adopted by the Board. In the absence of such approval, such grants shall be null and void. I5. PERIOD DURING WHICH PURCHASES MAY BE MADE. Purchases may be made pursuant to the Plan from time to time until March 15, 2004. No purchases shall be made thereafter. However, the Restricted Period for Restricted Shares purchased hereunder prior to such date may extend beyond such date, and the provisions of the Plan shall continue to apply to such Restricted Shares. 7 EX-10.(M) 11 EXHIBIT 10(M) 1 EXHIBIT 10(m) September 18, 1990 SUPPLEMENTAL PENSION BENEFIT PLAN K MART CORPORATION SECTION 1. PURPOSE The sole purpose of this Supplemental Pension Benefit Plan (the "Plan") is to assure that any person who becomes eligible for benefits under the K mart Corporation Employee Retirement Pension Plan (the "Retirement Plan") will receive the benefits he or she would have received under the Retirement Plan but for the limitations on contributions and benefits imposed by Sections 415 and 401(a)(17) of the Internal Revenue Code and Section IID of IRS Notice 88-131 (the "Benefit Limitations"). This Plan is intended to provide benefits which in the aggregate with benefits provided under the Retirement Plan equal the benefits which would result from the calculations made under the applicable provisions of the Retirement Plan without giving effect to the Benefit Limitations. SECTION 2. EFFECTIVE DATE The Plan shall become effective on February 1, 1983. SECTION 3. ELIGIBILITY FOR PARTICIPATION Persons whose benefits under the Retirement Plan are limited or reduced by a Benefit Limitation shall be eligible for benefits provided by this Plan. SECTION 4. AMOUNT AND PAYMENT OF BENEFITS 4.1 Amount of Benefit. The benefits payable hereunder shall equal the excess, if any, of: (a) the benefits which would be payable to a Retired Employee, joint annuitant or beneficiary under the Retirement Plan if benefits were paid thereunder without regard to the Benefit Limitations, over (b) the benefits which are actually payable to such person under the Retirement Plan, provided, however, that the maximum total benefits under this Plan and the Retirement Plan shall be $465,000 per year in the case of a pension payable to a Retired Employee on a life income basis, and 2 reduced in accordance with the terms of the Retirement Plan for any other form of payment of benefits. Such maximum shall be adjusted by the percentage increase in the Consumer Price Index (Urban) from January 1, 1988 through the end of the calendar year preceding the commencement of benefits hereunder. 4.2 Payment of Benefits. Payment of benefits pursuant to the Plan shall be made in the same manner and subject to the same terms and conditions as the benefits provided under the Retirement Plan; provided, however, that no person (or his or her joint annuitant or beneficiary) shall be entitled to benefits under this Plan if, as determined by the Board of Directors of K mart Corporation (the "Company"), such person (a) becomes an employee, director or advisor of, or otherwise affiliated with, any other corporation, firm or proprietorship in competition with the Company or an Affiliated Company (as defined in the Retirement Plan), or (b) participated in any theft, embezzlement, fraud, disclosure of confidential information or acts of a similar nature against the Company or an Affiliated Company. SECTION 5. FUNDING Benefits under the Plan shall be payable solely from the general assets of the Company or the appropriate participating Affiliated Company. The Plan shall remain unfunded during the entire period of its existence. SECTION 6. RIGHTS OF EMPLOYEES AND CONDITIONS OF EMPLOYMENT 6.1 Rights of Employees and Beneficiaries. Payment of benefits pursuant to this Plan shall be made only to a Retired Employee, joint annuitant or beneficiary. Such benefits shall not be subject in any manner to the debts or other obligations of the person to whom they are payable and shall not be sold, transferred, assigned or encumbered in any manner, either voluntarily or involuntarily. 6.2 Conditions of Employment Not Affected by Plan. The establishment and maintenance of the Plan shall not be construed as conferring any legal rights upon any person to the continuance of employment with the Company or any Affiliated Company, nor shall the Plan limit or affect the right of the Company or any Affiliated Company to discharge any person from its employ. -2- 3 SECTION 7. ADMINISTRATION The Company shall be responsible for the administration of the Plan and for carrying out the purposes and provisions of the Plan. As administrator, the Company: (a) May adopt such rules, regulations and forms and establish such procedures as it deems necessary or appropriate in its discretion for the administration of the Plan. (b) Shall have discretionary authority to interpret, construe and determine the application of the Plan and its terms and to resolve all issues arising under the Plan. This discretionary authority shall include the authority to (i) construe disputed or doubtful terms of the Plan or of any rule, regulation, form or procedure, (ii) determine the eligibilty of an individual to participate in the Plan, (iii) determine the amount, if any, of benefits to which any participant or other person may be entitled under the Plan, (iv) determine the timing and manner of payment of benefits, (v) determine any matter relating to the administration of the Plan or any claim under the Plan, and (vi) resolve all other issues arising under the Plan, any such determinations to be final and binding upon all persons. (c) May take such other action as it deems necessary or appropriate in its discretion for the proper administration of the Plan. (d) May delegate any of the foregoing powers to any person or persons or committee or committees. All claims for benefits under the Plan must be submitted to the Company's Director of Employee Benefits at the Company's headquarters on forms approved by the Company. If a claim is approved or denied in whole or in part, or additional information is required, notification will be furnished in most cases in less than 90 days after receipt of the claim. If more than 90 days is required for processing, the claimant will be advised prior to the expiration of the 90 days as to when a decision can be expected (not to exceed 180 days from receipt of the claim) and the circumstances necessitating the extension. -3- 4 A claimant may appeal a denial of a claim by submitting a written application for review to the Company's Director of Employee Benefits. Such application must be made within 60 days after the claimant received notification of the denial unless the period is extended by the Director of Employee Benefits due to special circumstances. A decision on the appeal will ordinarily be made within 60 days after receipt of the application. If more than 60 days is required, the claimant will be advised prior to the expiration of the 60 days as to when a decision can be expected (not to exceed 120 days from receipt of the application). SECTION 8. AMENDMENT AND TERMINATION The Company expects to continue the Plan indefinitely but reserves the right to amend or discontinue it if, in its sole judgment, such an amendment or discontinuance is deemed necessary or desirable. No such amendment or termination of the Plan shall operate to reduce the accrued benefit hereunder of any person eligible for benefits under this Plan determined as of the effective date of amendment or termination. Notwithstanding the foregoing, any benefits under this Plan may be reduced by amounts consistent with increases in the amount of benefits permitted by the Benefit Limitations or due to the elimination of any Benefit Limitation and any related benefit increase under the Retirement Plan. SECTION 9. MISCELLANEOUS 9.1 Merger, Consolidation, etc. In the event the Company liquidates or dissolves or merges or consolidates with any other corporation, suitable arrangements will be made for the payment of any benefits under the Plan. 9.2 Controlling Law. To the extent not preempted by the laws of the United States of America, the laws of the State of Michigan shall be the controlling law in all matters relating to the Plan. 9.3 Severability. If any provisions of the Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts of the Plan and this Plan shall be construed and enforced as if said illegal and invalid provisions had never been included herein. -4- 5 9.4 Limitations on Provisions. The Plan shall not operate or be construed in any way to modify, amend or affect the terms and provisions of the Retirement Plan. -5- EX-11 12 EXHIBIT 11 1 EXHIBIT 11 KMART CORPORATION AND SUBSIDIARY COMPANIES EXHIBIT 11 - INFORMATION ON COMPUTATION OF PER SHARE EARNINGS
(Millions) Fiscal Year Ended ------------------------------------------------------------ January 25, January 26, January 27, January 29, January 30, 1995 1994 1993 1992 1991 ----------- ----------- ---------- ----------- ----------- I. Earnings per common and common equivalent share: Income (loss) from continuing retail operations before extraordinary item and the effect of accounting changes $ 260 ($347) $ 901 $ 778 $ 688 Less--Series B/C convertible preferred shares dividend payment (9) (9) (3) - - ------ ----- ------ ------ ------ (a) Adjusted income from continuing retail operations before extraordinary item and the effect of accounting changes 251 (356) 898 778 688 (b) Discontinued operations including the effect of accounting changes, net of income taxes 20 (77) 40 81 68 (c) Gain (loss) on disposal on discontinued operations, net of income taxes 16 (521) - - - (d) Extraordinary item, net of income taxes - (10) - - - (e) Effect of accounting changes, net of income taxes - (19) - - - ------ ----- ------ ------ ------ (f) Adjusted net income (loss) (1) $ 287 ($983) $ 938 $ 859 $ 756 ====== ===== ====== ====== ====== Weighted average common shares outstanding 427.2 408.1 405.7 401.5 399.6 Weighted average $3.41 Depositary Shares outstanding (each representing 1/4 share Series A conversion preferred) 29.2 46.0 46.0 20.1 - Stock Options -- Common shares assumed issued 2.2 16.1 17.2 15.5 2.6 Less--common shares assumed repurchased (2.0) (13.5) (13.3) (12.7) (2.0) ------ ----- ------ ------ ------ 0.2 2.6 3.9 2.8 0.6 ------ ----- ------ ------ ------ (g) Applicable common shares, as adjusted (2) 456.6 456.7 455.6 424.4 400.2 ====== ===== ====== ====== ====== Earnings per common and common equivalent share: Adjusted income (loss) from continuing retail operations before extraordinary item and the effect of accounting changes (a)/(g) $ 0.55 ($0.78) $ 1.97 $ 1.83 $ 1.72 Discontinued operations including the effect of accounting changes (b)/(g) $ 0.04 ($0.17) $ 0.09 $ 0.19 $ 0.17 Gain (loss) on disposal of discontinued operations (c)/(g) $ 0.04 ($1.14) - - Extraordinary item (d)/(g) - ($0.02) - - - Effect of accounting changes (e)/(g) - ($0.04) - - - ------ ----- ------ ------ ------ Net income (loss) (f)/(g) $ 0.63 ($2.15) $ 2.06 $ 2.02 $ 1.89 ====== ===== ====== ====== ======
(1) Adjusted net income (loss) includes an after-tax provision of $862 million or $1.89 per share for fiscal year 1993 for store restucturing and other charges. (2) Shares were restated for fiscal years 1991 and 1990 to give effect to 2 for 1 common stock split that occurred in fiscal 1991. 2 KMART CORPORATION AND SUBSIDIARY COMPANIES EXHIBIT 11 - INFORMATION ON COMPUTATION OF PER SHARE EARNINGS
(Millions) Fiscal Year Ended ------------------------------------------------------------ January 25, January 26, January 27, January 29, January 30, 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- II. Earnings per common and common equivalent share assuming full dilution: (h) Income (loss) from continuing retail operations before extraordinary item and the effect of accounting changes $260 ($347) $901 $778 $688 (i) Discontinued operations including the effect of accounting changes, net of income taxes 20 (77) 40 81 68 (j) Gain (loss) on disposal on discontinued operations, net of income taxes 16 (521) - - - (k) Extraordinary item, net of income taxes - (10) - - - (l) Effect of accounting changes, net of income taxes - (19) - - - ----- ----- ----- ----- ----- (m) Net income (loss) (1) $296 ($974) $941 $859 $756 ===== ===== ===== ===== ===== Weighted average common shares outstanding 427.2 408.1 405.7 401.5 399.6 Weighted average $3.41 Depositary Shares outstanding (each representing 1/4 share Series A conversion preferred) 29.2 46.0 46.0 20.1 - Weighted average Series B/C convertible preferred shares outstanding 9.7 8.0 1.7 - - Stock options-- Common shares assumed issued 2.2 16.6 18.1 19.2 2.6 Less--common shares assumed repurchased (2.0) (14.5) (13.7) (14.6) (2.0) ----- ----- ----- ----- ----- 0.2 2.1 4.4 4.6 0.6 ----- ----- ----- ----- ----- (n) Applicable common shares, as adjusted (2) 466.3 464.2 457.8 426.2 400.2 ===== ===== ===== ===== ===== Earnings per common and common equivalent share assuming full dilution: Income (loss) from continuing retail operations before extraordinary item and the effect of accounting changes (h)/(n) $0.56 ($0.75) $1.97 $1.83 $1.72 Discontinued operations including the effect of accounting changes (i)/(n) $0.04 ($0.17) $0.09 $0.19 $0.17 Gain (loss) on disposal of discontinued operations (j)/(n) $0.03 ($1.12) - - Extraordinary item (k)/(n) - ($0.02) - - - Effect of accounting changes (l)/(n) - ($0.04) - - - ----- ----- ----- ----- ----- Net income (loss) (m)/(n) $0.63 ($2.10) $2.06 $2.02 $1.89 ===== ===== ===== ===== ===== (3) (3) (4) (4) (4)
(1) Net income (loss) includes an after-tax provision of $862 million or $1.89 per share for fiscal year 1993 for store restucturing and other charges. (2) Shares were restated for fiscal years 1991 and 1990 to give effect to 2 for 1 common stock split that occurred in fiscal 1991. (3) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive result. (4) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. EX-12 13 EXHIBIT 12 1 KMART CORPORATION AND SUBSIDIARY COMPANIES EXHIBIT 12 - INFORMATION ON RATIO OF EARNINGS TO FIXED CHARGES COMPUTATION
Fiscal Year Ended ----------------------------------- January 25, January 26, January 2 (Millions) 1995 1994 * 1993 * ----------- ----------- --------- Net Income (loss) from continuing retail operations before extraordinary items and the effect of accounting changes $ 260 $ (347) $ 901 Income taxes 114 (191) 474 -------- -------- -------- Pretax income (loss) from continuing retail operations 374 (538) 1,375 Equity income of unconsolidated affiliated retail companies that exceeds distributions (42) 3 6 Fixed charges per below 803 814 699 Less interest capitalized during the period (17) (14) (16) -------- -------- -------- Earnings from continuing retail operations $ 1,118 $ 265 $ 2,064 ======== ======== ======== Fixed Charges: Interest expense $ 521 $ 507 $ 457 Rent expense - portion of operating rentals representative of the interest factor 263 290 225 Other 19 17 17 -------- -------- -------- $ 803 $ 814 $ 699 ======== ======== ======== Ratio of income to fixed charges (1) 1.4 - 3.0 ======== ======== ========
(1) The deficiency of earnings from continuing retail operations versus fixed charges was $549 million for the fiscal year ended January 26, 1994. * Certain prior year amounts have been restated for the effect of discontinued operations. EX-13 14 EXHIBIT 13 1 EXHIBIT 13 KMART CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA The following selected financial data for the periods indicated has been derived from the consolidated financial statements of Kmart Corporation. Operating results and affected ratios have been restated to exclude discontinued operations of PACE Membership Warehouse, Inc. and Coles Myer, Ltd. All fiscal years prior to 1994 reflect the operations of PayLess Drug Stores Northwest, Inc., OfficeMax, Inc. and The Sports Authority, Inc. as part of continuing operations. The information set forth below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto.
