<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) April 11, 1995
------------------------------
KMART CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
MICHIGAN
(State or Other Jurisdiction of Incorporation)
<TABLE>
<S> <C>
1-327 38-0729500
(Commission File Number) (I.R.S. Employer Identification No.)
</TABLE>
3100 WEST BIG BEAVER ROAD, TROY, MICHIGAN 48084
(Address of Principal Executive Offices) (Zip Code)
(810) 643-1000
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name or Former Address, if Changed Since Last Report)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
ITEM 5. OTHER EVENTS
Kmart Corporation is releasing its 1994 Annual Report to Shareholders.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements
1. The following financial statements and information included in
the Registrant's 1994 Annual Report:
(i) Kmart Corporation Management's Discussion and Analysis of
Financial Condition and Results of Operations
(ii) Report of Independent Accountants
(iii) Consolidated Statements of Income
(iv) Consolidated Balance Sheets
(v) Consolidated Statements of Cash Flows
(vi) Consolidated Statements of Shareholders' Equity
(vii) Notes to Consolidated Financial Statements
-2-
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
KMART CORPORATION
(Registrant)
By: /s/ THOMAS F. MURASKY
--------------------------------------
THOMAS F. MURASKY
Executive Vice President
and Chief Financial Officer
Date: April 11, 1995
<PAGE> 1
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
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- CONTINUED
A three-year summary of consolidated sales follows:
<TABLE>
<CAPTION>
% %
1994 CHANGE 1993 CHANGE 1992
------- ------ ------- ------ -------
(U.S. $ MILLIONS)
<S> <C> <C> <C> <C> <C>
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
======= ======= =======
</TABLE>
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
<PAGE> 3
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.
<TABLE>
<CAPTION>
STORE RESTRUCTURING
AND OTHER CHARGES
-------------------
(MILLIONS)
<S> <C>
Kmart Group -- U.S. General Merchandise Operations........... $ 865
-- International General Merchandise
Operations................................... 39
Borders Group................................................ 218
Builders Square.............................................. 226
-------
Total Kmart.................................................. $ 1,348
=======
</TABLE>
11
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- CONTINUED
Net interest expense on debt reflects the following components:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Interest Expense on Debt................................ $286 $315 $272
Interest Income......................................... 28 12 29
---- ---- ----
Net Interest Expense on Debt....................... $258 $303 $243
==== ==== ====
</TABLE>
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 the
disposal of discontinued operations of $16 million in 1994 included a $48
million after-tax gain realized
12
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- CONTINUED
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 of applicable tax, a charge of $79 million has been included in net
income as the effect of an accounting change.
13
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- CONTINUED
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 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
14
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- CONTINUED
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 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.
15
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- CONTINUED
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 $1.44 per
Series B convertible preferred stock share in 1993 and 1992, respectively.
CAPITAL STRUCTURE
The following three-year analysis of Kmart's capital structure summarizes
Kmart's total debt and equivalent and total capitalization:
<TABLE>
<CAPTION>
1994 % 1993 % 1992 %
------- ----- ------- ----- ------- -----
($ MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
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
======= ===== ======= ===== ======= =====
</TABLE>
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 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.
