<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
__ OF 1934
For the fiscal year ended January 31, 1996
----------------
or
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission File No. 1-327
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KMART CORPORATION
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(Exact name of registrant as specified in its charter)
Michigan 38-0729500
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
00 West Big Beaver Road - Troy, Michigan 48084
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (810) 643-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE SECURITIES EXCHANGE ACT
OF 1934:
Name of each Exchange
Title of each class on which registered
------------------- -------------------
Common Stock, $1.00 par value New York, Pacific and Chicago Exchanges
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE SECURITIES EXCHANGE ACT
OF 1934: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock including common stock, held by non-
affiliates of the registrant on March 28, 1996 was $4,574,925,251. The market
value of the common stock is based on the closing price on the New York Stock
Exchange on such date.
As of March 28, 1996, 482,151,580 shares of Common Stock of the Registrant, held
by 98,252 shareholders, were outstanding.
Portions of the Registrant's 1995 Annual Report to Shareholders are incorporated
by reference into Parts I, II and IV of this report. Portions of the
Registrant's Preliminary Proxy Statement dated April 1, 1996 in connection with
the 1996 Annual Meeting of Stockholders are incorporated by reference into Part
III of this report.
<PAGE>
PART I
Item 1. Business
History
Kmart Corporation ("Kmart" or the "Registrant"), one of the world's largest
mass merchandise retailers, was incorporated under the laws of the State of
Michigan on March 9, 1916, as the successor to the business developed by its
founder, S. S. Kresge, who opened his first store in 1899. After operating
Kresge department stores for over 45 years, the Kmart store program commenced
with the opening of the first Kmart store in March 1962.
U.S. General Merchandise Operations
The dominant portion of the Registrant's operations is in a single industry:
general merchandise retailing through the operation of a chain of 2,161 Kmart
discount stores with locations in each of the 50 United States, Puerto Rico, the
U.S. Virgin Islands and Guam, including 87 Super Kmart Centers, all in the
United States, at January 31, 1996. Kmart's general merchandise retail
operations are located in 248 of the 250 Metropolitan Statistical Areas (MSAs)
in the United States, as well as in 72 of the country's 73 Primary Metropolitan
Statistical Areas (PMSAs). In addition, Kmart stores occupy each of the three
MSAs and three PMSAs in Puerto Rico. Kmart stores are generally one-floor,
free-standing units. Kmart general merchandise stores range from 40,000 to
120,000 square feet with the majority of stores which have been modernized in
the range of 85,000 to 120,000 square feet. Super Kmart Centers range from
135,000 to 190,000 square feet and feature a full line of general merchandise
and groceries as well as a variety of ancillary services including video
rentals, dry cleaning, hair care, optical and floral shops. Full-size stores
operate in the most densely populated urban areas and are geographically located
to increase customer awareness and maximize customer convenience and
accessibility.
International General Merchandise Operations
Kmart Canada Limited - At January 31, 1996, Kmart Canada operated 127 Kmart
stores located in all ten provinces. The Kmart stores in Canada range in size
from 45,000 to 97,000 square feet and offer a wide variety of general
merchandise at discount prices.
Czech and Slovak Republics - In 1992, Kmart acquired over 93% of a Czech
Republic company which operated one of the largest department stores in Prague,
as well as two companies which operated 12 department stores located in the
Czech and Slovak Republics. In March 1996, Kmart entered into an agreement with
Tesco PLC for the purchase of all of Kmart's business in the Czech and Slovak
Republics. Under the terms of the agreement, Tesco PLC will purchase the
companies which operate the six stores in the Czech Republic and the seven
stores in the Slovak Republic for approximately $118 million, which approximates
net book value. The transaction may be subject to certain regulatory approvals
and is expected to be concluded by the end of the second quarter of 1996.
Mexico - In 1993, Kmart entered into a joint venture with El Puerto de
Liverpool, S.A. de C.V. to build and operate grocery and general merchandise
stores in Mexico that are patterned after the Super Kmart Centers in the United
States. At January 31, 1996, the joint venture company operated four stores in
Mexico.
Singapore - In 1993, Kmart entered into a joint venture with Metro (Private)
Limited to open and operate Kmart stores in Singapore. At January 31, 1996, the
joint venture company operated three stores in Singapore.
Current Specialty Retail Operations
At January 28, 1996, Builders Square, Inc. ("Builders Square") operated 167
home improvement stores in 24 states and Puerto Rico, of which 57 were Builders
Square I stores and 110 were Builders Square II stores which have an easier-to-
shop layout that utilizes a "store-within-a-store" format with substantially
increased customer service levels over existing Builders Square I stores.
Builders Square's large format superstores emphasize customer service and
provide an extensive selection of quality products and services to repair,
remodel, redecorate and maintain both home and garden.
Information regarding the Registrant's business description and analysis of
consolidated operations appearing in the "Management's Discussion and Analysis
of Results of Operations and Financial Condition" on pages 10 through 20 of the
Registrant's 1995 Annual Report to Shareholders, is incorporated herein by
reference.
2
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Information regarding the Registrant's discontinued operations and
dispositions appearing in Note 3 of the "Notes to Consolidated Financial
Statements" on pages 29 through 30 of the Registrant's 1995 Annual Report to
Shareholders, is incorporated herein by reference.
Information regarding the Registrant's business group information, appearing
in Note 19 of the "Notes to Consolidated Financial Statements" on pages 41
through 42 of the Registrant's 1995 Annual Report to Shareholders, is
incorporated herein by reference.
Competition
Kmart is one of the world's largest mass merchandise retailers and has
several major competitors on a national level, including Dayton-Hudson, J.C.
Penney, Sears and Wal-Mart, and many competitors on a local level which compete
with Kmart's individual stores. Success in the competitive market is based on
factors such as price, quality, service, product mix and convenience.
Seasonality
The Registrant's business is highly seasonal and depends to a significant
extent on the results of operations for the last quarter of the fiscal year.
Credit Sales
In March 1996, the Registrant launched a brand new private label Kmart
Credit Card through Beneficial National Bank USA ("BNB USA"), a unit of
Beneficial Corporation, in 160 traditional Kmart stores and six Super Kmart
Centers located in 11 test markets throughout the United States. Upon
successful completion of a 90-day test, Kmart and BNB USA will finalize plans to
roll-out the Kmart Credit Card to all Kmart and Super Kmart locations in the
United States in August 1996. Builders Square has its own private label credit
card. In addition, substantially all the Registrant's stores accept major bank
credit cards as payment for merchandise.
Employees
The Registrant employed approximately 307,000 persons as of January 31,
1996.
Effect of Compliance with Environmental Protection Provisions
Compliance with federal, state and local provisions which have been enacted
or adopted regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment, has not had, and is not
expected to have, a material effect on capital expenditures, earnings or the
competitive position of the Registrant and its subsidiaries.
Item 2. Properties
At January 31, 1996, the Registrant, its subsidiaries and the joint ventures
to which it is a party, operated a total of 2,310 general merchandise stores:
2,163 in the United States, Puerto Rico, the U.S. Virgin Islands and Guam, 127
in Canada, 13 in the Czech and Slovak Republics, four in Mexico and three in
Singapore, as well as 167 home improvement stores in the United States and
Puerto Rico. With the exception of 115 store facilities which are either
partially or wholly owned, the Registrant leases its store facilities.
The Registrant owns its International Headquarters and one administrative
building in Troy, Michigan and leases administrative buildings in Royal Oak,
Michigan and North Bergen, New Jersey. The Registrant relocated its North
Bergen administrative operations to Troy during fiscal 1995. The Registrant
leases 19 United States distribution and port centers for initial terms of 10 to
30 years with options to renew for additional terms. In addition, the
Registrant owns or leases 777 parcels not currently used for store operations,
the majority of which are rented to others.
Kmart Canada Limited owns its administrative facility in Brampton, Ontario,
Canada and leases 125 of its 127 store locations. Kmart Canada Limited also
leases two of its three distribution centers.
Two subsidiaries of the Registrant own 13 department stores and various
other properties in the Czech and Slovak Republics.
3
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Kmart Mexico S.A. de C.V. leases its administrative facility in Mexico City,
Mexico and owns all four of its store locations, of which two were opened in
March 1995. Kmart Mexico S.A. de C.V. also leases its distribution center
located in Laredo, Texas.
Kmart Metro (Private) Limited leases its administrative facility in
Singapore and leases all three of its store locations. Kmart Metro (Private)
Limited also leases its distribution center.
Builders Square owns its administrative facility in San Antonio, Texas and
leases 159 of its 167 store locations.
The Registrant intends to sell and lease-back or mortgage the majority of
its owned but unfinanced retail properties.
A description of the Registrant's leasing arrangements, appearing in Note
11 of the "Notes to Consolidated Financial Statements" on pages 35 through 36 of
the Registrant's 1995 Annual Report to Shareholders, is incorporated herein by
reference.
Item 3. Legal Proceedings
The Registrant and its subsidiaries are parties to a substantial number of
legal proceedings, most of which are routine and all of which are incidental to
their business. Some matters involve claims for large amounts of damages as well
as other relief. Although the consequences of these proceedings are not
presently determinable, in the opinion of management, they will not materially
affect the Registrant's liquidity, financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
The name, position, age and a description of the business experience for
each of the executive officers of the Registrant is listed below as of March 28,
1996. There is no family relationship among the executive officers and there
has been no involvement in legal proceedings during the past five years that
would be material to the evaluation of the ability or integrity of any of the
executive officers. Executive officers of the Registrant are elected each year
at the Annual Meeting of the Board of Directors to serve for the ensuing year
and until their successors are elected and qualified. The business experience
for each of the executive officers described below include the principal
positions held by them since 1991. None of the corporations or organizations
listed below are a parent, subsidiary, or other affiliate of the Registrant.
Floyd Hall - Chairman of the Board, President and Chief Executive Officer,
57.
Mr. Hall joined the Registrant under his current title in June 1995. Prior
thereto he served concurrently as Chairman and Chief Executive Officer of The
Museum Company, Alva and Glassmasters from 1989 to 1995.
Warren Cooper - Executive Vice President, Human Resources & Administration,
51.
Mr. Cooper joined the Registrant under his current title in March 1996. Prior
thereto he was Senior Vice President, Human Resources, General Cable from 1995
to 1996; Vice President, Human Resources, the Sears Merchandise Group, Sears,
Roebuck & Co. from 1993 to 1995; and Vice President, Corporate Human Resources,
Sears, Roebuck & Co. from 1987 to 1993.
Warren Flick - Executive Vice President, President and General Merchandise
Manager, U.S. Kmart Stores, 52.
Mr. Flick joined the Registrant under his current title in December 1995. Prior
thereto he was the Chairman and Chief Executive Officer of Sears de Mexico,
Sears, Roebuck & Co. from 1994 to 1995; Group Vice President, Men's, Kids,
Footwear and Home Fashions, Sears, Roebuck & Co. from 1993 to 1994; Group Vice
President, Men's, Kids and Footwear, Sears, Roebuck & Co. from 1992 to 1993; and
Group Vice President, Men's and Kids, Sears, Roebuck & Co. from 1988 to 1992.
Ronald J. Floto - Executive Vice President and President, Super Kmart
Centers, 53.
Mr. Floto joined the Registrant under his current title in 1994. Prior thereto
he was the Chairman, CEO and President of Kash n' Karry Stores, Inc. from 1988
to 1994.
4
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Donald W. Keeble - Executive Vice President, Store Operations, 47.
Mr. Keeble has served as an executive officer of the Registrant since 1989 and
has served in his current position since February 1995. Prior thereto he held
the following positions at the Registrant: Executive Vice President,
Merchandising and Operations from 1994 to 1995; and Senior Vice President,
General Merchandise Manager, Fashions from 1991 to 1994.
Anthony N. Palizzi - Executive Vice President, General Counsel, 53.
Mr. Palizzi has served as an executive officer of the Registrant since 1985 and
has served in his current position since 1992. Prior thereto he was the Senior
Vice President, General Counsel since 1991.
Marvin P. Rich - Executive Vice President, Strategic Planning, Finance and
Administration, 50.
Mr. Rich joined the Registrant under his current title in 1994. Prior thereto
he was Executive Vice President, Specialty Companies, Wellpoint Health
Networks/Blue Cross of California from 1992 to 1994; and Executive Vice
President, Finance & Information Services, Wellpoint Health Networks/Blue Cross
of California from 1989 to 1992.
Joseph J. Collins - Senior Vice President, Logistics, 46.
Mr. Collins joined the Registrant in 1995 as Vice President, Strategic Business
Integration and Productivity Improvement and has served in his current position
since February 1996. Prior thereto he was Vice President, Consumer Products,
Gemini Consulting/Retail from 1993 to 1995; Consultant, Vice President,
Montgomery Ward Co. from 1992 to 1993; and the owner and President, Independent
Consulting, Capital Management Corp. from 1990 to 1992.
Andrew A. Giancamilli - Senior Vice President, General Merchandise Manager-
Consumables and Commodities, 45.
Mr. Giancamilli joined the Registrant in 1995 as Vice President, Pharmacy
Merchandising and Operations and has served in his current position since
February 1996. Prior thereto he was President, Chief Operating Officer,
Director, Perry Drug Stores, Inc. from 1993 to 1995; Executive Vice President,
Chief Operating Officer; Perry Drug Stores, Inc. from 1992 to 1993; and Senior
Vice President, Store Operations; Perry Drug Stores, Inc. from 1991 to 1992.
Paul J. Hueber - Senior Vice President, Sales and Operations, 47.
Mr. Hueber has served as an executive officer of the Registrant since 1991 and
has served in his current position since 1994. Prior thereto he was Vice
President, West/Central Region from 1991 to 1994.
Donald E. Norman - Senior Vice President, Chief Information Officer, 59.
Mr. Norman joined the Registrant in 1995 as Divisional Vice President, Business
Process Reengineering, Merchandise Inventory Controls and has served in his
current position since December 1995. Prior thereto he was President, DNA, Inc.
from 1994 to 1995; and Senior Vice President, Logistics, Ames Department Stores
from 1990 to 1994.
William D. Underwood - Senior Vice President, Vendor and Product
Development, 55.
Mr. Underwood has served as an executive officer of the Registrant since 1986
and has served in his current position since 1994. Prior thereto he was Senior
Vice President, General Merchandise Manager - Hardlines from 1991 to 1994.
Gilbert L. Wachsman - Senior Vice President and General Merchandise Manager-
Hardlines, 48.
Mr. Wachsman joined the Registrant under his current title in August 1995.
Prior thereto he owned Wachsman Management Consulting from 1990 to 1995.
Thomas W. Watkins - Senior Vice President, International and Off-Shore
Retailing, 50.
Mr. Watkins has served as an executive officer of the Registrant since 1985 and
has served in his current position since February 1996. Prior thereto he held
the following positions with the Registrant: Senior Vice President,
International Operations from 1992 to 1996; and Senior Vice President, Store
Operations from 1988 to 1992.
Martin E. Welch III - Senior Vice President and Chief Financial Officer, 47.
Mr. Welch joined the Registrant under his current title in December 1995. Prior
thereto he was Senior Vice President, Chief Financial Officer, Federal-Mogul
Corporation from 1991 to 1995.
Lawrence E. Carlson - Vice President, Real Estate Market Strategy, 52.
Mr. Carlson joined the Registrant under his current title in January 1996.
Prior thereto he was a consultant from 1994 to 1996; and Vice President,
Research and Planning, Dayton-Hudson Corporation from 1982 to 1994.
5
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Dennis V. Carter - Vice President, Food, Super Kmart Centers, 48.
Mr. Carter joined the Registrant under his current title in February 1995. Prior
thereto he was Executive Vice President, Kash n' Karry Stores, Inc. from 1988 to
1995.
James P. Churilla - Vice President, Real Estate Finance, 54.
Mr. Churilla has served as an executive officer of the Registrant since 1987 and
has served in his current position since February 1996. Prior thereto he was
Vice President and Treasurer from 1987 to 1996.
Larry C. Davis - Vice President, Advertising, 52.
Mr. Davis joined the Registrant under his current title in January 1996. Prior
thereto he was a consultant on the Sears Mexico account for Young & Rubicam from
1995 to 1996; President - Anthony Sicari, Winner International, from 1993 to
1994; and National Marketing Manager - Chicago, Sears, Roebuck & Co. from 1990
to 1993.
G. William Gryson, Jr. - Vice President, Special Projects, 53.
Mr. Gryson has served as an executive officer of the Registrant since 1994 and
has served in his current position since September 1995. Prior thereto he held
the following positions with the Registrant: Vice President, Midwestern Region
from 1994 to 1995; and Regional Manager, East/Central Region, from 1990 to 1994.
Shawn M. Kahle - Vice President, Corporate Affairs, 38.
Mrs. Kahle has served in her current position since January 1995. Prior thereto
she held the following positions with the Registrant: Divisional Vice
President, Corporate and International Communications from 1994 to 1995;
Director, Corporate Communications from 1993 to 1994; and Manager, Executive
Speeches from 1992 to 1993. Prior to joining the Registrant she was a freelance
writer/consultant from 1990 to 1992.
Cecil B. Kearse - Vice President, Merchandise Presentation and
Communication, 53.
Mr. Kearse has served in his current position since February 1996. Prior
thereto he held the following positions with the Registrant: Vice President and
General Merchandise Manager, Men's and Children's from 1995 to 1996; Divisional
Vice President, Merchandising Fashions from 1994 to 1995; and Senior Buyer, Bed,
Bath & Kitchen from 1990 to 1994.
Nancie W. LaDuke - Vice President and Secretary, 55.
Mrs. LaDuke has served in her current position since 1991.
Michael T. Macik - Vice President, Human Resources - U.S. Kmart Stores, 49.
Mr. Macik has served as an executive officer of the Registrant since 1989 and
has served in his current position since 1992. Prior thereto he was Vice
President, Human Resources, Kmart Fashions from 1989 to 1992.
David R. Marsico - Vice President, Super Kmart Centers, 46.
Mr. Marsico has served in his current position since 1993. Prior thereto he
held the following positions with the Registrant: Divisional Vice President,
Combination Stores from 1993 to 1994; and Director of Combination Stores from
1989 to 1993.
Harold Meeth III - Vice President, Design and Construction, 55.
Mr. Meeth joined the Registrant under his current title in September 1995.
Prior thereto he was Vice President, Facilities Management, Venture Stores, Inc.
from 1989 to 1995.
Douglas M. Meissner - Vice President, Central Region, 46.
Mr. Meissner has served in his current position since September 1995. Prior
thereto he held the following positions with the Registrant: Vice President,
Western Region from 1994 to 1995; and Regional Manager, Western Region from 1990
to 1994.
Thomas M. Nielsen - Vice President, Human Resources - International, 52.
Mr. Nielsen has served as an executive officer of the Registrant since 1988 and
has served in his current position since 1994. Prior thereto he held the
following positions with the Registrant: Vice President, Executive Resources
from 1992 to 1994; Vice President, Human Resources - Administration during 1992;
and Vice President, Human Resources from 1991 to 1992.
Peter J. Palmer - Vice President, Labor Relations and Assistant General
Counsel, 55.
Mr. Palmer has served in his current position since 1988.
6
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John S. Valenti - Vice President, Southern Region, 55.
Mr. Valenti has served in his current position since 1991.
Michael J. Viola - Vice President and Treasurer, 41.
Mr. Viola joined the Registrant under his current title in February 1996. Prior
thereto he was Vice President and Controller, Federal-Mogul Corporation from
1995 to 1996; Vice President and Treasurer, Federal-Mogul Corporation from 1992
to 1995; and Manager, Corporate Finance, Federal-Mogul Corporation from 1991 to
1992.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information as to the market for the Registrant's common stock and related
stockholder matters as set forth in Note 20 of the "Notes to Consolidated
Financial Statements" on pages 43 through 44 of the Registrant's 1995 Annual
Report to Shareholders, is incorporated herein by reference.
Item 6. Selected Financial Data
The "Selected Financial Data" summary appearing on page 9 of the
Registrant's 1995 Annual Report to Shareholders, insofar as it relates to the
five fiscal years ended January 31, 1996, is incorporated herein by reference.
Sales and store statistics for the three fiscal years ended January 31, 1996
appearing in the "Management's Discussion and Analysis of Results of Operations
and Financial Condition" on pages 10 through 11 of the Registrant's 1995 Annual
Report to Shareholders, are incorporated herein by reference.
General Merchandise selling square footage for the three fiscal years ended
January 31, 1996 appearing in the "Management's Discussion and Analysis of
Results of Operations and Financial Condition" on page 11 of the Registrant's
1995 Annual Report to Shareholders, is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The information under the caption "Management's Discussion and Analysis of
Results of Operations and Financial Condition" appearing on pages 10 through 20
of the Registrant's 1995 Annual Report to Shareholders, is incorporated herein
by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements of the Registrant consisting of the consolidated
balance sheets at January 31, 1996 and January 25, 1995 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three fiscal years ended January 31, 1996, and the notes to
consolidated financial statements, together with the report of Price Waterhouse
LLP, appearing on pages 22 through 44 of the Registrant's 1995 Annual Report to
Shareholders are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors of the Registrant
The information set forth under the caption "Proposal 1 - Election of
Directors" on pages 2 through 6 of the Registrant's Preliminary Proxy Statement
dated April 1, 1996 filed with the Securities and Exchange Commission pursuant
to Regulation 14A is incorporated herein by reference.
7
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Item 11. Executive Compensation
The information set forth on pages 6 through 14 of the Registrant's
Preliminary Proxy Statement dated April 1, 1996 filed with the Securities and
Exchange Commission pursuant to Regulation 14A is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Stock Ownership of Executive
Officers and Directors" on pages 4 through 5 of the Registrant's Preliminary
Proxy Statement dated April 1, 1996 filed with the Securities and Exchange
Commission pursuant to Regulation 14A is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
a) The following documents are filed as part of this report:
1. Financial Statements
The following consolidated financial statements of the Registrant
are incorporated herein by reference from the Registrant's 1995
Annual Report to Shareholders.
<TABLE>
<CAPTION>
Page(s) in
Registrant's
Annual Report
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<S> <C>
Report of Independent Accountants 22
Consolidated Statements of Operations for each of the
three fiscal years ended January 31, 1996 23
Consolidated Balance Sheets at January 31, 1996
and January 25, 1995 24
Consolidated Statements of Cash Flows for each
of the three fiscal years ended January 31, 1996 25
Consolidated Statements of Shareholders' Equity for
each of the three fiscal years ended January 31, 1996 26
Notes to Consolidated Financial Statements 27 through 44
</TABLE>
2. Financial Statement Schedules
The separate financial statements and summarized financial
information of majority-owned subsidiaries not consolidated and of
50% or less owned persons of the Registrant have been omitted
because they are not required pursuant to conditions set forth in
Rules 3-09(a), 4-08(g) and 1-02(v) of Regulation S-X.
All other schedules are omitted because they are not applicable or
the required information is shown in the Registrant's 1995 Annual
Report to Shareholders, which is incorporated herein by reference.
8
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3. Exhiibits
See Exhibit Index included in this report.
b) Reports on Form 8-K
The Registrant filed four reports on Form 8-K during the fourteen
weeks ended January 31 ,1996:
The purpose of the report dated November 6, 1995, was to file
certain documents in conjunction with the renegotiation of the puttable
debt agreements.
The purpose of the report dated November 14, 1995 was to file
certain real estate related agreements containing ratings decline put
provisions.
The purpose of the report dated December 20, 1995, was to disclose
agreements regarding amendments to certain terms and conditions of the
Registrant's existing revolving credit facilities and certain real
estate obligations.
The purpose of the report dated January 22, 1996, was to disclose
the agreement, in principle, reached with banks regarding amendments to
revolving credit facilities, certain real estate obligations and the
committed letter of credit facility.
9
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on April 4, 1996.
Each signatory hereby acknowledges and adopts the typed form of his or her
name in the electronic filing of this document with the Securities and Exchange
Commission.
Kmart Corporation
By: Floyd Hall
------------------
(Floyd Hall)
Chairman of the Board, President and
Chief Executive Officer
By: Martin E. Welch III
---------------------------
(Martin E. Welch III)
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
Registrant and in the capacities indicated, on April 4, 1996.
Each signatory hereby acknowledges and adopts the typed form of his or her
name in the electronic filing of this document with the Securities and Exchange
Commission.
<TABLE>
<CAPTION>
<S> <C>
James B. Adamson David B. Harper
- ------------------------------------- ----------------------------------
James B. Adamson, Director David B. Harper, Director
Lilyan H. Affinito Robert D. Kennedy
- ------------------------------------- ----------------------------------
Lilyan H. Affinito, Director Robert D. Kennedy, Director
Joseph A. Califano, Jr. F. James McDonald
- ------------------------------------- ----------------------------------
Joseph A. Califano, Jr., Director F. James McDonald, Director
Richard G. Cline J. Richard Munro
- ------------------------------------- ----------------------------------
Richard G. Cline, Director J. Richard Munro, Director
Willie D. Davis Gloria M. Shatto
- ------------------------------------- ----------------------------------
Willie D. Davis, Director Gloria M. Shatto, Director
Enrique C. Falla William P. Weber
- ------------------------------------- ----------------------------------
Enrique C. Falla, Director William P. Weber, Director
Joseph P. Flannery James O. Welch, Jr.
- ------------------------------------- ----------------------------------
Joseph P. Flannery, Director James O. Welch, Jr., Director
Floyd Hall
- -------------------------------------
Floyd Hall
Chairman of the Board
President and Chief Executive Officer
(Principal Executive Officer
and Director)
</TABLE>
10
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
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<S> <C> <C>
(3a) Restated Articles of Incorporation of Kmart Corporation
(3b) Bylaws of Kmart Corporation, as amended
* (10a) Kmart Corporation 1973 Stock Option Plan, as amended [10a] [A]
* (10b) Kmart Corporation 1981 Stock Option Plan, as amended [10b] [A]
(10d) Kmart Corporation Directors Retirement Plan, as amended [A]
** (10e) Kmart Corporation Performance Restricted Stock Plan, as amended [10e] [A]
*** (10f) Deferred Compensation Plan for Non-Employee Directors, as amended [10f] [A]
*** (10g) Kmart Corporation 1992 Stock Option Plan, as amended [10g] [A]
(10h) Kmart Corporation Directors Stock Plan, as amended [A]
** (10i) Form of Employment Agreement with Executive Officers [10j] [A]
*** (10j) Kmart Corporation Executive Deferred Compensation Plan [10j] [A]
*** (10k) Amended and Restated Kmart Corporation Annual Incentive Bonus Plan [10k] [A]
*** (10l) Amended and Restated Kmart Corporation Management Stock Purchase Plan [10l] [A]
*** (10m) Supplemental Pension Benefit Plan [10m] [A]
(10n) Agreement between Kmart Corporation and Executive [A]
(11) Statement Regarding Computation of Per Share Earnings
(12) Statement Regarding Computation of Ratios
(13) Annual Report to Shareholders of Kmart Corporation for the Fiscal Year
Ended January 31, 1996
(21) List of Significant Subsidiaries of Kmart Corporation
(23) Consent of Independent Accountants
(27) Financial Data Schedules
</TABLE>
Notes:
- ------
* Filed as an Exhibit to the Form 10-K Report of the Registrant for
the fiscal year ended January 27, 1993 (file number 1-327) and is
incorporated herein by reference.