FISCAL YEAR ENDED -------------------------------------------------------------- 1994 1993(1) 1992 1991 1990 1989(2) ------- ------- ------- ------- ------- ------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) SUMMARY OF OPERATIONS Sales..................................................... $34,025 $36,694 $33,366 $30,934 $29,775 $29,150 Cost of merchandise sold.................................. 25,992 27,520 24,516 22,622 21,809 21,397 Selling, general and administrative expenses.............. 7,701 8,217 7,393 7,036 6,815 7,251 Interest expense: Debt -- net............................................. 258 303 243 215 220 181 Capital lease obligations and other..................... 236 192 185 181 175 175 Income (loss) from continuing retail operations before income taxes and equity income.......................... 294 (590 ) 1,321 1,157 1,024 406 Equity in net income of unconsolidated companies.......... 80 52 54 50 45 43 Net income (loss) from continuing retail operations....... 260 (347 ) 901 778 688 261 Net income (loss)......................................... 296 (974 ) 941 859 756 323 PER SHARE DATA Earnings (loss) per common and common equivalent share from continuing retail operations....................... $ 0.55 $(0.78 ) $ 1.97 $ 1.83 $ 1.72 $ 0.65 Cash dividends declared per common share.................. 0.96 0.96 0.92 0.88 0.86 0.82 Book value................................................ 13.15 13.39 16.64 15.33 13.47 12.45 FINANCIAL DATA Working capital........................................... $ 3,561 $3,793 $ 5,014 $ 4,682 $ 3,519 $3,685 Total assets.............................................. 17,029 17,504 18,931 15,999 13,899 13,145 Long-term obligations -- Debt............................. 2,011 2,227 3,237 2,287 1,701 1,480 -- Capital leases....................... 1,777 1,720 1,698 1,638 1,598 1,549 Shareholders' equity...................................... 6,032 6,093 7,536 6,891 5,384 4,972 Capital expenditures -- owned property.................... 1,247 1,022 1,435 1,329 814 631 Depreciation and amortization............................. 724 754 647 558 513 485 Ending market capitalization.............................. 6,345 9,333 10,837 10,901 6,095 6,640 Weighted average shares outstanding (millions)............ 457 457 456 426 400 401 FINANCIAL RATIOS Return on sales -- Income (loss) from continuing retail operations before income taxes.......................................... 1.1% (1.5 )% 4.1% 3.9% 3.6% 1.5 % Net income (loss) from continuing retail operations..... 0.8% (0.9 )% 2.7% 2.5% 2.3% 0.9 % Return on beginning assets from continuing retail operations.............................................. 1.6% (2.0 )% 6.2% 6.2% 5.6% 2.2 % Inventory turnover........................................ 3.1 2.8 2.7 2.7 2.7 2.9 Return on beginning shareholders' equity from continuing retail operations....................................... 4.2% (4.9 )% 14.1% 15.9% 14.7% 5.2 % Return on beginning investment from continuing retail operations.............................................. 5.2% (0.1 )% 11.1% 11.3% 11.0% 6.1 % Working capital ratio..................................... 1.6 1.7 1.9 2.1 1.8 1.9 Debt and equivalent as a percentage of total capitalization.......................................... 45.8% 48.9 % 43.1% 37.3% 43.5% 43.4 % Ratio of income from continuing retail operations to fixed charges(3).............................................. 1.4 -- 3.0 3.0 2.9 1.8 Employee compensation and benefits, per sales dollar...... 14.8% 14.6 % 14.8% 15.1% 15.3% 15.2 %
- ------------------------- (1) Results of operations for 1993 include a pre-tax provision of $1,348 million ($862 million net of tax) for store restructuring and other charges. (2) Results of operations for 1989 include a pre-tax provision of $640 million ($422 million net of tax) for store restructuring and other charges. (3) Fixed charges represent total interest charges, a portion of operating rentals representative of the interest factor, and amortization of debt discount and expense. The deficiency of income from continuing retail operations versus fixed charges was $549 million for the fiscal year ended January 26, 1994. 8 2 KMART CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Kmart Corporation ("Kmart") is one of the world's largest mass merchandise retailers. The dominant portion of Kmart's business consists of the Kmart Group which operates a chain of 2,316 Kmart discount stores with locations in each of the 50 United States and Puerto Rico at January 25, 1995. Internationally, the Kmart Group has operations in Canada, the Czech Republic and Slovakia and has formed joint ventures in Mexico and Singapore which opened two stores each in 1994. The Central European stores were acquired in mid-1992 and represent Kmart's entry into that market. Kmart is developing advanced distribution methods and merchandising skills to modernize, refurbish and streamline operations in the two Central European countries. The Kmart Group also includes PACE Membership Warehouse, Inc. ("PACE"), substantially all of which assets were sold in January 1994, and a 21.5% equity interest in Coles Myer, Ltd. ("Coles Myer"), Australia's largest retailer, which was sold in November 1994. PACE and Coles Myer have been presented as discontinued operations in the consolidated financial statements. Kmart's current specialty retail operations consist of Borders Group, Inc. ("Borders Group"), the second largest operator of book superstores under the Borders name and the largest operator of mall-based bookstores under the Waldenbooks name in the U.S., and Builders Square, Inc. ("Builders Square") which operates home improvement stores. Kmart also holds significant equity interests in substantially all of the Meldisco subsidiaries of Melville Corporation, which operate the footwear departments in domestic Kmart stores, as well as OfficeMax, Inc. ("OfficeMax") and The Sports Authority, Inc. ("The Sports Authority"). In 1994, in separate Initial Public Offerings (IPO's), Kmart reduced its ownership interest in OfficeMax and The Sports Authority to approximately 25% and 30%, respectively. For fiscal 1994, Kmart's interest in the respective full year results of operations for OfficeMax and The Sports Authority are presented in the consolidated financial statements using the equity method. For fiscal years prior to 1994, the results of operations for OfficeMax and The Sports Authority are consolidated. In addition, Kmart has a significant investment in Thrifty PayLess Holdings, Inc. ("TPH"), an entity which resulted primarily from the combination of Kmart's former subsidiary PayLess Drug Stores Northwest, Inc. ("PayLess") with Thrifty Drug Stores after PayLess was sold to TPH in the first quarter of 1994. As Kmart's investment in TPH will extend beyond the period initially planned, the operations of PayLess have been reclassified as part of continuing operations in 1993 and 1992. In the 1993 consolidated financial statements, the operations of PayLess were presented as part of discontinued operations. Management will continue to actively pursue the sale of this investment during 1995 and expects that such disposition will occur through either a private offering or other alternative means. RESULTS OF CONSOLIDATED OPERATIONS Sales decreased 7.3% to $34.0 billion in 1994, compared to $36.7 billion in 1993 and $33.4 billion in 1992. On a comparable consolidated basis, adjusting for divested subsidiaries not included in the current year, sales increased 5.9% and 6.8% in 1994 and 1993, respectively. Consolidated comparable store sales increased 2.0% and 3.6% in 1994 and 1993, respectively. Refer to the following table and analysis of the Kmart Group, Borders Group and Builders Square. 9 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED A three-year summary of consolidated sales follows:
% % 1994 CHANGE 1993 CHANGE 1992 ------- ------ ------- ------ ------- (U.S. $ MILLIONS) Kmart Group United States................................... $28,386 5.3 $26,948 6.4 $25,326 International................................... 1,177 8.0 1,090 (4.7) 1,144 ------- ------- ------- Total Kmart Group.......................... 29,563 5.4 28,038 5.9 26,470 Specialty Retail Borders Group................................... 1,511 10.3 1,370 14.0 1,202 Builders Square................................. 2,951 8.5 2,719 12.4 2,419 ------- ------- ------- Total Specialty Retail..................... 4,462 9.1 4,089 12.9 3,621 ------- ------- ------- Total Comparable Basis Sales............... 34,025 5.9 32,127 6.8 30,091 Divested Specialty Retail Interests PayLess......................................... -- -- 2,538 8.7 2,335 OfficeMax....................................... -- -- 1,422 169.3 528 The Sports Authority............................ -- -- 607 47.5 412 ------- ------- ------- Total Kmart................................ $34,025 (7.3 ) $36,694 10.0 $33,366 ======= ======= =======
Cost of merchandise sold, including buying and occupancy costs, as a percent of sales, was 76.4% in 1994, as compared with 75.0% in 1993 and 73.5% in 1992. The increase of 1.4% of sales in 1994 reflects a mix of both apparel and hardline merchandise more heavily weighted toward promotional items and lower-margined merchandise and higher fixed occupancy costs on relatively level sales per square foot. As Kmart opens new stores, depreciation and rental expenses have increased faster than sales resulting in increased occupancy costs as a percentage of sales. Due to the extremely price-competitive retail environment, sales of seasonal apparel merchandise lines, especially outerwear, were weak, resulting in higher than planned promotional markdowns. A more aggressive markdown policy on discontinued and seasonal merchandise implemented in the fourth quarter reduced gross margins in the amount of $171 million. As a result of cycle inventory counts and the year-end physical inventory count, Kmart accrued an additional $17 million in the fourth quarter of 1994 for inventory shrinkage. The increase of 1.5% of sales in 1993 resulted primarily from competitive pricing pressure in both hardlines and softlines throughout the year, the U.S. Kmart inventory reduction program and increased markdowns at the Kmart Fashions division. During the third quarter of 1993, Kmart increased its focus on reducing inventory levels, including detailed review of the merchandise in each department and identified specific products that did not meet certain criteria, including sales volume and turnover level. In the latter part of the third quarter and in the fourth quarter, merchandise purchases were significantly adjusted to reflect replenishment needs increasingly identified through automatic replenishment and just-in-time technology. This resulted in Kmart slowing or canceling purchases of many higher-margin products, reducing U.S. Kmart inventory by approximately $720 million on a first-in, first-out (FIFO) basis, or 10.4%, and lowering the fourth quarter gross margin below the prior year by 4.1% of sales. Additionally, a portion of the inventory and gross margin reduction resulted from increased markdowns in the fashions departments reflecting greater seasonal apparel clearance activity as well as a sales mix more skewed toward lower-margined items in 1993 compared with 1992. Inventory write-offs resulting from shrinkage, obsolescence or unsalable merchandise did not have a significant impact on gross margin in 1993 compared to 1992. Substantially all of Kmart's domestic inventories are measured using the last-in, first-out (LIFO) method of inventory valuation. The deflationary impact on inventories contributed to pre-tax LIFO credits of 10 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED $57 million, $49 million and $30 million in 1994, 1993 and 1992, respectively. Kmart measures inflation using internal price indices. The LIFO credits resulted primarily from reductions in Kmart's retail prices. Selling, general and administrative ("SG&A") expenses, including advertising, were 22.6% of sales in 1994 as compared to 22.4% and 22.2% in 1993 and 1992, respectively. The 1994 increase in SG&A expenses relative to sales reflects the impact of lower than expected comparable store sales, professional services for the strategic review of Kmart's operations and processes and charges taken in the fourth quarter of 1994. These charges totaling $61 million include the previously announced closings of regional offices and the Kmart Fashions division headquarters, the cancellation of certain real estate projects that did not meet recently adopted, more stringent return on investment requirements and the sale of corporate aircraft. In addition, Kmart is continuing cost-cutting actions and is currently implementing planned productivity improvements to reduce costs. The increase in SG&A expenses relative to sales in 1993 was primarily a result of lower than expected comparable store sales combined with increased store operating expenses and depreciation expense, partially offset by lower advertising and employee compensation and benefits per sales dollar. As a percent of sales, employee compensation and benefits were 14.8%, 14.6% and 14.8% in 1994, 1993 and 1992, respectively. Advertising expense comprised 1.3%, 1.4% and 1.5% of sales in 1994, 1993 and 1992, respectively. Gain on subsidiary public offerings of $168 million ($101 million net of tax) resulted from the IPO's of shares in OfficeMax and The Sports Authority reducing Kmart's interests from over 90% and 100% to approximately 25% and 30%, respectively. Kmart received net proceeds of $642 million from the IPO of OfficeMax and $254 million from the IPO of The Sports Authority and recorded pre-tax gains of $86 million and $82 million, respectively. Kmart's investment in these companies has been accounted for under the equity method for 1994 resulting in $28 million of equity income; the results of operations and statement of financial position for prior years are included in the consolidated results. Store restructuring and other charges. On January 5, 1994, the Board of Directors approved a restructuring plan involving the Kmart Group (including Kmart Canada), Borders Group and Builders Square. As a result, in the fourth quarter of 1993, Kmart recorded a charge to earnings of $1,348 million before taxes. Net of taxes, the charge was $862 million. The provision included anticipated costs associated with Kmart stores which will be closed and relocated, enlarged or refurbished in the U.S. and Canada, the closing of underperforming Walden stores and the closing and relocation of certain Builders Square stores. These costs, which represented approximately 85% of the total, included lease obligations for store closings as well as fixed asset writedowns, primarily furniture and fixtures, and inventory dispositions and related operating losses for all affected stores. The remainder of the charge was for costs related to certain changes to Walden's accounting policies in connection with combination with Borders, re-engineering programs (principally severance) and a non-routine legal contingency accrual. See below for additional detail regarding the fourth quarter 1993 charge, and also refer to U.S. General Merchandise Operations, International General Merchandise Operations, Borders Group and Builders Square sections of this document.
STORE RESTRUCTURING AND OTHER CHARGES ------------------- (MILLIONS) Kmart Group -- U.S. General Merchandise Operations........... $ 865 -- International General Merchandise Operations.. 39 Borders Group................................................ 218 Builders Square.............................................. 226 ------- Total Kmart.................................................. $ 1,348 =======
11 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED Net interest expense on debt reflects the following components:
1994 1993 1992 ---- ---- ---- (MILLIONS) Interest Expense on Debt................................ $286 $315 $272 Interest Income......................................... 28 12 29 ---- ---- ---- Net Interest Expense on Debt....................... $258 $303 $243 ==== ==== ====
Net interest expense on debt in 1994 was $258 million, down 14.9% from $303 million in 1993. The decrease in net interest expense on debt in 1994 was due primarily to lower aggregate short-term borrowings, as a result of applying the proceeds from the IPO's of OfficeMax and The Sports Authority and the sale of the equity interest in Coles Myer, and the early retirement of long-term debt, as a result of applying the proceeds from the sale of PayLess, partially offset by higher interest rates resulting from market conditions and lower credit ratings. The 1993 increase was a result of greater borrowings resulting from higher inventory levels in the first nine months of 1993, acquisitions made in 1992 and the OfficeMax acquisition of BizMart in March 1993, partially offset by lower interest rates on long-term and short-term borrowings. Kmart's weighted average interest rates on total debt were 7.0% in 1994, 6.7% in 1993 and 7.6% in 1992. Weighted average interest rates for short-term borrowings were 4.6% in 1994, 3.2% in 1993 and 3.6% in 1992. Capital lease obligations and other interest expense increased primarily as a result of interest expense of $40 million related to the discounting of closed store lease obligations included in the 1993 store restructuring reserve. Income (loss) from continuing retail operations before income taxes and equity income for the year was $294 million, as compared to $(590) million and $1,321 million in 1993 and 1992, respectively. Excluding the store restructuring and other charges of $1,348 million, 1993 income from continuing operations before income taxes was $758 million. Equity in net income of unconsolidated companies was $80 million, $52 million and $54 million in 1994, 1993 and 1992, respectively. The increase in 1994 is due to the inclusion of OfficeMax and The Sports Authority as equity investments. The 1993 and 1992 amounts include equity income related only to Meldisco. Refer to the Licensee Operations and Equity Investments section for further information. Income tax expense (benefit) was $114 million with an effective tax rate of 30.5% in 1994 as compared to $(191) million with an effective tax rate of 35.5% in 1993 and $474 million with an effective tax rate of 34.4% in 1992. The decrease in the effective tax rate in 1994 was due to additional equity income not subject to tax, higher tax credits and the change in state tax expense. The increase in the effective tax rate in 1993 was primarily due to the 1% increase in the federal corporate tax rate retroactive to January 1, 1993. Net income (loss) from continuing retail operations in 1994 was $260 million, as compared to $(347) million and $901 million in 1993 and 1992, respectively. Excluding the net of tax $101 million gain on subsidiary public offerings, 1994 net income from continuing retail operations was $159 million, or 0.5% of sales as compared to $515 million, excluding the net of tax $862 million store restructuring and other charges, or 1.4% of sales in 1993. The 1994 decrease was the result of a sales mix heavily weighted toward promotional items and lower-margined merchandise as well as charges taken by Kmart in the fourth quarter to reduce expenses and improve productivity. The decrease in net income from continuing retail operations in 1993, exclusive of the store restructuring and other charges, resulted primarily from the inventory reduction program and gross margin pressure in U.S. Kmart stores. Net income (loss) from discontinued operations in 1994 was $20 million, as compared to $(77) million and $40 million in 1993 and 1992, respectively. Discontinued operations included the equity earnings from Coles Myer through the third quarter of 1994 and full year equity earnings in 1993 and 1992, as well as the results of PACE in 1993 and 1992. The $(77) million after-tax loss in 1993 was the result of a significant net operating loss at PACE which more than offset the equity in net income of Coles Myer. Additionally, gain on 12 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED the disposal of discontinued operations of $16 million in 1994 included a $48 million after-tax gain realized from the sale of Coles Myer offset by an after-tax charge of $32 million for sublease exposure related to lease guarantees on lease properties sublet to Furr's/Bishop ("Furrs") cafeteria chains. Kmart previously owned these cafeteria chains which were sold in 1986. In 1993, an after-tax loss of $521 million was realized from the disposal of discontinued businesses including PACE and the divestiture of PayLess. In November 1994, Kmart completed the sale of its 21.5% equity interest in Coles Myer for cash proceeds of $928 million. The results of operations for Coles Myer have been reclassified to discontinued operations to reflect the disposal of this line of business. Income from discontinued operations relating to Coles Myer was $20 million, $47 million and $42 million for 1994, 1993 and 1992, respectively. As part of the transaction, Kmart extended a long-term license agreement that allows Coles Myer to use the "Kmart" name in Australia and New Zealand. In April 1994, Kmart completed the sale of PayLess to Thrifty PayLess Holdings, Inc. ("TPH") and its subsidiary Thrifty PayLess, Inc. for approximately $595 million in cash, $100 million in Senior Notes of TPH and approximately 46% of the common equity of TPH. Of the cash proceeds, $50 million was invested in Senior Subordinated Notes of Thrifty PayLess, Inc. which Kmart subsequently sold in May 1994 at a slight premium. The book value of PayLess' net assets to be sold was $1,186 million at January 26, 1994. Kmart had intended to complete the divestiture of its TPH equity interest within a one year time frame and had, accordingly, classified the results of operations as a component of discontinued operations. During the latter part of 1994, Kmart pursued the disposition of its interest in TPH, but did not locate an acceptable buyer during this time frame. Therefore, management reclassified the results of operations for PayLess in 1993 and 1992 from discontinued operations to continuing retail operations. Management will continue to pursue the sale of this investment during 1995 and expects that such disposition will occur through either a private offering or other alternative means. In January 1994, PACE sold the assets and lease obligations of 93 of its warehouses and virtually all of the inventory and membership files in the 34 warehouses not included in the transaction to Sam's Club, a division of Wal-Mart, for approximately $774 million in cash. The book value of the assets sold to Wal-Mart was $624 million. Operations of the 34 remaining PACE sites not included in the transaction were discontinued. Included in the loss on the disposal of PACE was unamortized goodwill of $395 million, expected remaining lease obligations in the warehouses not sold, other PACE liabilities and a provision for additional costs anticipated during the wind-down of PACE operations. During 1994, PACE continued to market the remaining sites, including unopened warehouses and corporate facilities which were not sold. Extraordinary item, net of income taxes. In August 1993, Kmart called for early redemption of all $200 million of its 8 1/8% debentures due January 1, 1997. The debentures were redeemed at 100% of the principal amount plus interest accrued to the date of redemption. In April 1993, Kmart called for early redemption of all $200 million of its 10 1/2% Sinking Fund Debentures due December 1, 2017. The resulting redemption premium of $10 million, net of applicable income taxes, has been reported as an extraordinary item. Effect of accounting changes, net of income taxes. Kmart adopted Financial Accounting Standard No. 109 "Accounting for Income Taxes" (FAS 109) in the first quarter of 1993. FAS 109 requires that deferred taxes be calculated using the liability approach rather than the deferred method. As a result of the adjustment of deferred tax balances to the enacted tax rate at the date of adoption, Kmart has recorded a benefit of $60 million, as the cumulative effect of an accounting change. Kmart also adopted Financial Accounting Standard No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS 106) at the beginning of fiscal 1993. This statement requires that Kmart accrue for future postretirement medical benefits. In prior years, these claims were expensed when paid. Net 13 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED of applicable tax, a charge of $79 million has been included in net income as the effect of an accounting change. In addition, Kmart adopted Financial Accounting Standard No. 112 "Employers' Accounting for Postemployment Benefits" (FAS 112) in the first quarter of 1993. FAS 112 is an extension of the concepts underlying FAS 106 for similar benefits provided to terminated or laid-off employees. The financial effects of this statement on Kmart were not material. Net income (loss) in 1994 was $296 million, as compared