16
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- CONTINUED
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:
<TABLE>
<CAPTION>
% %
1994 CHANGE 1993 CHANGE 1992
------- ------ ------- ------ -------
(U.S. $ MILLIONS)
<S> <C> <C> <C> <C> <C>
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
======= ======= =======
</TABLE>
- -------------------------
(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
<PAGE> 10
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:
<TABLE>
<CAPTION>
1994 ACTIVITY PLANNED
END END -------------------------- END
1992 1993 OPENED CLOSED END 1995
------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
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
====== ====== ======
</TABLE>
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
<PAGE> 11
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:
<TABLE>
<CAPTION>
1993 PLANNED PROJECTS BY YEAR
RESTRUCTURING ----------------------------
PLAN 1994 1995 1996 1997
------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Closings and Relocations................... 503 100 150 175 78
Expansions................................. 265 55 84 96 30
Refurbishments............................. 235 35 100 100
------
Total................................. 1,003
======
</TABLE>
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:
<TABLE>
<CAPTION>
ORIGINALLY
ACTUAL PLANNED
1994 1994
------ ----------
<S> <C> <C>
Closings and Relocations..................................... 120 100
Expansions................................................... 48 55
Refurbishments............................................... 21 35
</TABLE>
19
<PAGE> 12
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):
<TABLE>
<CAPTION>
ACTIVITY TO DATE
---------------------------------------
CASH NONCASH COSTS
PROVISION COSTS AND ASSET CHANGES IN RESERVE AT
RECORDED INCURRED WRITEDOWNS ESTIMATE JANUARY 25, 1995
-------- -------- ------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
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
==== ==== ===== ==== ====
</TABLE>
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
<PAGE> 13
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:
<TABLE>
<CAPTION>
TOTAL
1992 1993 1994 COMPLETE
---- ---- ---- --------
<S> <C> <C> <C> <C>
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
=== === === =====
</TABLE>
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
<PAGE> 14
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):
<TABLE>
<CAPTION>
ACTIVITY TO DATE
-------------------------
CASH NONCASH COSTS
PROVISION COSTS AND ASSET RESERVE AT
RECORDED INCURRED WRITEDOWNS JANUARY 25, 1995
-------- -------- ------------- ----------------
<S> <C> <C> <C> <C>
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
==== == === ====
</TABLE>
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
<PAGE> 15
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:
<TABLE>
<CAPTION>
1994 ACTIVITY
END END -------------------------------------
1992 1993 ACQUIRED OPENED CLOSED END
----- ----- -------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
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
===== ===== == == ===== =====
</TABLE>
- -------------------------
* 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
<PAGE> 16
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):
<TABLE>
<CAPTION>
ACTIVITY TO DATE
---------------------------------------
CASH NONCASH COSTS
PROVISION COSTS AND ASSET CHANGES IN RESERVE AT
RECORDED INCURRED WRITEDOWNS ESTIMATES JANUARY 22, 1995
----------- -------- ------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
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
===== ==== === ==== ====
</TABLE>
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 $23 million. As a result of
reflecting these amounts in the fourth quarter of 1993 in the consolidated
financial statements, net income (loss) of Borders Group on a stand alone basis
differs by the restated amounts discussed above.
24
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- CONTINUED
Borders Group results of operations for the last three years follow ($
millions):
<TABLE>
<CAPTION>
% CHANGE
--------------
1994 1993 1992 1994 1993
------ ------ ------ ----- ----
<S> <C> <C> <C> <C> <C>
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%
====== ====== ======
</TABLE>
- -------------------------
(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
<PAGE> 18
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):
<TABLE>
<CAPTION>
ACTIVITY TO DATE
---------------------------------------
CASH NONCASH COSTS
PROVISION COSTS AND ASSET CHANGES IN RESERVE AT
RECORDED INCURRED WRITEDOWNS ESTIMATE JANUARY 22, 1995
-------- -------- ------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
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) $144
==== ==== === ==== ====
</TABLE>
Builders Square's results of operations for the last three years follow ($
millions):
<TABLE>
<CAPTION>
% CHANGE
--------------
1994 1993 1992 1994 1993
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
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%
====== ====== ======
</TABLE>
- -------------------------
(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 store
sales increases of 15.3% in 1994 over 1993. Sales in 1993 were $2,719 million, a
12.4% increase, over
26
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- CONTINUED
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 $80 million, or 3.3% of
sales, in 1992. The decrease in operating profit in 1993 resulted primarily from
lower than expected sales, higher occupancy costs and increased payroll expenses
associated with improving the level of customer service in the store.