** Filed as Exhibits to the Form 10-K Report of the Registrant for
the fiscal year ended January 26, 1994 (file number 1-327) and are
incorporated herein by reference.
*** Filed as Exhibits to the Form 10-K Report of the Registrant for
the fiscal year ended January 25, 1995 (file number 1-327) and are
incorporated herein by reference.
["#"] Exhibit numbers in the Form 10-K Reports for the fiscal years
ended: January 27, 1993, January 26, 1994, and January 25, 1995,
respectively.
[A] This document is a management contract or compensatory plan.
11
<PAGE>
The Registrant agrees to furnish a copy to the Commission upon request of the
following instruments defining the rights of holders of long-term debt:
Indenture dated as of February 1, 1985, between Kmart Corporation and The Bank
of New York, Trustee, as supplemented by the First Supplemental Indenture
dated as of March 1, 1991
12-1/2% Debentures Due 2005
8-1/8% Notes Due 2006
7-3/4% Debentures Due 2012
8-1/4% Notes Due 2022
8-3/8% Debentures Due 2022
7.95% Debentures Due 2023
Fixed-Rate Medium-Term Notes (Series A, B, C, D)
12
<PAGE>
EXHIBIT 3a
Restated
Articles of Incorporation
of
Kmart Corporation
A Michigan Corporation
March, 1996
<PAGE>
KMART CORPORATION
A MICHIGAN CORPORATION
(INC. MARCH 9, 1916)
I, , Secretary of Kmart Corporation, certify that
the following is a true and complete copy of the Restated Articles of
Incorporation of said Corporation as amended to the date of this certificate.
In witness whereof, i have hereunto set my hand and affixed the seal of the
Corporation at the City of Troy, Michigan this _____ day of __________________,
A. D. 19__.
----------------------------------------
Secretary
<PAGE>
RESTATED ARTICLES OF INCORPORATION
OF
KMART CORPORATION
1. The present name of the corporation is Kmart Corporation.
2. All of the former names of the corporation are as follows: S. S. Kresge
Company
3. The date of filing the original Articles of Incorporation was March 9, 1916.
ARTICLE I
The name of the corporation is Kmart Corporation.
ARTICLE II
The purpose or purposes for which the corporation is organized are:
1. To acquire, establish and conduct in the State of Michigan and in any part
of the world stores for the purchase, sale and distribution of goods, wares
and merchandise and to manufacture, buy, sell or deal in goods, wares and
merchandise in the State of Michigan and in any part of the world;
2. To purchase, or otherwise acquire, own, mortgage, pledge, sell, assign and
transfer, or otherwise dispose of, invest, trade in, deal in and deal with,
real and personal property of every class and description and wheresoever
located; to borrow money, with or without security, and to make, accept,
endorse, execute and issue bonds, debentures, notes and other obligations
from time to time, for any of the objects or purposes of the corporation,
and to secure the same by mortgage, pledge, deed of trust or otherwise, and
to mortgage, pledge, lend and hypothecate any stocks, bonds or other
evidences of indebtedness and any other property, real or personal, held by
it; and to lend money either without any collateral security or on the
security of real or personal property, and to enter into contracts of all
kinds pertaining to the business of the corporation;
3. To make, execute, endorse and accept promissory notes, bills of exchange and
other negotiable instruments, and to redeem any debt or other obligation
before the same shall fall due, on any terms or at any advance or premium;
4. To apply for, obtain, register, purchase, lease or otherwise acquire, hold,
own, use, borrow, introduce, develop or control, sell, assign or otherwise
dispose of, take or grant licenses or other rights with respect to, and in
any and all ways exploit or turn to account inventions, improvements,
processes, copyrights, patents, trademarks, formulae, trade names or
distinctive marks of any and all kinds, whether granted, registered or
established by or under the laws of the United States or of any state
thereof or of any other country or place;
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<PAGE>
5. To institute, enter into, assist, promote, conduct, perform or participate
in every kind of commercial, mercantile or industrial enterprise, business
or work, contract, undertaking, venture or operation in the United States or
in any foreign country or countries; and for any such purpose to purchase or
otherwise acquire, take over, hold, sell, liquidate or otherwise dispose of,
the real estate, plants, equipment, inventory, merchandise, materials and
other assets, stock, good will, rights, franchises, patents, trademarks and
trade names and other properties of domestic or foreign corporations, firms,
associations, syndicates, individuals and others; to continue, alter, extend
and develop their business, assume their liabilities, guarantee or become
surety for the performance of their obligations, reorganize their capital
and participate in any way in their affairs; to take over as a going concern
and continue in its own name any business so acquired and to pay for any
such business or properties in money, stock, bonds, debentures or
obligations of this corporation, or in any other lawful manner;
6. To promote, finance, aid and assist, financially or otherwise, any
corporation or association formed under the laws of the United States or any
state, territory, colony or possession thereof, or the District of Columbia,
or any foreign country or subdivision thereof, any shares of stock which, or
any bonds, debentures, notes, securities, evidences of indebtedness,
contracts or obligations of which or of whom, are held by or for this
corporation, directly or indirectly, or in the business, financing or
welfare of which or of whom this corporation shall have any interest, and in
connection therewith to guarantee or become surety for the performance of
any undertaking or obligation or the payment of principal or interest on
obligations and dividends on stock or any other payments whatsoever, and by
endorsement or otherwise to guarantee the payment of principal and interest
of bonds, notes, debentures, drafts and other securities or evidences of
security;
7. To pay for any property, rights or interests acquired by this corporation in
money or other property, rights or interests held by this corporation, or by
assigning and delivering in exchange therefor (in any manner permitted by
law) its own stock, bonds, debentures, notes, certificates of indebtedness
or other obligations or any of them however evidenced; to purchase or
otherwise acquire, hold, sell, pledge, transfer or otherwise dispose of, and
to reissue any shares of its own capital stock (so far as may be permitted
by law) and its bonds, debentures, notes or other securities or evidences of
indebtedness;
8. To do all and everything necessary and proper for the accomplishment of the
objects and purposes herein enumerated, or necessary or incidental to the
protection and benefit of this corporation, and in general to carry on any
lawful business necessary or incidental to the attainment of the purposes of
this corporation, whether such business is similar in nature to the objects
and purposes hereinabove set forth or otherwise, insofar as the same may be
permitted by law;
9. The foregoing clauses shall be construed as purposes, objects and powers,
and the matters expressed in each clause shall, except as otherwise
expressly provided, be in no wise limited by reference to or inference from
the terms of any other clause, and shall be regarded as independent
purposes, objects and powers, and the enumeration of specific purposes,
objects and powers shall not be construed to limit or restrict in any manner
the meaning of general terms or the general purposes, objects or powers of
the corporation, nor shall the expression of one such be deemed to exclude
another, although it be of like nature and not expressed.
2
<PAGE>
In general, to carry on any business in connection therewith and incident
thereto not forbidden by the laws of the State of Michigan and with all the
powers conferred upon corporations by the laws of the State of Michigan.
ARTICLE III
The total authorized capital stock is 1,500,000,000 shares of Common Stock of
the par value of $1.00 per share (hereinafter called the "Common Stock"), and
10,000,000 shares of Preferred Stock of no par value per share, issuable in
series (hereinafter called the "Preferred Stock").
A statement of all or any of the designations and the powers, privileges and
rights and the qualifications, limitations or restrictions of the Common Stock
and the Preferred Stock of the Company is as follows:
A. COMMON STOCK
1. Dividends. The holders of Common Stock shall be entitled to receive when and
as declared by the Board of Directors, out of the assets of the Company
which by law are available therefor, dividends payable either in cash, in
property or in Common Stock. No dividends (other than dividends payable in
Common Stock) shall be paid on Common Stock if cash dividends in full on all
outstanding Preferred Stock to which the holders thereof are entitled shall
not have been paid or declared and set apart for payment or any sinking fund
for the Preferred Stock is in arrears.
2. Voting Rights. At every meeting of stockholders the holders of Common Stock
shall have the right with the holders of Preferred Stock to vote in the
election of directors and upon each other matter coming before any meeting
of the stockholders on the basis of one vote for each share of Common Stock
held. Subject to the provisions of paragraphs 3 and 5 of Section B below and
except as otherwise provided by law, the holders of Common Stock and the
holders of Preferred Stock shall vote together as one class.
3. Liquidation Rights. In the event of any liquidation, dissolution or winding
up of the Company, the holders of Common Stock shall be entitled, after
payment or provisions for payment of the debts and other liabilities of the
Company and the amounts to which the holders of the Preferred Stock shall be
entitled, to share ratably in the remaining net assets of the Company.
4. Preemptive Rights. The holders of shares of Common Stock shall have no
preemptive right to subscribe for any additional shares of capital stock or
other obligations convertible into shares of capital stock which may
hereafter be issued by the Company.
3
<PAGE>
B. PREFERRED STOCK
1. Issuance of Preferred Stock in Series. The Board of Directors shall have
authority to divide and issue shares of Preferred Stock into series and,
within the limitations set forth in Section 17 of Act No. 327 of the Public
Acts of 1931, as amended, and the Company's Restated Articles of
Incorporation, to fix and determine the relative rights and preferences of
the shares of any series so established. Each series of Preferred Stock
shall be designated by the Board of Directors as to distinguish the shares
thereof from the shares of all other series of Preferred Stock and other
classes of stock of the Company. All shares of Preferred Stock will be
identical except as to the following rights and preferences as to which
there may be variations between different series as fixed and determined by
the Board of Directors: (a) the rate of dividend and the extent of further
participation in dividend distribution, if any; (b) the price and the terms
and conditions on which the shares are redeemable; (c) the amount payable
upon shares in event of voluntary or involuntary liquidation; (d) sinking
fund provisions for the redemption or purchase of shares and (e) the terms
and conditions on which shares are convertible.
The Board of Directors shall not create a sinking fund for the redemption or
purchase of shares of any series of Preferred Stock unless provision for a
sinking fund at least as beneficial to all issued and outstanding shares of
Preferred Stock shall either then exist or be at the same time created.
2. Dividends. The holders of Preferred Stock of each series shall be entitled
to receive out of any funds legally available therefor, when and as declared
by the Board of Directors, cash dividends in such amount as may be fixed by
the Board of Directors in accordance with the resolution adopted providing
for the issue of such series before any dividend (other than dividends
payable in Common Stock) shall be paid on the Common Stock or other stock
ranking junior to the Preferred Stock. Such dividends shall be cumulative
from the date or dates fixed in the resolution adopted by the Board of
Directors providing for the issue of such series. Dividends in full shall
not be declared or paid or set apart for payment on the Preferred Stock of
any one series for any dividend period unless dividends in full have been
declared or paid or set apart for payment on the Preferred Stock of all
series for all dividend periods terminating on the same or an earlier date.
When the dividends are not paid in full on all series of the Preferred
Stock, the shares of all series shall share ratably in the payment of
dividends, including accumulations, if any, in accordance with sums which
would be payable on said shares if all dividends were declared and paid in
full. A "dividend period" is the period between any two consecutive payment
dates (or, when shares are originally issued, the period from the date from
which dividends are cumulative to the first dividend payment date) as fixed
for a particular series. Accumulations shall not bear interest.
3. Voting Rights. Except as provided in this paragraph 3 and in paragraph 5
below, at every meeting of stockholders, the holders of Preferred Stock
shall have the right with the holders of Common Stock to vote in the
election of directors and upon each other matter coming before any meeting
of the stockholders on the basis of one vote for each share of Preferred
Stock held, the holders of Preferred Stock and the holders of Common Stock
voting together as one class. Whenever dividends on all series of Preferred
Stock shall be in arrears in an aggregate amount equivalent to six quarterly
dividends on all shares of all series of Preferred Stock at the time
outstanding, then and in such event the shares of all series of Preferred
Stock then outstanding, voting separately as a class, shall be entitled at
each meeting of stockholders thereafter held for the election of directors
to elect two of the total number of directors to be elected at such meeting.
4
<PAGE>
Such right shall continue until such time as all accumulated dividends on
all series of Preferred Stock at the time outstanding have been paid or
declared and set aside for payment. While holders of Preferred Stock voting
as a class are entitled to elect two directors, they shall not be entitled
to participate with the holders of Common Stock in the election of any other
directors. In the event any vacancy shall occur in the case of a director
elected by holders of Preferred Stock voting as a class (unless at the time
such vacancy occurs all accumulated dividends on the Preferred Stock shall
have been paid or declared and set aside for payment), a special meeting of
the holders of shares of all series of Preferred Stock shall be called
promptly to fill any such vacancy. Such meeting shall be held within 40 days
after such call at a place and upon notice as provided for the holding of
meetings of stockholders, except that no such special meeting shall be
required to be called if any such vacancy shall occur less than 90 days
before the date fixed for the Annual Meeting of Stockholders. The directors
elected by the class vote of holders of Preferred Stock shall serve until
the next Annual Meeting of Stockholders or until their successors shall be
elected and shall qualify; provided, however, that whenever during the term
of office of the directors so elected, all accumulated dividends shall have
been paid or declared and set aside for payment, the term of office of such
directors shall forthwith terminate.
4. Preemptive Rights. The holders of shares of Preferred Stock shall have no
preemptive right to subscribe for any additional shares of capital stock or
other obligations convertible into shares of capital stock which may
hereafter be issued by the Company.
5. Limitations on Certain Corporate Action. So long as shares of Preferred
Stock of any series shall be outstanding the Company shall not (a) without
the affirmative vote or written consent of the holders of at least 66-2/3%
of the shares of all such series at the time outstanding (i) authorize any
class of stock ranking prior to the Preferred Stock either in the payment of
dividends or in the distribution of assets, or (ii) alter or change the
preference or limitations with respect to the Preferred Stock in any
material respect prejudicial to the holders thereof; provided, however, that
any such alteration or change affecting a particular series of Preferred
Stock which does not adversely affect the holders of any other series may be
effected by the affirmative vote or written consent of the holders of record
of 66-2/3% of the shares of the particular series affected by such
alteration or change without the necessity of the vote or written consent of
the holders of shares of all other series; and provided further, that no
such vote or written consent of the holders of shares of the Preferred Stock
or any series thereof shall be required if, at or prior to the time the
issuance of any such prior ranking stock is to be made or any such change is
to take effect, provision is made for the redemption of all shares of
Preferred Stock at the time outstanding; or (b) without the affirmative vote
or written consent of the holders of record of at least a majority of the
shares of all such series at the time outstanding (i) increase the total
number of authorized shares of Preferred Stock, or (ii) authorize or
increase any class of stock ranking on a parity with the Preferred Stock;
provided, however, that nothing herein contained shall require such vote or
consent of the holders of the Preferred Stock in connection with (i) any
increase in the total number of authorized shares of Common Stock, or (ii)
the fixing of any of the specific rights, preferences and limitations of
other series of Preferred Stock that may be fixed by the Board of Directors.
5
<PAGE>
ARTICLE IV
The address of the current registered office is:
3100 West Big Beaver Road
Troy, Michigan 48084-3163
The name of the current resident agent is Anthony N. Palizzi.
ARTICLE V
The duration of the corporation is perpetual.
ARTICLE VI
The Board of Directors shall have power and authority, from time to time, to
borrow money and contract indebtedness for the lawful purposes of the Company,
to issue and dispose of its obligations for any amount so borrowed and to secure
the payment of the same by mortgage, pledge or other encumbrance on all or any
part of the property, assets, effects, business and good will of the Company,
and the income thereof.
ARTICLE VII
The business and affairs of the Company shall be managed by or under the
direction of a Board of Directors consisting of not less than seven or more than
twenty-one directors, the exact number of directors to be determined from time
to time solely by a resolution adopted by an affirmative vote of a majority of
the entire Board of Directors. The directors shall be divided into three
classes, designated Class I, Class II and Class III. Each class shall consist,
as nearly as may be possible, of one-third of the total number of directors
constituting the entire Board of Directors. At the 1986 Annual Meeting of
Stockholders, Class I directors shall be elected for a one-year term, Class II
directors for a two-year term and Class III directors for a three-year term. At
each succeeding Annual Meeting of Stockholders commencing in 1987, successors to
the class of directors whose terms expire at that annual meeting shall be
elected or reelected for a three-year term.
Any vacancy on the Board of Directors through death, resignation, retirement,
disqualification, removal or other cause, or resulting from an increase in the
number of directors, may be filled by the affirmative vote of a majority of the
remaining directors, though less than a quorum, for a term of office continuing
only until the next election of directors by the stockholders.
If the number of directors is changed, any increase or decrease shall be
apportioned among the classes of directors so as to maintain the number of
directors in each class as nearly equal as possible, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
When the number of directors is increased by the Board of Directors and any
newly created directorships are filled by the Board, there shall be no
classification of the additional directors until the next election of directors
by the stockholders.
6
<PAGE>
Any director may be removed from office at any time either (a) by vote of the
holders of a majority of the shares entitled to vote at an election of
directors, but only for cause or (b) by vote of a majority of the other
directors, with or without cause.
Notwithstanding the foregoing, whenever the holders of any one or more classes
of Preferred Stock or series thereof issued by the Company shall have the right,
voting separately by class or series, to elect directors at an annual or special
meeting of stockholders, the election, term of office, filling of vacancies and
other features of such directorship shall be governed by the terms of these
Restated Articles of Incorporation applicable thereto, and such directors so
elected shall not be divided into classes pursuant to this Article.
Notwithstanding anything contained in these Restated Articles of Incorporation
or the By-Laws of the Company to the contrary, the affirmative vote of at least
58% of the outstanding shares entitled to vote, voting as a single class, shall
be required to amend, repeal or adopt any provision inconsistent with this
Article VII.
ARTICLE VIII
A director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability for (i) any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) a violation
of Section 551 (1) of the Michigan Business Corporation Act or (iv) any
transaction from which the director derived any improper personal benefit.
Any repeal or modification of the foregoing paragraph by the stockholders of the
Company shall not adversely affect any right or protection of a director of the
Company existing at the time of such repeal or modification.
------------------------
These Restated Articles of Incorporation, consisting of Articles I through VIII,
were duly adopted by the Board of Directors on the 19th day of March, 1996, in
accordance with the provisions of Section 642, Act 284, Public Acts of 1972, as
amended. These Restated Articles of Incorporation only restate and integrate and
do not further amend the Articles of Incorporation as heretofore amended and
there is no material discrepancy between those provisions and the provisions of
these Restated Articles of Incorporation.
Signed this 19th day of March, 1996
By: /s/ Nancie W. LaDuke, Vice President and Secretary
7
<PAGE>
EXHIBIT 3b
=======================
By-Laws
of Kmart Corporation
A Michigan Corporation
(Inc. Mar. 9, 1916)
=======================
September 1995
<PAGE>
I, , Secretary of Kmart Corporation, a Michigan corporation,
hereby certify that the following is a true and complete copy of the By-Laws of
said Corporation as amended to the date of this certificate and now in force.
In witness whereof, I have hereunto set my hand and affixed the seal of the
Corporation at the City of Troy, Michigan, this ____ day of ________ A.D. 19__.
-----------------------------------
Secretary
<PAGE>
By-Laws
of Kmart Corporation
A Michigan Corporation
(Inc. Mar. 9, 1916)
ARTICLE I
Stockholders' Meetings
Section 1. Annual Meeting. The annual meeting of stockholders for the election
of directors and for the transaction of any other business authorized or
required to be transacted by the stockholders, shall be held at the principal
office of the Company on the fourth Tuesday in May in each year at nine o'clock
A.M., or at such other place and time as the Board of Directors may designate.
Any annual meeting not held at the time prescribed therefor may be held at any
time thereafter to which said meeting may be adjourned or for which it may be
called.
Section 2. Special Stockholders' Meetings. Special meetings of stockholders
other than those regulated by statute may be called by the Chairman or Vice
Chairman of the Board, or by the Board of Directors, either by a Directors'
resolution or a written instrument signed by a majority of the Directors.
Section 3. Notice of Meetings. Written notice of the time, place and purposes of
a meeting of stockholders shall be given not less than twenty (20) nor more than
sixty (60) days before the date of the meeting, either personally or by mail, to
each stockholder of record entitled to vote at the meeting. If mailed, such
notice shall be
1
<PAGE>
deemed to be given when deposited in the United States mail, addressed to the
stockholder at his or her address as it appears on the stock transfer books of
the Company, with postage prepaid.
Section 4. Quorum. At all meetings of stockholders, except where it is otherwise
provided by law, the holders of a majority of the outstanding shares entitled to
vote, being present in person or represented by proxy, shall constitute a quorum
for all purposes.
Section 5. Inspectors of Election. Prior to the annual meeting of stockholders,
the Chairman or Vice Chairman of the Board or the President shall appoint at
least two Inspectors of Election to act as inspectors at such meeting and at any
meeting of stockholders which may be held during the ensuing year. It shall be
the duty of Inspectors of Election to receive and classify all proxies as
received, and check same with the record of stockholders entitled to vote at
such meetings, to tabulate votes, and to report to the chairman of the meeting
the total number of shares represented at the meeting in person or by proxy, and
the result of the voting.
Section 6. Voting. At all meetings of stockholders, every stockholder of record
as of the applicable record date shall be entitled to vote, either in person or
by proxy appointed by instrument in writing, subscribed by such stockholder or
by his authorized agent. Each outstanding share of capital stock is entitled to
one vote on each matter submitted to a vote, except as otherwise provided in the
Articles of Incorporation. A vote may be cast either orally or in writing, at
the discretion of the chairman of the meeting.
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<PAGE>
Section 7. Adjournments. Any annual or special meeting of stockholders, whether
or not a quorum is present, may be adjourned from time to time by a majority
vote of the shares present in person or by proxy. Unless the Board of Directors
fixes a new record date for the adjourned meeting, it is not necessary to give
notice of the adjourned meeting if the time and place to which the meeting is
adjourned are announced at the meeting at which the adjournment is taken and at
the adjourned meeting only such business is transacted as might have been
transacted at the original meeting.
Section 8. Conduct of Business. Only such business shall be conducted at a
meeting of stockholders as is specified in the notice of meeting (or any
supplement thereto) or as may be properly brought before the meeting by or at
the direction of the Board of Directors or by a stockholder entitled to vote at
such meeting. In addition to any other applicable requirements and limitations
(including requirements of the Securities Exchange Act of 1934, as amended, and
rules and regulations thereunder with respect to inclusion of proposals in the
Company's proxy solicitation materials), for business to be properly brought
before a meeting by a stockholder (other than the nomination of candidates for
election as directors as provided in Article II, Section 2), notice thereof in
writing must be delivered to the Secretary of the Company not later than (a)
with respect to an annual meeting of stockholders, ninety (90) days in advance
of such meeting, provided, however, if the annual meeting is not held on or
within eight (8) days of the date set forth in Article I, Section 1 and if less
than one hundred (100) days notice or public disclosure of the date of the
meeting is given to stockholders, such notice by a stockholder must be not later
than the tenth day following the date on which notice or public disclosure of
the date of the meeting was first given the stockholders and (b) with respect to
a special meeting of stockholders, such notice by a stockholder must be not
later than the tenth day following the date on which notice or public disclosure
of the date of the meeting was first given to the
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<PAGE>
stockholders. A stockholder's notice to the Secretary shall set forth as to any
matter the stockholder proposes to bring before the meeting (a) the name and
address of the stockholder, (b) a brief description of the business desired to
be brought before the meeting and the reasons for conducting such business at
the meeting, and (c) any material interest of the stockholder in such business.
The chairman of the meeting may rule out of order any business not properly
brought before the meeting in compliance with the foregoing procedures.
ARTICLE II
Directors
Section 1. Number and Term of Office. The number of directors constituting the
entire Board of Directors of the Company shall be not less than seven (7) nor
more than twenty-one (21) and shall be determined in the manner set forth in the
Articles of Incorporation. Classifications of directors pursuant to the
Articles of Incorporation shall be by the Board of Directors. All directors
shall be stockholders in the Company. At each annual meeting of stockholders,
directors shall be elected by a plurality of the votes cast, to hold office as
provided in the Articles of Incorporation and until their successors are elected
and qualified.
Section 2. Nominations of Director Candidates. Nominations of candidates for
election as directors may be made by the Board of Directors or by any
stockholder entitled to vote for the election of directors. Nominations by a
stockholder must be made by notice in writing delivered to the Secretary of the
Company not later than (a) with respect to an election to be held at an annual
meeting of stockholders, ninety (90) days in advance of such meeting, provided,
however, if the annual meeting is not held on or within eight (8) days of the
date set forth in Article I, Section 1 and if less than
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<PAGE>
one hundred (100) days notice or public disclosure of the date of the meeting is
given to stockholders, such notice by a stockholder must be not later than the
tenth day following the date on which notice or public disclosure of the date of
the meeting was first given the stockholders, and (b) with respect to an
election to be held at a special meeting of stockholders, such notice by a
stockholder must be not later than the tenth day following the date on which
notice or public disclosure of the date of the meeting was first given the
stockholders. A stockholder's notice to the Secretary shall set forth: (a) the
name and address of the stockholder, (b) the name, age and business address of
each nominee proposed in such notice, (c) such other information concerning
each nominee as must be disclosed of nominees in proxy solicitations pursuant to
proxy rules of the Securities and Exchange Commission, and (d) the written
consent of each nominee to serve as a director if so elected. The chairman of
the meeting may refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedures. A stockholder's compliance with the
foregoing procedures shall not require the Company to include a proposed nominee
in the Company's proxy solicitation materials.
Section 3. Removal of Directors. Subject to the rights of holders of any series
of preferred stock then outstanding, any director may be removed from office at
any time either (a) by vote of the holders of a majority of the shares entitled
to vote at an election of directors, but only for cause, or (b) by vote of a
majority of the other directors, with or without cause.
Section 4. Vacancies. Any vacancy in the Board of Directors through death,
resignation, disqualification or other cause, or because of an increase in the
number
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<PAGE>
of directors, may be filled by the affirmative vote of a majority of the
remaining directors though less than a quorum, for a term of office continuing
only until the next election of directors by the stockholders.
Section 5. Regular Meetings. Regular meetings of the Board of Directors may be
held, either within or without the State of Michigan, at such time and at such
place as may from time to time be determined by the Board of Directors, and no
notice shall be required to be given of any regular meeting.
Section 6. Special Meetings. Special meetings of the Board of Directors may be
held, either within or without the State of Michigan, by resolution of the Board
of Directors or whenever called by the Chairman or Vice Chairman of the Board,
or the President, or a Vice President or the Secretary of the Company, provided
that notice thereof is given personally to the last known address of each
director either by mail, not less than forty-eight (48) hours before such
meeting, or by telephone or telegram, not less than twenty-four (24) hours
before such meeting, or on such shorter notice as the person or persons calling
such meeting may deem necessary or appropriate in the circumstances. Any
director may waive notice of any special meeting. Neither the business to be
transacted at, nor the purpose of, a special meeting need be specified in the
notice or waiver of notice of the meeting.
Section 7. Quorum and Voting. A majority of the members of the Board then in
office shall constitute a quorum for the transaction of business, except where
otherwise provided by law or the Articles of Incorporation or the By-Laws; but a
majority of members present at any regular or special meeting, although less
than a quorum, may adjourn the meeting from time to time, without notice. The
vote of the majority of
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members present at a meeting at which a quorum is present constitutes the action
of the Board, unless the vote of a larger number is required by law or the
Articles of Incorporation or the By-Laws.