with $(974) million in 1993 and $941 million in 1992. Earnings (loss) per share in 1994 was $0.63, as compared with $(2.15) in 1993 and $2.06 in 1992. EFFECTS OF INFLATION Kmart's financial statements have been prepared on a historical cost basis under generally accepted accounting principles. Kmart uses the LIFO method of inventory valuation in its historical financial statements; therefore, the cost of merchandise sold approximates current cost. In addition, because Kmart is refurbishing existing stores and opening new stores, depreciation and amortization expense more closely approximate current cost. FINANCIAL OBJECTIVE Kmart's financial policy focuses on return on investment and financial flexibility. Return on investment requires deployment of Kmart's assets and resources where they will provide the best long-term return. Kmart management focuses on funding an improved merchandise mix, additional Super Kmart Center stores, refurbishment, relocation and expansion of existing U.S. Kmart stores and potential international retail investment opportunities. Additionally, management seeks to maximize returns from its investments in Borders Group and Builders Square. In 1994, Kmart sold or closed Kmart and specialty retail stores which did not generate sufficient returns. Kmart anticipates that the cash required to fund the Kmart and Builders Square store modernization and Super Kmart Center programs will be provided primarily by operations and real estate financing. Potential cash proceeds in 1995 realized from the possible IPO of Borders Group and sale of all or part of Kmart's investment in TPH will be used to reduce debt and for other general corporate purposes. On an ongoing basis, Kmart utilizes commercial paper to cover peak working capital requirements. Kmart also believes that it will continue to have access to long-term debt and plans to fund new stores using primarily real estate financing. The types of financing to be used will be dependent on the availability and cost of various financing alternatives which could be influenced by several factors including future operating performance and ratings assigned to debt. CASH FLOW Kmart funds generated by operations, investing and financing activities as reported in the Consolidated Statements of Cash Flows are summarized below. Net cash provided by operations was $76 million in 1994, $1,127 million in 1993 and $852 million in 1992. The decrease in 1994 was due primarily to lower net income from continuing retail operations of $356 million, excluding the gain on subsidiary public offerings in 1994 and store restructuring and other charges in 1993, and the $510 million increase in U.S. Kmart FIFO inventory. This was offset by cash used for PACE obligations and noncash items related to the sale of the equity interest in Coles Myer. The increase in 1993 was due primarily to the $720 million decrease in U.S. Kmart FIFO inventory, increased accounts payable financing of inventory and increased depreciation and amortization expense. Inventory turnover was 3.1 in 1994, as compared with 2.8 in 1993 and 2.7 in 1992, as restated for the discontinuance of PACE and divestitures of PayLess in 1993 and OfficeMax and The Sports Authority in 1994. The improvement in inventory turnover in 1994 was due to the continuing focus on inventory management, the impact of higher turnover for the Super Kmart Center operations and a higher proportion of 14 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED lower-margined, faster moving inventory. The improvement in inventory turnover in 1993 was attributable to the U.S. Kmart division. In U.S. Kmart stores, 1993 FIFO inventory decreased 10.4%, as compared to an 8.0% increase in 1992. The 1993 decrease was primarily a result of increased focus on inventory management in U.S. Kmart stores including the increased use of automatic replenishment systems in hardline departments. Depreciation and amortization expense are recognized in determining net income, but do not require cash outlays. These expenses have been steadily rising each year on a comparable basis, and are expected to continue to increase, due to capital expenditures for the Kmart and Builders Square store modernization programs and new Super Kmart Centers. Kmart anticipates that after-tax cash outflows related to store restructuring and other charges will approximate $125 million, $90 million and $75 million in 1995, 1996 and 1997, respectively, and will result primarily from the payment of lease obligation costs. The pre-tax cash outflows related to store restructuring and other charges will approximate $195 million, $135 million, and $115 million in 1995, 1996 and 1997, respectively. Lease obligation costs (including property taxes, maintenance and utilities) have been estimated based upon scheduled lease payments and the estimated duration of time of such payments from when each store is closed until the lease obligation is concluded through subleasing, buyout or expiration. At January 25, 1995, the total remaining gross lease obligation costs relating to the U.S. Kmart 1993 restructuring plan aggregated approximately $1.2 billion, of which it is management's estimate, based upon historical results, approximately $600 million will be recovered through subleasing. Other forms of lease disposition have been considered in developing Kmart's estimates but are not material. Kmart has discounted the future net cash flows using a 7% discount rate which resulted in an aggregate remaining effect of discounting of approximately $115 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 and the remaining charge is substantially non-cash in nature. Management believes the estimates used to develop the timing and amount of cash flow related to net lease costs are reliably determinable. Net cash provided by (used for) investing was $1,160 million in 1994, $(568) million in 1993, and $(1,832) million in 1992. Cash provided by investing in 1994 was primarily comprised of proceeds from the OfficeMax and The Sports Authority IPO's, the divestiture of PayLess and the sale of the equity interest in Coles Myer partially offset by capital expenditures for store modernization. Excluding discontinued operations, capital expenditures for the Kmart Group, which included new distribution centers, refurbishments, expansions and store openings, were $1,021 million, $793 million and $1,110 million in 1994, 1993 and 1992, respectively. The increase in the Kmart Group capital expenditures in 1994 was due to the opening of stores in Mexico and Singapore in 1994 and the greater number of larger-format Super Kmart Centers in the store modernization program as compared to the prior year. The decrease in the Kmart Group capital expenditures in 1993 was due to a reduction in the number of U.S. Kmart modernization projects as the Kmart Group integrated the Super Kmart Center concept into the program as described below. Capital expenditures by specialty retail companies were primarily for new store openings resulting from aggressive expansion programs and totaled $226 million, $229 million and $138 million in 1994, 1993 and 1992, respectively. Net cash used for acquisitions totaled $12 million in 1994, $268 million in 1993 and $372 million in 1992 and included Borders Group's acquisition of Planet Music, a six unit music retailer in 1994, the acquisition of BizMart (by OfficeMax) in 1993 and, in 1992, the acquisition of Pay'n Save assets (by PayLess) and OW Office Warehouse, Inc. (by OfficeMax) and the purchase of 13 department stores in the Czech Republic and Slovakia. Approximately 43 new discount stores and 22 Super Kmart Center stores are currently planned to be opened in 1995. U.S. Kmart capital expenditures for owned property are expected to be approximately $0.5 billion in 1995 as compared with $0.8 billion in 1994 and 1993, and $1.1 billion in 1992. Presently, management is actively engaged in a comprehensive strategic review of the entire U.S. Kmart division which is expected to be completed in 1995. Additional information regarding the U.S. Kmart and Builders Square 15 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED store modernization and Super Kmart Center programs is included in the Analysis of Kmart Group Operations and Analysis of the Current Specialty Retail Operations sections of this report. Kmart anticipates that the cash required to fund the Kmart and Builders Square store modernization and the Super Kmart Center expansion will be provided primarily by operations and real estate financing. Additional cash proceeds may be realized in 1995 from the possible IPO of Borders Group and sale of all or part of Kmart's investment in TPH. Net cash used for financing was $1,205 million in 1994 and $721 million in 1993 as compared with net cash provided by financing of $1,026 million in 1992. The 1994 change resulted primarily from a $651 million net decrease in long-term debt and notes payable in 1994 as compared with a net decrease of $197 million in 1993 and a net increase of $1,522 million in 1992. The increase in cash used for financing in 1994 was due to a reduction in aggregate short-term borrowings, as a result of applying the proceeds from the IPO's of OfficeMax and The Sports Authority and the sale of the equity interest in Coles Myer, and the early retirement of long-term debt, as a result of applying the proceeds from the sale of PayLess. The increase in cash used for financing in 1993 was primarily due to lower short-term borrowings a result of lower U.S. Kmart inventory levels in 1993. The 1992 change was due primarily to a $590 million increase in notes payable and proceeds of $1,012 million from 1992 debt issuances and mortgage financing. Due to the seasonal nature of the retail industry, Kmart continues to utilize commercial paper to cover peak working capital requirements. Average short-term borrowings outstanding during 1994, 1993 and 1992 were $1,915 million, $2,079 million and $1,136 million, respectively. The maximum amount of aggregate short-term borrowings outstanding during 1994 was $3,784 million as compared with $3,220 million in 1993 and $2,371 million in 1992. Total lines of credit available were $3,810 million, $3,540 million and $2,400 million at the end of 1994, 1993 and 1992, respectively. As of January 25, 1995, Kmart had $19 million of outstanding borrowings under these lines. Total dividends paid during 1994 were $474 million, compared with $465 million and $448 million in 1993 and 1992, respectively. Dividends paid per Kmart existing common share were $0.96, $0.95 and $0.91 in 1994, 1993 and 1992, respectively. Dividends paid in 1994, 1993 and 1992 per $3.41 Depositary Share (each representing one-quarter share of Series A conversion preferred stock) were $2.56, $3.41 and $3.41, respectively. Dividends paid per Series C convertible preferred stock share were $11.50 in 1994, and $11.50 and $1.44 per Series B convertible preferred stock share in 1993 and 1992, respectively. CAPITAL STRUCTURE The following three-year analysis of Kmart's capital structure summarizes Kmart's total debt and equivalent and total capitalization:
1994 % 1993 % 1992 % ------- ----- ------- ----- ------- ----- ($ MILLIONS) Long-term debt due within one year.......... $ 236 2.2 $ 390 3.4 $ 117 0.8 Capital lease obligations due within one year...................................... 119 1.1 116 1.0 113 0.8 Notes payable............................... 638 5.9 918 8.0 590 4.3 Long-term debt.............................. 2,011 18.6 2,227 19.5 3,237 23.6 Capital lease obligations and other......... 1,954 18.0 1,936 17.0 1,862 13.6 ------- ----- ------- ----- ------- ----- Total debt and equivalent.............. 4,958 45.8 5,587 48.9 5,919 43.1 ------- ----- ------- ----- ------- ----- Deferred income taxes....................... (169) (1.5) (264) (2.3) 268 2.0 Shareholders' equity........................ 6,032 55.7 6,093 53.4 7,536 54.9 ------- ----- ------- ----- ------- ----- Total capitalization................... $10,821 100.0 $11,416 100.0 $13,723 100.0 ======= ===== ======= ===== ======= =====
Total debt and equivalent as a percentage of total capitalization was 45.8% in 1994, 48.9% in 1993 and 43.1% in 1992. The decrease in 1994 was primarily due to lower levels of debt outstanding and the reduction of notes payable with cash proceeds received from the OfficeMax and The Sports Authority IPO's and the sales 16 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED of the equity interest in Coles Myer and sale of PayLess. The 1993 increase resulted from lower shareholders' equity and a change in deferred taxes as a result of the 1993 store restructuring and other charges, partially offset by reduced debt outstanding. On October 30, 1992, Kmart issued 784,938 shares of Series B convertible preferred stock in exchange for all of the outstanding stock of Borders, Inc. As of July 8, 1994, all outstanding shares of Series B convertible preferred stock were exchanged for 784,938 shares of Series C convertible preferred stock. The Series C convertible preferred stock has substantially the same terms as the Series B convertible preferred stock. Subject to adjustment in certain events, each share of Series C convertible preferred stock is convertible into 6.49 shares of common stock or redeemable, over time, for common stock based on the market price of Kmart common stock. In August 1991, Kmart issued 23,000,000 $3.41 Depositary Shares, each representing one-quarter of a share of Series A conversion preferred stock, for $44 per Depositary Share. On September 15, 1994, each of the outstanding Depositary Shares automatically converted into two shares of Kmart common stock. The conversion rate had been adjusted to reflect the common stock split distributed June 5, 1992. A total of 46,000,000 shares of common stock were issued or issuable in the conversion of the Series A conversion preferred stock. ANALYSIS OF KMART GROUP OPERATIONS At January 25, 1995, the Kmart Group consisted of both domestic and international operations. A total of 2,316 Kmart stores were located in the United States and Puerto Rico, including 67 Super Kmart Centers, all in the United States. The Kmart Group's international operations included 128 Kmart stores in Canada, 13 stores in the Czech Republic and Slovakia and joint ventures operating two stores each in Mexico and Singapore. A three-year summary of the Kmart Group's sales and operating income follows:
% % 1994 CHANGE 1993 CHANGE 1992 ------- ------ ------- ------ ------- (U.S. $ MILLIONS) Sales United States................................... $28,386 5.3 $26,948 6.4 $25,326 International................................... 1,177 8.0 1,090 (4.7 ) 1,144 ------- ------- ------- Total Sales................................ $29,563 5.4 $28,038 5.9 $26,470 ======= ======= ======= Operating Income(1) United States................................... $ 513 (46.9 ) $ 966 (33.6 ) $ 1,454 International................................... 23 (52.1 ) 48 4.3 46 ------- ------- ------- Total Operating Income..................... $ 536 (47.1 ) $ 1,014 (32.4 ) $ 1,500 ======= ======= ======= Capital Expenditures -- Owned Property(2)......... $ 1,021 $ 793 $ 1,110 ======= ======= =======
- ------------------------- (1) 1994 operating income excludes gains on OfficeMax and The Sports Authority IPO's of $86 million and $82 million, respectively. 1993 operating income excludes store restructuring and other charges of $865 million and $39 million for United States and International operations, respectively. (2) Excludes capital expenditures of discontinued operations. 17 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED The following table highlights the Kmart Group's store activity during 1994:
1994 ACTIVITY PLANNED END END -------------------------- END 1992 1993 OPENED CLOSED END 1995 ------ ------ ------ ------ ------ ------- Kmart United States............................... 2,281 2,323 113 (120) 2,316 2,185 Canada...................................... 127 127 4 (3) 128 126 Czech Republic and Slovakia................... 13 13 -- -- 13 13 Mexico........................................ -- -- 2 -- 2 4 Singapore..................................... -- -- 2 -- 2 3 Other......................................... 14 23 6 (9) 20 -- ------ ------ ------ ------ ------ ------- Total General Merchandise.............. 2,435 2,486 127 (132) 2,481 2,331 ====== ====== ===== ===== ====== ====== General Merchandise Selling Square Feet (Millions).................................. 159 168 175 ====== ====== ====== General Merchandise Store Sales per Square Foot........................................ $ 179 $ 179 $ 179 ====== ====== ======
U.S. GENERAL MERCHANDISE OPERATIONS Sales in domestic Kmart stores increased 5.3% in 1994 due to a 1.4% comparable store sales increase and greater selling square footage due to the addition of larger-format stores and Super Kmart Centers. This was partially offset by a decrease in average selling price and weak sales of seasonal apparel merchandise lines. Comparable store sales in the first part of the year were affected by the inventory mix adjustments and reductions made in late 1993 and early in 1994 in the U.S. Kmart store division which contributed to lower store traffic. Domestic Kmart store sales increased 6.4% in 1993 as a result of a 3.8% comparable store sales increase and an increasing number of stores in operation, partially offset by a decrease in the average selling price of merchandise resulting primarily from competitive factors. Sales per square foot in U.S. Kmart stores, including unconsolidated Kmart store licensee sales, were $181, $182 and $181 in 1994, 1993 and 1992, respectively. Both comparable store sales and sales per square foot were adversely affected by competition and lower selling prices. Domestic Kmart operating income decreased 46.9% in 1994, excluding the gains on the IPO's of OfficeMax and The Sports Authority of $168 million, primarily due to a sales mix heavily weighted toward promotional items and lower-margined merchandise, higher fixed occupancy costs on relatively level sales per square foot, as well as actions taken in the fourth quarter to reduce expenses and improve productivity. These actions include provisions for implementing a more aggressive merchandise markdown policy on discontinued and seasonal inventory, closings of regional offices and the Kmart Fashions division headquarters, the cancellation of certain real estate projects and the sale of corporate aircraft. Operating income, excluding the store restructuring and other charges of $865 million, in domestic Kmart stores decreased 33.6% to $966 million in 1993 due primarily to gross margin pressure. Although there was competitive pricing pressure in both hardlines and softlines throughout the year, the lower gross margin in 1993 was primarily related to the U.S. Kmart inventory reduction program and increased markdowns at the Kmart Fashions division. As a result of a domestic Kmart inventory management program, which included the increased use of automatic replenishment systems in hardline departments, gross margins were significantly affected by the inventory reduction and resulting change in the mix of merchandise purchased, primarily in the fourth quarter of 1993, as compared to 1992. Restructuring Plan. During fiscal 1993, Kmart assessed its store renewal and modernization strategy, first announced in the 1989 restructuring plan, along with the impact of integrating Super Kmart Centers into the program. The decision to modernize the Kmart discount store base was in response to the negative earnings 18 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED trend that unmodernized stores continued to show resulting from declining sales and gross margins due to competitive pressures and generally smaller locations relative to their competition. It was determined that larger-format discount stores, approximately 110,000 square feet, would be more productive and competitive, in contrast to the previous 86,000 square foot store format included in the 1989 restructuring plan. In addition, based on the encouraging results from Super Kmart Centers, the first of which opened in 1991, management determined that there was a potential for several hundred Super Kmart Centers over the next several years. Super Kmart Centers range from 135,000 to 185,000 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. As a result of the above, on January 5, 1994, the Board of Directors approved the 1993 restructuring plan which assumed closure of 503 additional stores and expansion and refurbishment of the remaining 500 unmodernized stores. The following table outlines the original 1993 restructuring plan and planned projects by year:
1993 PLANNED PROJECTS BY YEAR RESTRUCTURING ---------------------------- PLAN 1994 1995 1996 1997 ------------- ---- ---- ---- ---- Closings and Relocations................... 503 100 150 175 78 Expansions................................. 265 55 84 96 30 Refurbishments............................. 235 35 100 100 ------ Total................................. 1,003 ==========
The Kmart Group recorded a pre-tax charge of $865 million in the fourth quarter of 1993 relating to its U.S. General Merchandise Operations. The charge was principally for store closings related to specifically-identified relocations which will result in replacing smaller, less productive stores with larger stores and Super Kmart Centers. These new stores are expected to generate improved sales and gross margins which will be partially offset by increased store occupancy and depreciation expense. The 1993 restructuring plan included $697 million and $78 million for store closures/relocations and expansions/refurbishments, respectively. The significant cost components of the restructuring charge include lease obligations for closed stores as well as fixed asset writedowns to net realizable value (primarily furniture and fixtures and leasehold improvements) and inventory liquidation costs during the final stage of the project for all affected stores. Inventory liquidation costs represent the incremental markdowns on inventory, including a substantial portion for inventory not physically on hand at January 5, 1994, but which will be at the time the store is modernized. Such charge does not include any provision for store occupancy, depreciation expense or normal inventory markdowns prior to the closing or completion date of a project. Kmart has accrued all significant costs in connection with store modernization. The remainder of the charge related to the implementation of re-engineering programs (principally severance) and other non-recurring charges. Also included in the 1993 charge was $20 million to increase the reserve for lease obligations for stores closed as part of the 1989 restructuring plan. The following table indicates the status of the 1993 restructuring plan projects completed through January 25, 1995:
ORIGINALLY ACTUAL PLANNED 1994 1994 ------ ---------- Closings and Relocations..................................... 120 100 Expansions................................................... 48 55 Refurbishments............................................... 21 35
19 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED Of the 120 U.S. Kmart stores closed, 90 stores were related to relocations and Super Kmart Centers and 21 stores were due to consolidation within existing markets. In many cases, multiple store locations are closed and relocated into a Kmart store or Super Kmart Center. The remaining nine closures related to exiting selected markets. The increase in store closings during 1994 resulted primarily from the acceleration of closings that were originally scheduled to occur in 1995. In addition, Kmart expanded and refurbished fewer stores in 1994. The decrease in expansions and refurbishments is due to management's ongoing assessment of modernization results, local market conditions and delays related to compliance with local ordinances. In 1995, Kmart expects to close a total of approximately 196 stores, compared to the original plan of 150 stores, of which 91 stores have been closed to date in early fiscal 1995. The accelerated 1995 planned closures include approximately 53 stores for relocations and Super Kmart Centers and 72 stores for consolidation within existing markets. The remaining 71 stores relate to exiting selected markets. Also in 1995, Kmart plans approximately 30 expansions and approximately 60 refurbishments as compared to the original plan of 84 expansions and 100 refurbishments. The decrease is due primarily to ongoing refinements of store layouts and merchandise assortments. It is management's intention to complete the delayed expansions and refurbishments in 1996 and 1997. The following table sets forth the restructuring provision established in 1993 and related activity through January 25, 1995 ($ millions):