SUMMARY OF PAYLESS, OFFICEMAX AND THE SPORTS AUTHORITY OPERATIONS IN 1993 AND
1992
The results of operations for PayLess, which was sold to TPH in the first
quarter of 1994, and OfficeMax and The Sports Authority, for which IPO's of
majority interests were completed in the fourth quarter of 1994, are included as
continuing retail operations in the consolidated financial statements, on a
fully consolidated basis, for 1993 and 1992. Previously, the operations of
PayLess were presented as part of discontinued operations in the consolidated
financial statements included in the Kmart Corporation fiscal 1993 Annual
Report. Refer to the Licensee Operations and Equity Investments section below
for 1994 equity earnings recorded on interests in OfficeMax and The Sports
Authority.
A two-year summary of the divested PayLess, OfficeMax and The Sports
Authority sales and operating income follows:
<TABLE>
<CAPTION>
%
1993 CHANGE 1992
------ ------ ------
($ MILLIONS)
<S> <C> <C> <C>
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
====== ======
</TABLE>
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
<PAGE> 20
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
<PAGE> 21
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
<PAGE> 22
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
<PAGE> 23
KMART CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 25, JANUARY 26, JANUARY 27,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
The consolidated statements of income for prior periods have been restated for
discontinued operations.
31
<PAGE> 24
KMART CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
JANUARY 25, JANUARY 26,
1995 1994
----------- -----------
<S> <C> <C>
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
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
32
<PAGE> 25
KMART CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 25, JANUARY 26, JANUARY 27,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Certain prior year amounts have been restated for the effect of discontinued
operations.
33
<PAGE> 26
KMART CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 29, 1992................................................. $ 986 $ -- $413 $ 453
Net income for the year.....................................................
Cash 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
====== ==== ==== =======
<CAPTION>
PERFORMANCE
RESTRICTED FOREIGN
STOCK CURRENCY
DEFERRED RETAINED TREASURY TRANSLATION
COMPENSATION EARNINGS SHARES ADJUSTMENT
------------ -------- -------- -----------
<S> <C> <C> <C> <C>
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)
==== ====== ====== =====
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
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
=======
</TABLE>
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
<PAGE> 27
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
<PAGE> 28
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
<PAGE> 29
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:
<TABLE>
<CAPTION>
1993 1992
------ ------
<S> <C> <C>
Assets....................................................... $1,651 $1,648
Liabilities.................................................. 918 603
Revenues..................................................... 2,543 2,347
Operating income............................................. 88 112
</TABLE>
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
<PAGE> 30
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:
<TABLE>
<CAPTION>
ACTIVITY TO DATE
----------------------------------------
CASH NONCASH COSTS
PROVISION COSTS AND ASSET CHANGES IN RESERVE AT
RECORDED INCURRED WRITEDOWNS ESTIMATE JANUARY 25, 1995
-------- -------- ------------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
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
====== ==== ===== ==== ====
</TABLE>
- -------------------------
(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
<PAGE> 31
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:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Interest (net of amounts capitalized)................... $521 $465 $444
==== ==== ====
Income taxes............................................ $ 83 $270 $320
==== ==== ====
</TABLE>
39
<PAGE> 32
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:
<TABLE>
<CAPTION>
JANUARY 25, JANUARY 26,
1995 1994
----------- -----------
<S> <C> <C>
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
======== ========
</TABLE>
PROPERTY AND EQUIPMENT
The components of property and equipment are:
<TABLE>
<CAPTION>
JANUARY 25, JANUARY 26,
1995 1994
----------- -----------
<S> <C> <C>
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
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Equity in income............................................ $52 $52 $54
=== === ===
Dividends................................................... $38 $55 $59
=== === ===
</TABLE>
40
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Meldisco companies' summarized financial information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
1994
----
<S> <C>
Equity in income........................................... $ 19
====
</TABLE>
OfficeMax summarized financial information follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 21, JANUARY 22, JANUARY 23,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
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
========
</TABLE>
41
<PAGE> 34
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:
<TABLE>
<CAPTION>
1994
----
<S> <C>
Equity in income........................................... $ 9
====
</TABLE>
The Sports Authority summarized financial information follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 22, JANUARY 23, JANUARY 24,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
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
========
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1993 1992
---- ----- ------
<S> <C> <C> <C>