Section 8. Action of Directors Without A Meeting. Except as otherwise provided
by law, action required or permitted to be taken pursuant to authorization voted
at a meeting of the Board or a committee thereof may be taken without a meeting
if, before or after the action, all members of the Board or of the committee
consent thereto in writing. The written consents shall be filed with the minutes
of the proceedings of the Board or committee. The consent has the same effect as
a vote of the Board or committee for all purposes.
Section 9. Chairman of the Board. The Board of Directors may elect a Chairman of
the Board from among the members of the Board. If the Board of Directors has
elected a Chairman of the Board, the Chairman shall preside at all meetings of
stockholders and of the Board of Directors and shall perform such duties as may
be designated by the Board of Directors.
Section 10. Vice Chairman of the Board. The Board of Directors may elect a Vice
Chairman of the Board from among the members of the Board. If the Board of
Directors has elected a Vice Chairman of the Board, the Vice Chairman shall
perform such duties as may be designated by the Chairman of the Board, subject
to the direction of the Board of Directors.
7
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ARTICLE III
Officers
Section 1. Officers. The officers of the Company shall be a President, one or
more Vice Presidents, a Secretary and a Treasurer. The Board of Directors shall
have power to add designations to the aforesaid offices and to create such other
offices as it may from time to time deem expedient, and shall, at some
convenient time after each annual meeting, elect officers of the Company for the
ensuing year.
Section 2. The President. The President shall perform such duties as may be
designated by the Board of Directors, and shall have authority to execute on
behalf of the Company any and all contracts, agreements, bonds, deeds,
mortgages, leases or other obligations of the Company. In the absence or
incapacity of the President, the Board of Directors shall determine which other
officer shall perform the duties of that office.
Section 3. The Vice Presidents. The Vice Presidents shall perform such duties as
may be designated by the Chairman of the Board or the President, subject to the
direction of the Board of Directors. Any Vice President shall have authority to
execute on behalf of the Company any and all contracts, agreements, bonds,
deeds, mortgages, leases or other obligations of the Company.
Section 4. The Treasurer. The Treasurer shall have the custody of and be
responsible for all funds and securities of the Company, subject to the control
of the Board of Directors. The Treasurer shall keep bank accounts in the name of
the Company and shall exhibit the books and accounts to any director upon
application at the principal office of the Company during ordinary business
hours. The Treasurer shall perform all duties incident to the position of
Treasurer, subject to the control of the Board of
8
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Directors, and shall have authority to sign and endorse all notes, checks,
drafts and other obligations of the Company.
Section 5. The Secretary. The Secretary shall keep a record in proper books
provided for that purpose of all the meetings and proceedings of the Board of
Directors and the minutes of the stockholders' meetings, and shall keep such
other records and shall perform such other duties as the Board of Directors or
Chairman of the Board shall designate. The Secretary shall notify the directors
and stockholders of their respective meetings, shall attend to the giving and
serving of all notices of the Company, and shall in general do and perform all
the duties pertaining to the office, subject to the control of the Board of
Directors.
The Secretary shall keep a stock certificate book and transfer book at the
office of the Company, or at such other place or places as may be chosen by the
Board of Directors. The Secretary shall keep careful data from which a list of
stockholders can be compiled, and shall furnish such list upon order of the
Board of Directors. The Secretary shall have the custody of the seal of the
Company, and shall attach the same to instruments required to be executed under
the seal of the Company.
Section 6. Divisional, Operations and Regional Vice Presidents and Junior
Officers. The Board of Directors may elect such junior officers as it may from
time to time deem expedient. In addition, the Board of Directors and the
Chairman of the Board may each elect such Divisional Vice Presidents, Operations
Vice Presidents and Regional Vice Presidents as each may from time to time deem
expedient. The Divisional Vice Presidents, Operations Vice Presidents, Regional
Vice Presidents and junior officers shall have such powers and authority and
shall perform such duties as may be
9
<PAGE>
assigned to them by the Board of Directors, the Chairman of the Board or the
senior officer to whom they report.
Section 7. Removal. Any officer elected or appointed by the Board of Directors
may be removed at any time with or without cause by the Board of Directors.
Section 8. Vacancies. Vacancies among officers of the Company during the year
may be filled by the Board of Directors for the unexpired portion of the term.
ARTICLE IV
Committees
Section 1. Executive/Finance Committee. There shall be an Executive and Finance
Committee chosen by the Board of Directors at its first meeting after this By-
Law is adopted and thereafter at its first meeting following the annual meeting
of stockholders of the Company each year. The Executive and Finance Committee
shall consist of not less than three members of the Board, one of whom shall be
the Chairman of the Board. One member shall be designated as chairman by the
Board. During the intervals between meetings of the Board of Directors and
subject to such limitations as provided by law or by resolution of the Board,
the Committee shall possess and may exercise all powers and authority of the
Board of Directors in the management and direction of the affairs of the Company
and shall be responsible for review of corporate financial policies and
procedures and shall recommend to the Board dividend policy, corporate
financing, the issuance and sale of company securities and investment of funds,
and shall perform such other duties as the Board may prescribe. The Committee
shall keep minutes of its proceedings, and all action by the Committee shall be
reported at the next meeting of the Board of Directors.
10
<PAGE>
Section 2. Audit Committee. There shall be an Audit Committee chosen by the
Board of Directors at its first meeting after this By-Law is adopted and
thereafter at its first meeting following the annual meeting of stockholders
each year. The Audit Committee shall consist of not less than three members of
the Board, none of whom shall be an officer of the Company or any of its
subsidiaries. One member shall be designated as chairman by the Board. The
Committee shall recommend to the Board the conditions, compensation and term of
appointment of independent certified public accountants for the auditing of the
books and accounts of the Company and its subsidiaries. From time to time, as
considered necessary and desirable, the Committee shall confer with such
accountants for the exchanging of views relating to the scope and results of the
auditing books and accounts of the Company and its subsidiaries and shall
provide to the Board such assistance as may be required with respect to the
corporate and reporting practices of the Company. The Committee shall perform
such other duties as the Board may prescribe.
Section 3. Compensation and Incentives Committee. There shall be a Compensation
and Incentives Committee chosen by the Board of Directors at its first meeting
after this By-Law is adopted and thereafter at its first meeting following the
annual meeting of stockholders each year. The Committee shall consist of not
less than three members of the Board, none of whom shall be an officer of the
Company or any of its subsidiaries. No person may be a member of this Committee
who is, or within one year prior to his appointment to the Committee was,
eligible for selection as a person to whom rights or benefits may be granted
pursuant to any stock option or other long term incentive plan of the Company or
any of its subsidiaries. One member shall be designated as chairman by the
Board. The Committee shall determine the nature and amount of compensation of
all senior officers and directors of the Company. As may be
11
<PAGE>
prescribed by the Board of Directors, the Committee shall administer any stock
option or other long term incentive plan of the Company and perform other
prescribed duties.
Section 4. Nominating Committee. There shall be a Nominating Committee chosen by
the Board of Directors at its first meeting following the annual meeting of
stockholders each year. The Nominating Committee shall consist of not less than
three members of the Board, none of whom shall be an officer of the Company or
any of its subsidiaries. One member shall be designated as chairman by the
Board. The Committee shall recommend to the Board nominees for election as
directors, and shall perform such other duties as the Board may prescribe.
Section 5. Committee Vacancies; Quorum, Voting and Procedures. Each member of a
committee shall serve at the pleasure of the Board of Directors, and vacancies
on a committee may be filled by the Board at any time. The Board may also
increase the number of members of a committee at any time. A majority of all
members of a committee shall constitute a quorum, and the affirmative vote of a
majority of all the members of a committee shall constitute the action of the
committee. Each committee shall determine its own rules of procedure and shall
meet as provided by such rules, or by resolution of the Board, or on the call of
the committee chairman or any member thereof.
Section 6. Other Committees. The Board of Directors may by resolution establish
such other committees as may be desirable, the responsibilities and duties of
which may be prescribed by the Board, subject to such limitations as provided by
law.
12
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ARTICLE V
Capital Stock
Section 1. Certificates. Certificates of shares of the capital stock of the
Company shall be in such form as shall be approved by the Board of Directors,
signed by the Chairman or Vice Chairman of the Board, the President or a Vice
President and also by the Secretary or an Assistant Secretary or by the
Treasurer or an Assistant Treasurer. The seal of the Company may be engraved on
the certificates instead of being manually affixed, and the signature of
officers may be facsimile signatures if the certificate is countersigned by a
transfer agent or registered by a registrar other than the Company itself or its
employee. All certificates of stock shall be consecutively numbered, and the
name(s) and address of the person(s) to whom issued, the number of shares and
date of issue, shall be entered on the stock transfer books of the Company. All
certificates of stock surrendered to the Company for transfer shall be cancelled
and, except in the case of lost or destroyed certificates as hereinafter
provided, no new certificate shall be issued until the former certificate or
certificates for the shares represented thereby shall have been surrendered and
cancelled.
Section 2. Lost Certificates. When a certificate of stock previously issued is
alleged to have been lost or destroyed, a new certificate may be issued therefor
upon such terms and indemnity to the Company as the Board of Directors may
prescribe.
Section 3. Transfer of Shares. Transfer of shares of stock of the Company shall
be made only on the stock transfer books of the Company, and the Company may
decline to recognize the holder of any certificate of stock of the Company as a
stockholder until
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the shares represented by such certificate are transferred into his or her name
on the stock transfer books of the Company. The Company shall be entitled to
treat the holder of record of any shares of stock as the absolute owner thereof,
and shall not be bound to recognize any equitable or other claim to or interest
in such shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by law. The Board
of Directors may appoint one or more stock transfer agents and registrars (which
functions may be combined), and may require all stock certificates to bear the
signature of such transfer agent and such registrar.
Section 4. Fixing of Record Date. For the purpose of determining stockholders
entitled to notice of and to vote at a meeting of stockholders or an adjournment
thereof, or for the purpose of determining stockholders entitled to receive
payment of a dividend or allotment of a right, or for the purpose of any other
action, the Board of Directors may fix in advance a date as the record date for
any such determination of stockholders. The date shall not be more than sixty
(60) nor less than ten (10) days before the date of the meeting, nor more than
sixty (60) days before any other action.
ARTICLE VI
Sale of the Assets of the Company
Section 1. The entire assets, business and good will of the Company may be sold
to any person, firm or corporation, either within or without the State of
Michigan, upon such terms and conditions, and for such lawful consideration, as
may be authorized by vote of majority of the whole Board of Directors, and
approved by vote in person or by proxy, of the holders of not less than
three-fourths (3/4) of the outstanding capital stock of the Company, given at an
annual or at a special meeting of the stockholders called and held for that
purpose.
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ARTICLE VII
Miscellaneous
Section 1. Seal. The seal of the Company shall be circular in form, with the
words "Kmart Corporation, Michigan" on the circumference, and shall be kept in
the charge and custody of the Secretary, to be affixed to all instruments
requiring a seal.
Section 2. Fiscal Year. The fiscal year of the Company shall end on the last
Wednesday in January in each year.
Section 3. Indemnification. Any director or officer of the Company who is or was
a party or is threatened to be made a party or is otherwise involved in any
threatened, pending or completed action (including any civil, criminal,
administrative or investigative suit or proceeding) by reason of the fact that
he or she is or was a director or officer of the Company or is or was serving
another corporation, partnership, joint venture, trust or other enterprise at
the request of the Company, including service with respect to employee benefit
plans, shall be indemnified by the Company against expenses, including
attorneys' fees, judgments, penalties, fines and amounts paid or to be paid in
settlement reasonably incurred by such person in connection with the action.
Such indemnification shall include the right to be paid by the Company any
reasonable expenses incurred by such person in defending such action in advance
of its final disposition.
Indemnification hereunder shall be to the fullest extent now or hereafter
authorized by the Michigan Business Corporation Act, and shall be determined in
the manner provided therein; provided, however, that the Company shall indemnify
any person seeking indemnity in connection with an action (or part thereof)
initiated by such
15
<PAGE>
person only if the action (or part thereof) was authorized by the Board of
Directors. It shall be a defense to any claim for indemnity hereunder that the
claimant has not met the applicable standard of conduct for which
indemnification is permitted under the Michigan Business Corporation Act.
The Company may, by action of its Board of Directors, provide indemnification to
employees and agents to the same or a lesser extent as the foregoing
indemnification of directors and officers.
Indemnification provided hereunder shall be a contract right between the Company
and each director or officer of the Company who serves in such capacity at any
time while this Section 3 is in effect; shall continue to a person who has
ceased to serve in such capacity and shall inure to the benefit of the heirs,
executors and administrators of such person; and shall not be exclusive of any
other right which any person may have or hereafter acquire under any other
written contractual agreement.
Neither the Company nor its directors or officers nor any person acting on its
behalf shall be liable to anyone for any determination as to the existence or
absence of conduct which would provide a basis for making or refusing to make
any payment hereunder or for taking or omitting to take any other action
hereunder, in reliance upon advice of counsel.
Section 4. Control Share Acquisitions. Chapter 7B of the Michigan Business
Corporation Act (being Sections 450.1790 through 450.1799 of Michigan Compiled
Laws) shall not apply to control share acquisitions of shares of the Company's
capital stock.
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ARTICLE VIII
Amendments
Section 1. By Directors. These By-Laws may be amended, altered or repealed and
new By-Laws may be adopted, at any meeting of the Board of Directors by a
majority vote of the members of the Board then in office; provided, however,
that the Board of Directors shall not amend, alter or repeal Article VI of these
By-Laws.
Section 2. By Stockholders. These By-Laws may also be amended, altered or
repealed and new By-Laws may be adopted at any meeting of stockholders, if such
purpose is contained in the notice of meeting (pursuant to Article 1, Section
3), by a majority of the votes cast by the holders of shares entitled to vote
thereon; provided, however, that Article VI of these By-Laws shall not be
amended, altered or repealed without the consent of the holders of at least
two-thirds (2/3) of the issued and outstanding capital stock of the Company,
given in person or by proxy, at an annual or special meeting of the stockholders
called and held for the purpose.
17
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Exhibit 10d
AMENDED AND RESTATED
KMART CORPORATION
DIRECTORS RETIREMENT PLAN
Section 1. Purpose
- -------------------
This Plan, which shall be known as the Kmart Corporation Directors Retirement
Plan, is designed to provide retirement benefits to non-employee directors who
have rendered service to Kmart Corporation (the "Company") as members of its
Board of Directors (the "Board"), and to attract and retain as directors persons
of substantial ability and experience who can contribute their knowledge and
judgment to the business of the Company.
Section 2. Eligibility
- -----------------------
Any person who is neither an employee, nor entitled to any pension earned as an
employee, of the Company (or any of its subsidiaries) and who is a member of the
Board at or after the effective date of this Plan shall be eligible for benefits
hereunder after retirement from the Board if such director has served on the
Board at least 5 years.
The rights of any director shall be determined under the terms of this Plan as
in effect as of the date of his or her retirement.
Section 3. Benefit Amount
- --------------------------
Effective June 20, 1995, the annual amount of benefits to be paid hereunder to
an eligible director shall be a sum equal to the annual retainer fee for service
as a director (exclusive of any retainer for committee service) in effect for
non-employee directors at the time of the director's retirement from the Board.
Section 4. Payment and Duration of Benefits
- --------------------------------------------
Benefits hereunder shall become payable as of the director's retirement from the
Board, but not sooner than attainment of age 62 unless the director shall have
made an election no later than 12 calendar months prior to his or her retirement
from the Board to commence payment of benefits earlier, or up to 3 years later,
than age 62. Benefits shall be paid to the retired director on a quarterly basis
on the last day of each calendar quarter.
Benefits payable hereunder shall continue until the earlier of:
(a) the expiration of 10 years, or
(b) the expiration of a period equivalent to the retired director's period
of service as a member of the Board, provided, however, that for this
purpose, only the director's service prior to January 1, 1996 shall be
taken into account. (However, the foregoing proviso shall be effective
only if the amendments to the Kmart Corporation Amended and Restated
Directors Stock Plan are approved at the 1996 annual meeting of
stockholders.)
Any period of service as a member of the Board for a partial month shall be
rounded to a full month for purposes of calculating the period during which
benefits are payable. Payment shall be pro-rated for any period less than a full
calendar quarter.
<PAGE>
Section 5. Benefit Payable to Estate or Designated Beneficiary(ies)
- --------------------------------------------------------------------
In the event of the death of a director who is eligible for benefits hereunder,
or who would be eligible for benefits if he or she had retired from the Board as
of the date of death, the benefits which would otherwise have been payable to
such director shall be paid in a lump sum to the beneficiary or beneficiaries
designated in writing by the director, or if no designation has been made to the
estate of the director.
Section 6. Conditions
- ----------------------
The Company shall not be liable to make any payments hereunder if, as determined
by the Board in its sole discretion, the director (during or following his or
her membership on the Board) engaged in any activity or association in
competition with or adverse or detrimental to the interests of the Company.
Section 7. Miscellaneous
- -------------------------
The right to receive benefits hereunder shall be non-assignable and shall not be
subject in any manner to the debts or other obligations of the director or his
or her beneficiary(ies) or estate.
The Company shall not be required to reserve or otherwise set aside funds to
meet any obligations of this Plan.
Nothing in this Plan shall be construed as conferring any right upon any
director to continuance as a member of the Board.
Section 8. Amendment and Termination
- -------------------------------------
This Plan may be amended or discontinued by the Board at any time in its sole
judgment. No such amendment or termination shall reduce the benefit to which any
person shall have become entitled hereunder prior to such amendment or
termination.
Section 9. Effective Date
- --------------------------
This Plan shall be effective as of May 1, 1984. (Amended June 20, 1995 and
September 19, 1995.)
-2-
<PAGE>
Exhibit 10h
KMART CORPORATION
AMENDED AND RESTATED
DIRECTORS STOCK PLAN
--------------------
1. PURPOSE
- -----------
1.1 The Kmart Corporation Directors Stock Plan (the "Plan") is intended to
increase the proprietary interest of nonemployee members of the Board of
Directors (the "Board") of Kmart Corporation (the "Company") by providing
further opportunity for ownership of the Company's common stock ("Stock"), and
to increase their incentive to contribute to the success of the Company's
business.
1.2 The Plan is intended to comply with Rule 16b-3 under the Securities
Exchange Act of 1934 as amended (the "Exchange Act"), as such Rule may be
amended from time to time ("Rule 16b-3") and shall be construed to so comply. In
particular, the provisions of Sections 4.1, 5.1 and 5.2 hereof are intended to
comply with the provisions of Section (c)(2)(ii) of Rule 16b-3, and the
provisions of Section 4.2 hereof are intended to comply with the provisions of
Section (d)(1)(i) of Rule 16b-3, and each such Section shall be construed to so
comply.
2. ADMINISTRATION
- ------------------
2.1 The Plan shall be administered by the Compensation and Incentives
Committee (the "Committee") of the Board.
2.2 The Committee may make such rules and establish such procedures for the
administration of the Plan as it deems appropriate to carry out the purpose of
the Plan. The interpretation and application of the Plan or of any rule or
procedure, and any other matter relating to or necessary to the administration
of the Plan, shall be determined by the Committee, and any such determination
shall be final and binding on all persons.
3. SHARES OF STOCK
- -------------------
3.1 Shares Reserved. Shares of Stock which may be issued under the Plan may
either be authorized and unissued shares or issued shares which have been
reacquired by the Company, provided that the total amount of Stock which may be
issued under the Plan shall not exceed 400,000 shares.
3.2 Capital Adjustments. In the event of a change in the number or class of
shares of Stock as a result of reorganization, recapitalization, stock split,
stock dividend, combination of shares, merger, consolidation or a similar
corporate transaction, the maximum number or class of shares available under the
Plan, and the number or class of shares of Stock to be delivered hereunder shall
be proportionately adjusted to reflect any such change.
4. STOCK IN LIEU OF CASH COMPENSATION
- --------------------------------------
4.1 Mandatory Portion. For each calendar year commencing with the calendar
year beginning January 1, 1996, each member of the Board who is not an employee
of the Company or any of its subsidiaries (an "Eligible Director") shall receive
a whole number of shares of Stock equal in value to 50% of any cash compensation
payable for services as an Eligible Director (including services as non-
executive Chairman or Vice-Chairman of the Board) during each such calendar year
in lieu of payment of such percentage of such cash compensation. Such shares
shall be delivered to each such director, in substantially equal installments,
on the last business day of each calendar quarter of each such calendar year
(the "Normal
<PAGE>
Stock Payment Date"), except to the extent that a Deferral Election (as defined
in Section 4.3 hereof) shall be in effect with respect to such shares or that
Section 4.6 hereof applies.
Each such share shall be valued at the closing price per share of Stock as
reported on the Composite Transactions reporting system, or if not so reported,
as reported by the New York Stock Exchange (the "Closing Price") on the last
business day preceding each Normal Stock Payment Date (the "Share Value Price").
The value of fractional shares shall be paid to the director in cash.
4.2 Elective Portion. In addition to the shares of stock received pursuant
to Section 4.1 hereof, for each calendar year commencing with the calendar year
beginning January 1, 1996, each Eligible Director may elect to receive a whole
number of shares of Stock equal in value (based on the Share Value Price) to up
to 50% of his or her cash compensation payable for services as an Eligible
Director (including services as non-executive Chairman or Vice Chairman of the
Board) during each such calendar year in lieu of payment of such percentage of
such cash compensation. Such shares shall be delivered to each such director, in
substantially equal installments, on the Normal Stock Payment Dates, except to
the extent that a Deferral Election (as defined in Section 4.3 hereof) shall be
in effect with respect to such shares or that Section 4.6 hereof applies.
Provided, however, no shares shall be delivered to an Eligible Director
pursuant to the director's election hereunder for a period of six months
following the director's initial election hereunder, or any subsequent change of
such election hereunder, and the shares accrued during such six month period
shall be delivered on the Normal Stock Payment Date next following expiration of
the six month period and shall be valued at the Closing Price on the last
business day preceding such date.
The value of fractional shares shall be paid to the director in cash.
4.3 Deferral Election. Each Eligible Director may elect to defer the receipt
(a "Deferral Election") of all or a portion of the shares of Stock otherwise
deliverable on a Normal Stock Payment Date ("Deferred Shares").
The director shall elect that Deferred Shares be distributed in a lump sum or
in equal annual installments (not exceeding ten), with the lump sum or first
installment to be distributed on the tenth day of the calendar year immediately
following the year in which the director ceases to be a director of the Company;
provided, however, that the foregoing shall be subject to Section 4.6 hereof.
Installments subsequent to the first installment shall be distributed on the
tenth day of each succeeding calendar year until all of the director's Deferred
Shares shall have been distributed.
In the event the director should die before all of the director's Deferred
Shares have been distributed, the balance of the Deferred Shares shall be
distributed in a lump sum to the beneficiary or beneficiaries designated in
writing by the director, or if no designation has been made, to the estate of
the director.
4.4 Dividend Equivalents. Deferred Shares shall be credited with an amount
equivalent to the dividends which would have been paid on an equal number of
outstanding shares of Stock ("Dividend Equivalents"). Dividend Equivalents shall
be credited (i) as of the payment date of such dividends, and (ii) only with
respect to Deferred Shares which were otherwise deliverable as of a Normal Stock
Payment Date, or into which Dividend Equivalents were converted pursuant to the
second paragraph of this Section 4.4, prior to the record date of the dividend.
Deferred Shares held pending distribution shall continue to be credited with
Dividend Equivalents.
Dividend Equivalents so credited shall be converted into an additional whole
number of Deferred Shares as of the payment date of the dividend (based on the
Closing Price on such payment date). Such Deferred Shares shall thereafter be
2
<PAGE>
treated in the same manner as any other Deferred Shares under the Plan. Dividend
Equivalents resulting in fractional shares shall be held for the credit of the
director until the next dividend payment date and shall be converted into
Deferred Shares on such date. Any Dividend Equivalents not converted into
Deferred Shares shall be paid in cash upon the final distribution of the
director's Deferred Shares.
4.5 Timing and Form of Elections. Any election described in Sections 4.2 and
4.3 hereof:
(a) shall be in the form of a document executed by the director and
filed with the Secretary of the Company,
(b) shall be made before the first day of the calendar year in which the
applicable cash compensation is earned and shall become irrevocable
on the last day prior to the beginning of such calendar year, and
(c) shall continue until a director ceases to be a director of the
Company or until he or she terminates or modifies such election by
written notice, any such termination or modification to be
effective, except as otherwise provided in the second paragraph of
paragraph 4.2 hereof, as of the end of the calendar year in which
such notice is given with respect to cash compensation otherwise
payable in subsequent calendar years.
4.6 Effect of Certain Events. Notwithstanding an election pursuant to
Section 4.2 or Section 4.3 hereof:
(a) If, as determined by the Board in its sole discretion, the director
(during or following his or her membership on the Board) engaged in
any activity or association in competition with or adverse or
detrimental to the interest of the Company (i) all of such
director's Deferred Shares shall be distributed immediately in the
form of shares of Stock, (ii) all of such director's Dividend
Equivalents not yet converted into Deferred Shares shall be
distributed immediately in cash, and (ii) all of such director's
cash compensation earned and not yet converted into shares of Stock
or Deferred Shares under the terms of this Plan shall be distributed
in the form of shares of Stock as soon as practicable after the next
Normal Stock Payment Date.
(b) Upon the occurrence of a Change in Control (as defined below), (i)
all Deferred Shares to the extent credited prior to the Change in
Control shall be distributed immediately in the form of shares of
Stock or their cash equivalent value, and (ii) all Dividend
Equivalents not yet converted into Deferred Shares and all cash
compensation earned and not yet converted into shares of Stock or
Deferred Shares under the terms of this Plan shall be distributed
immediately in cash.
A Change in Control shall have occurred if (i) the "beneficial ownership" (as
defined in Rule 13d-3 under the Exchange Act) of securities representing more
than 50% of the combined voting power of the Company is acquired by any "person"
as defined in Sections 13(d) and 14(d) of the Exchange Act (other than the
Company, any trustee or other fiduciary holding securities under an employee
benefit plan of the Company, or any corporation owned, directly or indirectly,
by the stockholders of the Company in substantially the same proportions as
their ownership of stock of the Company), or (ii) the stockholders of the
Company approve a definitive agreement to merge or consolidate the Company with
or into another corporation or to sell or otherwise dispose of all or
substantially all of its assets, or adopt a plan of liquidation, or (iii) during
any period of two consecutive years, individuals who at the beginning of such
period were members of the Board cease for any reason to constitute at least a
majority thereof
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(unless the election or the nomination for election by the Company's
stockholders of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of
such period).
The provisions of this Section 4.6 shall not apply to the extent inconsistent
with the requirements of Rule 16b-3, as the same may be interpreted from time to
time.
5. RESTRICTED STOCK UNITS
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5.1 Awards. For each year beginning January 1, 1996, each Eligible Director
who as of such date is not entitled to receive benefits under the Company's
Directors Retirement Plan (the "Retirement Plan") for a period of ten years
following retirement from the Board shall be credited with Restricted Stock
Units ("Units") equal in value to 50% of the annual Board retainer fee then in
effect for an Eligible Director. Such Units shall be credited to each such
director, in substantially equal installments, on Normal Stock Payment Dates.