ACTIVITY TO DATE --------------------------------------- CASH NONCASH COSTS PROVISION COSTS AND ASSET CHANGES IN RESERVE AT RECORDED INCURRED WRITEDOWNS ESTIMATE JANUARY 25, 1995 -------- -------- ------------- ---------- ---------------- Store modernization: Lease obligation costs.............. $444 $ 9 $ (33) $ -- $468 Asset writedowns.................... 141 -- 56 17 102 Inventory disposition costs......... 190 -- 61 -- 129 Re-engineering and other non-recurring charges............................. 70 23 25 -- 22 -------- --- ------ --- ------ $845 $ 32 $ 109 $ 17 $721 ======= ====== =========== ======== ============
As of January 25, 1995, Kmart Group is substantially on plan in terms of total costs and the number of locations as compared to the original provision recorded in the 1993 restructuring plan. The fiscal 1994 activity includes $9 million of cash outlays for lease obligations incurred once a store is closed until it can be either subleased, bought-out or terminated. In 1994, most of the 120 U.S. Kmart store closures occurred in the fourth quarter. The noncash portion for lease obligations represents interest expense accreted on the discounted lease obligations. Asset writedowns of $56 million represent primarily furniture and fixture and leasehold improvement writedowns to net realizable value in the 120 stores closed and 69 stores expanded or refurbished. The inventory disposition costs of $61 million represents total liquidation costs for the 120 stores closed in 1994 and the liquidation costs incurred through January 25, 1995 for the 91 stores closed in early fiscal 1995. Also, Kmart Group accrued $17 million in the fourth quarter of 1994 related primarily to additional furniture and fixture writedowns for stores closed in 1994 and 1995. Also included in the 1993 charge was $45 million in severance and related benefits as part of re-engineering programs. During 1994, Kmart had a workforce reduction of approximately 660 salaried and 430 hourly positions as part of implementing the re-engineering programs. Of the total incurred, $23 million was paid in 1994 and the remaining $22 million will be paid in 1995. 20 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED Activity for the U.S. Kmart store modernization program for the past three years and total since program inception is summarized in the following table:
TOTAL 1992 1993 1994 COMPLETE ---- ---- ---- -------- New stores (including relocations) Kmart stores...................................... 114 116 65 494 Super Kmart Centers............................... 5 14 48 67 Store expansions.................................... 122 51 48 478 Store refurbishments................................ 208 10 21 465 ---- ---- ---- -------- Totals....................................... 449 191 182 1,504 ==== ==== ==== =======
In 1994, Kmart completed 182 store modernization projects as compared to the original 1993 restructuring plan of approximately 225 modernization projects. Completed modernization projects as compared to plan decreased by approximately 15 new discount stores, seven Super Kmart Centers and 21 expansions/refurbishments. This reflects management's ongoing assessment of modernization results, local market conditions and rigorous site by site analysis which extended the time to completion for some projects. Also, approximately 43 new discount stores and 22 new Super Kmart Centers are planned for 1995. During 1994, Kmart closed certain stores that were either expanded or refurbished that were not part of the original stores to be closed. As market conditions change, Kmart has and will substitute stores that were not included in the original provision. Management does not believe the substitution of stores has or will have a material impact on the original restructuring charge. In 1994, average sales per store at modernized stores (including new stores, relocations, expansions and refurbishments) was approximately 34% higher than non-modernized stores and the 18 Super Kmart Center stores open the full year averaged in excess of $45 million in sales per store. The remaining unmodernized store base contributed approximately $26 million and $95 million to after-tax earnings from continuing operations in 1994 and 1993, respectively. The 1989 restructuring plan, including the $20 million added in 1993, included $385 million for 310 closed/relocated stores and $141 million for 1,880 expanded/refurbished stores. Relating to the 1989 restructuring plan, Kmart has closed/relocated 323 stores and expanded/refurbished 874 stores and has charged against the reserve $381 million and $74 million relating to these store closures/relocations and expansions/refurbishments, respectively. The remaining liability recorded from the 1989 restructuring plan which will be used for future lease costs is $71 million at January 25, 1995. Actual costs on a per store basis have been higher than the original estimate for the closed/relocated component of the 1989 restructuring plan due primarily to higher than expected net lease costs. The actual costs for expansions/refurbishments, on a per store basis, have been slightly higher than the original estimate due primarily to fixed asset write-offs related to store refurbishments. The closure and relocation costs above original estimates were charged to the reserve for expansions and refurbishments and no changes to the original reserve were recorded prior to the fourth quarter of 1993 when the additional $20 million was recorded. INTERNATIONAL GENERAL MERCHANDISE OPERATIONS At January 25, 1995, international operations consisted of 128 Kmart stores in Canada and 13 department stores located in the Czech Republic and Slovakia and joint ventures in Mexico and Singapore which opened two stores each in 1994. The Central European stores were acquired in mid-1992 and represent the Kmart Group's entry into that market. The Kmart Group is developing advanced distribution methods and merchandising skills to modernize, refurbish and streamline operations in the two Central European countries. 21 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED International sales increased 8.0% in 1994 due primarily to the joint ventures in Mexico and Singapore established in 1994 and higher sales in the Czech Republic and Slovakia. Canadian stores experienced an increase in sales in local currency despite increased competition and the lingering depressed economic environment. However, the continuing deterioration of the Canadian exchange rate caused a negative sales comparison when converted to U.S. dollars. International sales decreased 4.7% in 1993 due primarily to lower Kmart Canada sales resulting from unfavorable exchange rates relative to the U.S. dollar, weak consumer spending attributed to increased taxes in Ontario and unfavorable weather in the eastern provinces of Canada during the first half of the year. International operating income decreased in 1994 due primarily to the start-up operations in Mexico and Singapore and margin pressure in Canada. Czech Republic and Slovak operating income improved in 1993 while Kmart Canada's operating income approximated prior year levels. The Canadian average dollar exchange rates were 0.7303 in 1994, 0.7745 in 1993 and 0.8226 in 1992. Restructuring Plan. On January 5, 1994, the Board approved a restructuring plan to modernize the remaining Kmart stores in Canada and, as a result, the Kmart Group recorded a pre-tax charge of $39 million in the fourth quarter of 1993. Of the total charge, $33 million is for specifically-identified store modernization projects including store relocations, expansions and refurbishments. These costs include lease obligations for store relocations fixed asset writedowns (primarily furniture and fixtures) to net realizable value and inventory liquidation costs during the final stage of the project for all affected stores. Such charge does not include any provision for store occupancy, depreciation expense or normal inventory markdowns prior to the closing or completion date of a project. The remainder of the charge relates to the implementation of re-engineering programs (principally severance). The following table sets forth the restructuring provision established in 1993 and related activity through January 25, 1995 ($ millions):
ACTIVITY TO DATE ------------------------- CASH NONCASH COSTS PROVISION COSTS AND ASSET RESERVE AT RECORDED INCURRED WRITEDOWNS JANUARY 25, 1995 -------- -------- ------------- ---------------- Store modernization: Lease obligation costs........................ $ 15 $3 $-- $ 12 Asset writedowns.............................. 7 -- 2 5 Inventory disposition costs and related operating losses........................... 11 2 8 1 Re-engineering.................................. 6 3 -- 3 --- -- --- ---- $ 39 $8 $10 $ 21 ==== == === ====
As of January 25, 1995, Kmart is substantially on plan both in terms of total costs and number of locations as compared to the original provision recorded in the 1993 restructuring reserve for Kmart stores in Canada. ANALYSIS OF CURRENT SPECIALTY RETAIL OPERATIONS At January 25, 1995, ongoing specialty retail operations consisted of Borders Group and Builders Square. Borders Group continued its aggressive store expansion program while closing underperforming mall-based 22 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED stores and Builders Square continued its modernization program closing and relocating stores as illustrated in the following table:
1994 ACTIVITY END END ------------------------------------- 1992 1993 ACQUIRED OPENED CLOSED END ----- ----- -------- ------ ------ ----- Borders Group Borders....................................... 31 44 -- 34 (3) 75 Walden*....................................... 1,202 1,159 -- 11 (68) 1,102 Planet Music.................................. -- -- 6 4 -- 10 Builders Square................................. 165 177 -- 37 (48) 166 ----- ----- ------ ----- ----- ----- Total.................................... 1,398 1,380 6 86 (119) 1,353 ===== ===== ====== ===== ===== =====
- ------------------------- * Excludes 57 and 58 Walden Software stores operated in 1993 and 1992, respectively. BORDERS GROUP Borders Group, through its primary subsidiaries Borders, Inc. ("Borders") and Walden Book Company, Inc. ("Walden"), is the second largest operator of book superstores and the largest operator of mall-based bookstores in the United States based upon both sales and number of stores. As of January 22, 1995, Borders Group operated 53 books and music superstores and 22 large format book superstores under the Borders name and 1,102 mall-based and other bookstores primarily under the Waldenbooks name. Borders Group is also expanding rapidly in the pre-recorded music business through the introduction of an extensive selection of pre-recorded music in its Borders books and music superstores, and the acquisition in 1994 of a music superstore chain currently operating 10 stores under the names Planet Music and CD Superstore. Borders Group's business strategy is to accelerate the growth and increase its profitability through (i) the continued rapid expansion of its books and music superstore operations, (ii) the continued focus on core operations and on cost reductions in its mall-based bookstore operations and (iii) the realization of synergies and economies of scale through a combination of certain of its books and music operations. Restructuring Plan. During fiscal 1993, Kmart evaluated the business strategy of its specialty retail book operations with the goal of enhancing the competitiveness and improving the profitability of such operations. This evaluation culminated in the development of a restructuring plan pursuant to which Borders Group planned to close 187 underperforming Walden stores and to combine certain distribution and headquarters functions of Borders and Walden. In January 1994, the Board of Directors approved the restructuring plan and the Borders Group recorded a restructuring charge of $143 million to provide for the estimated costs of implementing the plan. Throughout 1994, Borders Group aggressively pursued the closure of stores identified in the restructuring plan, 45 of which closed in 1994 with another 29 stores expected to be closed in 1995. Borders Group management encountered significant difficulty in negotiating early lease terminations for the remaining 113 stores initially identified for closure of which 40 have closed or will have closed by the end of 1995 and 21 of which will now remain in operation. While management still intends to aggressively pursue early lease terminations on the remaining 52 stores, these leases contain covenants requiring the stores be operated until lease expiration. In view of the number of the stores initially identified for closure for which early lease terminations could not be negotiated or which will continue to be operated, Borders Group has restated in its separate financial statements the 1993 restructuring charge to remove provisions which aggregated $33 million established for the 113 stores. Furthermore, in 1994, Borders Group recorded additional restructuring charges of $21 million which included a charge for the writedown of Walden headquarters facility to estimated net realizable value, lease buyout costs and operating losses exceeding original expectations, and costs associated with the relocation of the Walden headquarters facility. The net effect of the above was to reduce restructuring 23 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED reserves by $12 million which has been recorded in the consolidated financial statements in the fourth quarter of 1994. Had Kmart recorded the impact of reducing the 1993 restructuring charge in the fourth quarter of 1993, the net loss from continuing retail operations would have been reduced by $21 million. As a result of reflecting the above in the fourth quarter of 1994 in the consolidated financial statements, net income (loss) of Borders Group on a stand alone basis differs by the restated amounts discussed above. As a result of the restructuring plan, as restated, Borders Group incurred a net pre-tax charge of $131 million ($80 million net of tax) for store closing costs and other non-recurring charges. These costs include lease buyout costs related to store closures, disposition costs for inventory to be liquidated during the final closing of each store, costs for writedown of fixed assets (primarily furniture and fixtures) to net realizable value, costs associated with combining certain operations of Borders and Walden, including inventory reduction costs and costs of consolidating redundant distribution center functions, and re-engineering program costs. The following table sets forth the restructuring provision established in 1993, as restated, and related activity through January 22, 1995 ($ millions):
ACTIVITY TO DATE --------------------------------------- CASH NONCASH COSTS PROVISION COSTS AND ASSET CHANGES IN RESERVE AT RECORDED INCURRED WRITEDOWNS ESTIMATES JANUARY 22, 1995 ----------- -------- ------------- ---------- ---------------- Store closure: Lease buyout costs................ $ 74 $ 24 $ 5 $(30) $ 15 Asset writedowns.................. 27 -- 19 (8) -- Inventory disposition costs and related operating losses....... 21 10 1 (5) 5 Consolidation of operations......... 15 2 21 31 23 Re-engineering programs............. 6 5 -- -- 1 ----- --- --- ---- ---- $ 143 $ 41 $46 $(12) $ 44 ===== ==== === ==== ====
In addition, a pre-tax charge of $75 million related to certain changes to Walden's accounting policies was recorded in connection with combination with Borders including a change in the method of inventory valuation for Walden from last-in, first-out (LIFO) to first-in, first-out (FIFO) to conform Walden's inventory accounting and to correct certain prior period errors with respect to inventory shrinkage, lease accounting and revenue recognition, and to conform the accounting policies of Walden and Borders in the area of fixed asset capitalization. Such changes were made in consideration of separate reporting of the Borders Group results. Kmart believes the pre-tax effect of recognizing the corrections of errors of $93 million, accounting changes calling for restatement of $(57) million, and other accounting changes of $36 million does not have a material impact on the results of operations. Had Kmart recorded the accounting changes of $36 million as accounting changes, the net loss from continuing retail operations would have been reduced by $23 million. As a result of reflecting these amounts in the fourth quarter of 1993 in the consolidated financial statements, net income (loss) of Borders Group on a stand alone basis differs by the restated amounts discussed above. 24 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED Borders Group results of operations for the last three years follow ($ millions):
% CHANGE -------------- 1994 1993 1992 1994 1993 ------ ------ ------ ----- ---- Sales............................................. $1,511 $1,370 $1,202 10.3 14.0 ====== ====== ====== Operating Income(1)............................... $ 44 $ 50 $ 46 (12.0) 8.7 ====== ====== ====== Comparable Store Sales Increase Borders......................................... 17.6% 14.8% 12.6% ====== ====== ====== Walden.......................................... 0.9% 0.7% 1.4% ====== ====== ======
- ------------------------- (1) Borders Group 1994 and 1993 operating income excludes store restructuring and other charges of $(12) million and $218 million, respectively. Sales in 1994 were $1,511 million, a 10.3% increase, over sales of $1,370 million in 1993. The 1994 sales increase resulted primarily from rapid growth in the number of Borders superstores, strong Borders comparable store sales and, to a lesser extent, the acquisition of Planet Music in August 1994, partially offset by a decrease in Walden sales resulting primarily from store closures. The 1993 sales increase of 14.0% over 1992 sales was primarily due to the inclusion of a full year of sales for the Borders stores versus three months in the prior year. Comparable Walden store sales increased 0.7% in 1993 versus a 1.4% increase in 1992. The slower rate of Walden comparable store sales growth was a result of increased competition from superstores in several markets and sluggish mall traffic. Operating income was $44 million, or 2.9% of sales, in 1994 exclusive of store restructuring and other charges, a 12.0% decrease, as compared to $50 million, or 3.6% of sales, in 1993 exclusive of store restructuring and other charges. The 1994 decrease resulted primarily from the increase in lower margin music sales and higher occupancy costs reflecting the larger format stores recently opened by Borders, which generally have higher occupancy costs as a percentage of sales, and Borders' expansion into more expensive markets, partially offset by higher sales. In 1993, Borders Group reported an operating loss of $168 million, inclusive of the store restructuring and other charges of $218 million. Excluding store restructuring and other charges, 1993 operating income was $50 million, or 3.6% of sales, as compared to operating income of $46 million, or 3.8% of sales, in the prior year. The 1993 increase resulted primarily from higher sales and improved gross margins, partially offset by increased goodwill amortization as a result of the acquisition of Borders by Kmart. BUILDERS SQUARE At January 22, 1995, Builders Square operated 166 home improvement stores in 24 states and Puerto Rico, of which 75 were Builders Square I Stores ("BSQ I Stores") and 91 were Builders Square II Stores ("BSQ II Stores"). Builders Square plans to operate 174 stores at the end of fiscal 1995. The long-term business strategy of Builders Square is to phase out its self-service warehouse-style home improvement stores and operate large format superstores that emphasize customer service and provide an extensive selection of quality products and services to repair, remodel, redecorate and maintain both home and garden. Restructuring Plan. On January 5, 1994, the Board approved a restructuring plan to convert virtually all of the existing Builders Square stores to the new BSQ II format by 1997. The BSQ II stores have an easier-to-shop layout that utilizes a "store-within-a-store" format with substantially increased customer service levels. In connection with the restructuring plan, Builders Square is closing selected BSQ I stores, converting other existing BSQ I stores to the BSQ II format and filling in existing markets with BSQ II stores. During the next three years, Builders Square currently expects to phase out 28 BSQ I stores by closing three stores, relocating 23 stores and renovating two stores. These activities will result in 47 existing high volume original format 25 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED stores remaining in operation at the end of fiscal 1997 which management still intends to expand and renovate into new format stores in the future. In addition, Builders Square plans to open approximately 10 new BSQ II stores in 1995. As a result of the restructuring plan, Builders Square recorded a pre-tax charge of $226 million ($141 million, net of tax) in the fourth quarter of 1993 for the estimated cost of closing and relocating BSQ I stores to the BSQ II format. Of the total pre-tax charge, $214 million is for specifically-identified store closings and relocations. These costs include lease obligations, the disposition of inventory to be liquidated during the final closing of each store and the writedown of fixed assets, primarily furniture and fixtures, to net realizable value. Such charge does not include any provision for store occupancy, depreciation expense or normal inventory markdowns prior to the closing or completion date of a project. The remainder of the charge relates to an accrual for a non-routine legal judgment resulting from the insolvency of the insurer. In 1994, based on favorable sublease experience on over half of the stores closed to date, Builders Square lowered the estimate of net lease obligation costs by approximately $13 million. Also, based on higher than planned inventory disposition costs at the 48 stores closed in 1994, Builders Square increased its estimate of these costs by approximately $10 million. As a result of the above, the favorable settlement of the non-routine legal judgment and small revisions to other reserve elements, Builders Square recorded a net decrease to the restructuring reserve of $5 million. The following table sets forth the restructuring provision established in 1993 and related activity through January 22, 1995 ($ millions):
ACTIVITY TO DATE --------------------------------------- CASH NONCASH COSTS PROVISION COSTS AND ASSET CHANGES IN RESERVE AT RECORDED INCURRED WRITEDOWNS ESTIMATE JANUARY 22, 1995 -------- -------- ------------- ---------- ---------------- Closings/relocations: Lease obligation costs.............. $118 $ 27 $(7) $(13) $ 85 Asset writedowns.................... 33 -- 19 1 15 Inventory disposition costs......... 37 -- 20 10 27 Operating losses.................... 26 11 -- 2 17 Non-routine legal accrual............. 12 7 -- (5) -- ------ ---- --- ---- ---- $226 $ 45 $32 $ (5) $144 ====== ==== === ==== ====
Builders Square's results of operations for the last three years follow ($ millions):
% CHANGE -------------- 1994 1993 1992 1994 1993 ------ ------ ------ ----- ----- Sales.............................................. $2,951 $2,719 $2,419 8.5 12.4 ====== ====== ====== Operating Income(1)................................ $ 28 $ 61 $ 80 (54.1) (23.7) ====== ====== ====== Comparable Store Sales Increase.................... 5.9% 0.9% 8.5% ====== ====== ======
- ------------------------- (1) Builders Square's 1993 operating income excludes store restructuring and other charges of $226 million. Sales in 1994 were $2,951 million, an 8.5% increase, over sales of $2,719 million in 1993. The 1994 increase was attributable to the 5.9% increase in comparable store sales as well as additional sales generated from the ongoing restructuring effort. This involved opening 37 new BSQ II stores, closing 48 of the smaller, less profitable BSQ I stores and expanding nine BSQ I stores in prime locations into the new BSQ II format. The restructuring effort has yielded favorable results with the new BSQ II format stores reporting comparable 26 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED store sales increases of 15.3% in 1994 over 1993. Sales in 1993 were $2,719 million, a 12.4% increase, over sales of $2,419 million in 1992. The 1993 sales increase was due to the 28 stores opened, all of which were BSQ II stores, in 1993 and the inclusion of a full year of sales for the 22 stores opened in 1992. Comparable store sales increased 0.9% in 1993 versus an 8.5% increase in 1992. The slower rate of comparable store sales growth in 1993 was a result of increased competition in the Northeast and Midwest, severe winter weather conditions that continued into the spring selling season and the strong comparable store sales growth reported in the Southeast region in 1992 as the result of rebuilding in the aftermath of Hurricane Andrew. Operating income was $28 million, or 1.0% of sales, as compared to $61 million, or 2.2% of sales, in 1993 excluding store restructuring and other charges. The decrease in 1994 is attributable to increased competitive pricing, resulting in lower gross margins, short-term costs associated with the expansion of nine stores and increased pre-opening costs. Inclusive of store restructuring and other charges of $226 million, operating loss in 1993 was $166 million. Excluding store restructuring and other charges, Builders Square 1993 operating income was $61 million, or 2.2% of sales, as compared to $80 million, or 3.3% of sales, in 1992. The decrease in operating profit in 1993 resulted primarily from lower than expected sales, higher occupancy costs and increased payroll expenses associated with improving the level of customer service in the store. SUMMARY OF PAYLESS, OFFICEMAX AND THE SPORTS AUTHORITY OPERATIONS IN 1993 AND 1992 The results of operations for PayLess, which was sold to TPH in the first quarter of 1994, and OfficeMax and The Sports Authority, for which IPO's of majority interests were completed in the fourth quarter of 1994, are included as continuing retail operations in the consolidated financial statements, on a fully consolidated basis, for 1993 and 1992. Previously, the operations of PayLess were presented as part of discontinued operations in the consolidated financial statements included in the Kmart Corporation fiscal 1993 Annual Report. Refer to the Licensee Operations and Equity Investments section below for 1994 equity earnings recorded on interests in OfficeMax and The Sports Authority. A two-year summary of the divested PayLess, OfficeMax and The Sports Authority sales and operating income follows:
% 1993 CHANGE 1992 ------ ------ ------ ($ MILLIONS) Sales PayLess........................................................... $2,538 8.7 $2,335 OfficeMax......................................................... 1,422 169.3 528 The Sports Authority.............................................. 607 47.5 412 ------ ------ Total Sales.................................................... $4,567 39.5 $3,275 ====== ====== Operating Income PayLess........................................................... $ 88 (21.4 ) $ 112 OfficeMax......................................................... 20 -- 1 The Sports Authority.............................................. 21 110.0 10 ------ ------ Total Operating Income......................................... $ 129 4.9 $ 123 ====== ======
LICENSEE OPERATIONS AND EQUITY INVESTMENTS Meldisco equity income was $52 million in both 1994 and 1993 and $54 million in 1992. Unchanged equity income in 1994 as compared to 1993 reflected an increase in sales in 1994 offset by higher labor costs and supplies in the distribution centers. Lower 1993 Meldisco equity income as compared to 1992 was a result of unfavorable weather in early 1993 and increased competition. 27 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED Combined OfficeMax and The Sports Authority equity income was $28 million in 1994 reflecting Kmart's over 90% and 100% ownership, respectively, in the first three quarters of 1994, and its approximately 25% and 29% ownership, respectively, in the fourth quarter of 1994. In November 1994, Kmart completed the sale of its 21.5% equity interest in Coles Myer for cash proceeds of approximately $928 million. As part of the transaction, Kmart extended a long-term license agreement that allows Coles Myer to use the "Kmart" name in Australia and New Zealand. Kmart's Coles Myer equity income prior to the sale has been presented as a discontinued operation in the consolidated financial statements. 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 the capital expenditures, earnings or competitive position of Kmart. 28 22 KMART CORPORATION REPORT BY MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS Kmart Corporation management is responsible for the integrity of the information and representations contained in its interim and annual financial statements. This responsibility includes making informed estimates and judgments in selecting the appropriate accounting principles. Management believes the financial statements conform with generally accepted accounting principles applied on a consistent basis. To assist management in fulfilling these obligations, several tools are utilized, which include the following: A system of internal accounting controls is maintained to provide for the integrity of information for purposes of preparing financial statements and to assure that assets are properly accounted for and safeguarded. This concept of reasonable assurance is based on the recognition that the cost of the system is related to the benefits to be derived and modified for changing conditions. Management believes its system provides reasonable assurance of this appropriate balance. As part of the internal control system, a policy of Standards of Business Conduct and Management Integrity Statements is in effect. All officers and key employees periodically submit a signed statement regarding compliance with these policies. An Internal Audit Department is maintained to evaluate, test and report on the application of internal accounting controls in conformity with standards of the practice of internal auditing. The financial statements have been audited by independent accountants whose report is contained herein. This audit includes, among other things, a review of the system of internal controls as required by generally accepted auditing standards. The Audit Committee of the Board of Directors, consisting solely of outside directors, meets regularly with management, internal auditors and the independent accountants to assure that each is carrying out its responsibilities. The internal auditors and independent accountants both have full and free access to the Audit Committee, with and without the presence of management. Anthony N. Palizzi President Thomas F. Murasky Executive Vice President and Chief Financial Officer 29 23 KMART CORPORATION REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Kmart Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Kmart Corporation and its subsidiaries at January 25, 1995 and January 26, 1994, and the results of their operations and their cash flows for each of the three years in the period ended January 25, 1995, 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. As discussed in the notes to the consolidated financial statements, Kmart Corporation adopted Statement of Financial Accounting Standard No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes," at the beginning of fiscal 1993. Price Waterhouse LLP Detroit, Michigan February 27, 1995 30 24 KMART CORPORATION CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED ----------------------------------------- JANUARY 25, JANUARY 26, JANUARY 27, 1995 1994 1993 ----------- ----------- ----------- Sales........................................................ $34,025 $36,694 $33,366 Licensee fees and other income............................... 288 296 292 -------- -------- -------- 34,313 36,990 33,658 -------- -------- -------- Cost of merchandise sold (includes buying and occupancy costs)..................................................... 25,992 27,520 24,516 Selling, general and administrative expenses................. 7,701 8,217 7,393 Gain on subsidiary public offerings.......................... (168) -- -- Store restructuring and other charges........................ -- 1,348 -- Interest expense: Debt -- net................................................ 258 303 243 Capital lease obligations and other........................ 236 192 185 -------- -------- -------- 34,019 37,580 32,337 -------- -------- -------- Income (loss) from continuing retail operations before income taxes and equity income.................................... 294 (590) 1,321 Equity in net income of unconsolidated companies............. 80 52 54 Income taxes................................................. 114 (191) 474 -------- -------- -------- Net income (loss) from continuing retail operations before extraordinary item and the effect of accounting changes.... 260 (347) 901 Discontinued operations including the effect of accounting changes, net of income taxes of $7, $(61) and $11, respectively............................................... 20 (77) 40 Gain (loss) on disposal of discontinued operations, net of income taxes of $215 and $(248), respectively.............. 16 (521) -- Extraordinary item, net of income taxes of $(6).............. -- (10) -- Effect of accounting changes, net of income taxes of $(37)... -- (19) -- -------- -------- -------- Net income (loss)............................................ $ 296 $ (974) $ 941 ======== ======== ======== Earnings per common and common equivalent share: Net income (loss) from continuing retail operations before extraordinary item and the effect of accounting changes................................................. $ .55 $ (.78) $ 1.97 Discontinued operations including the effect of accounting changes, net of income taxes............................ .04 (.17) .09 Gain (loss) on disposal of discontinued operations, net of income taxes............................................ .04 (1.14) -- Extraordinary item, net of income taxes.................... -- (.02) -- Effect of accounting changes, net of income taxes.......... -- (.04) -- -------- -------- -------- $ .63 $ (2.15) $ 2.06 ======== ======== ======== Weighted average shares (millions)........................... 456.6 456.7 455.6 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. The consolidated statements of income for prior periods have been restated for discontinued operations. 31 25 KMART CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS)
JANUARY 25, JANUARY 26, 1995 1994 ----------- ----------- ASSETS Current Assets: Cash (includes temporary investments of $93 and $32, respectively).................................................... $ 480 $ 449 Merchandise inventories............................................. 7,382 7,252 Accounts receivable and other current assets........................ 1,325 1,816 -------- -------- Total current assets.................................................. 9,187 9,517 Investments in Affiliated Retail Companies............................ 368 606 Property and Equipment -- net......................................... 6,280 5,886 Other Assets and Deferred Charges..................................... 910 799 Goodwill -- net of accumulated amortization of $45 and $59, respectively........................................................ 284 696 -------- -------- $17,029 $17,504 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Long-term debt due within one year.................................. $ 236 $ 390 Notes payable....................................................... 638 918 Accounts payable -- trade........................................... 2,910 2,763 Accrued payrolls and other liabilities.............................. 1,313 1,347 Taxes other than income taxes....................................... 272 271 Income taxes........................................................ 257 35 -------- -------- Total current liabilities............................................. 5,626 5,724 Capital Lease Obligations............................................. 1,777 1,720 Long-Term Debt........................................................ 2,011 2,227 Other Long-Term Liabilities (includes store restructuring obligations)........................................................ 1,583 1,740 Shareholders' Equity: Preferred stock, 10,000,000 shares authorized; Series A, 5,750,000 shares authorized and issued at January 26, 1994............................................................ -- 986 Series C, 790,287 shares authorized; shares issued 658,315 and 784,938, respectively........................................... 132 157 Common stock, 1,500,000,000 shares authorized; shares issued 464,549,561 and 416,546,780, respectively........................ 465 417 Capital in excess of par value...................................... 1,505 538 Performance restricted stock deferred compensation.................. -- (3) Retained earnings................................................... 4,074 4,237 Treasury shares..................................................... (86) (109) Foreign currency translation adjustment............................. (58) (130) -------- -------- Total shareholders' equity............................................ 6,032 6,093 -------- -------- $17,029 $17,504 ======== ========
See accompanying Notes to Consolidated Financial Statements. 32 26 KMART CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
FISCAL YEAR ENDED ----------------------------------------- JANUARY 25, JANUARY 26, JANUARY 27, 1995 1994 1993 ----------- ----------- ----------- CASH PROVIDED BY (USED FOR): OPERATIONS Net income (loss) from continuing retail operations before extraordinary item and the effect of accounting changes........ $ 260 $ (347) $ 901 Adjustments to reconcile net income (loss) to operating cash flows: Depreciation and amortization.................................. 724 754 647 Cash used for store restructuring and other charges............ (168) (93) (52) Store restructuring and other charges.......................... -- 1,348 -- Deferred income taxes.......................................... 65 (308) 153 Undistributed equity income.................................... (42) (15) (11) Gain on subsidiary public offerings............................ (168) -- -- Other -- net................................................... (158) (382) 50 Increase in other long-term liabilities.......................... 180 85 63 Cash provided by (used for) current assets and current liabilities net of effects from subsidiary public offerings and divestitures: (Increase) decrease in inventories............................. (716) 249 (956) Increase in accounts payable................................... 470 258 167 Other -- net................................................... 43 (433) (188) --------- --------- --------- Total cash provided by continuing retail operations.............. 490 1,116 774 --------- --------- --------- Discontinued Operations Gain (loss) on disposal of discontinued operations............. 16 (521) -- Income (loss) from discontinued operations..................... 20 (77) 40 Items not affecting cash -- net................................ (88) 609 38 Cash used for discontinued operations.......................... (362) -- -- --------- --------- --------- Total cash provided by (used for) discontinued operations........ (414) 11 78 --------- --------- --------- Net cash provided by operations.................................. 76 1,127 852 --------- --------- --------- INVESTING Capital expenditures -- owned property........................... (1,247) (1,022) (1,435) Acquisitions..................................................... (12) (268) (372) Proceeds from subsidiary public offerings........................ 896 -- -- Proceeds from divestiture of PayLess -- net...................... 590 -- -- Proceeds from the sale of assets................................. 17 20 25 Proceeds from the sale of discontinued operations................ 928 774 -- Other -- net..................................................... (12) (72) (50) --------- --------- --------- Net cash provided by (used for) investing........................ 1,160 (568) (1,832) --------- --------- --------- FINANCING Proceeds from issuance of long-term debt and notes payable....... 66 736 1,602 Reduction in long-term debt and notes payable.................... (717) (933) (80) Reduction in capital lease obligations........................... (124) (123) (113) Capital contributions from minority interest..................... 15 29 -- Issuance of common stock......................................... 6 32 57 Reissuance of treasury shares.................................... 23 13 8 Extraordinary item for bond redemptions.......................... -- (10) -- Dividends paid................................................... (474) (465) (448) --------- --------- --------- Net cash provided by (used for) financing........................ (1,205) (721) 1,026 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS.................... 31 (162) 46 Cash and Equivalents at Beginning of Year........................ 449 611 565 --------- --------- --------- CASH AND EQUIVALENTS AT END OF YEAR................................ $ 480 $ 449 $ 611 ========= ========= =========
See accompanying Notes to Consolidated Financial Statements. Certain prior year amounts have been restated for the effect of discontinued operations. 33 27 KMART CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SERIES A SERIES B AND C CAPITAL CONVERSION CONVERTIBLE IN EXCESS PREFERRED PREFERRED COMMON OF PAR STOCK STOCK STOCK VALUE ---------- -------------- ------ --------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) BALANCE AT JANUARY 29, 1992................................................. $ 986 $ -- $413 $ 453 Net income for the year..................................................... [BCash dividends declared, common, $.92 per share............................. Cash dividends declared, $3.41 Depositary Share, $3.41 per share............ Cash dividends declared, Series B convertible preferred, $4.31 per share.... Series B convertible preferred stock issued................................. 157 Common issued under stock option plans...................................... 3 42 Common issued under performance restricted stock plan....................... 1 Treasury shares reissued to the Employee Savings Plan....................... 10 Foreign currency translation adjustment..................................... ------ ---- ---- ------- BALANCE AT JANUARY 27, 1993................................................. 986 157 416 506 Net loss for the year....................................................... Cash dividends declared, common, $.96 per share............................. Cash dividends declared, $3.41 Depositary Share, $3.41 per share............ Cash dividends declared, Series B convertible preferred, $11.50 per share... Minimum pension liability in excess of intangible pension asset............. Common issued under stock option plans...................................... 1 14 Common issued under performance restricted stock plan....................... 2 Treasury shares reissued to the Employee Savings Plan....................... 16 Foreign currency translation adjustment..................................... ------ ---- ---- ------- BALANCE AT JANUARY 26, 1994................................................. 986 157 417 538 Net income for the year..................................................... Cash dividends declared, common, $.96 per share............................. Cash dividends declared, $3.41 Depositary Share, $1.71 per share............ Cash dividends declared, Series C convertible preferred, $11.50 per share... Decrease in additional minimum pension liability in excess of intangible pension asset.............................................................. Common issued under stock option plans...................................... 2 Common issued under performance restricted stock plan....................... (1) Common issued from conversion of Series A conversion preferred.............. (986) 46 940 Common issued from redemption of Series C convertible preferred............. (25) 2 23 Treasury shares reissued to the Employee Savings Plan....................... 3 Foreign currency translation adjustment..................................... ------ ---- ---- ------- BALANCE AT JANUARY 25, 1995................................................. $ -- $132 $465 $ 1,505 ====== ==== ==== ======= PERFORMANCE RESTRICTED FOREIGN STOCK CURRENCY DEFERRED RETAINED TREASURY TRANSLATION COMPENSATION EARNINGS SHARES ADJUSTMENT ------------ -------- -------- ----------- BALANCE AT JANUARY 29, 1992................................................. $ (2) $5,214 $ (130) $ (43) Net income for the year..................................................... 941 Cash dividends declared, common, $.92 per share............................. (374) Cash dividends declared, $3.41 Depositary Share, $3.41 per share............ (78) Cash dividends declared, Series B convertible preferred, $4.31 per share.... (3) Series B convertible preferred stock issued................................. Common issued under stock option plans...................................... Common issued under performance restricted stock plan....................... Treasury shares reissued to the Employee Savings Plan....................... 8 Foreign currency translation adjustment..................................... (62) ------ ---- ---- ------- BALANCE AT JANUARY 27, 1993................................................. (2) 5,700 (122) (105) Net loss for the year....................................................... (974) Cash dividends declared, common, $.96 per share............................. (392) Cash dividends declared, $3.41 Depositary Share, $3.41 per share............ (78) Cash dividends declared, Series B convertible preferred, $11.50 per share... (9) Minimum pension liability in excess of intangible pension asset............. (10) Common issued under stock option plans...................................... Common issued under performance restricted stock plan....................... (1) Treasury shares reissued to the Employee Savings Plan....................... 13 Foreign currency translation adjustment..................................... (25) ------ ---- ---- ------- BALANCE AT JANUARY 26, 1994................................................. (3) 4,237 (109) (130) Net income for the year..................................................... 296 Cash dividends declared, common, $.96 per share............................. (418) Cash dividends declared, $3.41 Depositary Share, $1.71 per share............ (39) Cash dividends declared, Series C convertible preferred, $11.50 per share... (9) Decrease in additional minimum pension liability in excess of intangible pension asset.............................................................. 7 Common issued under stock option plans...................................... Common issued under performance restricted stock plan....................... 3 Common issued from conversion of Series A conversion preferred.............. Common issued from redemption of Series C convertible preferred............. Treasury shares reissued to the Employee Savings Plan....................... 23 Foreign currency translation adjustment..................................... 72 ------ ---- ---- ------- BALANCE AT JANUARY 25, 1995................................................. $ -- $4,074 $ (86) $ (58) ====== ==== ==== ======= TOTAL SHAREHOLDERS' EQUITY ------------- BALANCE AT JANUARY 29, 1992................................................. $ 6,891 Net income for the year..................................................... 941 Cash dividends declared, common, $.92 per share............................. (374) Cash dividends declared, $3.41 Depositary Share, $3.41 per share............ (78) Cash dividends declared, Series B convertible preferred, $4.31 per share.... (3) Series B convertible preferred stock issued................................. 157 Common issued under stock option plans...................................... 45 Common issued under performance restricted stock plan....................... 1 Treasury shares reissued to the Employee Savings Plan....................... 18 Foreign currency translation adjustment..................................... (62) ----- BALANCE AT JANUARY 27, 1993................................................. 7,536 Net loss for the year....................................................... (974) Cash dividends declared, common, $.96 per share............................. (392) Cash dividends declared, $3.41 Depositary Share, $3.41 per share............ (78) Cash dividends declared, Series B convertible preferred, $11.50 per share... (9) Minimum pension liability in excess of intangible pension asset............. (10) Common issued under stock option plans...................................... 15 Common issued under performance restricted stock plan....................... 1 Treasury shares reissued to the Employee Savings Plan....................... 29 Foreign currency translation adjustment..................................... (25) ----- BALANCE AT JANUARY 26, 1994................................................. 6,093 Net income for the year..................................................... 296 Cash dividends declared, common, $.96 per share............................. (418) Cash dividends declared, $3.41 Depositary Share, $1.71 per share............ (39) Cash dividends declared, Series C convertible preferred, $11.50 per share... (9) Decrease in additional minimum pension liability in excess of intangible pension asset.............................................................. 7 Common issued under stock option plans...................................... 2 Common issued under performance restricted stock plan....................... 2 Common issued from conversion of Series A conversion preferred.............. Common issued from redemption of Series C convertible preferred............. Treasury shares reissued to the Employee Savings Plan....................... 26 Foreign currency translation adjustment..................................... 72 ------- BALANCE AT JANUARY 25, 1995................................................. $ 6,032 =======