U.S..................................................... $348 $(550) $1,360
Foreign................................................. 26 12 15
---- ----- ------
Total................................................... $374 $(538) $1,375
==== ===== ======
</TABLE>
42
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1994 1993 1992
---- ----- ----
<S> <C> <C> <C>
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
==== ===== ====
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1993 1992 1994 1993 1992
---- ----- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
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%
==== ===== ==== ==== ===== ====
</TABLE>
43
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Deferred tax assets and liabilities resulted from the following:
<TABLE>
<CAPTION>
JANUARY 25, JANUARY 26,
1995 1994
----------- -----------
<S> <C> <C>
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
======= =======
</TABLE>
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
<PAGE> 37
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:
<TABLE>
<CAPTION>
JANUARY 25, JANUARY 26,
1995 1994
----------- -----------
<S> <C> <C>
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
======== ========
</TABLE>
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
<PAGE> 38
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:
<TABLE>
<CAPTION>
2000
1995 1996 1997 1998 1999 AND LATER
---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Long-term debt....................................... $236 $48 $153 $94 $71 $1,645
</TABLE>
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
<PAGE> 39
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:
<TABLE>
<CAPTION>
MINIMUM LEASE
PAYMENTS
--------------------
CAPITAL OPERATING
------- ---------
<S> <C> <C>
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
=======
</TABLE>
Rental Expense: A summary of operating lease rental expense and short-term
rentals follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Minimum rentals....................................................... $850 $908 $700
Percentage rentals.................................................... 39 49 53
Less-sublease rentals................................................. (120) (102) (76)
---- ---- ----
Total................................................................. $769 $855 $677
==== ==== ====
</TABLE>
Reconciliation of Capital Lease Information: The impact of recording
amortization and interest expense versus rent expense on capital leases follows:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
Related minimum lease payments above exclude executory costs for 1994, 1993
and 1992 in the amounts of $97, $91 and $96, respectively.
47
<PAGE> 40
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:
<TABLE>
<CAPTION>
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)
---- ------- -------- ---------- --------- -------------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- -------------------------
(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
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
INVESTMENTS
IN CAPITAL
AFFILIATED DEPRECIATION EXPENDITURES-
IDENTIFIABLE RETAIL DISCONTINUED TOTAL AND OWNED AND
YEAR ASSETS COMPANIES OPERATIONS ASSETS AMORTIZATION LEASED
---- ------------ ----------- ------------ ------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- -------------------------
(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
<PAGE> 42
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:
<TABLE>
<CAPTION>
JANUARY 25, 1995 JANUARY 26, 1994
----------------------------- -----------------------------
EMPLOYEES' EMPLOYEES'
RETIREMENT NON-QUALIFIED RETIREMENT NON-QUALIFIED
PENSION PLAN PLANS PENSION PLAN PLANS
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
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)
======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE> 43
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.
<TABLE>
<CAPTION>
JANUARY 25, JANUARY 26,
1995 1994
----------- -----------
<S> <C> <C>
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
===== =====
</TABLE>
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
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
===== =====
</TABLE>
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
<PAGE> 44
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:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
52
<PAGE> 45
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
<PAGE> 46
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:
<TABLE>
<CAPTION>
1994 1993
-------------------------- --------------------------
NUMBER OPTION PRICE NUMBER OPTION PRICE
OF SHARES PER SHARE OF SHARES PER SHARE
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
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
========== ==========
</TABLE>
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Each of the quarters includes 13 weeks.
<TABLE>
<CAPTION>
QUARTER
-------------------------------------
1994 FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
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
====== ====== ====== =======
</TABLE>
54
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER
-------------------------------------
1993 FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
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)
====== ====== ====== =======
</TABLE>
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:
<TABLE>
<CAPTION>
QUARTER
----------------------------------
1994 FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------- ----- ------ ----- ------
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
QUARTER
----------------------------------
1993 FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------- ----- ------ ----- ------
<S> <C> <C> <C> <C>
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
</TABLE>
- -------------------------
* 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