Each Unit shall be valued at the Share Value Price.
An Eligible Director shall be entitled to be credited with such Units (a) for
ten years, (b) until the period during which the director is credited with such
Units when combined with the period for which the director is entitled to
receive benefits under the Retirement Plan is equal to ten years or (c) until
the director's retirement from the Board, whichever first occurs.
5.2 Committee Chairs. For each year beginning January 1, 1996 during which
an Eligible Director serves as chair of a regular committee of the Board, such
director shall be credited with Units equal in value to 10% of the annual Board
retainer fee then in effect for an Eligible Director. Such Units shall be
credited to each such director, in substantially equal installments, on Normal
Stock Payment Dates. Each Unit shall be valued at the Share Value Price.
5.3 Distribution. Following the director's retirement from the Board, the
value of the Units credited to the director shall be distributed to the director
in shares of Stock pursuant to the election of the director.
The director shall elect that distribution be in a lump sum or in equal
annual installments (not exceeding ten), with the lump sum or first installment
to be distributed on the tenth day of the calendar year immediately following
the year in which the director ceases to be a director of the Company; provided,
however, that the foregoing shall be subject to Section 5.6 hereof. Installments
subsequent to the first installment shall be distributed on the tenth day of
each succeeding calendar year until all of the director's Units shall have been
distributed.
In the event the director should die before all of the director's Units have
been distributed, the balance of the Units shall be distributed in a lump sum to
the beneficiary or beneficiaries designated in writing by the director, or if no
designation has been made, to the estate of the director.
5.4 Dividend Equivalents. Units shall be credited with Dividend Equivalents.
Dividend Equivalents shall be credited (i) as of the payment date of such
dividends, and (ii) only with respect to Units which were credited as of a
Normal Stock Payment Date, or into which Dividend Equivalents were converted
pursuant to the second paragraph of this Section 5.4, prior to the record date
of the dividend. Units held pending distribution shall continue to be credited
with Dividend Equivalents.
Dividend Equivalents so credited shall be converted into an additional whole
number of Units as of the payment date of the dividend (based on the Closing
Price on such payment date). Such Units shall thereafter be treated in the same
manner as any other Units under the Plan. Dividend Equivalents resulting in
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fractional shares shall be held for the credit of the Eligible Director until
the next dividend payment date and shall be converted into Units on such date.
Any Dividend Equivalents not converted into Units shall be paid in cash upon the
final distribution of the director's Units.
5.5 Timing the Form of Elections. The election described in Section 5.3
hereof:
(a) shall be in the form of a document executed by the director and
filed with the Secretary of the Company,
(b) shall be made no later than 12 months prior to the director's
retirement from the Board, and
(c) shall become irrevocable 12 months prior to the director's
retirement from the Board.
If no election is made, the Units shall be distributed in a lump sum on the
tenth day of the calendar year immediately following the year in which the
director ceases to be a director of the Company.
5.6 Effect of Certain Events. Notwithstanding an election pursuant to
Section 5.3 hereof:
(a) If, as determined by the Board in its sole discretion, the director
(during or following his or her membership on the Board) engaged in
any activity or association in competition with or adverse or
detrimental to the interest of the Company (i) all of such
director's Units credited under Section 5.1 hereof, as well as
Dividend Equivalents and other Units resulting from such Units,
shall be immediately forfeited and (ii) all of such director's Units
credited under Section 5.2 hereof, as well as Dividend Equivalents
and other Units resulting from such Units, shall be distributed
immediately in the form of shares of Stock or cash.
(b) Upon the occurrence of a Change in Control, (i) all Units to the
extent credited prior to the Change in Control shall be distributed
immediately in the form of shares of Stock or their cash equivalent
value, and (ii) all Dividend Equivalents not yet converted into
Units shall be distributed immediately in cash.
The provisions of this Section 5.6 shall not apply to the extent inconsistent
with the requirements of Rule 16b-3, as the same may be interpreted from time to
time.
6. TERM OF PLAN
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6.1 The Plan, as amended by the Board as of January 1, 1996, is subject to
approval by the stockholders of the Company at the Company's 1996 annual meeting
of stockholders; provided, however, that if the Plan as so amended is approved
by stockholders, any election described in Sections 4.2, 4.3 and 5.3 hereof
which was made prior to such approval shall be deemed to be effective as of the
date such election was made. In no event shall any delivery of shares of Stock
be made to any director or other person under the Plan as so amended until such
time as stockholder approval of the Plan as so amended is obtained.
6.2 The Plan shall remain in effect until the earlier to occur of a Change in
Control or December 31, 2011, unless sooner terminated by the Board; provided,
however, that, except as provided in Sections 4.6(b) and 5.6(b) hereof, shares
of Stock and Dividend Equivalents may be delivered after such date pursuant to
an election made prior to such date.
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7. AMENDMENT; TERMINATION
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7.1 The Board may at any time and from time to time alter, amend, suspend or
terminate the Plan in whole or in part; provided, however, that the provisions
of Sections 4.1, 5.1 and 5.2 hereof shall not be amended more than once every
six months, other than to comport with changes in the Internal Revenue Code, the
Employee Retirement Income Security Act or the rules thereunder.
7.2 Except as provided in Sections 4.6 and 5.6 hereof, in the event the Plan
is terminated, Deferred Shares, Units and Dividend Equivalents shall be
distributed at such time and in such manner as the Board shall determine, no
later than they would have been distributed pursuant to the election applicable
thereto.
8. MISCELLANEOUS
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8.1 The right of a director to Deferred Shares, Units and/or Dividend
Equivalents shall be non-assignable and shall not be subject in any manner to
the debts or other obligations of the director or any other person.
8.2 The Company shall not be required to reserve or otherwise set aside funds
to meet any obligations under this Plan.
8.3 Nothing in this Plan shall be construed as conferring any right upon any
director to continuance as a member of the Board.
8.4 This Plan and all rights hereunder shall be construed in accordance with
and governed by the laws of the State of Michigan.
Dated: December 16, 1991 (Amended March 28, 1995 and as of January 1, 1996)
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Exhibit 10n
AGREEMENT
AGREEMENT, made and entered into the 5th day of December, 1995, by and
between Kmart Corporation, a Michigan corporation (together with its successors
and assigns permitted under this Agreement, the "Company"), and Warren Flick
(the "Executive").
W I T N E S S E T H
-------------------
WHEREAS, the Company desires to employ the Executive and to enter into an
agreement concerning such employment (this "Agreement") and the Executive
desires to enter into this Agreement and to accept such employment, subject to
the terms and provisions of this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Executive (individually a
"Party" and together the "Parties") agree as follows:
1. Definitions.
(a) "Affiliate" of a person or other entity shall mean a person or
other entity that directly or indirectly controls, is controlled by, or is under
common control with the person or other entity specified.
(b) "Base Salary" shall mean the salary provided for in Section 4
below or any increased salary granted to the Executive pursuant to Section 4.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Cause" shall mean:
(i) the Executive is convicted of a felony involving moral
turpitude or any other felony if in the case of such other felony the Executive
is unable to show that he (A) acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company and (B)
had no reasonable cause to believe his conduct was unlawful; or
(ii) the Executive engages in conduct that constitutes willful
gross neglect or willful gross misconduct in carrying out his duties under this
Agreement, resulting, in either case, in material harm to the Company, unless
the Executive believed in good faith that such act or nonact was in or not
opposed to the best interests of the Company.
(e) A "Change in Control" shall have the meaning set forth in Section
5(B) of the Company's 1992 Stock Option Plan (the "1992 Plan") as in effect on
the date hereof.
(f) "Committee" shall mean the Compensation and Incentives Committee
of the Board or any other committee of the Board performing similar functions.
(g) "Constructive Termination Without Cause" shall mean a termination
of the Executive's employment at his initiative as provided in Section 10(d)
below within six months following the occurrence, without the Executive's prior
written consent, of one or more of the following events (except in consequence
of a prior termination):
<PAGE>
(i) a reduction in the Executive's then current Base Salary or
on-plan target bonus opportunity under the Company's Annual Incentive Bonus Plan
or any similar plan (the "Bonus Plan") below the minimum opportunity set forth
herein or the termination or material reduction of any employee benefit or
perquisite enjoyed by him (other than as part of an across-the-board reduction
of such benefit or perquisite applicable to all executive officers of the
Company);
(ii) removal of the Executive from any of the positions
described in Section 3 below;
(iii) a material diminution in the Executive's duties or
responsibilities or the assignment to the Executive of duties which are
materially inconsistent with his duties or which materially impair the
Executive's ability to function in his position;
(iv) the relocation of the Company's principal office, or the
Executive's own office location as assigned to him by the Company, to a location
more than 35 miles from Troy, Michigan; or
(v) the failure of the Company to obtain the assumption in
writing of its obligation to perform this Agreement by any successor to all or
substantially all of the assets of the Company within 15 days after a merger,
consolidation, sale or similar transaction.
(h) "Disability" shall mean the Executive's inability to substantially
perform his duties and responsibilities under this Agreement by reason of any
physical or mental incapacity for a period of 180 consecutive days.
(i) "Stock" shall mean the Common Stock of the Company.
(j) "Subsidiary" of the Company shall mean any corporation of which
the Company owns, directly or indirectly, more than 50% of the Voting Stock.
2. Employment.
The Company hereby employs the Executive, and the Executive hereby
accepts such employment, commencing as of the earlier of 6:00 p.m. on December
31, 1995, or, in the event the Executive is released or resigns from his current
position prior to such date, the date which is not more than five business days
following the date of such release (such commencement date being referred to as
the "Effective Date"). The Executive's employment with the Company shall be
subject to termination in accordance with the terms of this Agreement.
3. Position, Duties and Responsibilities.
(a) During his employment with the Company, the Executive shall be
employed and serve as an Executive Vice President of the Company and as
President & General Merchandise Manager, U.S. Kmart Stores (or such other
position or positions as may be agreed upon in writing by the Executive and the
Company) and shall report to the Chief Executive Officer of the Company ("CEO").
(b) The Executive shall perform such duties and carry out such
responsibilities incident to his position as may be determined from time to time
by the CEO, which shall be consistent with the duties and responsibilities
customarily performed by persons in a similar executive capacity. The Executive
shall have primary responsibility for all merchandising, marketing and inventory
planning and management (including foreign
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buying functions), but excluding any such responsibilities relating to groceries
and consumables. The Executive shall devote substantially all of his business
time, attention and skill to the performance of such duties and
responsibilities, and shall use his best efforts to promote the interests of the
Company. The Executive shall not, without the prior written approval of the
CEO, engage in any other business activity which would materially interfere with
the performance of the Executive's duties and responsibilities hereunder or
which is in violation of policies established from time to time by the Company.
(c) Anything herein to the contrary notwithstanding, nothing shall
preclude the Executive from (i) serving on the boards of directors of a
reasonable number of other corporations or the boards of a reasonable number of
trade associations and/or charitable organizations (subject to the reasonable
approval of the CEO), (ii) engaging in charitable activities and community
affairs, and (iii) managing his personal investments and affairs, provided that
such activities do not materially interfere with the proper performance of his
duties and responsibilities hereunder.
4. Base Salary.
During his employment with the Company, the Executive shall be paid an
annualized Base Salary, payable in accordance with the regular payroll practices
of the Company, of $600,000. The Base Salary shall be reviewed no less
frequently than annually (commencing in the Spring of 1996) for increase in the
discretion of the Board and/or the Committee.
5. Hiring Payment; Annual Incentive Awards.
Provided the Executive shall have reported for work at the Company's
headquarters and, if requested by the Company, affirmed in writing that he has
ceased employment with his current employer, the Company shall, within five
business days following the Effective Date (but in no event prior to January 2,
1996), make a hiring payment to the Executive in the amount of $1,000,000 (the
"Hiring Payment"). During his employment with the Company, the Executive shall
participate in all annual incentive award programs, including, without
limitation, commencing with the Fiscal Year beginning on or about February 1,
1997, the Bonus Plan. The Executive shall receive a guaranteed bonus of
$300,000 for the fiscal year ending on or about January 31, 1997. Thereafter,
the Executive shall have an on-plan target bonus opportunity each year under the
Bonus Plan of an amount equal to fifty percent (50%) of the Executive's Base
Salary, which amount shall be payable if the performance goals established by
the Committee for the relevant year are met. If such performance goals are
exceeded, the Executive shall receive a greater amount as determined in
accordance with guidelines established by the Committee, but not more than 225%
of the target bonus, unless the Committee shall increase the maximum payable
under such guidelines. If such performance goals are not met, the Executive
shall receive a lesser amount as determined in accordance with guidelines
established by the Committee, consistent with the guidelines applicable to other
senior executives of the Company. Payment of annual incentive awards shall be
made at the same time that other senior-level executives receive their incentive
awards. The Executive shall participate in the Company's Management Stock
Purchase Plan, which requires that a minimum of 20% of an officer's annual bonus
be used to purchase restricted stock of the Company under such plan. The
Executive also acknowledges that payment of any cash compensation in excess of
$1,000,000 per year which is not deductible by the Company by reason of Section
162(m) of the Internal Revenue Code of 1986, as amended, is subject to mandatory
deferral under the Company's Executive Deferred Compensation Plan. The Company
acknowledges that the Hiring Payment shall not constitute an annual bonus for
purposes of the Management Stock Purchase Plan.
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6. Long-Term Incentive Programs.
(a) General. During his employment with the Company, the Executive
shall be eligible to participate in the long-term incentive programs of the
Company, any awards under such programs to be in the sole discretion of the
Committee. In any event, he shall be entitled to the awards described in Section
6(b) below.
(b) Stock Option Awards. The Company shall grant to the Executive non-
qualified stock options under the 1992 Plan, substantially in the form attached
hereto as Exhibit A, as follows: an option to purchase 400,000 shares of Stock
as of the Effective Date and an option to purchase a minimum of 250,000 shares
of Stock no later than May 1, 1996 (the "Options"). Subject to the terms of this
Agreement and the provisions of the 1992 Plan, the Options shall (a) have a per
share option price equal to the fair market value of the Stock as of the date of
grant, (b) have a term of ten years and two days and (c) unless previously
terminated, become exercisable on the third anniversary of the date of grant.
Notwithstanding anything to the contrary, (i) if the Executive's employment
terminates pursuant to Section 10(c) or 10(f) below prior to the third
anniversary of the date of grant, or pursuant to Section 10(c) after the third
anniversary of the date of grant, the Options shall terminate, (ii) if the
Executive's employment terminates pursuant to Section 10(d) below, the Options,
to the extent not otherwise exercisable, shall become fully exercisable and
remain exercisable for the lesser of three years or the remainder of their
respective terms; provided, however, that the ability of the Options to be
exercised for up to three years following such termination shall be subject to
the approval by Company shareholders at the 1996 annual meeting of an amendment
to the 1992 Plan to such effect (which approval shall be sought by the Company
only if necessary for grants of options under the 1992 Plan to comply with the
requirements of Rule 16b-3 under the Securities Exchange Act of 1934, as
amended, and in the absence of the need to obtain such approval, this proviso
shall be of no force and effect), and (iii) if the Executive violates the
provisions of Section 11 hereof, the Options shall terminate.
7. Employee Benefit Programs.
During his Employment with the Company, the Executive shall be
entitled to participate in all employee pension and welfare benefit plans and
programs made available to the Company's senior-level executives or to its
employees generally, as such plans or programs may be in effect from time to
time, including, without limitation, pension, profit sharing, savings and other
retirement plans or programs, medical, dental, hospitalization, short-term and
long-term disability and life insurance plans, accidental death and
dismemberment protection, travel accident insurance, and any other pension or
retirement plans or programs and any other employee welfare benefit plans or
programs that may be sponsored by the Company from time to time, including any
plans that supplement the above-listed types of plans or programs, whether
funded or unfunded. The Executive shall be entitled to post-retirement welfare
benefits, if any, as are made available by the Company to its senior-level
executives, provided that for this purpose the Executive's period of employment
shall, in accordance with the last sentence of this Section 7, be deemed to be
the period necessary to obtain the maximum level of such benefits. The Executive
shall, in all events, be entitled during his employment with the Company to term
life insurance which, together with other life insurance under the Company's
term life insurance program, shall provide face amount coverage of no less than
two times Base Salary, provided that the amount of such coverage in excess of
$1,000,000 may be subject to a physical examination. To the extent there is a
period of employment required as a condition for full benefit coverage under any
employee welfare benefit program, the Executive shall be deemed to have met such
requirement.
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8. Supplemental Pension.
The Executive shall be entitled to participate in any nonqualified
supplemental retirement plan the Company may subsequently adopt. For the
purposes of determining his eligibility to participate in such subsequently
adopted plan, the Executive shall be deemed to have been employed for five years
prior to the Effective Date, to have received the Base Salary for each such year
and to have participated in any Company plan, participation in which shall be a
condition to eligibility under such subsequently adopted nonqualified
supplemental retirement plan. If the Executive is eligible to participate in
such subsequently adopted plan, he shall be deemed credited with five years of
service under such plan as of the commencement of his employment in addition to
credited service for his actual employment with the Company.
9. Reimbursement of Business and Other Expenses; Perquisites; Vacations;
Loans.
(a) The Executive is authorized to incur reasonable expenses in
carrying out his duties and responsibilities under this Agreement and the
Company shall promptly reimburse him for all business expenses incurred in
connection with carrying out the business of the Company, subject to
documentation in accordance with the Company's policy. The Company shall pay
all reasonable legal expenses incurred in connection with the preparation of the
Executive's employment arrangements with the Company.
(b) During his employment with the Company, the Executive shall be
entitled to participate in any of the Company's executive fringe benefits,
including the Company's relocation policy, in accordance with the terms and
conditions of such arrangements as are in effect from time to time for the
Company's senior-level executives.
(c) The Executive shall be entitled to four weeks paid vacation per
year.
(d) Provided the Executive shall have reported to work at the
Company's headquarters and, if requested by the Company, affirmed in writing
that he has ceased employment with his current employer, the Company shall,
within five business days following the Effective Date, make an interest-free
loan to the Executive in the aggregate principal amount of $1,000,000. Such loan
shall have a maturity date of January 31, 2003, provided, that so long as the
Executive remains employed by the Company, as of the end of each fiscal year
(commencing with the fiscal year ending on or about January 31, 1997), the
Company shall forgive the following amount:
i) On or about January 31, 1997: the excess of (a) $1,000,000 over (b)
the sum of (i) the Executive's Base
Salary for the fiscal year ended on or
about such date, plus (ii) the bonus
payable under Section 5 hereof in
respect of such fiscal year.
(ii) On or about each subsequent the excess of (a) $1,000,000 over (b)
January 31 (until the principal the Executive's Base Salary for the
amount of the loan has been fiscal year ended on or about such
reduced to zero): January 31.
In the event the Executive's employment terminates pursuant to Section 10(c) or
10(f) hereof, the then outstanding principal amount of the loan shall
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<PAGE>
become due and payable immediately. If the Executive's employment terminates
due to death or Disability or pursuant to Section 10(d) or 10(e) hereof, the
remaining outstanding principal amount of the loan shall be forgiven.
10. Termination of Employment.
(a) Termination Due to Death. In the event the Executive's
employment is terminated due to his death, his estate or his beneficiaries as
the case may be, shall be entitled to:
(i) Base Salary through the date of death;
(ii) a pro rata annual incentive award for the year in which
the Executive's death occurs based on the on-plan target bonus for such year,
payable in a single installment promptly after his death;
(iii) any restricted stock award outstanding at the time of his
death, subject to any forfeiture provisions set forth in the relevant restricted
stock agreement;
(iv) the balance of any incentive awards earned (but not yet
paid);
(v) the right to exercise any stock option to the extent and
for the period set forth herein or in the relevant option agreement;
(vi) any amounts earned, accrued or owing to the Executive but
not yet paid under Section 7 or 9 above; and
(vii) other or additional benefits in accordance with applicable
plans and programs of the Company,
(b) Termination Due to Disability. In the event the Executive's
employment is terminated due to his Disability, he shall be entitled in such
case to the following:
(i) the benefits due him under the then current disability
program of the Company;
(ii) annual incentive award for the year in which termination
due to Disability occurs based on the on-plan target bonus for such year,
payable in a single installment promptly following termination due to
Disability;
(iii) any restricted stock award outstanding at the time of his
termination due to Disability, subject to any forfeiture provisions set forth in
the relevant restricted stock agreement;
(iv) the balance of any incentive awards earned (but not yet
paid);
(v) the right to exercise any stock option to the extent and
for the period set forth herein or in the relevant option agreement;
(vi) any amounts earned, accrued or owing to the Executive but
not yet paid under Section 7 or 9 above;
(vii) continued participation to the extent provided in medical,
dental, hospitalization and life insurance coverage and in all other employee
welfare plans and programs in which he was participating on
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the date of termination of his employment due to Disability until he attains age
65; and
(viii) other or additional benefits in accordance with
applicable plans and programs of the Company.
In no event shall a termination of the Executive's employment for
Disability occur unless the Party terminating his employment gives written
notice to the other Party in accordance with Section 23 below.
(c) Termination by the Company for Cause.
(i) A termination for Cause shall not take effect unless the
provisions of this paragraph (i) are complied with. The Executive shall be
given written notice by the CEO of the intention to terminate him for Cause,
such notice (A) to state in detail the particular act or acts or failure or
failures to act that constitute the grounds on which the proposed termination
for Cause is based and (B) to be given within six months of the CEO learning of
such act or acts or failure or failures to act. The Executive shall have 10
days after the date that such written notice has been given to the Executive in
which to cure such conduct, to the extent such cure is possible. If he fails to
cure such conduct, the Executive shall then be entitled to written notice by the
CEO confirming that, in his judgment, grounds for Cause on the basis of the
original notice exist, at which time he shall thereupon be terminated for Cause.
(ii) In the event the Company terminates the Executive's
employment for Cause, he shall be entitled to:
(A) Base Salary through the date of the termination of his
employment for cause;
(B) any incentive awards earned (but not yet paid);
(C) the right to exercise any stock option to the extent
and for the period set forth herein or in the relevant option agreement;
(D) any amounts earned, accrued or owing to the Executive
but not yet paid under Section 7 or 9 above; and
(E) other or additional benefits in accordance with
applicable plans or programs of the Company.
(d) Termination Without Cause or Constructive Termination Without
Cause. In the event the Executive's employment is terminated without Cause,
other than due to Disability or death, or in the event there is a Constructive
Termination Without Cause, the Executive shall be entitled to:
(i) Base Salary through the date of termination of the
Executive's employment;
(ii) Base Salary, at the annualized rate in effect on the date
of termination of the Executive's employment (or in the event a reduction in
Base Salary is the basis for a Constructive Termination without Cause, then the
Base Salary in effect immediately prior to such reduction), for a period of
twenty-four (24) months; provided that the Executive and the Company may agree
that the Company shall pay him the present value of such salary continuation
payments in a lump sum (using as the discount rate the Applicable Federal Rate
for short-term Treasury obligations as published by
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the Internal Revenue Service for the month in which such termination occurs);
(iii) pro rata annual incentive award for the year in which
termination occurs based on the Executive's on-plan target bonus for such year,
payable in a single installment promptly following termination;
(iv) an amount equal to one-twelfth (1/12) of the Executive's on-plan
target bonus for the year in which termination occurs, payable monthly for a
period of twenty-four (24) months; provided that the Executive and the Company
may agree that the Company shall pay him the present value of the aggregate
payments in a lump sum (using the discount referred to in Section 10(d)(ii)
above);
(v) any restricted stock award outstanding at the time of such
termination of employment, subject to any forfeiture provisions set forth in the
relevant restricted stock agreement;
(vi) the balance of any incentive awards earned (but not yet paid);
(vii) the right to be issued the Options under Section 6(b) and the
right to exercise any stock option to the extent and for the period set forth
herein or in the relevant option agreement;
(viii) any amounts earned, accrued or owing to the Executive but not
yet paid under Section 7 or 9 above;
(ix) continued participation in all medical, dental, hospitalization
and life insurance coverage and in other employee welfare benefit plans or
programs in which he was participating on the date of the termination of his
employment until the end of the period during which he is receiving salary
continuation payments (or in respect of which a lump-sum severance payment is
made); provided that the Company's obligations under this clause (ix) shall be
reduced to the extent that the Executive receives similar coverage and benefits
under the plans and programs of a subsequent employer; and provided further that
(x) if the Executive is precluded from continuing his participation in any
employee benefit plan or program as provided in this clause (ix) of this Section
10(d), he shall be provided with the after-tax economic equivalent of the
benefits provided under the plan or program in which he is unable to participate
for the period specified in this clause (ix) of this Section 10(d), (y) the
economic equivalent of any benefit foregone shall be deemed to be the lowest
cost that would be incurred by the Executive in obtaining such benefit himself
on an individual basis, and (z) payment of such after-tax economic equivalent
shall be made quarterly in advance; and
(x) other or additional benefits in accordance with
applicable plans and programs of the Company.
(e) Termination of Employment Following a Change in Control. If,
within two years following a Change in Control, the Executive's employment is
terminated without Cause or there is a Constructive Termination Without Cause,
the Executive shall be entitled to the payments and benefits provided in Section
10(d) above, provided that the salary and bonus continuation payments under
Section 10(d)(ii) and 10(d)(iv) shall be paid in a lump sum without any
discount. Also, immediately following a Change in Control, all accrued or earned
amounts that are not otherwise vested, as well as all options, restricted stock
and other equity-based awards in which he is not yet vested, shall become fully
vested.
8
<PAGE>
(f) Voluntary Termination. In the event of a termination of
employment by the Executive on his own initiative, other than a termination due
to death or Disability or a Constructive Termination Without Cause, the
Executive shall have the same entitlements as provided in Section 10(c)(ii)
above for a termination for Cause. A voluntary termination under this Section
10(f) shall be effective upon 30 days prior written notice to the Company and
shall not be deemed a breach of this Agreement.
(g) No Mitigation; No Offset. In the event of any termination of
employment under this Section 10, the Executive shall be under no obligation to
seek other employment and there shall be no offset against amounts due the
Executive under this Agreement on account of (i) any remuneration attributable
to any subsequent employment that he may obtain, except as specifically provided
in this Section 10 or (ii) any claims the Company may have against the
Executive; provided, however, that, the Executive acknowledges that, in
connection with a termination of employment pursuant to Section 10(c) or 10(f)
hereof, the Company may deduct from any amounts owed to the Executive all or any
portion of the then principal amount of the loan referred to in Section 9(d)
hereof which the Executive is then obligated to repay.
(h) Nature of Payments. Any amounts due under this Section 10 are in
the nature of severance payments considered to be reasonable by the Company and
are not in the nature of a penalty.
(i) Assignment. The severance payments hereunder may not be
transferred, assigned or encumbered in any manner, either voluntarily or
involuntarily.
(j) Exclusivity of Severance Payments. Upon termination of the
Executive's employment, he shall not be entitled to any severance payments or
severance benefits from the Company or any payments by the Company on account of
any claim by him of wrongful termination, including claims under any federal,
state or local human and civil rights or labor laws, other than the payments and
benefits provided hereunder, except for any benefits which may be due the
Executive in normal course under any employee benefit plan of the Company which
provides benefits after termination of employment.