Common stock, authorized 1,500,000,000 shares, $1 par value. Preferred stock, authorized 10,000,000 shares, no par value. See accompanying Notes to Consolidated Financial Statements. 34 28 KMART CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Kmart Corporation's significant accounting policies, which conform to generally accepted accounting principles applied on a consistent basis between years, are described below. Fiscal Year: Kmart Corporation's fiscal years end on the last Wednesday in January. Fiscal years 1994, 1993 and 1992 each consisted of 52 weeks and ended on January 25, 1995, January 26, 1994 and January 27, 1993, respectively. Basis of Consolidation: Kmart Corporation 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 using their fiscal year-end financial statements. Intercompany transactions and accounts have been eliminated in consolidation. Earnings Per Common and Common Equivalent Share: Kmart Corporation computes earnings per common and common equivalent share by dividing net income less dividends paid on Series C convertible preferred stock by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during each year. In determining the weighted average number of fully diluted common shares outstanding, the Series A conversion preferred stock, prior to its conversion into common stock in September 1994, was treated as common stock. Foreign Operations: Foreign currency assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Results of operations are translated at average exchange rates during the period for revenues and expenses. Translation gains and losses resulting from fluctuations in the exchange rates are accumulated as a separate component of shareholders' equity. Inventories: Merchandise inventories are valued at the lower of cost or market, primarily using the retail method, on the last-in, first-out (LIFO) basis for substantially all domestic inventories and the first-in, first-out (FIFO) basis for the remainder. Property Owned and Depreciation: Land, buildings, leasehold improvements and equipment are recorded at cost, including a provision for capitalized interest. Depreciation is provided over the estimated useful lives of related assets on the straight-line method for financial statement purposes and on accelerated methods for income tax purposes. Most store properties are leased and improvements are amortized over the term of the lease but not more than 25 years. Other annual rates used in computing depreciation for financial statement purposes are 2% to 4% for buildings, 10% to 14% for store fixtures and 5% to 33% for other fixtures and equipment. Expenditures for owned properties, primarily self-developed locations, which Kmart Corporation intends to sell and lease-back within one year are included in accounts receivable and other current assets, and those extending beyond one year are included in other assets and deferred charges. Goodwill: Excess of cost over the net assets of acquired companies is amortized using the straight-line method over 40 years. Kmart Corporation evaluates the recoverability of goodwill and reviews the amortization period on an annual basis. Several factors are used to evaluate goodwill, including but not limited to: management's plans for future operations; recent operating results and each business' projected undiscounted cash flows. The primary method is each business' projected undiscounted cash flows. Financial Instruments: With the exception of long-term debt, shareholders' equity and equity investments, Kmart Corporation records all financial instruments, including accounts receivable, accounts payable and marketable securities at, or approximating, market value. 35 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) Licensee Sales: Kmart Corporation's policy is to exclude sales of licensed departments from total sales. Sales from licensed departments are primarily comprised of sales from the Meldisco subsidiaries of Melville Corporation which operate the footwear departments in domestic Kmart stores. 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, Kmart Corporation provides for the future net lease obligation, nonrecoverable investment in fixed assets, other expenses directly related to discontinuance of operations and estimated operating loss through the expected closing dates. Income Taxes: Deferred income taxes are provided on temporary differences between financial statement and taxable income. Kmart Corporation accrues appropriate 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. Reclassifications: Certain reclassifications of prior year amounts have been made to conform to the presentation adopted in 1994. SUBSIDIARY PUBLIC OFFERINGS In November 1994, initial public offerings (IPO's) of OfficeMax, Inc. ("OfficeMax") and The Sports Authority, Inc. ("The Sports Authority") were completed. The IPO of OfficeMax reduced Kmart Corporation's interest from over 90% to approximately 25% and resulted in net proceeds of $642 paid to Kmart Corporation. The IPO of The Sports Authority reduced Kmart Corporation's interest from 100% to approximately 30% and resulted in net proceeds of $254 paid to Kmart Corporation. The transactions resulted in pre-tax gains of $86 and $82 for OfficeMax and The Sports Authority, respectively, or a total of $168 ($101 net of tax). Kmart Corporation's investment in these companies has been accounted for under the equity method for 1994 resulting in $28 of equity income; the results of operations and statement of financial position for prior years are included in the consolidated results. DISCONTINUED OPERATIONS AND DISPOSITIONS Discontinued operations results include Coles Myer Ltd., ("Coles Myer") and PACE Membership Warehouse, Inc. ("PACE"). The gain/(loss) on disposal of discontinued operations includes Coles Myer, PACE, PayLess Drugs Stores Northwest, Inc. ("PayLess") and Furr's/Bishop ("Furrs") cafeteria chains. In November 1994, Kmart Corporation completed the sale of its 21.5% equity interest in Coles Myer, an Australian retailer which operates department and general merchandise stores including certain stores using the "Kmart" name. Cash proceeds of $928 were realized from the sale resulting in a gain on disposal of discontinued operations of $48, net of income taxes of $233. The results of operations for Coles Myer have been reclassified to discontinued operations to reflect the disposal of this line of business. Income from discontinued operations relating to Coles Myer was $20, $47 and $42 for 1994, 1993 and 1992, respectively. As part of the transaction, Kmart Corporation extended a long-term license agreement that allows Coles Myer to use the "Kmart" name in Australia and New Zealand. During the fourth quarter of fiscal 1994, Kmart charged to discontinued operations $32, net of income taxes of $18, for sublease exposure related to lease guarantees on lease properties sublet to Furrs which was sold by Kmart in 1986. In January 1994, PACE sold the assets and lease obligations of 93 of its warehouses and virtually all of the inventory and membership files in the 34 warehouses not included in the transaction to Sam's Club, a division of Wal-Mart, for approximately $774 in cash. The book value of the assets sold to Wal-Mart was $624. Operations of the 34 remaining PACE sites not included in the transaction were discontinued. Included in the loss on the disposal of PACE was unamortized goodwill of $395, expected remaining lease obligations in 36 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) the warehouses not sold, other PACE liabilities and a provision for additional costs anticipated during the wind-down of PACE operations. Sales applicable to PACE were $4,336 and $4,358 for 1993 and 1992, respectively. There were no sales related to discontinued operations for 1994. During 1994, PACE continued to market the remaining sites, including unopened warehouses and corporate facilities which were not sold. At January 25, 1995, management believes that the remaining provisions for anticipated costs for PACE are adequate. The loss on disposal of discontinued operations in 1993 of $521 includes the losses on the disposal of PACE assets and the divestiture of PayLess. The operations of these businesses were reclassified to discontinued operations to reflect their respective plans for disposition. Part of the sale of PayLess was completed in April 1994 to Thrifty PayLess Holdings, Inc. ("TPH") and its subsidiary Thrifty PayLess, Inc. for approximately $595 in cash, $100 in Senior Notes of TPH and approximately 46% of the common equity of TPH. Of the cash proceeds, $50 was invested in Senior Subordinated Notes of Thrifty PayLess, Inc. which Kmart Corporation subsequently sold in May 1994 at a slight premium. The book value of PayLess' net assets to be sold was $1,186 at January 26, 1994. Kmart Corporation had intended to complete the divestiture of its TPH equity interest within a one year time frame and had, accordingly, classified the results of operations as a component of discontinued operations. During the latter part of 1994, Kmart Corporation pursued the disposition of its interest in TPH, but did not locate an acceptable buyer during this time frame. Therefore, management reclassified the results of operations for PayLess in 1993 and 1992 from discontinued operations to continuing retail operations. Management will continue to pursue the sale of this investment during 1995 and expects that such disposition will occur through either a private offering or other alternative means. Based upon valuations received from third parties, Kmart Corporation continues to believe that its net investment is appropriately valued. Included in these reclassified results are the following:
1993 1992 ------ ------ Assets....................................................... $1,651 $1,648 Liabilities.................................................. 918 603 Revenues..................................................... 2,543 2,347 Operating income............................................. 88 112
In 1993, Kmart Corporation decided to call for early redemption of all $300 of its 8 3/8% debentures due January 15, 2017 using the proceeds from the sale of PayLess. The resulting redemption premium and other associated costs of $18, net of applicable income taxes, was recorded in 1993 as part of the loss on the disposal of discontinued operations. Management believes the effect of recognizing the charge in 1993 rather than in the first half of 1994 did not have a material effect on the results of operations. ACQUISITIONS On March 4, 1993, OfficeMax purchased all of the outstanding shares of BizMart, Inc. ("BizMart"), a chain of 105 office products superstores, for $268 in cash. During 1993, BizMart was completely integrated into OfficeMax operations and BizMart stores converted to the OfficeMax format. The excess of the cost over fair value of the assets acquired totaled $186. In October 1992, Kmart Corporation acquired Borders, Inc. in a stock-for-stock exchange in which Kmart issued 784,938 shares of Series B convertible preferred stock in exchange for all outstanding Borders shares. Effective July 8, 1994, all outstanding shares of Series B were converted to Series C convertible preferred stock. Borders is headquartered in Ann Arbor, Michigan and at January 22, 1995 operated 53 books and music superstores and 22 large format book superstores. The excess of cost over the fair value of the net assets acquired totaled $172. 37 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) In June 1992, OfficeMax acquired OW Office Warehouse, Inc., a 41-store office products superstore chain with stores located primarily throughout the Mid-Atlantic region. The excess of the purchase price over the fair value of the net assets acquired was $61 on January 22, 1994. In May 1992, Kmart Corporation acquired three companies which operate a total of 13 department stores located in the Czech Republic and Slovakia. The acquisition marks Kmart Corporation's initial entry into the Central European retail market. No goodwill resulted from the transaction. Net cash used in 1992 for the acquisitions of Pay'n Save assets (by PayLess), OW Office Warehouse, Inc. (by OfficeMax) and the 13 department stores located in the Czech Republic and Slovakia totaled $372. The above acquisitions have been accounted for as purchases and, accordingly, the results of operations have been consolidated from their respective dates of acquisition. STORE RESTRUCTURING AND OTHER CHARGES On January 5, 1994, the Board approved a restructuring plan involving the Kmart Group (including Kmart Canada), Builders Square, Inc. ("Builders Square") and Borders Group, Inc. ("Borders Group"). As a result, in the fourth quarter of 1993, Kmart Corporation recorded a charge (Store Restructuring and Other Charges) to earnings of $1,348 before taxes. Net of taxes, the charge was $862. The restructuring provision included anticipated costs of $1,144 associated with Kmart stores which will be closed and relocated, enlarged or refurbished in the U.S. and Canada, the closing and relocation of certain Builders Square stores and the closing of underperforming Walden stores. These costs included lease obligations for store closings as well as fixed asset writedowns, primarily furniture and fixtures, and inventory dispositions and related operating losses for all affected stores. The restructuring provision also included $20 to increase the reserve for lease obligations for stores closed as part of the 1989 restructuring plan. Other charges included the estimated costs of $97 for re-engineering programs (principally severance) and other non-recurring charges, an accrual of $12 for a non-routine legal judgment resulting from the insolvency of the insurer and a charge of $75 related to costs for certain changes to Walden's accounting policies in connection with combination with Borders (see footnote below). The following table sets forth the 1993 restructuring plan and related activity through January 25, 1995:
ACTIVITY TO DATE ---------------------------------------- CASH NONCASH COSTS PROVISION COSTS AND ASSET CHANGES IN RESERVE AT RECORDED INCURRED WRITEDOWNS ESTIMATE JANUARY 25, 1995 -------- -------- ------------- ---------- ------------------ 1993 Restructuring Plan: Lease obligation costs.......... $ 651 $ 63 $ (35)(a) $(43) $580 Asset writedowns................ 208 -- 96 10 122 Inventory disposition costs and related operating losses..... 285 23 90 7 179 Re-engineering and other non-recurring charges........... 97 33 46 31 49 Non-routine legal accrual......... 12 7 -- (5) -- Restatement of Prior Years' Amounts of Borders Group........ 75 -- 75 -- -- ------ ---- ----- ---- ---- $1,328 $126 $ 272 $ -- $930 ====== ==== ===== ==== ====
- ------------------------- (a) Includes $40 for interest expense accreted on discounted lease obligations. Cash costs incurred for the 1993 restructuring plan of $126 include $115 for 1994 and $11 for 1993 and noncash charges of $272 include $181 for 1994 and $91 for 1993. 38 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) The 1989 restructuring plan, with the $20 addition in 1993, included $526 for stores which were closed and relocated, enlarged or refurbished, and through January 25, 1995, $455 was charged against this reserve. Cash costs relating to the 1989 restructuring plan were $53, $82 and $52 for 1994, 1993 and 1992, respectively. Noncash charges relating to the 1989 restructuring plan were $29, $137 and $21 for 1994, 1993 and 1992, respectively. The remaining liability recorded from the 1989 restructuring plan which will be used for future lease costs is $71 at January 25, 1995. Additionally in 1994, Kmart had a workforce reduction of approximately 660 salaried and 430 hourly positions at the Kmart Group and approximately 200 hourly positions at Borders Group as part of implementing re-engineering programs. RESTATEMENT OF PRIOR YEARS' AMOUNTS OF BORDERS GROUP The 1993 results of operations of Borders Group were restated from amounts previously included in Kmart Corporation's consolidated financial statements in order to (i) reflect a change in the method of inventory valuation for Walden from LIFO to FIFO to conform Walden's inventory accounting method with Borders, (ii) correct prior period errors with respect to inventory shrinkage, lease accounting and revenue recognition and (iii) conform accounting policies of Walden and Borders in the area of fixed asset capitalization. These restatements have been recorded as part of the store restructuring and other charges in the consolidated financial statements. Kmart Corporation believes the pre-tax effect of recognizing the corrections of errors of $93, accounting changes calling for restatement of ($57), and other accounting changes of $36 does not have a material impact on the results of operations. Had Kmart Corporation recorded the accounting changes of $36 as accounting changes, the net loss from continuing retail operations would have been reduced by $23. As a result of reflecting these amounts in the fourth quarter of 1993 in Kmart Corporation's consolidated financial statements, net income (loss) of Borders Group on a stand-alone basis differs by the restated amounts discussed above. EXTRAORDINARY ITEM In August 1993, Kmart Corporation called for early redemption of all $200 of its 8 1/8% debentures due January 1, 1997. The debentures were redeemed at 100% of the principal amount plus interest accrued to the date of redemption. In April 1993, Kmart Corporation called for early redemption of all $200 of its 10 1/2% Sinking Fund Debentures due December 1, 2017. The resulting redemption premium of $10, net of applicable income taxes, has been reported as an extraordinary item. SUPPLEMENTAL CASH FLOW INFORMATION Kmart Corporation incurred capital lease obligations to obtain store facilities and equipment of $189, $177 and $185 in 1994, 1993 and 1992, respectively. Kmart Corporation acquired Borders, Inc. in a stock-for-stock exchange in 1992. These noncash transactions have been excluded from the Consolidated Statements of Cash Flows. Kmart Corporation considers cash on hand in stores, deposits in banks, certificates of deposit and short-term marketable securities with maturities of 90 days or less as cash and cash equivalents for the purposes of the statement of cash flows. The effect of changes in foreign exchange rates on cash balances is not material. Cash paid for interest and income taxes follows:
1994 1993 1992 ---- ---- ---- Interest (net of amounts capitalized)................... $521 $465 $444 ==== ==== ==== Income taxes............................................ $ 83 $270 $320 ==== ==== ====
39 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) MERCHANDISE INVENTORIES For LIFO purposes, Kmart Corporation uses internal price indices to measure inflation in merchandise inventories. A summary of inventories, at lower of cost or market, by method of pricing and the excess of current cost over stated LIFO value due to inflation follows:
JANUARY 25, JANUARY 26, 1995 1994 ----------- ----------- Last-in, first-out.................................... $ 6,518 $ 5,874 First-in, first-out................................... 864 1,378 -------- -------- Total inventories................................ $ 7,382 $ 7,252 ======== ======== Excess of current cost over stated LIFO value......... $ 804 $ 861 ======== ========
PROPERTY AND EQUIPMENT The components of property and equipment are:
JANUARY 25, JANUARY 26, 1995 1994 ----------- ----------- Property owned: Land................................................. $ 165 $ 144 Buildings............................................ 501 451 Leasehold improvements............................... 1,754 1,705 Furniture and fixtures............................... 5,775 5,488 Construction in progress............................. 157 125 Property under capital leases.......................... 3,055 2,949 -------- -------- 11,407 10,862 Less-accumulated depreciation and amortization: Property owned....................................... (3,619) (3,508) Property under capital leases........................ (1,508) (1,468) -------- -------- Total............................................. $ 6,280 $ 5,886 ======== ========
Accumulated depreciation for owned property includes $122 and $282 of the store restructuring provision as of January 25, 1995 and January 26, 1994, respectively. Interest costs capitalized were $17, $14 and $16 in 1994, 1993 and 1992, respectively. INVESTMENTS IN AFFILIATED RETAIL COMPANIES Meldisco Subsidiaries of Melville Corporation All U.S. Kmart footwear departments are operated under license agreements with the Meldisco subsidiaries of Melville Corporation, substantially all of which are 49% owned by Kmart Corporation and 51% owned by Melville. Fees and income earned under the license agreements in 1994, 1993 and 1992 of $204, $195 and $200, respectively, are included in licensee fees and other income. Kmart Corporation's equity in the income of footwear departments in Kmart stores and dividends received were as follows:
1994 1993 1992 ---- ---- ---- Equity in income............................................ $52 $52 $54 ==== ==== ==== Dividends................................................... $38 $55 $59 ==== ==== ====
40 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) Meldisco companies' summarized financial information follows:
YEAR ENDED DECEMBER 31, -------------------------- 1994 1993 1992 ------ ------ ------ Net sales............................................. $1,235 $1,175 $1,164 ====== ====== ====== Gross profit.......................................... $ 548 $ 525 $ 525 ====== ====== ====== Net income............................................ $ 107 $ 97 $ 111 ====== ====== ====== Inventory............................................. $ 148 $ 137 $ 129 Other current assets.................................. 117 85 123 Noncurrent assets..................................... 2 2 2 ------ ------ ------ Total assets.......................................... 267 224 254 Current liabilities................................... 42 30 47 ------ ------ ------ Net assets............................................ $ 225 $ 194 $ 207 ====== ====== ====== Equity of Kmart Corporation........................... $ 109 $ 94 $ 101 ====== ====== ======
OfficeMax, Inc. Kmart Corporation had an approximate 25% equity interest at January 25, 1995 in OfficeMax, the second largest operator of high-volume, deep discount office products superstores in the United States. Kmart Corporation's equity in the income of OfficeMax follows:
1994 ---- Equity in income........................................... $ 19 ====
OfficeMax summarized financial information follows:
FISCAL YEAR ENDED ----------------------------------------- JANUARY 21, JANUARY 22, JANUARY 23, 1995 1994 1993 ----------- ----------- ----------- Net sales..................................... $ 1,841 $ 1,422 $ 528 ======== ======== ======== Gross profit.................................. $ 419 $ 313 $ 117 ======== ======== ======== Net income (loss)............................. $ 30 $ 11 $ (1) ======== ======== ======== Inventory..................................... $ 468 $ 409 $ 178 Other current assets.......................... 223 77 29 Noncurrent assets............................. 566 524 242 -------- -------- -------- Total assets.................................. $ 1,257 $ 1,010 $ 449 ======== ======== ======== Current liabilities........................... $ 479 $ 373 $ 177 Noncurrent liabilities........................ 29 28 14 Equity........................................ 749 609 258 -------- -------- -------- Total liabilities and equity.................. $ 1,257 $ 1,010 $ 449 ======== ======== ======== Equity of Kmart Corporation................... $ 187 ======== Market value of investment in OfficeMax common stock....................................... $ 324 ========
41 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) The Sports Authority, Inc. Kmart Corporation had an approximate 29% equity interest at January 25, 1995 in The Sports Authority, the largest operator of large format sporting goods stores in the United States. Kmart Corporation's equity in the income of The Sports Authority follows:
1994 ---- Equity in income........................................... $ 9 ====
The Sports Authority summarized financial information follows:
FISCAL YEAR ENDED ----------------------------------------- JANUARY 22, JANUARY 23, JANUARY 24, 1995 1994 1993 ----------- ----------- ----------- Net sales..................................... $ 839 $ 607 $ 412 ======== ======== ======== Gross profit.................................. $ 230 $ 166 $ 114 ======== ======== ======== Net income.................................... $ 17 $ 13 $ 6 ======== ======== ======== Inventory..................................... $ 218 $ 157 $ 114 Other current assets.......................... 85 23 12 Noncurrent assets............................. 157 118 110 -------- -------- -------- Total assets.................................. $ 460 $ 298 $ 236 ======== ======== ======== Current liabilities........................... $ 196 $ 143 $ 92 Noncurrent liabilities........................ 11 7 5 Equity........................................ 253 148 139 -------- -------- -------- Total liabilities and equity.................. $ 460 $ 298 $ 236 ======== ======== ======== Equity of Kmart Corporation................... $ 72 ======== Market value of investment in The Sports Authority common stock...................... $ 104 ========
The results of operations for OfficeMax and The Sports Authority in 1993 and 1992 are fully consolidated in these consolidated financial statements. Unremitted earnings of unconsolidated companies included in consolidated retained earnings were $92, $362 and $346 at January 25, 1995, January 26, 1994 and January 27, 1993, respectively. INCOME TAXES Components of income from continuing retail operations and equity in income of unconsolidated companies before income taxes follow:
1994 1993 1992 ---- ----- ------ U.S..................................................... $348 $(550) $1,360 Foreign................................................. 26 12 15 ---- ----- ------ Total................................................... $374 $(538) $1,375 ==== ===== ======
42 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) The provision for income taxes consists of:
1994 1993 1992 ---- ----- ---- Current: Federal........................................................... $ 2 $ 40 $248 State and local................................................... 12 (5) 63 Foreign........................................................... 8 26 15 Deferred: Store restructuring and other charges............................. 59 (385) 29 Excess of tax over book depreciation.............................. 51 72 71 LIFO inventory.................................................... 11 82 38 Property taxes.................................................... 13 (16) (12) Pension overfunding............................................... (22) (3) (15) Inventory reserve................................................. (31) -- -- Gain on sale of shares in OfficeMax and The Sports Authority...... 22 -- -- Other............................................................. (11) (2) 37 ---- ----- ---- Total income taxes.................................................. $114 $(191) $474 ==== ===== ====
A reconciliation of the federal statutory rate to Kmart Corporation's effective tax rate from continuing retail operations and equity in income of unconsolidated companies follows:
1994 1993 1992 1994 1993 1992 ---- ----- ---- ---- ----- ---- Federal statutory rate...................... $131 $(188) $467 35.0% (35.0)% 34.0% State and local taxes, net of federal tax benefit................................... 8 (16) 42 2.2 (3.0) 3.1 Tax credits................................. (11) (8) (7) (3.0) (1.4) (0.5) Equity in net income of affiliated retail companies subject to lower tax rates...... (14) -- (14) (3.7) -- (1.1) Enacted federal tax rate change............. -- 13 -- -- 2.4 -- Other....................................... -- 8 (14) -- 1.5 (1.1) ---- ----- ---- ---- ----- ---- Total income taxes.......................... $114 $(191) $474 30.5% (35.5)% 34.4% ==== ===== ==== ==== ===== ====
43 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) Deferred tax assets and liabilities resulted from the following:
JANUARY 25, JANUARY 26, 1995 1994 ----------- ----------- Deferred tax assets: Federal benefit for state and foreign deferred....................... $ 37 $ 33 Discontinued operations.............................................. 199 137 Accruals and other liabilities....................................... 202 214 Capital leases....................................................... 145 145 Store restructuring obligations...................................... 416 490 Other................................................................ 76 30 --------- -------- Total deferred tax assets....................................... 1,075 1,049 --------- -------- Deferred tax liabilities: Inventory............................................................ 301 338 Property and equipment............................................... 547 472 Other................................................................ 58 5 --------- -------- Total deferred tax liabilities.................................. 906 815 --------- -------- Net deferred tax assets......................................... $ 169 $ 234 ======== ========
Undistributed earnings of subsidiaries totaled $181, $189 and $195 at January 25, 1995, January 26, 1994 and January 27, 1993, respectively. Financial Accounting Standard No. 109 "Accounting for Income Taxes" (FAS 109) was issued in February 1992. FAS 109 requires that deferred taxes be calculated using the liability approach rather than the deferred method. In addition, the standard requires adjustment of deferred tax liabilities to reflect enacted changes in the statutory federal income tax rate. Kmart Corporation adopted FAS 109 as the cumulative effect of an accounting change in the first quarter of fiscal 1993 resulting in a one-time credit of $60. CURRENT NOTES PAYABLE, LINES OF CREDIT AND OTHER Notes payable of $638 and $918 were comprised entirely of Kmart Corporation's commercial paper at January 25, 1995 and January 26, 1994, respectively. The weighted average interest rates on short-term borrowings outstanding on January 25, 1995 and January 26, 1994 were 6.1% and 3.4%, respectively. Effective October 7, 1994, Kmart Corporation entered into a $2,665, (excluding seasonal lines of credit), revolving credit facility with various banks. The agreements provide for borrowings at an interest rate based on the prime rate, "CD-based rate" or "LIBOR-based rate" at Kmart Corporation's election. As of January 25, 1995, $2,498 was available as backup lines of credit for Kmart's commercial paper. In addition, as of January 25, 1995, Kmart Corporation had $132 in other bank lines of credit, of which $19 was outstanding at January 25, 1995. Additional seasonal bank lines of credit totaling $1,180 were available during the period September 1, 1994 to December 31, 1994. The current revolving credit agreements contain certain restrictive provisions regarding the maintenance of net worth and coverage ratios. At January 25, 1995, $1,271 of consolidated retained earnings were free of such restrictions. Kmart Corporation had an interest rate swap agreement outstanding with a commercial bank in 1994 which expired in January 1995. Under this agreement, Kmart Corporation paid interest on a $50 notional principal amount based on a fixed rate. The variable rate was a calculated bond equivalent rate based on the 30-day commercial paper rate. Kmart Corporation's effective interest rate on this agreement during 1994 was 7.9%. 44 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) At January 25, 1995, Kmart Corporation had a $200 line of credit and had guaranteed an additional $200 line of credit, the proceeds of which will be used by certain of Kmart Corporation's real estate development joint ventures. The agreement provides for interest on the borrowings calculated on a "LIBOR-based rate". In addition, Kmart Corporation guaranteed a related interest rate swap agreement with a notional principal amount of $50. As of January 25, 1995, there was $277 of borrowings outstanding under these agreements. Kmart Corporation has outstanding lease guarantees for certain facilities previously sold including Furrs, OfficeMax and The Sports Authority. Also, Kmart Corporation has entered into certain real estate arrangements whereby Kmart is obligated to purchase completed projects if alternate financing is not available to the developer. Kmart Corporation's aggregate guarantees under these arrangements was $1,207 at January 25, 1995. Kmart Corporation and Coles Myer have guaranteed indebtedness related to certain properties in Australia on a joint and several basis. Coles Myer subsequently indemnified Kmart Corporation from any liability incurred pursuant to the Kmart guarantees. As of January 25, 1995, the amount guaranteed was $19. Kmart Corporation has guaranteed indebtedness related to certain of its leased properties financed by industrial revenue bonds. At January 25, 1995, the total amount of such guaranteed indebtedness was $238, of which $92 was included in capital lease obligations. The agreements will expire during fiscal years 2004 to 2009. Kmart Corporation's exposure to credit loss, in the event of nonperformance by the other parties to the agreements, was $146 at January 25, 1995. However, no concentration of credit risk exists and Kmart Corporation does not anticipate nonperformance by the other parties. There are various claims, lawsuits and pending actions against Kmart Corporation incident to its operations. It is the opinion of management that the ultimate resolution of these matters will not have a material effect on Kmart Corporation's liquidity, financial position or results of operations. LONG-TERM DEBT Kmart Corporation's long-term debt, net of unamortized discount, is comprised of the following:
JANUARY 25, JANUARY 26, 1995 1994 ----------- ----------- 8 3/8% debentures due 2017............................................. $ -- $ 300 12 1/8% notes due 1995................................................. 150 150 8 1/8% notes due 2006.................................................. 199 199 8 1/4% notes due 2022.................................................. 99 99 12 1/2% debentures due 2005............................................ 100 100 8 3/8% debentures due 2022............................................. 100 99 7 3/4% debentures due 2012............................................. 198 198 7.95% debentures due 2023.............................................. 299 299 Medium-term notes due 1995 through 2020 (8.36% weighted average interest rate)............................... 680 745 Mortgages.............................................................. 315 330 Other.................................................................. 107 98 -------- -------- Total............................................................. 2,247 2,617 Portion due within one year............................................ 236 390 -------- -------- Long-term debt......................................................... $ 2,011 $ 2,227 ======== ========
In June 1994, Kmart Corporation called for early redemption of all $300 of its 8 3/8% debentures due January 15, 2017. The resulting redemption premium and associated cost of $18, net of applicable taxes, has been reported as part of the loss on disposal of discontinued operations in 1993. In August 1993, Kmart 45 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) Corporation called for early redemption of all $200 of its 8 1/8% debentures due January 1, 1997. The debentures were redeemed at 100% of the principal amount plus interest accrued to the date of redemption. In April 1993, Kmart Corporation called for early redemption of all $200 of its 10 1/2% Sinking Fund Debentures due December 1, 2017. The resulting redemption premium of $10, net of applicable income taxes, has been reported as an extraordinary item. During fiscal 1994, Kmart Corporation issued a mortgage note payable of $7. The note bears an interest rate of 8.35%. Interest and principal are payable quarterly through the year 2019. The note is secured by various owned properties. In February 1993, Kmart Corporation issued $300 of 7.95% debentures due February 1, 2023. These debentures are not redeemable prior to maturity. Based on the quoted market prices for the same, or similar issues, or on the current rates offered to Kmart Corporation for debt of the same remaining maturities, the fair value of long-term debt was $2,114 and $2,923 at January 25, 1995 and January 26, 1994, respectively. The following table indicates the principal maturities of long-term debt:
2000 1995 1996 1997 1998 1999 AND LATER ---- ---- ---- ---- ---- --------- Long-term debt....................................... $236 $48 $153 $94 $71 $ 1,645
LEASES Description of Leasing Arrangements: Kmart Corporation conducts operations primarily in leased facilities. Kmart store leases are generally for terms of 25 years with multiple five-year renewal options which allow Kmart Corporation the option to extend the life of the lease up to 50 years beyond the initial noncancellable term. Substantially all specialty retail units are leased, generally for terms varying from five to 25 years with varying renewal options. Certain leases provide for additional rental payments based on a percent of sales in excess of a specified base. Also, certain leases provide for the payment by the lessee of executory costs (taxes, maintenance and insurance). Some selling space has been sublet to other retailers in certain of Kmart Corporation's leased facilities. 46 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) Lease Commitments: Future minimum lease payments with respect to capital and operating leases as of January 25, 1995 follow:
MINIMUM LEASE PAYMENTS -------------------- CAPITAL OPERATING ------- --------- Fiscal Year: 1995..................................................................... $ 402 $ 668 1996..................................................................... 397 639 1997..................................................................... 387 606 1998..................................................................... 370 580 1999..................................................................... 354 552 Later years.............................................................. 3,281 6,645 ------- ------- Total minimum lease payments........................................ 5,191 9,690 Less-minimum sublease rental income........................................ -- 144 ------- ------- Net minimum lease payments................................................. 5,191 $ 9,546 ======= Less: Estimated executory costs................................................ 1,421 Amount representing interest............................................. 1,874 ------- 1,896 Portion due within one year................................................ 119 ------- Long-term lease obligations................................................ $ 1,777 =======
Rental Expense: A summary of operating lease rental expense and short-term rentals follows:
1994 1993 1992 ---- ---- ---- Minimum rentals....................................................... $850 $908 $700 Percentage rentals.................................................... 39 49 53 Less-sublease rentals................................................. (120) (102) (76) ---- ---- ---- Total................................................................. $769 $855 $677 ==== ==== ====
Reconciliation of Capital Lease Information: The impact of recording amortization and interest expense versus rent expense on capital leases follows:
1994 1993 1992 ----- ----- ----- Amortization of capital lease property............................. $ 119 $ 117 $ 113 Interest expense related to obligations under capital leases....... 196 192 185 ----- ----- ----- Amounts charged to earnings........................................ 315 309 298 Related minimum lease payments net of executory costs.............. (312) (306) (294) ----- ----- ----- Excess of amounts charged over related minimum lease payments...... $ 3 $ 3 $ 4 ===== ===== =====
Related minimum lease payments above exclude executory costs for 1994, 1993 and 1992 in the amounts of $97, $91 and $96, respectively. 47 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) BUSINESS GROUP INFORMATION The dominant portion of Kmart Corporation's business is general-merchandise retailing through the operation of a chain of Kmart discount department stores. Specialty retail operations at January 25, 1995 include Borders Group and Builders Square. The results of operations for PayLess, which was sold to TPH in the first quarter of 1994, and OfficeMax and The Sports Authority, for which IPO's of majority interests were completed in the fourth quarter of 1994, are included as continuing retail operations in the consolidated financial statements, on a fully consolidated basis, for 1993 and 1992. Business group information follows:
TOTAL INCOME(LOSS) REVENUES FROM LICENSEE FROM EQUITY IN CONTINUING FEES AND CONTINUING OPERATING INCOME OF NET RETAIL OPERATIONS OTHER RETAIL INCOME UNCONSOLIDATED INTEREST BEFORE YEAR SALES INCOME OPERATIONS (LOSS)(A) COMPANIES EXPENSE INCOME TAXES(B) ---- ------- -------- ---------- --------- -------------- ------- ----------------- Kmart Group:............... 1994 $29,563 $285 $ 29,848 $ 704 $ 80 $(479) $ 305 1993 28,038 288 28,326 110 52 (472) (310) 1992 26,470 278 26,748 1,500 54 (411) 1,143 Borders Group:............. 1994 1,511 3 1,514 56 -- -- 56 1993 1,370 1 1,371 (168) -- (1) (169) 1992 1,202 1 1,203 46 -- (1) 45 Builders Square:........... 1994 2,951 -- 2,951 28 -- (15) 13 1993 2,719 -- 2,719 (166) -- (9) (175) 1992 2,419 -- 2,419 80 -- (4) 76 Divested Specialty Retail Businesses: PayLess:................... 1994 -- -- -- -- -- -- -- 1993 2,538 5 2,543 88 -- (13) 75 1992 2,335 12 2,347 112 -- (12) 100 OfficeMax:................. 1994 -- -- -- -- -- -- -- 1993 1,422 -- 1,422 20 -- -- 20 1992 528 -- 528 1 -- -- 1 The Sports Authority:...... 1994 -- -- -- -- -- -- -- 1993 607 2 609 21 -- -- 21 1992 412 1 413 10 -- -- 10 Total Kmart Corporation:... 1994 $34,025 $288 $ 34,313 $ 788 $ 80 $(494) $ 374 1993 36,694 296 36,990 (95) 52 (495) (538) 1992 33,366 292 33,658 1,749 54 (428) 1,375
- ------------------------- (a) Operating income for 1994 includes gains on OfficeMax and The Sports Authority IPO's of $168. Operating income (loss) for 1993 includes store restructuring and other charges of $904, $218, $226 and $1,348 for the Kmart Group, Borders Group, Builders Square and Kmart Corporation, respectively. Operating income also includes corporate expense of $40, $41 and $58, for 1994, 1993 and 1992, respectively. (b) Including equity in income of unconsolidated companies. 48 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
INVESTMENTS IN CAPITAL AFFILIATED DEPRECIATION EXPENDITURES- IDENTIFIABLE RETAIL DISCONTINUED TOTAL AND OWNED AND YEAR ASSETS COMPANIES OPERATIONS ASSETS AMORTIZATION LEASED ---- ------------ ----------- ------------ ------- ------------ ------------- Kmart Group:........ 1994 $ 14,134 $ 368 $ 76 $14,578 $641 $ 1,182 1993 11,960 606 (98) 12,468 591 936 1992 14,144 597 68 14,809 517 1,375 Borders Group:...... 1994 1,240 -- -- 1,240 44 122 1993 1,002 -- -- 1,002 41 71 1992 913 -- -- 913 36 34 Builders Square:.... 1994 1,211 -- -- 1,211 39 132 1993 1,130 -- -- 1,130 35 112 1992 877 -- -- 877 30 87 Eliminations:....... 1994 -- -- -- -- -- -- 1993 (54)(a) -- -- (54) -- -- 1992 -- -- -- -- -- -- Divested Specialty Retail Businesses: PayLess:............ 1994 -- -- -- -- -- -- 1993 1,651 -- -- 1,651 51 -- 1992 1,648 -- -- 1,648 47 77 OfficeMax:.......... 1994 -- -- -- -- -- -- 1993 1,010 -- -- 1,010 26 57 1992 448 -- -- 448 10 21 The Sports Authority:........ 1994 -- -- -- -- -- -- 1993 297 -- -- 297 10 23 1992 236 -- -- 236 7 26 Total Kmart Corporation:...... 1994 $ 16,585 $ 368 $ 76 $17,029 $724 $ 1,436(b) 1993 16,996 606 (98) 17,504 754 1,199 1992 18,266 597 68 18,931 647 1,620
- ------------------------- (a) Represents reclassification of deferred tax balances for individual financial statements. (b) Leased asset additions for Kmart Corporation were $189, $177 and $185 for 1994, 1993 and 1992, respectively. PENSION PLANS Kmart Corporation and certain domestic subsidiaries have non-contributory pension plans covering most employees who meet certain requirements of age, length of service and hours worked per year. Benefits paid to retirees are based upon age at retirement, years of credited service and earnings. Kmart Canada Limited employees are covered by a defined contribution plan. Kmart Corporation's policy is to fund at least the minimum amounts required by the Employee Retirement Income Security Act of 1974. The plans' assets consist primarily of equity securities, fixed income securities, guaranteed insurance contracts and real estate. Kmart Corporation contributed $64 to its principal pension plan during fiscal 1994, but was not required to contribute to its principal pension plan in fiscal 1993 or fiscal 1992. Total pension expense was $84 in 1994, $68 in 1993 and $65 in 1992. 49 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) For Kmart Corporation's principal pension plans, the following tables summarize the funded status, components of pension cost and actuarial assumptions:
JANUARY 25, 1995 JANUARY 26, 1994 ----------------------------- ----------------------------- EMPLOYEES' EMPLOYEES' RETIREMENT NON-QUALIFIED RETIREMENT NON-QUALIFIED PENSION PLAN PLANS PENSION PLAN PLANS ------------ ------------- ------------ ------------- Actuarial value of benefit obligations: Estimated present value of vested benefits............................... $ (1,379) $ (29) $ (1,438) $ (32) Estimated present value of non-vested benefits............................... (140) (1) (156) (3) --------- --------- --------- --------- Accumulated benefit obligation............ (1,519) (30) (1,594) (35) Value of future pay increases............. (189) (4) (247) (4) --------- --------- --------- --------- Projected benefit obligation.............. (1,708) (34) (1,841) (39) Estimated market value of plan assets....... 1,462 -- 1,490 -- --------- --------- --------- --------- Plan assets under projected benefit obligation................................ (246) (34) (351) (39) Unrecognized net asset...................... (97) 3 (106) 3 Unrecognized prior service cost............. 38 4 46 4 Unrecognized net loss and other............. 112 7 227 14 Adjustment required to recognize minimum liability................................. -- (10) -- (17) --------- --------- --------- --------- Accrued pension costs....................... $ (193) $ (30) $ (184) $ (35) ========= ========== ========= ==========
1994 1993 1992 ----- ----- ----- Components of pension expense: Normal service cost.............................................. $ 77 $ 65 $ 56 Interest cost on projected benefit obligation.................... 140 132 119 Return on plan assets............................................ 30 (159) (117) Net amortization and deferral of other components................ (167) 27 (8) ----- ----- ----- Total.............................................................. $ 80 $ 65 $ 50 ===== ===== ===== Actuarial assumptions at end of year: Discount rates................................................... 8.25% 7.25% 8.50% Expected return on plan assets................................... 9.50% 9.50% 9.50% Salary increases................................................. 4.50% 4.50% 5.00%
Under the provisions of Financial Accounting Standard No. 87 (FAS 87), "Employers' Accounting for Pensions," Kmart Corporation is required to record an unfunded pension liability when accumulated benefit obligation exceeds plan assets. This liability is partially offset by an intangible pension asset, with the intangible asset being limited to the amount of unrecognized prior service cost, including unamortized transition obligation. At January 25, 1995, the unfunded pension liability exceeded the intangible pension asset by $3. FAS 87 requires this excess to be recorded as a reduction in shareholders' equity. OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFIT PLANS Kmart Corporation adopted Financial Accounting Standard No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS 106) at the beginning of fiscal 1993. This statement requires Kmart Corporation to accrue for future postretirement medical benefits. In prior years, these claims were expensed when paid. Net of applicable tax, a charge of $79, or $.18 per share, was included in net income as the effect of an accounting change in 1993. 50 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) In addition to Kmart Corporation's defined benefit pension plan, Kmart Corporation sponsors a defined benefit health care plan that offers postretirement medical benefits to full-time employees who have worked 10 years and who have retired after age 55, with the option of participation in Kmart Corporation'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 to the written plan that are consistent with Kmart Corporation's expressed intent to increase the retiree contribution rate annually for the expected general inflation rate for that year. In 1993, Kmart Corporation amended its plan to limit retiree benefits to 150% of average per capita benefits. The following table sets forth the plans' funded status reconciled with amounts shown in the balance sheets.