(k) Non-competition. The Executive agrees that any right to receive
severance payments hereunder will cease if the Executive breaches the provisions
of Section 11 below.
(l) Termination at Will. Notwithstanding anything herein to the
contrary, the Executive's employment with the Company is terminable at will with
or without Cause; provided, however, that a termination of the Executive's
employment shall be governed in accordance with the terms hereof.
11. Non-Compete.
(a) By and in consideration of the substantial compensation and
benefits to be provided by the Company hereunder, and further in consideration
of the Executive's exposure to the proprietary information of the Company, the
Executive agrees that he shall not, during his employment with the Company and
for a period equal to the period during which he is receiving salary
continuation payments (or in respect of which a lump-sum salary continuation
payment is made), directly or indirectly own, manage, operate, join, control, be
employed by, or participate in the ownership, management, operation or control
of or be connected in any manner, including but not limited to holding the
positions of officer, director, shareholder, consultant, independent contractor,
employee, partner, or investor, with any
9
<PAGE>
Competing Enterprise; provided, however, that the Executive may invest in
stocks, bonds, or other securities of any corporation or other entity (but
without participating in the business thereof) if such stocks, bonds, or other
securities are listed for trading on a national securities exchange or NASDAQ
and the Executive's investment does not exceed 1% of the issued and outstanding
shares of capital stock, or in the case of bonds or other securities, 1% of the
aggregate principal amount thereof issued and outstanding. "Competing
Enterprise" shall mean any person, corporation, partnership or other entity
which owns and operates retail stores selling general merchandise and/or food if
at least 10 of such stores have an area of 50,000 or more square feet and at
least 10 of such stores with 50,000 or more square feet are within 25 miles of a
Kmart retail store.
(b) The Executive agrees that any breach of the terms of this Section
would result in irreparable injury and damage to the Company for which the
Company would have no adequate remedy at law; the Executive therefore also
agrees that in the event of said breach or any reasonable threat of breach, the
Company shall be entitled to an immediate injunction and restraining order to
prevent such breach and/or threatened breach and/or continued breach by the
Executive and/or any and all persons and/or entities acting for and/or with the
Executive. The terms of this paragraph shall not prevent the Company from
pursuing any other available remedies for any breach or threatened breach
hereof, including but not limited to the recovery of damages. The Executive and
the Company further agree that the provisions of the covenant not to compete are
reasonable. Should a court or arbitrator determine, however, that any provision
of the covenant not to compete is unreasonable, either in period of time,
geographical area, or otherwise, the parties hereto agree that the covenant
shall be interpreted and enforced to the maximum extent which such court or
arbitrator deems reasonable.
(c) The provisions of this Section shall survive any termination of
this Agreement, and the existence of any claim or cause of action by the
Executive against the Company, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the Company of
the covenants and agreements of this Section.
12. Indemnification.
(a) The Company agrees that if the Executive is made a party, or is
threatened to be made a party, to any action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "Proceeding"), by reason of the
fact that he is or was a director, officer or employee of the Company or is or
was serving at the request of the Company as a director, officer, member,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
whether or not the basis of such Proceeding is the Executive's alleged action in
an official capacity while serving as a director, officer, member, employee or
agent, the Executive shall be indemnified and held harmless by the Company to
the fullest extent legally permitted or authorized by the Company's certificate
of incorporation or bylaws or resolutions of the Company's Board of Directors
or, if greater, by the laws of the State of Michigan against all cost, expense,
liability and loss (including, without limitation, attorney's fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by the Executive in connection
therewith, and such indemnification shall continue as to the Executive even if
he has ceased to be a director, officer, member, employee or agent of the
Company or other entity and shall inure to the benefit of the Executive's heirs,
executors and administrators. The Company shall advance to the Executive all
reasonable costs and expenses incurred by him in connection with a Proceeding
within 20 days after receipt by the Company of
10
<PAGE>
a written request for such advance. Such request shall include an undertaking
by the Executive to repay the amount of such advance if it shall ultimately be
determined that he is not entitled to be indemnified against such costs and
expenses.
(b) Neither the failure of the Company (including its board of
directors, independent legal counsel or stockholders) to have made a
determination prior to the commencement of any Proceeding concerning payment of
amounts claimed by the Executive under Section 11(a) above that indemnification
of the Executive is proper because he has met the applicable standard of
conduct, nor a determination by the Company (including its board of directors,
independent legal counsel or stockholders) that the Executive has not met such
applicable standard of conduct, shall create a presumption that the Executive
has not met the applicable standard of conduct.
(c) The Company agrees to continue and maintain a directors and
officers' liability insurance policy covering the Executive to the extent the
Company provides such coverage for its other executive officers.
13. Effect of Agreement on Other Benefits.
Except as specifically provided in this Agreement, the existence of
this Agreement shall not prohibit or restrict the Executive's entitlement to
full participation in the employee benefit and other plans or programs in which
senior executives of the Company are eligible to participate.
14. Assignability; Binding Nature.
This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors, heirs (in the case of the Executive)
and assigns. No rights or obligations of the Company under this Agreement may
be assigned or transferred by the Company except that such rights or obligations
may be assigned or transferred pursuant to a merger or consolidation in which
the Company is not the continuing entity, or the sale or liquidation of all or
substantially all of the assets of the Company, provided that the assignee or
transferee is the successor to all or substantially all of the assets of the
Company and such assignee or transferee assumes the liabilities, obligations and
duties of the Company, as contained in this Agreement, either contractually or
as a matter of law. The Company further agrees that, in the event of a sale of
assets or liquidation as described in the preceding sentence, it shall take
whatever action it legally can in order to cause such assignee or transferee to
expressly assume the liabilities, obligations and duties of the Company
hereunder. No rights or obligations of the Executive under this Agreement may
be assigned or transferred by the Executive other than his rights to
compensation and benefits, which may be transferred only by will or operation of
law, except as provided in Section 20 below.
15. Representation.
The Company represents and warrants that it is fully authorized and
empowered by action of the Board to enter into this Agreement and that the
performance of its obligations under this Agreement will not violate any
agreement between it and any other person, firm or organization.
16. Entire Agreement.
This Agreement contains the entire understanding and agreement between
the Parties concerning the subject matter hereof and supersedes all prior
agreements, understandings, discussions, negotiations
11
<PAGE>
and undertakings, whether written or oral, between the Parties with respect
thereto.
17. Amendment or Waiver.
No provision in this Agreement may be amended unless such amendment is
agreed to in writing and signed by the Executive and an authorized officer of
the Company. No waiver by either Party of any breach by the other Party of any
condition or provision contained in this Agreement to be performed by such other
Party shall be deemed a waiver of a similar or dissimilar condition or provision
at the same or any prior or subsequent time. Any waiver must be in writing and
signed by the Executive or an authorized officer of the Company, as the case may
be.
18. Severability.
In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, in whole or in part,
the remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect to the fullest extent permitted by law.
19. Survivorship.
The respective rights and obligations of the Parties hereunder shall
survive any termination of the Executive's employment to the extent necessary to
the intended preservation of such rights and obligations.
20. Beneficiaries/References.
The Executive shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following the Executive's death by
giving the Company written notice thereof. In the event of the Executive's death
or a judicial determination of his incompetence, reference in this Agreement to
the Executive shall be deemed, where appropriate, to refer to his beneficiary,
estate or other legal representative.
21. Governing Law/Jurisdiction.
This Agreement shall be governed by and construed and interpreted in
accordance with the laws of Michigan without reference to principles of conflict
of laws.
22. Resolution of Disputes.
Any disputes arising under or in connection with this Agreement shall,
at the election of the Executive or the Company, be resolved by binding
arbitration, to be held in Detroit, Michigan in accordance with the rules and
procedures of the American Arbitration Association. Judgment upon the award
rendered by the arbitrator(s) may be entered in any court having jurisdiction
thereof. One-half of all costs incurred by the Executive in connection with such
arbitration or litigation, including, without limitation, reasonable attorneys'
fees, shall be borne by the Company.
23. Notices.
Any notice given to a Party shall be in writing and shall be deemed to
have been given when delivered personally or sent by certified
12
<PAGE>
or registered mail, postage prepaid, return receipt requested, duly addressed to
the Party concerned at the address indicated below or to such changed address as
such Party may subsequently give such notice of:
If to the Company: Kmart Corporation
3100 West Big Beaver Road
Troy, MI 48084-3163
Attention: General Counsel
If to the Executive: Warren Flick
c/o Kmart Corporation
3100 West Big Beaver Road
Troy, MI 48084-3163
24. Withholding.
All amounts required to be paid by the Company shall be subject to
reduction in order to comply with applicable Federal, state and local tax
withholding requirements.
25. Headings.
The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
26. Counterparts.
This Agreement may be executed in two or more counterparts.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on
the date first written above.
Kmart Corporation
By: /s/ Floyd Hall
-----------------------------
/s/ Warren Flick
-----------------------------
13
<PAGE>
Exhibit 11
KMART CORPORATION AND SUBSIDIARY COMPANIES
INFORMATION ON COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
($ Millions) Fiscal Year Ended
-----------------------------------------------------------
January 31, January 25, January 26, January 27, January 29,
1996 1995* 1994* 1993* 1992*
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
I. Earnings per common and common equivalent share:
Income (loss) from continuing retail operations before
extraordinary item and the effect of accounting changes $ (490) $ 104 $ (260) $ 867 $ 752
Less: Series B and C convertible preferred shares dividend
payment (6) (9) (9) (3) -
-----------------------------------------------------------
(a) Adjusted income (loss) from continuing retail operations
before extraordinary item and the effect of accounting
changes (496) 95 (269) 864 752
(b) Discontinued operations including the effect of accounting
changes, net of income taxes - 75 (169) 74 107
(c) Gain (loss) on disposal of discontinued operations,
net of income taxes (30) 117 (521) - -
(d) Extraordinary item, net of income taxes (51) - (10) - -
(e) Effect of accounting changes, net of income taxes - - (14) - -
-----------------------------------------------------------
(f) Adjusted net income (loss) (1) (577) 287 (983) 938 859
===========================================================
Weighted average common shares outstanding 459.8 427.2 408.1 405.7 401.5
Weighted average $3.41 Depositary Shares outstanding
(each representing 1/4 share Series A conversion preferred) - 29.2 46.0 46.0 20.1
Stock Options:
Common shares assumed issued 1.6 2.2 16.1 17.2 15.5
Less: common shares assumed repurchased (1.5) (2.0) (13.5) (13.3) (12.7)
-----------------------------------------------------------
0.1 0.2 2.6 3.9 2.8
-----------------------------------------------------------
(g) Applicable common shares, as adjusted (2) 459.9 456.6 456.7 455.6 424.4
===========================================================
Earnings per common and common equivalent share:
Adjusted income (loss) from continuing retail operations
before extraordinary item and the effect of accounting
changes (a)/(g) $ (1.08) $ 0.21 $ (0.59) $ 1.90 $ 1.77
Discontinued operations including the effect of accounting
changes, net of income taxes (b)/(g) - 0.16 (0.37) 0.16 0.25
Gain (loss) on disposal of discontinued operations,
net of income taxes (c)/(g) (0.06) 0.26 (1.14) - -
Extraordinary item, net of income taxes (d)/(g) (0.11) - (0.02) - -
Effect of accounting changes, net of income taxes (e)/(g) - - (0.03) - -
-----------------------------------------------------------
Net income (loss) (f)/(g) $ (1.25) $ 0.63 $ (2.15) $ 2.06 $ 2.02
===========================================================
</TABLE>
* Prior year amounts have been restated for the effect of discontinued
operations.
(1) Adjusted net income (loss) includes an after-tax provision of $390
million or $0.85 per share for fiscal 1995 related to the adoption of
Financial Accounting Standard No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and an
after-tax provision of $723 million or $1.58 per share for fiscal 1993 for
store restructuring and other charges.
(2) Shares were restated for fiscal year 1991 to give effect to the 2 for 1
common stock split that occurred in fiscal 1991.
1
<PAGE>
Exhibit 11
KMART CORPORATION AND SUBSIDIARY COMPANIES
INFORMATION ON COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
($ Millions) Fiscal Year Ended
------------------------------------------------------------
January 31, January 25, January 26, January 27, January 29,
1996 1995* 1994* 1993* 1992*
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
II. Earnings per common and common equivalent share
assuming full dilution:
(h) Income (loss) from continuing retail operations before
extraordinary item and the effect of accounting changes $ (490) $ 104 $ (260) $ 867 $ 752
(i) Discontinued operations including the effect of accounting
changes, net of income taxes - 75 (169) 74 107
(j) Gain (loss) on disposal of discontinued operations,
net of income taxes (30) 117 (521) - -
(k) Extraordinary item, net of income taxes (51) - (10) - -
(l) Effect of accounting changes, net of income taxes - - (14) - -
-----------------------------------------------------------
(m) Adjusted net income (loss) (1) (571) 296 (974) 941 859
===========================================================
Weighted average common shares outstanding 459.8 427.2 408.1 405.7 401.5
Weighted average $3.41 Depositary Shares outstanding
(each representing 1/4 share Series A conversion preferred) - 29.2 46.0 46.0 20.1
Weighted average Series B and C convertible preferred shares
outstanding - 9.7 8.0 1.7 -
Stock Options:
Common shares assumed issued 1.6 2.2 16.6 18.1 19.2
Less: common shares assumed repurchased (1.4) (2.0) (14.5) (13.7) (14.6)
-----------------------------------------------------------
0.2 0.2 2.1 4.4 4.6
-----------------------------------------------------------
(n) Applicable common shares, as adjusted (2) 460.0 466.3 464.2 457.8 426.2
===========================================================
Earnings per common and common equivalent share:
Adjusted income (loss) from continuing retail operations before
extraordinary item and the effect of accounting changes (h)/(n) $ (1.07) $ 0.22 $(0.56) $ 1.89 $ 1.76
Discontinued operations including the effect of accounting
changes, net of income taxes (i)/(n) - 0.16 (0.37) 0.16 0.25
Gain (loss) on disposal of discontinued operations,
net of income taxes (j)/(n) (0.06) 0.25 (1.12) - -
Extraordinary item, net of income taxes (k)/(n) (0.11) - (0.02) - -
Effect of accounting changes, net of income taxes (l)/(n) - - (0.03) - -
-----------------------------------------------------------
Net income (loss) (m)/(n) $ (1.24) $ 0.63 $(2.10) $ 2.05 $ 2.01
===========================================================
(3) (3) (3) (4) (4)
</TABLE>
* Prior year amounts have been restated for the effect of discontinued
operations.
(1) Adjusted net income (loss) includes an after tax provision of $390 million
or $0.85 per share for fiscal 1995 related to the adoption of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" and an after tax provision of $723
million or $1.58 per share for fiscal 1993 for store restructuring and other
charges.
(2) Shares were restated for fiscal year 1991 to give effect to the 2 for 1
common stock split that occurred in fiscal 1991.
(3) This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15 because
it produces an anti-dilutive result.
(4) This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion
No. 15 because it results in dilution of less than 3%.
2
<PAGE>
Exhibit 12
KMART CORPORATION AND SUBSIDIARY COMPANIES
INFORMATION ON RATIO OF EARNINGS
TO FIXED CHARGES COMPUTATION
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------
($ Millions) January 31, January 25, January 26,
1996 1995* 1994*
-------------------------------------
<S> <C> <C> <C>
Net income (loss) from continuing retail operations before
extraordinary items and the effect of accounting changes $(490) $104 $(260)
Income taxes (222) 11 (150)
------------------------------------
Pretax income (loss) from continuing retail operations $(712) $115 $(410)
Equity income of unconsolidated affiliated
retail companies that exceeds distributions (14) 14 (2)
Fixed charges per below 710 757 736
Less: interest capitalized during the period (7) (17) (14)
------------------------------------
Earnings (loss) from continuing retail operations $ (23) $869 $ 310
====================================
Fixed Charges:
Interest expense 496 520 506
Rent expense - portion of operating rentals representative
of the interest factor 205 218 214
Other 9 19 16
------------------------------------
Total Fixed Charges $ 710 $757 $ 736
====================================
Ratio of income to fixed charges (1) - 1.2 -
====================================
</TABLE>
* Prior year amounts have been restated for the effect of discontinued
operations.
(1) The deficiency of earnings from continuing retail operations versus fixed
charges was $733 million for the fiscal year ended January 31, 1996 and $426
million for the fiscal year ended January 26, 1994.
1
<PAGE>
Exhibit 13
KMART CORPORATION
CONSOLIDATED
SELECTED FINANCIAL DATA
The following selected financial data for the periods indicated has been
derived from the consolidated financial statements of Kmart Corporation.
Information for all years has been restated to exclude discontinued operations
of Borders Group, Inc., OfficeMax, Inc., The Sports Authority, Inc., PACE
Membership Warehouse, Inc. and Coles Myer, Ltd. The information set forth below
should be read in conjunction with Management's Discussion and Analysis of
Results of Operations and Financial Condition and the financial statements and
notes thereto.
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------------------------
1995 (1) 1994 1993 (2) 1992 1991 1990
-------- ------- -------- ------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Sales................................................................. $ 34,389 $32,514 $ 33,295 $31,224 $29,488 $28,607
Cost of merchandise sold, including buying and occupancy costs........ 26,996 24,868 24,950 22,895 21,531 20,921
Selling, general and administrative expenses.......................... 7,554 7,376 7,477 6,926 6,723 6,561
Interest expense:
Debt, net........................................................... 220 258 302 243 215 219
Capital lease obligations and other................................. 226 235 192 185 180 175
Income (loss) from continuing retail operations before
income taxes and equity income...................................... (750) 63 (462) 1,265 1,115 998
Equity in net income of unconsolidated companies...................... 38 52 52 53 50 45
Net income (loss) from continuing retail operations................... (490) 104 (260) 867 752 673
Net income (loss)..................................................... (571) 296 (974) 941 859 756
PER SHARE DATA
Earnings (loss) per common share from continuing
retail operations................................................... $ (1.08) $ 0.21 $ (0.59) $ 1.90 $ 1.77 $ 1.68
Cash dividends declared per common share.............................. 0.36 0.96 0.96 0.92 0.88 0.86
Book value per common share........................................... 10.99 13.15 13.39 16.64 15.33 13.47
FINANCIAL DATA
Working capital....................................................... $ 5,558 $ 3,562 $ 3,793 $ 5,014 $ 4,682 $ 3,519
Total assets.......................................................... 15,397 16,642 16,433 17,742 15,182 13,303
Long-term obligations -- Debt......................................... 3,935 2,003 2,223 3,180 2,244 1,660
-- Capital leases............................... 1,629 1,777 1,720 1,669 1,608 1,579
Shareholders' equity.................................................. 5,280 6,032 6,093 7,536 6,891 5,384
Capital expenditures.................................................. 578 1,125 871 1,244 1,199 734
Depreciation and amortization......................................... 729 680 677 596 519 477
Ending market capitalization.......................................... 2,858 6,345 9,333 10,837 10,901 6,095
Weighted average shares outstanding (millions)........................ 460 457 457 456 426 400
FINANCIAL RATIOS
Return on sales --
Income (loss) from continuing retail operations before
income taxes and equity income.................................... (2.2)% 0.2% (1.4)% 4.1% 3.8% 3.5%
Net income (loss) from continuing retail operations................. (1.4)% 0.3% (0.8)% 2.8% 2.6% 2.4%
Return on beginning assets from continuing retail operations.......... (3.1)% 0.7% (1.6)% 6.4% 6.4% 5.8%
Inventory turnover.................................................... 3.4 3.2 2.8 2.7 2.8 2.8
Return on beginning shareholders' equity from continuing
retail operations................................................... (9.3)% 1.9% (4.1)% 15.0% 16.8% 15.6%
Return on beginning investment from continuing retail operations...... (1.6)% 4.1% 0.6% 11.5% 11.6% 11.4%
Working capital ratio................................................. 2.7 1.7 1.8 2.1 2.3 1.9
Debt and equivalent as a percentage of total capitalization........... 52.7% 46.1% 48.4% 42.7% 36.9% 43.1%
Ratio of income from continuing retail operations to fixed charges (3) -- 1.2 -- 3.0 3.0 2.9
</TABLE>
- ----------
(1) Results of operations for 1995 include a pretax provision of $532 million
($390 million net of tax) related to the adoption of Financial Accounting
Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of".
(2) Results of operations for 1993 include a pretax provision of $1,130 million
($723 million net of tax) for store restructuring and other charges.
(3) Fixed charges represent total interest charges, a portion of operating
rentals representative of the interest factor, and amortization of debt
discount and expense. The deficiency of income from continuing retail
operations versus fixed charges was $733 million and $426 million for 1995
and 1993, respectively.
9
<PAGE>
KMART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
General
Kmart Corporation ("the Company" or "Kmart") is one of the world's largest
mass merchandise retailers. The dominant portion of Kmart's business consists of
its domestic general merchandise group which operates a chain of 2,161 Kmart
discount stores with locations in each of the 50 United States, Puerto Rico, the
U.S. Virgin Islands and Guam, including 87 Super Kmart Centers, all in the
United States, at January 31, 1996. Internationally, the general merchandise
group has operations in Canada, the Czech and Slovak Republics (see Note 2 of
Notes to Consolidated Financial Statements) and joint ventures in Mexico and
Singapore. Kmart's remaining specialty retail operation consists of Builders
Square, Inc. ("Builders Square") which operates 167 home improvement stores.
Kmart also holds 49% equity interests in substantially all of the Meldisco
subsidiaries of Melville Corporation, which operate the footwear departments in
domestic Kmart stores. 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.
During 1995, public offerings were completed for Borders Group, Inc. ("Borders
Group") and the Company's remaining interests in OfficeMax, Inc. ("OfficeMax")
and The Sports Authority, Inc. ("The Sports Authority"). The results of these
operations have been restated as discontinued operations in the financial
statements for all years presented. Discontinued operations also include 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.
Results of Consolidated Operations
A three-year summary of sales and operating income (loss) follows:
<TABLE>
<CAPTION>
% CHANGE % CHANGE
------------------- -------------------
ALL COMPARABLE ALL COMPARABLE
(Millions U.S. $) 1995 STORES STORES (1) 1994 STORES STORES 1993
---- ------ ---------- ---- ------ ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Sales
United States............... $30,429 7.2 5.6 $28,386 5.3 1.4 $26,948
International............... 1,284 9.1 3.0(2) 1,177 8.0 4.2(2) 1,090
Builders Square............. 2,676 (9.3) (8.7) 2,951 8.5 5.9 2,719
PayLess..................... - - - - - - 2,538
------- ------- -------
Total Sales............... $34,389 5.8 4.3 $32,514 (2.3) 1.9 $33,295
======= ======= =======
Operating Income (Loss) (3)
United States............... $ 262 (48.1) $ 505 (47.7) $ 966
International............... (17) (173.9) 23 (52.1) 48
Builders Square............. (17) (160.7) 28 (53.3) 60
PayLess..................... - - - - 88
------- ------- -------
Total Operating Income.... $ 228 (59.0) $ 556 (52.2) $ 1,162
======= ======= =======
</TABLE>
(1) Comparable store sales are based on the 52 week period ended January 24,
1996.
(2) International comparable store sales change is calculated on sales in the
applicable local currency.
(3) Operating income (loss) for 1995 excludes charges of $370 million and $162
million related to the adoption of Financial Accounting Standard No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("FAS 121") regarding the accounting for
impairment of long-lived assets for Builders Square and certain
international operations, respectively. Operating income for 1993 excludes
store restructuring and other charges of $865 million, $39 million and $226
million for United States operations, international operations and Builders
Square, respectively.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION - CONTINUED
The following table highlights the store activity during 1995:
<TABLE>
<CAPTION>
1995 ACTIVITY PLANNED
END END ------------------------ END
1993 1994 OPENED CLOSED END 1996
---- ---- ------ ------ --- -------
<S> <C> <C> <C> <C> <C> <C>
Kmart
United States............................................ 2,323 2,316 59 (214) 2,161 2,142
Canada................................................... 127 128 2 (3) 127 115
Czech and Slovak Republics................................ 13 13 - - 13 -
Mexico.................................................... - 2 2 - 4 4
Singapore................................................. - 2 1 - 3 3
Other..................................................... 23 20 - (18) 2 -
----- ------ -- ---- ----- -----
Total General Merchandise.............................. 2,486 2,481 64 (235) 2,310 2,264
----- ------ -- ---- ----- -----
Builders Square........................................... 177 166 16 (15) 167 169
----- ------ -- ---- ----- -----
Total Stores.............................................. 2,663 2,647 80 (250) 2,477 2,433
===== ====== == ==== ===== =====
General Merchandise Selling Square Feet (Millions)........ 168 175 169
===== ====== =====
General Merchandise Store Sales per Selling Square Foot... $179 $179 $192
===== ====== =====
General Merchandise Capital Expenditures.................. $793 $1,021 $540
===== ====== =====
</TABLE>
Fiscal 1995 Compared to Fiscal 1994
Sales
Consolidated sales increased 5.8% during 1995 driven by comparable store sales
growth of 4.3% and the opening of 80 new stores during the past year, partially
offset by the closing of 250 stores primarily during the first and third
quarters of the year. Comparable store sales increases are attributed to
continued maturation of domestic and international stores opened during and
prior to 1994, increased levels of promotional activity and related customer
traffic, improved in-stock positions and a larger average transaction size.
Total sales and comparable store sales declines at Builders Square reflect
increased competition in its major markets, generally weak sales in its industry
segment and deflation in lumber prices.
Cost of Merchandise Sold, Including Buying and Occupancy Costs
Cost of merchandise sold, including buying and occupancy costs, as a
percentage of sales, was 78.5% in 1995 as compared with 76.5% in 1994. Cost of
merchandise sold was significantly affected by the aggressive clearance of
discontinued inventory at stores closed during the year. The increase also
reflects a mix of both apparel and hardline merchandise more heavily weighted
toward promotional items and lower-margined merchandise. International,
particularly Canada, and Builders Square costs of merchandise sold, as a
percentage of sales, were significantly affected by competitive pressures.
While continued pursuit of sales volumes could potentially cause some erosion
of gross margin rates, Kmart intends to offset this margin pressure through a
reduction in the level of clearance items and an improved balance between
promotional and non-promotional sales achieved through new advertising
initiatives and a more customer pleasing merchandise assortment.
Substantially all of Kmart's domestic inventories are measured using the last-
in, first-out (LIFO) method of inventory valuation. A reduction in inventory
levels, together with deflation in internal price indices, contributed to pretax
LIFO credits of $36 million and $57 million in 1995 and 1994, respectively.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION - CONTINUED
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses, including advertising,
were 22.0% of sales in 1995 as compared to 22.7% in 1994. This decrease relative
to sales was reflective of continuing cost cutting efforts, leveraging of fixed
costs over a higher sales base and a number of one-time charges taken in the
fourth quarter of 1994. SG&A expense dollars are higher than 1994 levels due
primarily to the opening of 20 additional Super Kmart Centers during 1995, the
full year expenses related to 48 Super Kmart Centers opened in 1994 and
increased levels of advertising. Kmart continues to aggressively pursue
opportunities to reduce its overall operating cost structure.