JANUARY 25, JANUARY 26, 1995 1994 ----------- ----------- Accumulated postretirement benefit obligation: Retirees............................................................. $ 12 $ 7 Fully eligible active plan participants.............................. 21 24 Other active plan participants....................................... 32 43 -------- -------- 65 74 Plan assets at fair value.............................................. -- -- -------- -------- Accumulated postretirement benefit obligation in excess of plan assets............................................................... 65 74 Unrecognized prior service cost........................................ 35 41 Unrecognized net (gain) loss........................................... 7 (6) -------- -------- Accrued postretirement benefit cost.................................... $ 107 $ 109 ======== ========
1994 1993 ----------- ----------- Net periodic postretirement benefit cost includes the following components: Service cost........................................................... $ 3 $ 3 Interest cost.......................................................... 5 7 Actual return on plan assets........................................... -- -- Net amortization and deferral.......................................... (6) (4) -------- -------- Net periodic postretirement benefit cost............................... $ 2 $ 6 ======== ========
The weighted-average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is 10.3% and 11.3% in 1995 and 1994, respectively. This rate is assumed to decrease gradually to 6.3% by 2002 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligations as of January 25, 1995, by 0.6%, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for fiscal 1994 by 0.5%. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation at January 25, 1995 and January 26, 1994 was 8.25% and 7.25%, respectively. In addition, Financial Accounting Standard No. 112 "Employers' Accounting for Postemployment Benefits" (FAS 112) was issued in November 1992. FAS 112 is an extension of the concepts underlying FAS 106 for similar benefits provided to terminated or laid-off employees such as salary extension, severance, disability and supplemental unemployment benefits. The effect of this statement is not significant. 51 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) SHAREHOLDERS' EQUITY In October 1992, Kmart Corporation issued 784,938 shares of Series B convertible preferred stock in exchange for all the outstanding stock of Borders, Inc. As of July 8, 1994, all outstanding shares of Series B convertible preferred stock were exchanged for 784,938 shares of Series C convertible preferred stock. The Series C convertible preferred stock has substantially the same terms as the Series B convertible preferred stock, i.e., each share of Series C convertible preferred stock is convertible by the holders at any time into 6.49 shares of common stock, subject to adjustment in certain events, and is redeemable for Kmart common stock by Kmart Corporation after November 1, 1999 at a redemption rate based on the then-current market price of the common stock. In addition, the holders have the right to compel the Company to call for redemption into Kmart common stock, at a redemption rate based on the then-current market price of the common stock, up to 25% of outstanding Series C convertible preferred shares between the date of issuance and December 15, 1995, up to 50% of outstanding Series C shares between December 16, 1995 and November 1, 1997 and up to all outstanding Series C shares after November 1, 1997. Common shares totaling 7,000,000 have been reserved for the conversion or redemption of the Series C convertible preferred shares. The holders of Series C convertible preferred stock have the right to vote upon the election of directors and each matter coming before the meeting of the shareholders on the basis of one vote per share held. The holders of Series C convertible preferred stock and the holders of common stock vote together as one class except as otherwise required by the Articles of Incorporation. The Series C convertible preferred stock ranks senior to the common stock upon liquidation with respect to the amounts to which such preferred shareholders are entitled. In August 1991, Kmart Corporation sold 23,000,000 $3.41 Depositary Shares, each representing one quarter of a share of Series A conversion preferred stock, for $44 per Depositary Share. On September 15, 1994, each of the outstanding Depositary Shares automatically converted into two shares of Kmart common stock. The conversion rate had been adjusted to reflect the common stock split distributed June 5, 1992. A total of 46,000,000 shares of common stock were issued or issuable in the conversion of the Series A conversion preferred stock. Common and treasury shares outstanding and related changes for the three years ended January 25, 1995, January 26, 1994 and January 27, 1993 are as follows:
1994 1993 1992 ----------- ----------- ----------- Common Shares -- Including Treasury Shares Beginning of the year............................... 416,546,780 415,640,206 413,072,028 Sold under stock option plans....................... 237,230 791,425 2,544,655 Issued under performance restricted stock plan...... 95,162 192,526 101,820 Issued under directors stock plan................... 2,518 1,950 1,481 Common issued from conversion of Series A conversion preferred........................................ 46,000,000 -- -- Common issued from redemption of Series C convertible preferred............................ 1,874,799 -- -- Forfeited or withheld under performance restricted stock plan....................................... (178,255) (28,955) (35,233) Retirement of shares, at cost....................... (28,673) (50,372) (44,545) ----------- ----------- ----------- End of the year..................................... 464,549,561 416,546,780 415,640,206 =========== =========== =========== Treasury Shares Beginning of the year............................... 7,468,564 8,756,822 9,537,456 Reissue of shares for the employee savings plan..... (1,586,077) (1,288,258) (780,634) ---------- ---------- ---------- End of the year..................................... 5,882,487 7,468,564 8,756,822 ========== ========== ==========
52 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) Ten million shares of no par value preferred stock with voting and cumulative dividend rights are authorized; 658,315 are issued as Series C convertible preferred stock and 9,341,685 are unissued. Of the unissued, 500,000 have been designated Series A junior participating preferred stock. Each share of outstanding common stock includes a right which entitles the holder to one-thousandth of a share of Series A junior participating preferred stock at an exercise price of $110, or to purchase, at the right's then-current exercise price, common shares having a value twice the right's exercise price. The rights are exercisable only if a person or group acquires, or attempts to acquire, ownership of 20% or more of Kmart Corporation's common stock, or, if the person or group acquires 10% of Kmart Corporation's common stock and the Board of Directors of Kmart Corporation determines that such ownership is adverse to the long-term interests of Kmart Corporation and its shareholders. The rights will be redeemed no later than 30 days after the May 1995 Annual Meeting of Stockholders of Kmart Corporation pursuant to the Shareholder Rights Plan, as amended. EMPLOYEE SAVINGS PLAN The Employee Savings Plan provides that employees of Kmart Corporation and certain subsidiaries who have attained age 21 and completed one "Year of Service" can invest from 2% to 16% of their earnings in the employee's choice of a growth equity fund, a balanced equity fund, a managed income fund or a Kmart common stock fund. For each dollar the employee invests up to 6% of his or her earnings, Kmart Corporation will contribute an additional 50 cents which is invested in the Employee Stock Ownership Plan (ESOP). As of June 17, 1986, 11,035,500 shares of Kmart common stock were made available for issuance or sale to the Trustee, consisting of 5,035,500 treasury shares and 6,000,000 authorized but unissued shares and, as of January 18, 1994, 7,467,600 treasury shares of Kmart common stock were made available for issuance or sale to the Trustee. As of January 25, 1995, 11,882,487 common shares remained available. Kmart Corporation's expense related to the Employee Savings Plan was $48 for 1994 and 1993, and $47 for 1992. PERFORMANCE RESTRICTED STOCK PLAN Under the Performance Restricted Stock Plan, the Compensation and Incentives Committee of the Board of Directors may grant awards for up to 4,000,000 shares of common stock to officers and other key employees of Kmart Corporation and its subsidiaries through March 21, 1998. With respect to outstanding awards: the shares are issued only if specified performance goals are achieved; the shares are issued as restricted stock and are held in the custody of Kmart Corporation for a period up to three years; and if conditions or terms under which an award is granted are not satisfied, the shares are forfeited. The Compensation and Incentives Committee decided in 1994 to make no additional grants under the Performance Restricted Stock Plan, and no new grants were made in 1994. At January 25, 1995, outstanding awards and shares available for grant totaled 67,142 and 3,418,553, respectively. Kmart Corporation recorded $1, $3 and $4 of compensation expense related to the Performance Restricted Stock Plan in 1994, 1993 and 1992, respectively. STOCK OPTION PLANS Under the 1992 Stock Option Plan, the Compensation and Incentives Committee may grant options to acquire shares of common stock to officers and other key employees of Kmart Corporation and its subsidiaries at no less than 100% of the fair market value of the common stock on the date of grant. Such options may be either incentive options (ISOs) with a maximum term of ten years pursuant to Section 422 of the Internal Revenue Code or non-qualified stock options with a maximum term of 10 years and two days (NQSOs). Options become exercisable three years after the date of grant for the 1992 Stock Option Plan and two years after the date of grant for the 1973 and 1981 Stock Option Plans. The ability to grant options under the 1973 and 1981 Plans expired in August 1991 according to the terms of those Plans. 53 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) Shares of common stock authorized for issuance under the 1992, 1981 and 1973 Stock Option Plans were 20,000,000, 24,000,000 and 21,000,000, respectively. Payment upon exercise of an option may be made in cash, already owned shares or a combination of both according to the terms of those Plans. Pertinent information covering the Plans follows:
1994 1993 -------------------------- -------------------------- NUMBER OPTION PRICE NUMBER OPTION PRICE OF SHARES PER SHARE OF SHARES PER SHARE ---------- ------------ ---------- ------------ Outstanding at beginning of year........... 22,095,167 $9.90-$26.03 19,489,867 $9.90-$26.03 Granted.................................... 3,325,500 18.88 3,700,600 24.06 Exercised.................................. (237,230) 9.90-20.66 (791,425) 9.90-21.94 Cancelled.................................. (1,973,400) 9.90-26.03 (303,875) 9.90-26.03 ---------- ---------- Outstanding at end of year................. 23,210,037 $9.90-$26.03 22,095,167 $9.90-$26.03 ========== ========== Exercisable at end of year................. 15,357,537 $9.90-$23.03 16,238,867 $9.90-$23.41 ========== ========== Available for grant at end of year......... 12,072,800 14,143,700 ========== ==========
QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Each of the quarters includes 13 weeks.
QUARTER ------------------------------------- 1994 FIRST SECOND THIRD FOURTH - ----------------------------------------------------------- ------ ------ ------ ------- Gross revenue from continuing retail operations............ $7,276 $8,340 $8,170 $10,527 Cost of merchandise sold................................... $5,384 $6,210 $6,134 $ 8,264 Net income from continuing retail operations............... $ 16 $ 86 $ 29 $ 129 Discontinued operations, net of income taxes............... 2 8 10 -- Gain on disposal of discontinued operations, net of income taxes.................................................... -- -- -- 16 ------ ------ ------ ------- Net income................................................. $ 18 $ 94 $ 39 $ 145 ====== ====== ====== ======= Earnings per common and common equivalent share: Net income from continuing retail operations............. $ .03 $ .18 $ .06 $ .27 Discontinued operations, net of income taxes............. .01 .02 .02 -- Gain on disposal of discontinued operations, net of income taxes.......................................... -- -- -- .04 ------ ------ ------ ------- Net income............................................... $ .04 $ .20 $ .08 $ .31 ====== ====== ====== =======
54 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
QUARTER ------------------------------------- 1993 FIRST SECOND THIRD FOURTH - ----------------------------------------------------------- ------ ------ ------ ------- Gross revenue from continuing retail operations............ $8,011 $9,124 $8,752 $11,103 Cost of merchandise sold................................... $5,912 $6,760 $6,415 $ 8,433 Net income (loss) from continuing retail operations before extraordinary item and the effect of accounting changes.................................................. $ 64 $ 125 $ 107 $ (643) Discontinued operations including the effect of accounting changes, net of income taxes............................. (14) (23) (13) (27) Loss on disposal of discontinued operations, net of income taxes.................................................... -- -- -- (521) Extraordinary item, net of income taxes.................... (10) -- -- -- Effect of accounting changes, net of income taxes.......... (17) -- -- (2) ------ ------ ------ ------- Net income (loss).......................................... $ 23 $ 102 $ 94 $(1,193) ====== ====== ====== ======= Earnings per common and common equivalent share: Net income (loss) from continuing retail operations before extraordinary item and the effect of accounting changes............................................... $ .14 $ .27 $ .23 $ (1.41) Discontinued operations including the effect of accounting changes, net of income taxes............... (.03) (.05) (.03) (.06) Loss on disposal of discontinued operations, net of income taxes.......................................... -- -- -- (1.14) Extraordinary item, net of income taxes.................. (.02) -- -- -- Effect of accounting changes, net of income taxes........ (.04) -- -- -- ------ ------ ------ ------- Net income (loss)........................................ $ .05 $ .22 $ .20 $ (2.61) ====== ====== ====== =======
The fourth quarters of 1994 and 1993 include LIFO credits of $57 and $64, respectively. Also, the fourth quarter of 1994 includes provisions for inventory markdowns and shrinkage aggregating $188 and charges totaling $61 for closings of regional offices and the Kmart Fashions division headquarters, the cancellation of certain real estate projects and the sale of corporate aircraft. Previously published quarterly financial data have been restated for discontinued operations. Quarterly Stock Market Information and Dividend Highlights:
QUARTER ---------------------------------- 1994 FIRST SECOND THIRD FOURTH - ----------------------------------------------------------------- ----- ------ ----- ------ Dividends paid per common share.................................. $.24 $.24 $.24 $.24 Common stock price range* High........................................................... 21 1/2 18 5/8 18 5/8 17 3/4 Low............................................................ 17 7/8 15 15 3/4 12 3/4
QUARTER ---------------------------------- 1993 FIRST SECOND THIRD FOURTH - ----------------------------------------------------------------- ----- ------ ----- ------ Dividends paid per common share.................................. $.23 $.24 $.24 $.24 Common stock price range* High........................................................... 25 23 5/8 24 1/4 24 7/8 Low............................................................ 22 3/8 19 7/8 20 21
- ------------------------- * Calendar quarters. As of January 25, 1995, there were 94,115 Kmart Corporation shareholders of record. Kmart Corporation common stock is listed on the New York, Pacific and Chicago stock exchanges (trading symbol KM). 55 EX-21 15 EXHIBIT 21 1 KMART CORPORATION AND SUBSIDIARY COMPANIES EXHIBIT 21 - SUBSIDIARIES The Registrant has no parent but has the following significant subsidiaries as of January 25, 1995.
Percentage Jurisdiction of of voting Name incorporation securities held - -------------------------- --------------- ---------------- Kmart Canada Limited Dominion of Canada 100% Kmart CR a.s. Czech Republic 100% Kmart SR a.s. Slovakia 100% MAJ a.s. Czech Republic 99.99% Builders Square, Inc. Delaware 100% PACE Membership Warehouse, Inc. Colorado 100% Borders Group, Inc. Delaware 100% Kmart Mexico S.A. de C.V. Mexico 50% Kmart Metro (Private) Limited Singapore 50.1%
EX-23 16 EXHIBIT 23 1 KMART CORPORATION AND SUBSIDIARY COMPANIES EXHIBIT 23 - CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Registration No. 33-54879, No. 33-48490, No. 33-48673, No. 33-52797 and No. 33-52799) of Kmart Corporation of our report dated February 27, 1995 appearing on page 30 of the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 11 of this Form 10-K. Price Waterhouse LLP Detroit, Michigan April 10, 1995 EX-27 17 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION 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-25-1995 JAN-25-1995 480 0 462 0 7,382 9,187 11,407 5,127 17,029 5,626 2,011 465 0 132 5,435 17,029 34,025 34,313 25,992 25,992 0 0 494 374 114 260 36 0 0 296 0.63 0.63
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