Other Expenses and Other Income
Asset impairment charges. Kmart adopted Financial Accounting Standard No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("FAS 121") in the fourth quarter of 1995. This statement
requires companies to record impairments of long-lived assets, certain
identifiable intangibles, and associated goodwill on an exception basis, when
there is evidence that events or changes in circumstances have made recovery of
an asset's carrying value unlikely. In conducting its review, management
considered, among other things, its current and expected operating cash flows
together with a judgment as to the fair value the Company could receive upon
sale of its investment. Based on this review, Kmart recorded a $532 million
pretax charge, $390 million after tax, relating to Builders Square and certain
international operations.
Gain on pension curtailment. Kmart recorded a gain on pension curtailment of
$124 million during the first quarter of 1995. This gain resulted from the
decision to replace the existing defined benefit pension plans with a profit
sharing program under the Retirement Savings Plan. Effective January 31, 1996,
the pension plans were frozen and associates no longer earn additional benefits
under the plans. The curtailment gain is attributable to the change in net
liabilities resulting from the decision to freeze the pension plans. The new
profit sharing program, effective February 1, 1995, requires a minimum yearly
contribution of $32 million.
Net interest expense on debt during 1995 was $220 million, down 14.7% from
$258 million in 1994. Net interest expense consisted of $270 million of expense
and $50 million of income in 1995 and $285 million of expense and $27 million of
income in 1994. The interest income increase was due primarily to $17 million of
interest income resulting from a favorable Internal Revenue Service litigation
settlement. The decrease in interest expense was due primarily to the scheduled
retirement of $150 million of 12-1/8% notes and lower average short-term
borrowings due to the application of proceeds from the disposal of discontinued
operations. This decrease was partially offset by higher average interest rates
on short-term borrowings. Kmart's weighted average interest rate on total debt
was 7.8% in 1995 and 7.0% in 1994. Weighted average interest rates for short-
term borrowings were 6.4% in 1995 and 4.6% in 1994. Interest rates were higher
due to market conditions and lower credit ratings. Capital lease obligations and
other interest expense was down slightly in 1995 due to capital lease
expirations and terminations.
Income tax provision (credit) was a $222 million credit with an effective tax
rate of 31.2% in 1995 as compared to an $11 million provision with an effective
tax rate of 9.6% in 1994. Effective tax rates in each year were favorably
impacted by tax credits and equity income relative to income levels. The
effective tax rate for 1995 was negatively affected by the provision of a
valuation allowance associated with the tax benefits recorded on the
international portion of the asset impairment charge. Due primarily to losses in
1993 and 1995, Kmart recognized net tax benefits of approximately $255 million
consisting of refundable taxes and anticipated future tax benefits. Kmart
expects to realize a portion of these tax benefits during 1996 and intends to
continue to evaluate realizability of its deferred tax assets through analysis
of the need for any valuation allowance in relation to actual operating
performance, executed or proposed tax strategies and other changes in facts or
circumstances. See Note 12 of Notes to Consolidated Financial Statements.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION - CONTINUED
Discontinued operations during 1995 resulted in a $30 million loss from
disposal and included the sale of the Borders Group and remaining equity
interests in OfficeMax and The Sports Authority. Discontinued operations during
1994 resulted in income of $75 million from operations and included the Borders
Group, OfficeMax, The Sports Authority and Coles Myer. The gain on the disposal
of discontinued operations of $117 million in 1994 included a $101 million after
tax gain resulting from the Initial Public Offerings (IPO's) of shares in
OfficeMax and The Sports Authority, a $48 million after tax gain realized from
the sale of Coles Myer, partially offset by an after tax charge of $32 million
for sublease exposure related to lease guarantees on properties sublet to
Furr's/Bishop cafeteria chains. See Note 3 of Notes to Consolidated Financial
Statements for additional information.
Extraordinary item, net of income taxes. Kmart entered into agreements whereby
holders of approximately $550 million of certain real estate related debt agreed
to eliminate put features which would have required Kmart to purchase the debt
from the holders if Kmart's long-term debt rating was lowered to non-investment
grade or the lowest level of investment grade rating in certain cases. As a
result, Kmart recorded an extraordinary noncash charge of $51 million, net of
income taxes, primarily relating to make-whole premiums payable under such
agreements. See discussion of Liquidity and Financial Condition for additional
information.
As a result of the combination of the foregoing factors, the net loss for 1995
was $571 million, or 1.7% of sales, as compared to net income for 1994 of $296
million, or 0.9% of sales. Excluding the asset impairment charges and the
extraordinary item, the net loss for 1995 would have been $130 million, or 0.4%
of sales.
FISCAL 1994 COMPARED TO FISCAL 1993
Sales
Consolidated sales decreased 2.3% during 1994 driven by the divestiture of
PayLess which was only partially offset by comparable store sales growth of 1.9%
and an increase in overall selling square footage due to the addition of larger-
format stores and Super Kmart Centers. Comparable store sales were adversely
affected by competition, resulting in lower selling prices, weak sales of
apparel merchandise and, particularly during the first part of the year,
inventory mix adjustments and reductions made in late 1993 and early 1994, which
resulted in lower customer traffic. International and Builders Square sales
increases were attributable to the performance of new and remodeled stores.
Cost of Merchandise Sold, Including Buying and Occupancy Costs
Cost of merchandise sold, including buying and occupancy costs, as a
percentage of sales, was 76.5% in 1994 as compared with 74.9% in 1993. This
increase of 1.6% of sales in 1994 reflected 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. Additionally, a more aggressive markdown policy on discontinued and
seasonal merchandise implemented in the fourth quarter of 1994 reduced gross
margins by $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. International, particularly Canada, and
Builders Square costs of merchandise sold, as a percentage of sales, were
affected by competitive pressures.
Substantially all of Kmart's domestic inventories are measured using the LIFO
method of inventory valuation. The deflation impact in certain internal price
indices contributed to pretax LIFO credits of $57 million and $49 million in
1994 and 1993, respectively.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION - CONTINUED
Selling, General and Administrative Expenses
SG&A expenses, including advertising, were 22.7% of sales in 1994 as compared
to 22.5% in 1993. The 1994 increase relative to sales reflected the small rise
in comparable store sales, professional services for the strategic review of
Kmart's operations and processes and certain charges taken in the fourth quarter
of 1994. These charges, totaling $61 million, included a provision for the
closings of regional offices and the Kmart Fashions division headquarters, the
cancellation of certain real estate projects that did not meet new, more
stringent return on investment requirements and the sale of corporate aircraft.
SG&A expenses were also negatively affected by start-up operations in Mexico and
Singapore and costs associated with the opening and expansion of certain
Builders Square stores.
Other Expenses and Other Income
Net interest expense on debt during 1994 was $258 million, down 14.6% from
$302 million in 1993. Net interest expense consisted of $285 million of expense
and $27 million of income in 1994 and $314 million of expense and $12 million of
income in 1993. The decrease in net interest expense was due primarily to lower
aggregate short-term borrowings, a result of applying the proceeds from the
IPO's of shares in 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.
Kmart's weighted average interest rate on total debt was 7.0% in 1994 and 6.7%
in 1993. Weighted average interest rates for short-term borrowings were 4.6% in
1994 and 3.2% in 1993. Capital lease obligations and other interest expense
increased in 1994 primarily as a result of $40 million in interest expense
related to the discounting of closed store lease obligations included in the
1993 store restructuring reserve.
Income tax provision (credit) was an $11 million provision with an effective
tax rate of 9.6% in 1994 as compared to a credit of $150 million with an
effective tax rate of 36.6% in 1993. Effective tax rates in each year were
favorably impacted by tax credits and equity income relative to income levels.
Changes in state tax rates also impacted the overall effective tax rates. See
Note 12 of Notes to Consolidated Financial Statements.
Discontinued operations during 1994 resulted in income of $75 million from
operations as compared to a loss of $169 million from operations in 1993.
Discontinued operations included the Borders Group, OfficeMax, The Sports
Authority, Coles Myer and PACE. The $169 million after tax loss in 1993 was the
result of significant net operating losses of the Borders Group and PACE which
more than offset the net operating income of OfficeMax and The Sports Authority
and the equity in net income of Coles Myer.
The gain on the disposal of discontinued operations of $117 million in 1994
included a $101 million after tax gain resulting from the IPO's of shares in
OfficeMax and The Sports Authority, a $48 million after tax gain realized from
the sale of Coles Myer, partially offset by an after tax charge of $32 million
for sublease exposure related to lease guarantees on properties sublet to
Furr's/Bishop cafeteria chains. Kmart sold these cafeteria chains 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. See Note
3 of Notes to Consolidated Financial Statements for additional information.
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, was reported as an extraordinary item.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION - CONTINUED
Effect of accounting changes, net of income taxes. Effective in the first
quarter of 1993, Kmart adopted Financial Accounting Standard No. 109 "Accounting
for Income Taxes" ("FAS 109"). FAS 109 is an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in a company's
financial statements or tax returns. In estimating future tax consequences, FAS
109 generally considers all expected future events other than enactment of
changes in the tax law or rates. The adoption of FAS 109 resulted in the
recording of a one-time credit, as the cumulative effect of an accounting
change, of $64 million in the first quarter of 1993.
Kmart adopted Financial Accounting Standard No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("FAS 106") at the beginning of
1993. This statement requires Kmart to accrue for future postretirement medical
benefits. In prior years, these claims were expensed when paid. As a result of
adopting FAS 106, Kmart recorded an after tax charge of $78 million, as the
cumulative effect of an accounting change, in 1993.
Store restructuring and other charges. In January 1994, the Kmart Board of
Directors approved a restructuring plan involving domestic and Canadian Kmart
stores, Builders Square and the Walden division of the Borders Group. As a
result, in the fourth quarter of 1993, Kmart recorded a pretax charge of $1,348
million, $862 million after tax. The portion of the charge associated with the
Borders Group, $218 million pretax and $139 million after tax, has subsequently
been restated as discontinued operations. The remaining restructuring provision
included anticipated costs of $1,130 million associated with Kmart stores which
were to be closed and relocated, enlarged or refurbished in the U.S. and Canada
and relocation of certain Builders Square stores. The 1993 restructuring
provision also included $20 million to increase the reserve for lease
obligations for stores closed as part of Kmart's 1989 restructuring plan. Other
charges included the estimated costs of $76 million for re-engineering programs
(principally severance) and other non-recurring charges and an accrual of $12
million for a non-routine legal judgment resulting from the insolvency of an
insurer.
The 1993 restructuring plan assumed closure of 503 additional domestic stores
and expansion or refurbishment of the remaining 500 unmodernized domestic
stores, as well as, specific plans for the modernization of the remaining
unmodernized Canadian discount stores and conversion of virtually all of the
existing Builders Square stores to the new BSQ II format by the end of 1997. The
following table outlines the original 1993 restructuring plan for domestic Kmart
stores and planned and completed projects by year:
<TABLE>
<CAPTION>
1993 PLANNED PROJECTS BY YEAR COMPLETED PROJECTS BY YEAR
RESTRUCTURING ------------------------- --------------------------
PLAN 1994 1995 1996 1997 TOTAL 1994 1995
------------- ---- ---- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Closings and Relocations.. 503 100 150 175 78 334 120 214
Expansions................ 265 55 84 96 30 60 48 12
Refurbishments............ 235 35 100 100 27 21 6
----- ---
Total................... 1,003 421
===== ===
</TABLE>
Kmart closed 214 domestic Kmart stores during 1995, as compared to the
original 1993 plan of 150. The acceleration of closings is partially due to the
Company not replacing all stores closed with either a new Kmart store or Super
Kmart Center, as originally planned. The number of new stores being opened, 59
in 1995 as compared to 113 in 1994, has been reduced due in part to reductions
in capital spending resulting from lower than projected operational results. As
a result, Kmart has closed stores sooner than planned as there was no need to
keep stores open until the new store was built. During 1995, Kmart substantially
completed its restructuring plans for Builders Square and Canada. Due in part to
the change in management, Kmart is re-evaluating its store design and
merchandise assortments and has effectively canceled its expansion and
refurbishment program.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION - CONTINUED
For 1996, Kmart is planning to close approximately 50 stores, including
approximately 35 stores to be replaced with either a new Kmart store or Super
Kmart Center. The original plan called for 425 store closings through 1996 as
compared to projected actual closings of 384 through 1996. The decrease is due
in part to the new management team's evaluation of the current store base and
store design. Once management finalizes its review, Kmart intends to complete
the original plan for store closures.
The following table sets forth the consolidated 1993 restructuring provision
established in 1993 and related activity through January 31, 1996 ($ millions):
<TABLE>
<CAPTION>
ACTIVITY TO DATE
-----------------------------------
CASH NONCASH COSTS
PROVISION COSTS AND ASSET CHANGES IN RESERVE AT
RECORDED INCURRED WRITEDOWNS ESTIMATE JANUARY 31, 1996
--------- -------- ------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
1993 Restructuring Plan:
Lease obligation costs................................... $ 577 $166 $(75)(a) $(57) $429
Asset writedowns......................................... 181 - 201 49 29
Inventory disposition costs and related operating losses. 264 35 159 13 83
Re-engineering and other non-recurring charges........... 76 54 25 12 9
Non-routine legal accrual................................ 12 7 - (5) -
------ ---- ---- ---- ----
$1,110 $262 $310 $ 12 $550
====== ==== ==== ==== ====
</TABLE>
(a) Represents $35 million and $40 million for interest expense accreted
during 1995 and 1994 on discounted lease obligations.
The fiscal 1995 and 1994 activity included $127 million and $39 million,
respectively, of cash outlays for lease obligations incurred once a store is
closed, until it can be either assigned, bought-out or terminated, offset by any
sublease income. Asset writedowns of $124 million for 1995 and $77 million for
1994 represent primarily furniture and fixture and leasehold improvement
writedowns to net realizable value in the stores closed and expanded or
refurbished. The inventory disposition costs for 1995 and 1994 of $70 million
and $89 million, respectively, represent total liquidation costs for the stores
closed. Due to favorable sublease and termination experience for stores closed
to date, Kmart lowered the estimate of net lease obligation costs for domestic
and Canadian Kmart stores and Builders Square stores by $44 million and $13
million in 1995 and 1994, respectively. These favorable results have been offset
by higher than planned inventory disposition costs for Builders Square stores to
date and increased fixed asset disposition costs for domestic Kmart stores
primarily due to the acceleration of the closing of stores originally planned to
be closed in later years. As a result, Kmart increased the reserve for fixed
asset disposal writedowns by $31 million and $18 million in 1995 and 1994,
respectively. A $12 million addition to the provision was made in 1994 for the
increased fixed asset disposal writedowns net of the decrease of $5 million
relating to the non-routine legal settlement. In addition, with the decision to
suspend the expansion and refurbishment plan, the excess reserve for the
canceled projects, which relate to inventory disposition and fixed asset
writedowns, will be allocated to closing stores. Kmart continues to believe that
the Company is on track in total dollars incurred to date compared to the
original estimates made in 1993. Actual results were in line with the original
reserve in total dollars of $226 million and $39 million for Builders Square and
Canada, respectively.
Also included in the 1993 charge was $45 million, for domestic Kmart
operations, 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 $22 million
was paid in 1995. During 1995, the Company allocated an additional $12 million
to re-engineering and other non-recurring charges for the domestic and Canadian
operations due to higher than planned re-engineering costs.
Kmart has completed 1,581 domestic store modernization projects since program
inception in 1989, including 533 new Kmart stores, 87 Super Kmart Centers, 490
expansions and 471 refurbishments. In 1995,
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION - CONTINUED
average sales per store at the traditional modernized stores were approximately
24% higher than non-modernized stores, and the 67 Super Kmart Center stores open
the full year averaged in excess of $42 million in sales per store. The
remaining unmodernized store base contributed approximately $23 million, $26
million and $95 million to after tax earnings from continuing operations in
1995, 1994 and 1993, respectively.
During 1995 and 1994, Kmart closed certain stores that were previously
modernized and therefore 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.
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
closed/relocated 323 stores and expanded/refurbished 874 stores and has charged
against the reserve $435 million and $74 million relating to these store
closures/relocations and expansions/refurbishments, respectively. 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.
As a result of the combination of the foregoing factors, net income for 1994
was $296 million, or 0.9% of sales, as compared to a net loss in 1993 of $974
million or 2.9% of sales.
Liquidity and Financial Condition
Historically, Kmart's primary sources of working capital have been cash flows
from operations and borrowings through its commercial paper program. Kmart had
working capital of $5,558, $3,562 and $3,793 million at year end 1995, 1994 and
1993, respectively. Working capital ratios were 2.7:1, 1.7:1 and 1.8:1,
respectively, at the same periods. Kmart's working capital fluctuates in
relation to (i) profitability, (ii) inventory levels during the course of the
year due to seasonality, (iii) the number and timing of new store openings and
closings and (iv) the nature of Kmart's working capital borrowings.
Since the end of October 1995, primarily due to review of its long-term debt
credit rating, Kmart experienced a general tightening of credit conditions,
including the elimination of commercial paper and certain uncommitted letter of
credit facilities. As a result, Kmart has used its revolving bank credit lines
as its primary source of short-term liquidity and intends to continue to use
these lines for short-term liquidity and to fund a portion of Kmart's continuing
letter of credit requirements. As of March 7, 1996, Kmart had $1,988 million
borrowed under its credit lines. Additional borrowings in excess of repayments
will be conditioned upon the approval of the banks.
In early 1996, Kmart's long-term senior unsecured debt rating was downgraded
to non-investment grade (BB by Standard and Poor's Corporation and Ba2 by
Moody's Investors Services, Inc.). As a result of the ratings downgrade, higher
interest rates became effective on Kmart's bank debt. Prior to the downgrade,
Kmart had entered into agreements in principle (a) with a group of debt holders
to eliminate put features from approximately $550 million of certain real estate
related debt in exchange for repayment of such debt, including make-whole
premiums on certain debt, in October 1997 or such earlier date as the debt
matures or is refinanced and (b) with its bankers, to modify the terms of
certain of Kmart's credit facilities. The maturities of Kmart's seasonal bank
credit facility and certain of the bank real estate debt were extended to
February
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION - CONTINUED
1997, and the maturity of all other bank credit facilities remained at October
1997. Under the agreements, Kmart is required to maintain $400 million in
balances in its cash management system with its credit facility banks. The
current credit agreements contain certain restrictive provisions regarding the
maintenance of net worth and a fixed charge coverage ratio. At January 31, 1996,
Kmart was in compliance with all covenants under these agreements. In addition,
included in the agreements is a prohibition against declaration or payment of
dividends. Kmart recorded an extraordinary noncash charge of $51 million, net of
income taxes, in the fourth quarter of 1995 associated with these agreements,
primarily relating to make-whole premiums due upon maturity of certain of the
real estate debt. As a result of these agreements, Kmart expects incremental
interest expense during 1996 resulting from the debt rating downgrade to
approximate $60 million. Including the costs associated with the closing and
incremental interest, Kmart expects cash costs associated with the agreements to
approximate $98 million during 1996 exclusive of any such costs which may be
payable upon prepayment of any such debt.
Real estate debt in the principal amount of approximately $90 million was not
subject to the agreements described in the preceding paragraph and relates to
real estate debt of certain of the Company's former subsidiaries. Of the $90
million outstanding, subsequent to year end, $20 million was put to the Company
and repaid, along with a $3 million make-whole premium. Kmart expects to sell
and/or remarket such debt to the former subsidiaries or other third parties.
Kmart does not expect that any losses incurred by it as a result of such
repayment will exceed $15 million, which is the threshold absent a waiver for an
event of default under the agreements described in the preceding paragraph.
During the first half of 1996, Kmart expects to explore the renegotiation
and/or restructuring of its bank credit facilities to enhance its credit,
liquidity and financial flexibility and to enable Kmart, under its current
forecast, to meet its committed and other capital needs and scheduled debt
repayments throughout 1996 and later years. In that connection, Kmart also
intends to explore other alternatives, including the possible divestiture of
additional non-core assets, sale-leaseback of certain real estate and the sale
of debt or equity securities. There can be no assurance, however, as to Kmart's
ability to effect such modifications in its capital structure or as to the terms
of any such modification.
Kmart's liquidity is presently sufficient, and it remains generally current
with trade vendors, continues to receive and honor usual and customary trade
terms and remains in compliance with all bank covenants. However, should Kmart's
operating performance deteriorate or should providers of goods and services to
Kmart tighten credit terms, Kmart may need to consider alternative sources of
funds, a reduction in capital expenditures or additional restructuring of its
capital structure.
Certain of the matters discussed in the Management's Discussion and Analysis
of Results of Operations and Financial Condition, other than the historical
information, may constitute forward-looking statements and as such may involve
risks and uncertainties. In addition to the specific matters referred to herein,
important factors which may cause actual results to differ include: (i) economic
and weather conditions which affect the buying patterns of the Company's
customers, (ii) actions of the Company's competitors and the Company's ability
to respond to such actions, (iii) the continued support of the Company's
numerous providers of goods and services, (iv) the results of the Company's
efforts during the first half of 1996 to renegotiate and/or restructure its bank
credit facilities and take other steps to improve its financial flexibility and
(v) the continued success of the Company's efforts to implement its strategy to
effect a business turnaround.
Net cash provided by (used for) operations was $(104) million in 1995 and
$(96) million in 1994 compared to cash provided by operations of $777 million in
1993. The use of $(104) million in 1995 was primarily due to the loss from
operations, cash paid on lease obligations of closed stores, together with
income taxes paid in 1995, most of which will be recouped in 1996, and a
reduction in accounts payable resulting from the 53rd week of operations being
only partially offset by a reduction in inventory. The decrease in 1994 was due
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION - CONTINUED
primarily to lower net income from continuing retail operations, excluding store
restructuring and other charges, a $510 million increase in U.S. Kmart first-in,
first-out (FIFO) inventory, partially offset by a decrease in cash used for PACE
obligations and noncash items related to the sale of the equity interest in
Coles Myer.
Inventory turnover was 3.4 in 1995, as compared with 3.2 in 1994 and 2.8 in
1993, as restated for discontinued operations. The improvement in inventory
turnover in 1995 and 1994 was due to a continuing focus on inventory management,
the aggressive clearance of discontinued inventory, the continued impact of
higher turnover for the Super Kmart Center operations and an increase in sales
mix of higher volume, lower-margined consumables and commodities.
Kmart anticipates that after tax cash outflows related to store restructuring
and other charges will approximate $85 million, $70 million and $65 million in
1996, 1997 and 1998, respectively, and will result primarily from the payment of
lease obligation costs. The pretax cash outflows related to store restructuring
and other charges will approximate $125 million, $110 million, and $95 million
in 1996, 1997 and 1998, 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 31, 1996, the total remaining gross lease
obligation costs relating to the U.S. Kmart 1993 restructuring plan aggregated
approximately $1.1 billion, of which it is management's estimate, based upon
historical results, approximately $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 $110 million. Future cash outlays are based upon
management's estimate of the period of time between store closing and the
ultimate disposition of the lease obligation, the remaining charge being
substantially noncash in nature. 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 $321 million in 1995, $1,077
million in 1994 and $(155) million in 1993. Cash provided by investing in 1995
was primarily comprised of proceeds from asset sales and subsidiary public
offerings, partially offset by capital expenditures. 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 Kmart's equity
interest in Coles Myer, partially offset by capital expenditures for store
modernization. Capital expenditures for the general merchandise group, which
included new distribution centers, refurbishments, expansions and store
openings, were $540 million, $1,021 million and $793 million in 1995, 1994 and
1993, respectively. The decrease in the general merchandise group capital
expenditures in 1995 was due to a decrease in store openings as a result of
management's ongoing assessment of modernization results. The increase in the
general merchandise 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.
Approximately 20 new discount stores and 11 Super Kmart Center stores are
currently planned to be opened in 1996. U.S. Kmart capital expenditures for
owned property are expected to be approximately $350 million in 1996 as compared
with $464 million, $767 million and $727 million in 1995, 1994 and 1993,
respectively. Kmart anticipates that the cash required to fund planned 1996
capital spending will be provided primarily by operations and real estate
financing.
In February 1996, Melville Corporation announced a restructuring and possible
spinoff of its footwear businesses, including its 51% interest in its Meldisco
subsidiaries. It is not anticipated that any restructuring or spinoff of
Meldisco will have a material impact on Kmart's financial position or results of
operations. As a result of the spinoff, Kmart expects to receive up to $50
million in a one-time dividend payment during 1996.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION - CONTINUED
Net cash provided by (used for) financing was $525 million in 1995, $(1,007)
million in 1994 and $(808) million in 1993. Cash provided by financing in 1995
was primarily comprised of net proceeds from long-term debt and notes payable of
$963 million, compared to net reductions in long-term debt and notes payable of
$453 million and $284 million in 1994 and 1993, respectively. The net proceeds
in 1995 were primarily the result of higher outstanding debt due to repayment
restrictions in accordance with the modified bank agreements. 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 net reduction in 1993 was primarily due to lower short-term
borrowings as a result of lower U.S. Kmart inventory levels.
Total dividends paid during 1995 were $283 million, compared with $474 million
and $465 million in 1994 and 1993, respectively. In April 1995, the quarterly
dividend on Kmart's common stock was reduced from 24 cents per share to 12 cents
per share. In December 1995, as part of the agreements to remove put features
from certain real estate related debt, the common stock dividend was eliminated.
Dividends paid per Kmart existing common share were $0.60, $0.96 and $0.95 in
1995, 1994 and 1993, respectively. Dividends paid in 1994 and 1993 per $3.41
Depositary Share (each representing one-quarter share of Series A conversion
preferred stock) were $2.56 and $3.41, respectively. Dividends paid per Series C
convertible preferred stock share were $11.50 in 1995 and 1994, and $11.50 per
Series B convertible preferred stock share in 1993.
Total debt and equivalent as a percentage of total capitalization was 52.7% in
1995, 46.1% in 1994 and 48.4% in 1993. The increase in 1995 was due to higher
levels of notes payable outstanding as a result of repayment restrictions in
accordance with the modified bank agreements. 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, the
sale of the equity interest in Coles Myer and sale of PayLess.
20
<PAGE>
KMART CORPORATION
Management's Responsibility for Financial Statements
Management is responsible for the preparation of the Company's consolidated
financial statements and related information appearing in this annual report.
These financial statements have been prepared in conformity with generally
accepted accounting principles on a consistent basis, except for the adoption of
Financial Accounting Standard No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of", applying certain
estimates and judgments based upon currently available information and
management's view of current conditions and circumstances. On this basis, we
believe that these financial statements reasonably present the Company's
financial position and results of operations.
To fulfill our responsibility, we maintain comprehensive systems of internal
controls designed to provide reasonable assurance that assets are safeguarded
and transactions are executed in accordance with established procedures. The
concept of reasonable assurance is based upon a recognition that the cost of the
controls should not exceed the benefit derived. We believe our systems of
internal controls provide this reasonable assurance.
The Board of Directors of the Company has an Audit Committee, consisting
solely of outside directors. The duties of the Committee include keeping
informed of the financial condition of the Company and reviewing its financial
policies and procedures, its internal accounting controls and the objectivity of
its financial reporting. Both the Company's independent accountants and the
internal auditors have free access to the Audit Committee and meet with the
Committee periodically, with and without management present.
Floyd Hall
Chairman of the Board,
President and Chief Executive Officer
Martin E. Welch III
Senior Vice President
and Chief Financial Officer
21
<PAGE>
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 operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Kmart
Corporation and its subsidiaries at January 31, 1996 and January 25, 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended January 31, 1996, 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, the
Company adopted Statement of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" in fiscal 1995.
Price Waterhouse LLP
Detroit, Michigan
March 7, 1996
22
<PAGE>
KMART CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
JANUARY 31, JANUARY 25, JANUARY 26,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Sales..................................................................... $34,389 $32,514 $33,295
Licensee fees and other income............................................ 265 286 294
------- ------- -------
34,654 32,800 33,589
------- ------- -------
Cost of merchandise sold, including buying and occupancy costs............ 26,996 24,868 24,950
Selling, general and administrative expenses.............................. 7,554 7,376 7,477
Store restructuring and other charges..................................... - - 1,130
Asset impairment charges.................................................. 532 - -
Gain on pension curtailment............................................... (124) - -
Interest expense:
Debt, net............................................................... 220 258 302
Capital lease obligations and other..................................... 226 235 192
------- ------- -------
35,404 32,737 34,051
------- ------- -------
Income (loss) from continuing retail operations before income taxes
and equity income........................................................ (750) 63 (462)
Equity in net income of unconsolidated companies.......................... 38 52 52
Income tax provision (credit)............................................. (222) 11 (150)
------- ------- -------
Net income (loss) from continuing retail operations before extraordinary
items and the effect of accounting changes............................... (490) 104 (260)
Discontinued operations including the effect of accounting changes,
net of income taxes of $59 and $(91), respectively....................... - 75 (169)
Gain (loss) on disposal of discontinued operations, net of income taxes
of $88, $282 and $(248), respectively.................................... (30) 117 (521)
Extraordinary items, net of income taxes of $(27) and $(6), respectively.. (51) - (10)
Effect of accounting changes, net of income taxes of $(36)................ - - (14)
------- ------- -------
Net income (loss)......................................................... $ (571) $ 296 $ (974)
======= ======= =======
Earnings (loss) per common share:
Continuing retail operations............................................ $ (1.08) $ .21 $ (.59)
Discontinued operations................................................. - .16 (.37)
Gain (loss) on disposal of discontinued operations...................... (.06) .26 (1.14)
Extraordinary items..................................................... (.11) - (.02)
Effect of accounting changes............................................ - - (.03)
------- ------- -------
Net income (loss)......................................................... $ (1.25) $ .63 $ (2.15)
======= ======= =======
Weighted average shares (millions)........................................ 459.9 456.6 456.7
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
The Consolidated Statements of Operations for prior periods have been
restated for discontinued operations.
23
<PAGE>
KMART CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 25,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash (including temporary investments of $637 and $32, respectively)..... $ 1,095 $ 353
Merchandise inventories.................................................. 6,635 6,853
Other current assets..................................................... 1,092 1,290
Net current assets of discontinued operations............................ - 369
------- -------
Total current assets...................................................... 8,822 8,865
Investments in affiliated retail companies................................ 94 108
Property and equipment, net............................................... 5,301 6,011
Other assets and deferred charges......................................... 1,180 913
Net long-term assets of discontinued operations........................... - 745
------- -------
$15,397 $16,642
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year....................................... $ 7 $ 235
Notes payable............................................................ - 748
Trade accounts payable................................................... 1,993 2,638
Accrued payrolls and other liabilities................................... 1,076 1,158
Taxes other than income taxes............................................ 188 268
Income taxes............................................................. - 256
------- -------
Total current liabilities................................................. 3,264 5,303
Capital lease obligations................................................. 1,629 1,777
Long-term debt and notes payable.......................................... 3,935 2,003
Other long-term liabilities............................................... 1,289 1,527
Shareholders' Equity:
Preferred stock, 10,000,000 shares authorized; Series C, 790,287 shares
authorized; 658,315 shares issued at January 25, 1995................... - 132
Common stock, 1,500,000,000 shares authorized;
486,511,184 and 464,549,561 shares issued, respectively................. 486 465
Capital in excess of par value........................................... 1,624 1,505
Retained earnings........................................................ 3,326 4,074
Treasury shares and restricted stock..................................... (92) (86)
Foreign currency translation adjustment.................................. (64) (58)
------- -------
Total shareholders' equity................................................ 5,280 6,032
------- -------
$15,397 $16,642
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
The Consolidated Balance Sheet for the prior period has been
restated for discontinued operations.
24
<PAGE>
KMART CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
JANUARY 31, JANUARY 25, JANUARY 26,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing retail operations before extraordinary
items and the effect of accounting changes............................... $ (490) $ 104 $ (260)
Adjustments to reconcile net income (loss) from continuing
retail operations to net cash from operating activities:
Extraordinary item....................................................... (51) - -
Asset impairment charges................................................. 532 - -
Depreciation and amortization............................................ 729 680 677
Cash used for store restructuring and other charges...................... (231) (133) (87)
Store restructuring and other charges.................................... - - 1,130
Deferred income taxes.................................................... (9) 40 (252)
Undistributed equity income.............................................. 14 (15) 7
Other, net............................................................... 39 (158) (425)
Increase (decrease) in other long-term liabilities....................... (12) 112 47
(Increase) decrease in inventories....................................... 236 (628) 1,199
Increase (decrease) in accounts payable.................................. (645) 420 -
Changes in certain assets and liabilities................................ (342) 288 74
------ ------- -------
Net cash provided by (used for) continuing retail operations............. (230) 710 2,110
------ ------- -------
Discontinued Operations:
Income (loss) from discontinued operations............................... - 75 (169)
Gain (loss) on disposal of discontinued operations....................... (30) 117 (521)
Cash used for discontinued operations.................................... (22) (362) (268)
Items not affecting cash, net............................................ 178 (636) (375)
------ ------- -------
Net cash provided by (used for) discontinued operations................... 126 (806) (1,333)
------ ------- -------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES...................... (104) (96) 777
------ ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................................... (578) (1,125) (871)
Proceeds from asset sales and subsidiary public offerings................ 1,245 2,431 793
Other, net............................................................... (346) (229) (77)
------ ------- -------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES...................... 321 1,077 (155)
------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt and notes payable............... 1,948 62 644
Reduction in long-term debt and notes payable............................ (985) (515) (928)
Reduction in capital lease obligations................................... (173) (124) (123)
Capital contributions from minority interest............................. 15 15 29
Issuance of common stock................................................. 3 6 32
Reissuance of treasury shares............................................ - 23 13
Extraordinary item for bond redemptions.................................. - - (10)
Dividends paid........................................................... (283) (474) (465)
------ ------- -------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES...................... 525 (1,007) (808)
------ ------- -------
NET INCREASE (DECREASE) IN CASH........................................... 742 (26) (186)
CASH, BEGINNING OF YEAR................................................... 353 379 565
------ ------- -------
CASH, END OF YEAR......................................................... $1,095 $ 353 $ 379
====== ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
The Consolidated Statements of Cash Flows for prior periods have been
restated for discontinued operations.
25
<PAGE>
<TABLE>
<CAPTION>
KMART CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Treasury
Shares and
Series B, C Performance
Series A and D Capital Restricted Foreign
Conversion Convertible In Excess Stock Currency Total
Preferred Preferred Common of Par Retained Deferred Translation Shareholders'
Stock Stock Stock Value Earnings Compensation Adjustment Equity
---------- ----------- ------ --------- -------- ------------ ----------- -------------
(Dollars in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 27, 1993......... $ 986 $ 157 $416 $ 506 $5,700 $(124) $(105) $7,536
Net loss for the year............... (974) (974)
Cash dividends declared,
common, $.96 per share............. (392) (392)
Cash dividends declared,
$3.41 Depositary Share,
$3.41 per share.................... (78) (78)
Cash dividends declared,
Series B convertible
preferred, $11.50 per
share.............................. (9) (9)
Minimum pension liability
in excess of intangible
pension asset...................... (10) (10)
Common issued under stock
option plans....................... 1 14 15
Common issued under
Performance Restricted
Stock Plan......................... 2 (1) 1
Treasury shares reissued
to the Employee Savings
Plan............................... 16 13 29
Foreign currency
translation adjustment............. (25) (25)
----- ----- ---- ------ ------ ----- ----- ------
BALANCE AT JANUARY 26, 1994......... 986 157 417 538 4,237 (112) (130) 6,093
Net income for the year............. 296 296
Cash dividends declared,
common, $.96 per share............. (418) (418)
Cash dividends declared,
$3.41 Depositary Share,
$1.71 per share.................... (39) (39)
Cash dividends declared,
Series C convertible
preferred, $11.50 per
share.............................. (9) (9)
Decrease in additional
minimum pension liability
in excess of intangible
pension asset...................... 7 7
Common issued under stock
option plans....................... 2 2
Common issued under
Performance Restricted
Stock Plan......................... (1) 3 2
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 23 26
Foreign currency
translation adjustment............. 72 72
----- ----- ---- ------ ------ ----- ----- ------
BALANCE AT JANUARY 25, 1995......... - 132 465 1,505 4,074 (86) (58) 6,032
Net loss for the year............... (571) (571)
Cash dividends declared,
common, $.36 per share............. (165) (165)
Cash dividends declared,
Series C convertible
preferred, $11.50 per
share.............................. (6) (6)
Increase in additional
minimum pension liability
in excess of intangible
pension asset...................... (6) (6)
Common issued under
Performance Restricted
Stock Plan......................... 1 7 (6) 2
Common issued from
redemption of Series C
and D convertible
preferred.......................... (132) 20 112 -
Foreign currency
translation adjustment............. (6) (6)
----- ----- ---- ------ ------ ----- ----- ------
BALANCE AT JANUARY 31, 1996......... $ - $ - $486 $1,624 $3,326 $ (92) $ (64) $5,280
===== ===== ==== ====== ====== ===== ===== ======
</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.
26
<PAGE>
KMART CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
1) Summary of Significant Accounting Policies
Kmart Corporation's ("the Company" or "Kmart") significant accounting
policies, which conform to generally accepted accounting principles applied on a
consistent basis between years, except for the adoption of Financial Accounting
Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("FAS 121"), are described below.
Nature of Operations: The Company's operations consist principally of discount
department stores located in all 50 states, Puerto Rico, the U.S. Virgin Islands
and Guam. Kmart also operates discount stores in Canada, the Czech and Slovak
Republics (see Note 2 of Notes to Consolidated Financial Statements), and has
joint ventures in Mexico and Singapore. Kmart's operations also include Builders
Square, Inc. ("Builders Square"), a chain of home improvement stores. Kmart's
equity investments consist of 49% of substantially all of the Meldisco
subsidiaries of Melville Corporation, which operate the footwear departments in
domestic Kmart stores, and an approximate 46% interest in Thrifty PayLess
Holdings ("TPH"), a drug store chain located in the western United States.
Basis of Consolidation: Kmart includes all majority owned subsidiaries in the
consolidated financial statements. Investments in affiliated retail companies
owned 20% or more are accounted for by the equity method using their fiscal
year-end financial statements. Intercompany transactions and accounts have been
eliminated in consolidation.
Fiscal Year: The Company's fiscal years end on the last Wednesday in January.
Fiscal year 1995 consisted of 53 weeks and ended on January 31, 1996. Fiscal
years 1994 and 1993 each consisted of 52 weeks and ended on January 25, 1995 and
January 26, 1994, respectively.
Cash: For the purpose of reporting cash flows, cash includes cash on hand in
stores, deposits in banks, certificates of deposit and short-term marketable
securities with maturities of 90 days or less.
Inventories: Inventories are stated at the lower of cost or market, primarily
using the retail method. As of year end 1995, 1994 and 1993, the last-in, first-
out (LIFO) method, utilizing internal inflation indices, was used to determine
cost for $6,131, $6,518 and $5,874 of inventory, respectively. Inventories
valued on LIFO at year end 1995, 1994 and 1993 were $751, $804 and $861 lower
than amounts that would have been reported using the first-in, first-out (FIFO)
method. The FIFO method was used to determine cost at year end 1995 and 1994 for
$504 and $335 of inventory, respectively.
Property and Equipment: Property and equipment are recorded at cost, less any
impairment losses relating to FAS 121, including a provision for capitalized
interest. Capitalized amounts include expenditures which materially extend the
useful lives of existing facilities and equipment. Expenditures for repairs and
maintenance which do not materially extend the useful lives of the related asset
are charged to expense as incurred.
Expenditures for owned properties, primarily self-developed locations, which
Kmart intends to sell and lease-back within one year are included in other
current assets, and those extending beyond one year are included in other assets
and deferred charges.
Depreciation and Amortization: Depreciation and amortization, which includes
amortization of property held under capital leases over the respective lease
terms, are computed based upon the estimated useful lives of the respective
assets using the straight-line method for financial statement purposes and
accelerated methods for tax purposes. The general range of lives are twenty-five
to fifty years for buildings, five to twenty-five years for leasehold
improvements and three to seventeen years for furniture and fixtures.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars in millions, except per share data)
Financial Instruments: With the exception of long-term debt, shareholders'
equity and equity investments, Kmart records all financial instruments,
including accounts receivable, accounts payable and marketable securities at
cost, which approximates market value.
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.
Licensee Sales: Kmart'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 provides for the future net lease
obligation and nonrecoverable investment in fixed assets directly related to
discontinuance of operations and, prior to 1994, other expenses and estimated
operating losses through the expected closing dates.
Advertising Costs: Advertising costs are expensed the first time the
advertising takes place. Included in selling, general and administrative
expenses for fiscal 1995, 1994 and 1993 are $515, $459 and $481, respectively,
of advertising expenses.
Income Taxes: Deferred income taxes are provided on temporary differences
between financial statement and taxable income. Kmart 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.
Earnings (Loss) Per Common Share: Kmart computes earnings (loss) per common
share by dividing net income (loss) 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 ("weighted average common shares")
during each year. As of January 31, 1996, all the outstanding shares of Series C
convertible preferred stock were exchanged for the same number of shares of
Series D convertible preferred stock and all the Series D shares were then
redeemed for shares of Kmart common stock. The redemption of the remaining
outstanding shares of Series D convertible preferred stock had no effect on the
weighted average common shares. 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.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications: Certain reclassifications of prior year amounts have been
made to conform to the 1995 presentation.
2) Subsequent Event
In March 1996, Kmart entered into an agreement with Tesco PLC ("Tesco") for
the purchase of Kmart's businesses in the Czech and Slovak Republics. Under the
terms of the agreement, Tesco will purchase two companies which operate six
Kmart stores in the Czech Republic and seven stores in the Slovak Republic for
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars in millions, except per share data)
approximately $118, which approximates net book value. The final transaction may
be subject to certain regulatory approvals and is expected to be concluded by
the end of the second quarter of 1996.
3) Discontinued Operations and Dispositions
Discontinued operations include Borders Group, Inc. ("Borders Group"),
OfficeMax, Inc. ("OfficeMax"), The Sports Authority, Inc. ("The Sports
Authority"), Coles Myer, Ltd. ("Coles Myer"), PACE Membership Warehouse, Inc.
("PACE") and Furr's/Bishop ("Furr's") cafeteria chains.
1995 ACTIVITY
Discontinued operations for 1995 include the Borders Group, whose initial
public offering ("IPO") was completed in June 1995. In this IPO, Kmart sold 87%
of its equity interest for net proceeds of approximately $493. Additionally, in
July 1995, the Borders Group agreed to purchase all of Kmart's remaining 13%
interest which resulted in net proceeds of approximately $73. As a result of
these transactions, the Company recorded an after tax loss of $185.
Also in July 1995, OfficeMax completed the public offering of Kmart's
remaining equity interest in OfficeMax. Kmart received net proceeds of
approximately $360 and recorded an after tax gain of $107.
In October 1995, The Sports Authority completed the public offering of Kmart's
remaining equity interest in The Sports Authority. Kmart received approximately
$151 in net proceeds and recorded an after tax gain of $48.
As the Company no longer owns any interest in the aforementioned entities,
they are accounted for as discontinued operations in the accompanying financial
statements.
In November 1995, Kmart disposed of the assets of its automotive service
centers at a book value of approximately $84 receiving approximately $50 in cash
and the balance in a five-year interest-bearing note. Under the terms of the
agreement, the centers will continue to operate at Kmart locations in exchange
for various rents and fees for services provided by Kmart. The Company also
disposed of certain Senior Notes of Thrifty PayLess Holdings, Inc. ("TPH")
acquired in 1993 in connection with the sale of PayLess Drug Stores Northwest,
Inc. ("PayLess") for approximately $102.
1994 ACTIVITY
Discontinued operations for 1994 include OfficeMax, whose IPO was completed in
November 1994. This IPO reduced Kmart's interest in OfficeMax from over 90% to
approximately 25% and resulted in net proceeds of approximately $642. Also, in
November 1994, the IPO of The Sports Authority was completed reducing Kmart's
interest from 100% to approximately 30% and resulted in net proceeds of
approximately $254. These transactions resulted in an after tax gain of $101.
Additionally, in November 1994, Kmart 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. Net
cash proceeds of $928 were realized from the sale resulting in an after tax gain
of $48. 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 January 1995, Kmart charged $32 to loss on disposal of discontinued
operations for sublease exposure related to lease guarantees on properties
sublet to Furr's, which was sold by Kmart in 1986.
Due to the 1995 completion of the divestitures of the Borders Group, OfficeMax
and The Sports Authority, results of these operations for 1994 and 1993 have
been restated and accounted for as discontinued operations. The results of Coles
Myer and the charge for Furr's have also been included as discontinued
operations. Kmart's interest in the results of these operations was an after tax
gain of $75 during 1994.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars in millions, except per share data)
1993 ACTIVITY
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. Operations of the 34 remaining PACE sites
not included in the transaction were discontinued, and PACE was subsequently
divested in August 1995. Included in this loss was the write-off of unamortized
goodwill of $395, a provision for the 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.
The loss on disposal of discontinued operations in 1993 of $521 includes the
losses on 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. The sale of PayLess was completed in
April 1994 to 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.
Kmart had originally 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 prior from
discontinued operations to continuing retail operations.
4) Store Restructuring and Other Charges
On January 5, 1994 the Kmart Board of Directors approved a restructuring plan
involving domestic and Canadian Kmart stores, Builders Square and the Walden
division of the Borders Group. As a result, in the fourth quarter of 1993, Kmart
recorded a pretax charge (Store Restructuring and Other Charges) of $1,348, $862
after tax. The portion of the charge associated with the Borders Group, $218
pretax and $139 after tax, has subsequently been restated as discontinued
operations. The remaining restructuring provision included anticipated costs of
$1,130 associated with Kmart stores which were to be closed and relocated,
enlarged or refurbished in the U.S. and Canada and the closing and relocation of
certain Builders Square 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 Kmart's 1989 restructuring plan. Other
charges included the estimated costs of $76 for re-engineering programs
(principally severance) and other non-recurring charges and an accrual of $12
for a non-routine legal judgment resulting from the insolvency of an insurer.
The following table sets forth the 1993 restructuring plan and related
activity through January 31, 1996:
<TABLE>
<CAPTION>
ACTIVITY TO DATE
------------------------------------
CASH NONCASH COSTS
PROVISION COSTS AND ASSET CHANGES IN RESERVE AT
RECORDED INCURRED WRITEDOWNS ESTIMATE JANUARY 31, 1996
--------- -------- ------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
1993 Restructuring Plan:
Lease obligation costs................................... $ 577 $166 $(75)(a) $(57) $429
Asset writedowns......................................... 181 - 201 49 29
Inventory disposition costs and related operating losses. 264 35 159 13 83
Re-engineering and other non-recurring charges........... 76 54 25 12 9
Non-routine legal accrual................................ 12 7 - (5) -
------ ---- ---- ---- ----
$1,110 $262 $310 $ 12 $550
====== ==== ==== ==== ====
</TABLE>
(a) Represents $35 and $40 for interest expense accreted during 1995 and 1994 on
discounted lease obligations.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars in millions, except per share data)
Cash costs incurred for the 1993 restructuring plan of $262, include $177, $80
and $5 for 1995, 1994 and 1993, respectively. Noncash charges of $310 include
$159, $146 and $5 for the same periods, respectively.
Changes in estimate are representative of management's assessment in the
fourth quarter of 1995 and 1994, that based on actual experiences to date,
certain charges will be higher than originally planned while others will be less
than planned.
Builders Square and Kmart Canada have substantially completed their
restructuring plans during 1995. Actual results were in line with the original
reserve of $226 and $39 for Builders Square and Canada, respectively.
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 31, 1996, $509 was charged against this reserve. Cash costs relating to
the 1989 restructuring plan were $54, $53 and $82 for 1995, 1994 and 1993,
respectively. There were no noncash charges for 1995 compared to $29 and $137
for 1994 and 1993, respectively.
The restructuring obligation is included primarily in "Other long-term
liabilities" in the Consolidated Balance Sheets.
5) Asset Impairment Charges
Kmart adopted Financial Accounting Standard No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("FAS 121") in the fourth quarter of 1995. This statement requires companies to
record impairments of long-lived assets, certain identifiable intangibles, and
associated goodwill on an exception basis, when there is evidence that events or
changes in circumstances have made recovery of an asset's carrying value
unlikely. In conducting its review, management considered, among other things,
its current and expected operating cash flows together with a judgment as to the
fair value the Company could receive upon sale of its investment. Based on this
review, Kmart recorded a $532 pretax charge, $390 after tax, relating to
Builders Square and certain international operations.
6) Extraordinary Items
The Company entered into agreements whereby holders of approximately $550 of
certain real estate related debt agreed to eliminate put features which would
have required Kmart to purchase the debt from the holders if Kmart's long-term
debt rating was lowered to non-investment grade or the lowest level of
investment grade rating in certain cases. As a result, Kmart recorded an
extraordinary noncash charge of $51, net of income taxes, primarily relating to
make-whole premiums payable under such agreements.
In August 1993, Kmart 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 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, was reported as an extraordinary item.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars in millions, except per share data)
7) Property and Equipment
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 25,
1996 1995
----------- -----------
<S> <C> <C>
Property owned:
Land.......................................... $ 153 $ 153
Buildings..................................... 440 446
Leasehold improvements........................ 1,438 1,619
Furniture and fixtures........................ 5,132 5,540
Construction in progress...................... 78 132
Property under capital leases................... 2,811 3,055
------- -------
10,052 10,945
Less-accumulated depreciation and amortization:
Property owned................................ (3,262) (3,426)
Property under capital leases................. (1,489) (1,508)
------- -------
Total....................................... $ 5,301 $ 6,011
======= =======
</TABLE>
Accumulated depreciation for owned property includes $29 and $122 of the store
restructuring provision as of January 31, 1996 and January 25, 1995,
respectively. Interest costs capitalized were $7, $17 and $14 in 1995, 1994 and
1993, respectively.
8) Investments in Affiliated Retail Companies
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 and 51% owned by Melville. Fees and income earned under
the license agreements in 1995, 1994 and 1993 of $182, $204 and $195,
respectively, are included in licensee fees and other income. Kmart's equity in
the income of footwear departments in Kmart stores and dividends received were
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Equity in income............................... $38 $52 $52
=== === ===
Dividends...................................... $52 $38 $55
=== === ===
</TABLE>
Meldisco's summarized financial information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Net sales....................................... $1,141 $1,235 $1,175
====== ====== ======
Gross profit.................................... $ 487 $ 548 $ 525
====== ====== ======
Net income...................................... $ 79 $ 107 $ 97
====== ====== ======
Inventory....................................... $ 135 $ 148 $ 137
Other current assets............................ 74 117 85
Non-current assets.............................. 1 2 2
------ ------ ------
Total assets.................................... 210 267 224
Current liabilities............................. 15 42 30
------ ------ ------
Net assets...................................... $ 195 $ 225 $ 194
====== ====== ======
Equity of Kmart................................. $ 94 $ 108 $ 94
====== ====== ======
</TABLE>
Unremitted earnings included in consolidated retained earnings were $72, $86
and $64 at year end 1995, 1994 and 1993, respectively.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars in millions, except per share data)
9) Notes Payable, Lines of Credit and Other Commitments and Contingencies
The following table is a summary of annual short-term borrowings:
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 25,
1996 1995
----------- -----------
<S> <C> <C>
Maximum amount outstanding.................. $2,660 $3,784
Average amount outstanding.................. 1,043 1,915
Amount outstanding at year end.............. - 748
Weighted average interest rate at year end.. - 6.1%
Weighted average annual interest rate....... 6.4% 4.6%
</TABLE>
At January 31, 1996, Kmart had guaranteed lines of credit of which $199 had
been borrowed against to fund certain of Kmart's real estate development joint
ventures. These lines of credit mature February 1997. In addition, Kmart had
guaranteed a line of credit, of which $385 had been borrowed against to fund
certain of Kmart's real estate development projects. This line of credit had a
weighted average interest rate at January 31, 1996 of 7.6%. Additional
borrowings in excess of repayments will be conditioned upon the approval of the
banks.
Kmart has outstanding guarantees for leases of certain previously sold
subsidiaries including Furr's, the Borders Group, OfficeMax and The Sports
Authority. Also, Kmart has entered into certain real estate arrangements whereby
Kmart is obligated to purchase completed projects. The aggregate amount
guaranteed was $1,542 at January 31, 1996.
Kmart and Coles Myer have guaranteed indebtedness related to certain
properties in Australia on a joint and several basis. Coles Myer subsequently
indemnified Kmart from any liability incurred pursuant to the Kmart guarantees.
As of January 31, 1996, the amount guaranteed was approximately $18.
Kmart has guaranteed indebtedness of other parties related to certain of its
leased properties financed by industrial revenue bonds. At January 31, 1996, the
total amount of such guaranteed indebtedness was $218, of which $81 was included
in capital lease obligations. The agreements will expire during fiscal years
2004 to 2009. Kmart's exposure to credit loss, in the event of nonperformance by
the other parties to the agreements, was $137 at January 31, 1996. However, no
concentration of credit risk exists and Kmart does not anticipate nonperformance
by the other parties.
There are various claims, lawsuits and pending actions against Kmart incident
to its operations. It is the opinion of management that the ultimate resolution
of these matters will not have a material effect on Kmart's liquidity, financial
position or results of operations.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars in millions, except per share data)
10) Long-Term Debt and Notes Payable
Long-term debt and notes payable, net of unamortized discount, is comprised of
the following:
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 25,
1996 1995
----------- -----------
<S> <C> <C>
Notes payable due 1997 (7.76% weighted average interest rate).. $1,998 $ -
12-1/8% notes due 1995......................................... - 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..................................... 100 100
7-3/4% debentures due 2012..................................... 198 198
7.95% debentures due 2023...................................... 299 299
Medium-term notes due 1997 through 2020
(8.22% weighted average interest rate)........................ 605 680
Mortgages...................................................... 301 306
Other.......................................................... 43 107
------ ------
Total........................................................ 3,942 2,238
Portion due within one year.................................... (7) (235)
------ ------
Long-term debt and notes payable............................... $3,935 $2,003
====== ======
</TABLE>
As of March 7, 1996, Kmart had $1,988 borrowed under its credit facilities.
Additional borrowings in excess of repayments will be conditioned upon the
approval of the banks.
In early 1996, Kmart's long-term senior unsecured debt rating was downgraded
to non-investment grade (BB by Standard and Poor's Corporation and Ba2 by
Moody's Investors Services, Inc.). As a result of the ratings downgrade, higher
interest rates became effective on Kmart's bank debt. Prior to the downgrade,
Kmart had entered into agreements in principle (a) with a group of debt holders
to eliminate put features from approximately $550 of certain real estate related
debt in exchange for repayment of such debt, including make-whole premiums on
certain debt, in October 1997 or such earlier date as the debt matures or is
refinanced and (b) with its bankers, to modify the terms of certain of Kmart's
credit facilities. The maturities of Kmart's seasonal bank credit facility and
certain of the bank real estate debt were extended to February 1997, and the
maturity of all other bank credit facilities remained at October 1997. Under the
agreements, Kmart is required to maintain $400 in balances in its cash
management system with its credit facility banks. The current credit agreements
contain certain restrictive provisions regarding the maintenance of net worth
and a fixed charge coverage ratio. At January 31, 1996, Kmart was in compliance
with all covenants under these agreements. In addition, included in the
agreements is a prohibition against declaration or payment of dividends.
Real estate debt in the principal amount of approximately $90 was not subject
to the agreements described in the preceding paragraph and relates to real
estate debt of certain of the Company's former subsidiaries. Of the $90
outstanding, subsequent to year end, $20 was put to the Company and repaid,
along with a $3 make-whole premium. Kmart expects to sell and/or remarket such
debt to the former subsidiaries or other third parties. Kmart does not expect
that any losses incurred by it as a result of such repayment will exceed $15,
which is the threshold absent a waiver for an event of default under the
agreements described in the preceding paragraph.
During the first half of 1996, Kmart expects to explore the renegotiation
and/or restructuring of its bank credit facilities to enhance its credit,
liquidity and financial flexibility and to enable Kmart, under its current
forecast, to meet its committed and other capital needs and scheduled debt
repayments throughout 1996 and later years. In that connection, Kmart also
intends to explore other alternatives, including the possible
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars in millions, except per share data)
divestiture of additional non-core assets, sale-leaseback of certain real estate
and the sale of debt or equity securities. There can be no assurance, however,
as to Kmart's ability to effect such modifications in its capital structure or
as to the terms of any such modification.
Kmart's liquidity is presently sufficient, and it remains generally current
with trade vendors, continues to receive and honor usual and customary trade
terms and remains in compliance with all bank covenants. However, should Kmart's
operating performance deteriorate or should providers of goods and services to
Kmart tighten credit terms, Kmart may need to consider alternative sources of
funds, a reduction in capital expenditures or additional restructuring of its
capital structure.
In June 1994, Kmart 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 PayLess included in discontinued operations in 1993.
Based on the quoted market prices for the same, or similar issues, or on the
current rates offered to Kmart for debt of the same remaining maturities, the
fair value of long-term debt was $3,462 and $2,106 at January 31, 1996 and
January 25, 1995, respectively.
The principal maturities of long-term debt for years subsequent to 1995 are:
1996-$7, 1997-$2,167, 1998-$94, 1999-$70, 2000-$65 and 2001 and later-$1,539.
Cash paid for interest, net of amounts capitalized was $460, $521 and $465 in
1995, 1994 and 1993, respectively.
11) Leases
Kmart conducts operations primarily in leased facilities. Kmart store leases
are generally for terms of 25 years with multiple five-year renewal options
which allow the Company the option to extend the life of the lease up to 50
years beyond the initial noncancelable term. Substantially all Builders Square
retail units are leased, generally for terms 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's
leased facilities.
Lease Commitments: Future minimum annual lease payments with respect to
noncancelable capital and operating leases as of January 31, 1996 are summarized
below for the years indicated:
<TABLE>
<CAPTION>
MINIMUM LEASE
PAYMENTS
---------------------
CAPITAL OPERATING
------- ---------
<S> <C> <C>
Fiscal Year:
1996................................. $ 385 $ 591
1997................................. 376 569
1998................................. 361 557
1999................................. 345 540
2000................................. 326 530
Later years.......................... 2,933 7,261
------- -------
Total minimum lease payments........ 4,726 10,048
Less-minimum sublease rental income... - (777)
------- -------
Net minimum lease payments............ 4,726 $ 9,271
=======
Less:
Estimated executory costs............ (1,290)
Amount representing interest......... (1,688)
-------
1,748
Portion due within one year........... (119)
-------
Long-term lease obligations........... $ 1,629
=======
</TABLE>
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars in millions, except per share data)
A summary of operating lease rental expense and short-term rentals is as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Minimum rentals............. $ 680 $ 691 $ 695
Percentage rentals.......... 36 33 42
Less-sublease rentals....... (111) (120) (101)
----- ----- -----
Total....................... $ 605 $ 604 $ 636
===== ===== =====
</TABLE>
Kmart incurred capital lease obligations to obtain store facilities and
equipment of $7, $189 and $177 in 1995, 1994 and 1993, respectively. These
noncash transactions have been excluded from the Consolidated Statements of Cash
Flows.
12) Income Taxes
Components of income (loss) from continuing retail operations and equity in
net income of unconsolidated companies before income taxes are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
U.S. ....................... $(513) $ 89 $(422)
Foreign..................... (199) 26 12
----- ----- -----
Total....................... $(712) $ 115 $(410)
===== ===== =====
</TABLE>
The provision (credit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current:
Federal.................... $(211) $ (48) $ 39
State and local............ 1 6 (3)
Foreign.................... (3) 8 26
Deferred:
Store restructuring and
other charges............. 122 38 (334)
Excess of tax over book
depreciation.............. - 58 84
LIFO inventory............. (13) 14 68
Property taxes............. 17 13 (16)
Pension funding............ 29 (22) (3)
Inventory reserve.......... - (34) -
Fixed asset impairment..... (199) - -
Valuation allowance........ 57 - -
Tax credits................ (29) - -
Other...................... 7 (22) (11)
----- ----- -----
Total income taxes.......... $(222) $ 11 $(150)
===== ===== =====
</TABLE>
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars in millions, except per share data)
A reconciliation between the federal statutory income tax rate to Kmart's
effective tax rate is shown below stated as a percent of income (loss) from
continuing retail operations and equity in net income of unconsolidated
companies:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Provision (credit) at federal statutory rate %..... (35.0) 35.0 (35.0)
State and local taxes, net of federal tax benefit.. 0.1 3.7 (2.2)
Tax credits........................................ (1.1) (9.5) (1.8)
Equity in net income of affiliated retail
companies subject to lower tax rates.............. (1.5) (12.7) (3.2)
Enacted federal tax rate change.................... -- -- 3.3
Valuation allowance................................ 8.1 -- --
Tax rate differential in international............. (2.1) 1.2 (0.2)
ESOP dividend...................................... (0.5) (4.4) (1.2)
Basis differences on IPO's......................... -- -- 3.4
Other.............................................. 0.8 (3.7) 0.3
----- ----- -----
Effective tax rate %............................... (31.2) 9.6 (36.6)
===== ===== =====
</TABLE>
Deferred tax assets and liabilities which are included in the accompanying
consolidated balance sheets are comprised of the following:
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 25,
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Federal benefit for state and foreign deferred..... $ 32 $ 35
Discontinued operations............................ 93 199
Accruals and other liabilities..................... 202 200
Capital leases..................................... 140 145
Store restructuring obligations.................... 238 396
Other.............................................. 122 56
----- ------
Total deferred tax assets......................... 827 1,031
----- ------
Deferred tax liabilities:
Inventory.......................................... 236 283
Property and equipment............................. 370 542
Valuation allowance................................ 57 --
Other.............................................. 86 58
----- ------
Total deferred tax liabilities.................... 749 883
----- ------
Net deferred tax assets........................... $ 78 $ 148
===== ======
</TABLE>
Kmart has not recorded deferred income taxes applicable to undistributed
earnings of foreign subsidiaries that are indefinitely reinvested in foreign
operations. Undistributed earnings totaled $7, $181 and $189 at year end 1995,
1994 and 1993, respectively.
The Company has available alternative minimum tax credit carryforwards of
approximately $54 which may be carried forward indefinitely.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars in millions, except per share data)
Cash paid for income taxes was $80, $83 and $270 in 1995, 1994 and 1993,
respectively.
Effective in the first quarter of 1993, Kmart adopted Financial Accounting
Standard No. 109 "Accounting for Income Taxes" ("FAS 109"). FAS 109 is an asset
and liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in a company's financial statements or tax returns. In estimating
future tax consequences, FAS 109 generally considers all expected future events
other than enactment of changes in the tax law or rates. The adoption of FAS 109
resulted in the recording of a one-time credit, as the cumulative effect of an
accounting change, of $64 in the first quarter of 1993.
13) Shareholders' Equity
In August 1991, Kmart 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. In September 1994, each of the outstanding Depositary
Shares automatically converted into two shares of Kmart common stock.
In October 1992, Kmart issued 784,938 shares of Series B convertible preferred
stock in exchange for all the outstanding stock of Borders, Inc. In July 1994,
all outstanding shares of Series B convertible preferred stock were exchanged
for the same number of shares of Series C convertible preferred stock. As of
January 31, 1996, all of the outstanding shares of Series C convertible
preferred stock were exchanged for the same number of shares of Series D
convertible preferred stock and all the Series D shares were then redeemed for
shares of Kmart common stock.
Common and treasury shares outstanding and related changes for year end 1995,
1994 and 1993, are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Common Shares:
Beginning of the year.................................................. 464,549,561 416,546,780 415,640,206
Sold under stock option plans.......................................... 292,715 237,230 791,425
Issued under performance restricted stock plan......................... 504,635 95,162 192,526
Issued under directors stock plan...................................... 9,472 2,518 1,950
Common issued from conversion of Series A conversion preferred......... -- 46,000,000 --
Common issued from redemption of Series C and D convertible preferred.. 21,313,503 1,874,799 --
Forfeited or withheld under performance restricted stock plan.......... (36,565) (178,255) (28,955)
Retirement of shares, at cost.......................................... (122,137) (28,673) (50,372)
----------- ----------- -----------
End of the year........................................................ 486,511,184 464,549,561 416,546,780
=========== =========== ===========
Treasury Shares:
Beginning of the year.................................................. 5,882,487 7,468,564 8,756,822
Reacquisition of shares................................................ 219 -- --
Reissue of shares for the retirement savings plan...................... -- (1,586,077) (1,288,258)
----------- ----------- -----------
End of the year........................................................ 5,882,706 5,882,487 7,468,564
=========== =========== ===========
</TABLE>
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars in millions, except per share data)
14) Pension Plans
Prior to 1996, U.S. Kmart and Builders Square had defined benefit pension
plans covering eligible associates who meet certain requirements of age, length
of service and hours worked per year. Effective January 31, 1996, the pension
plans were frozen and associates no longer earn additional benefits under the
plans. Benefits paid to retirees are based upon age at retirement and years of
credited service and earnings as of January 31, 1996. Kmart Canada Limited
associates are covered by a defined contribution plan. Kmart's policy is to fund
at least the minimum amounts required by the Employee Retirement Income Security
Act of 1974. The plans' assets consist primarily of equity securities, fixed
income securities, guaranteed insurance contracts and real estate. Kmart
contributed $6 and $64 to its principal pension plan during fiscal 1995 and 1994
respectively, but was not required to contribute to its principal pension plan
in fiscal 1993. The total consolidated pension expense was $44, $81 and $66 in
1995, 1994 and 1993, respectively.
As a result of freezing the plans, the Company recorded a pretax net pension
curtailment gain of $124 in the first quarter of 1995.
For Kmart's pension plans, the following tables summarize the funded status,
components of pension cost and actuarial assumptions:
<TABLE>
<CAPTION>
JANUARY 31, 1996 JANUARY 25, 1995
-------------------------------- ----------------------------
EMPLOYEE NON-QUALIFIED EMPLOYEE NON-QUALIFIED
PENSION PLAN PLANS PENSION PLAN PLANS
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Actuarial value of benefit obligations:
Estimated present value of vested benefits......... $(1,742) $ (36) $(1,379) $ (29)
Estimated present value of non-vested benefits..... (127) (1) (140) (1)
------- ----- ------- -----
Accumulated benefit obligation..................... (1,869) (37) (1,519) (30)
Value of future pay increases...................... - - (189) (4)
------- ----- ------- -----
Projected benefit obligation....................... (1,869) (37) (1,708) (34)
Estimated market value of plan assets............... 1,778 - 1,462 -
------- ----- ------- -----
Plan assets under projected benefit obligation...... (91) (37) (246) (34)
Unrecognized net asset.............................. (89) - (97) 3
Unrecognized prior service cost..................... - - 38 4
Unrecognized net loss and other..................... 85 10 112 7
Adjustment required to recognize minimum liability.. - (9) - (10)
------- ----- ------- -----
Accrued pension costs............................... $ (95) $ (36) $ (193) $ (30)
======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Components of pension cost:
Normal service cost..................................................... $ 51 $ 77 $ 65
Interest cost on projected benefit obligation........................... 136 140 132
Return on plan assets................................................... (378) 30 (159)
Net amortization and deferral of other components....................... 233 (167) 27
----- ----- -----
Total.................................................................... $ 42 $ 80 $ 65
===== ===== =====
Actuarial assumptions at end of year:
Discount rates.......................................................... 7.25% 8.25% 7.25%
Expected return on plan assets.......................................... 9.50% 9.50% 9.50%
Salary increases........................................................ 4.50% 4.50% 4.50%
</TABLE>
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars in millions, except per share data)
Under the provisions of Financial Accounting Standard No. 87 ("FAS 87"),
"Employers' Accounting for Pensions," Kmart is required to record an unfunded
pension liability when the 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 31, 1996, the unfunded
pension liability exceeded the intangible pension asset by $9. FAS 87 requires
this excess to be recorded as a reduction in shareholders' equity.
15) Other Postretirement and Postemployment Benefit Plans
Kmart adopted Financial Accounting Standard No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("FAS 106") at the beginning of
1993. This statement requires Kmart to accrue for future postretirement medical
benefits. In prior years, these claims were expensed when paid. As a result of
adopting FAS 106, Kmart recorded an after tax charge of $78, as the cumulative
effect of an accounting change, in 1993.
Kmart sponsors a health care plan that offers postretirement continuation of
medical benefits to full-time associates who have worked 10 years and who have
retired after age 55, with the option of participation in Kmart's medical plan,
until age 65. The plan is contributory, with retiree contributions adjusted
annually.
The accounting for the plan anticipates future cost-sharing changes to the
written plan that are consistent with Kmart's expressed intent to increase the
retiree contribution rate annually for the expected inflation rate for that
year. The accrued postretirement benefit costs under FAS 106 were $104 and $107
at January 31, 1996 and January 25, 1995, respectively.
16) Retirement Savings Plan
The Retirement Savings Plan provides that associates of Kmart and certain
subsidiaries who have completed one year of service can invest from 1% to 16% of
their earnings in the associate's choice of a growth equity fund, an
international equity fund, a core equity fund, a balanced equity fund, a managed
income fund, a Kmart common stock fund or a choice of three pre-mixed portfolio
funds. For each dollar the participant contributes, up to 6% of earnings, Kmart
will contribute an additional 50 cents which is invested in the Employee Stock
Ownership Plan (ESOP). Effective February 1, 1995, a new profit sharing program
was introduced as part of the Retirement Savings Plan. The Company makes all
contributions based on profits, with minimum yearly contributions required of
$32. Kmart's expense related to the Retirement Savings Plan was $73 for 1995 and
$46 for 1994 and 1993.
17) Performance Restricted Stock Plan
Under the Performance Restricted Stock Plan, the Compensation and Incentives
Committee of the Board of Directors may grant awards of common stock to officers
and other key employees of Kmart and its subsidiaries. As of January 31, 1996,
there were awards for 3,000,000 shares outstanding and shares available for
grant of 442,100. Kmart recorded $(1), $1 and $3 of compensation expense related
to the Performance Restricted Stock Plan in 1995, 1994 and 1993, respectively.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars in millions, except per share data)
18) 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 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 (ISO's) 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 ten years and two days (NQSO's). 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.
Twenty million shares of common stock were authorized for issuance under the
1992 Stock Option Plan. Payment upon exercise of an option may be made in cash,
already owned shares or a combination of both according to the terms of the
Plan.
Pertinent information covering the Plans follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------- -------------------------
NUMBER OPTION PRICE NUMBER OPTION PRICE
OF SHARES PER SHARE OF SHARES PER SHARE
---------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.... 23,210,037 $ 9.90-$26.03 22,095,167 $9.90-$26.03
Granted............................. 4,961,900 6.31-15.44 3,325,500 18.88
Exercised........................... (292,715) 10.94 (237,230) 9.90-20.66
Canceled............................ (1,412,932) 10.94-26.03 (1,973,400) 9.90-26.03
---------- ----------
Outstanding at end of year.......... 26,466,290 $ 6.31-$26.03 23,210,037 $9.90-$26.03
========== ==========
Exercisable at end of year.......... 16,151,681 $17.16-$26.03 15,357,537 $9.90-$23.03
========== ==========
Available for grant at end of year.. 11,436,791 12,072,800
========== ==========
</TABLE>
In October 1995, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("FAS
123") which is effective for fiscal years beginning after December 15, 1995. As
permitted by FAS 123, the Company has elected to continue to account for its
stock-based plans under APB No. 25, "Accounting for Stock Issued to Employees".
19) Business Group Information
Kmart's consolidated operations consist primarily of the operation of general
merchandise, discount retail stores under the Kmart name in the United States.
Operations also include a chain of home improvement stores operated under the
name Builders Square. The results of operations for PayLess, which was sold to
TPH in the first quarter of 1994, are included as continuing retail operations
in the consolidated financial statements, on a fully consolidated basis, for
1993. The results of operations for the Borders Group, OfficeMax and The Sports
Authority, for which public offerings were completed in 1995, are included as
discontinued operations. Business group information follows:
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars in millions, except per share data)
<TABLE>
<CAPTION>
INCOME (LOSS)
FROM
EQUITY IN NET CONTINUING CAPITAL
OPERATING INCOME OF NET RETAIL OPERATIONS DEPRECIATION EXPENDITURES-
INCOME UNCONSOLIDATED INTEREST BEFORE AND OWNED AND
YEAR SALES (LOSS)(A) COMPANIES EXPENSE INCOME TAXES (B) AMORTIZATION LEASED (C)
---- ------- --------- -------------- -------- ----------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
General Merchandise:....... 1995 $31,713 $ 83 $38 $(434) $(313) $689 $ 547
1994 29,563 528 52 (478) 102 641 1,182
1993 28,038 110 52 (472) (310) 591 936
Builders Square:........... 1995 2,676 (387) -- (12) (399) 40 38
1994 2,951 28 -- (15) 13 39 132
1993 2,719 (166) -- (9) (175) 35 112
Divested Specialty Retail
Business:.................. 1993 2,538 88 -- (13) 75 51 --
Total Kmart:............... 1995 34,389 (304) 38 (446) (712) 729 585
1994 32,514 556 52 (493) 115 680 1,314
1993 33,295 32 52 (494) (410) 677 1,048
</TABLE>
(a) Operating income (loss) for 1995 includes charges of $162, $370 and $532
related to the adoption of FAS 121 regarding the accounting for impairment
of long-lived assets for General Merchandise, Builders Square and Kmart,
respectively. Operating income (loss) for 1993 includes store restructuring
and other charges of $904, $226 and $1,130 for General Merchandise, Builders
Square and Kmart, respectively. Operating income also includes corporate
expense of $40 and $41 for 1994 and 1993, respectively. Corporate expenses
were not significant in 1995.
(b) Including equity in net income of unconsolidated companies.
(c) Leased asset additions for Kmart were $7, $189 and $177 for 1995, 1994 and
1993, respectively.
<TABLE>
<CAPTION>
INVESTMENTS IN
IDENTIFIABLE AFFILIATED DISCONTINUED TOTAL
YEAR ASSETS RETAIL COMPANIES OPERATIONS ASSETS
---- ------------ ---------------- ------------ -------
<S> <C> <C> <C> <C> <C>
General Merchandise: ............ 1995 $14,283 $ 94 $ 7 $14,384
1994 14,133 108 76 14,317
Builders Square:................. 1995 1,013 -- -- 1,013
1994 1,211 -- -- 1,211
Divested/Discontinued Specialty
Retail Businesses:............... 1995 -- -- -- --
1994 -- -- 1,114 1,114
Total Kmart:..................... 1995 15,296 94 7 15,397
1994 15,344 108 1,190 16,642
</TABLE>
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars in millions, except per share data)
20) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Each of the quarters includes 13 weeks, except for the fourth quarter of 1995
which includes 14 weeks. Earnings per share amounts for each quarter are
required to be computed independently and may not equal the amount computed for
the total year.
<TABLE>
<CAPTION>
QUARTER
----------------------------------------
1995 FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Gross revenue from continuing retail operations........................... $ 7,443 $ 8,440 $ 7,975 $10,531
Cost of merchandise sold.................................................. $ 5,788 $ 6,544 $ 6,286 $ 8,378
Net income (loss) from continuing retail operations
before extraordinary item................................................ $ (25) $ 22 $ (118) $ (369)
Discontinued operations, net of income taxes.............................. (3) 1 1 1
Gain (loss) on disposal of discontinued operations, net of income taxes... - (77) 48 (1)
Extraordinary item, net of income taxes................................... - - - (51)
------- ------- ------- -------
Net loss.................................................................. $ (28) $ (54) $ (69) $ (420)
======= ======= ======= =======
Earnings (loss) per common share:
Continuing retail operations............................................. $ (.06) $ .05 $ (.26) $ (.80)
Gain (loss) on disposal of discontinued operations....................... - (.17) .11 -
Extraordinary item....................................................... - - - (.11)
------- ------- ------- -------
Net loss.................................................................. $ (.06) $ (.12) $ (.15) $ (.91)
======= ======= ======= =======
Common stock price range (calendar quarters):
High..................................................................... $14-3/8 $15-3/8 $16-1/4 $14-1/2
Low...................................................................... 12 12-5/8 13-5/8 6
Dividends paid per common share (calendar quarters)....................... .24 .12 .12 .12
</TABLE>
<TABLE>
<CAPTION>
QUARTER
----------------------------------------
1994 FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Gross revenue from continuing retail operations........................... $ 6,913 $ 7,942 $ 7,783 $ 9,876
Cost of merchandise sold.................................................. $ 5,153 $ 5,963 $ 5,883 $ 7,869
Net income (loss) from continuing retail operations....................... $ 14 $ 85 $ 21 $ (16)
Discontinued operations, net of income taxes.............................. 4 9 18 44
Gain on disposal of discontinued operations, net of income taxes.......... - - - 117
------- ------- ------- -------
Net income................................................................ $ .18 $ 94 $ 39 $ 145
======= ======= ======= =======
Earnings (loss) per common share:
Continuing retail operations............................................. $ .03 $ .18 $ .04 $ (.04)
Discontinued operations.................................................. $ .01 $ .02 $ .04 $ .09
Gain on disposal of discontinued operations.............................. - - - $ .26
------- ------- ------- -------
Net income................................................................ $ .04 $ .20 $ .08 $ .31
======= ======= ======= =======
Common stock price range (calendar quarters):
High..................................................................... $21-1/2 $18-5/8 $18-5/8 $17-3/4
Low...................................................................... 17-7/8 15 15-3/4 12-3/4
Dividends paid per common share (calendar quarters)....................... .24 .24 .24 .24
</TABLE>
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars in millions, except per share data)
Kmart implemented a new inventory accounting system in 1995 which provides
more precise, detailed departmental information by store. This system results in
a more accurate valuation of inventories and the recording of gross profit
margins during interim periods in a manner consistent with that used to value
inventory at year end. The use of this more precise interim information had no
effect on annual results. However, gross profits reported during each of the
first three quarters of fiscal 1995 were lower than those that would have been
reported using the prior method, with an equivalent positive effect in the
fourth quarter. The new inventory accounting system contributed to approximately
1.3%, 0.2% and 0.5%, as a percentage of sales, of the U.S. Kmart gross margin
decline in the first, second and third quarters of 1995, respectively, and 1.5%,
as a percentage of sales, of the U.S. Kmart gross margin increase in the fourth
quarter of 1995.
The first quarter of 1995 included a $124 pretax net pension curtailment gain
resulting from the decision to replace the defined benefit pension plans with a
profit sharing program. The fourth quarter of 1995 included a pretax provision
of $532 related to the adoption of FAS 121.
The fourth quarters of 1995 and 1994 included LIFO credits of $43 and $57,
respectively. Also, the fourth quarter of 1994 included 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 has been restated for
discontinued operations.
In December 1995, the common stock dividend was eliminated.
As of January 31, 1996, there were 94,656 Kmart shareholders of record. Kmart
common stock is listed on the New York, Pacific and Chicago stock exchanges
(trading symbol KM).
44
<PAGE>
Exhibit 21
KMART CORPORATION AND SUBSIDIARY COMPANIES
SIGNIFICANT SUBSIDIARIES
The Registrant has no parent but had the following significant subsidiaries as
of January 31, 1996:
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation Percentage of Voting Securities Held
- ------------------------------- ----------------------------- ------------------------------------
<S> <C> <C>
Kmart Canada Limited Dominion of Canada 100%
Kmart CR a.s. Czech Republic 100%
Kmart SR a.s. Slovak Republic 100%
Builders Square, Inc. Delaware 100%
Kmart Mexico S.A. de C.V. Mexico 50%
Kmart Metro (Private) Limited Singapore 50.1%
</TABLE>
1
<PAGE>
KMART CORPORATION AND SUBSIDIARY COMPANIES
EXHIBIT 23 - CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Registration Statement Nos. 33-54879, 33-48490,
33-48673, 33-52797, and 33-52799) of Kmart Corporation of our report
dated March 7, 1996 appearing on page 22 of the Annual Report to
Shareholders which is incorporated by reference in this Annual Report on
Form 10-K for the year ended January 31, 1996.
Price Waterhouse LLP
Detroit, Michigan
April 3, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statements of operations and consolidated balance sheets and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> JAN-31-1996
<CASH> 1,088
<SECURITIES> 7
<RECEIVABLES> 382
<ALLOWANCES> 0
<INVENTORY> 6,635
<CURRENT-ASSETS> 8,822
<PP&E> 10,052
<DEPRECIATION> 4,751
<TOTAL-ASSETS> 15,397
<CURRENT-LIABILITIES> 3,264
<BONDS> 3,935
<COMMON> 486
0
0
<OTHER-SE> 4,794
<TOTAL-LIABILITY-AND-EQUITY> 15,397
<SALES> 34,389
<TOTAL-REVENUES> 34,654
<CGS> 26,996
<TOTAL-COSTS> 26,996
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 446
<INCOME-PRETAX> (712)
<INCOME-TAX> (222)
<INCOME-CONTINUING> (490)
<DISCONTINUED> (30)
<EXTRAORDINARY> (51)
<CHANGES> 0
<NET-INCOME> (571)
<EPS-PRIMARY> $(1.25)
<EPS-DILUTED> $(1.24)
</TABLE>
