<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
- ----
ACT OF 1934
For the fiscal year ended January 27, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 1-327
KMART CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-0729500
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 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 (248) 643-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE SECURITIES EXCHANGE ACT
OF 1934:
<TABLE>
<CAPTION>
Name of each Exchange
Title of each class on which registered
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<S> <C>
Common Stock, $1.00 par value New York, Pacific and Chicago Exchanges
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE SECURITIES EXCHANGE
ACT OF 1934: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock including Common Stock held by
non-affiliates of the Registrant on March 24, 1999 was $7,876,925,721. 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 24, 1999, 494,238,477 shares of Common Stock of the Registrant, held
by approximately 80,120 shareholders, were outstanding.
Portions of the Registrant's 1998 Annual Report to Shareholders are incorporated
by reference into Parts I, II and IV of this report. Portions of the
Registrant's Proxy Statement dated April 12, 1999 in connection with the 1999
Annual Meeting of Stockholders are incorporated by reference into Part III of
this report.
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PART I
Item 1. Business
History
Kmart Corporation ("the Registrant") is the nation's second
largest discount retailer and the world's third largest general merchandise
retailer. Kmart was incorporated under the laws of the State of Michigan on
March 9, 1916, as the successor to the business developed by its founder, S. S.
Kresge, who opened his first store in 1899. After operating Kresge department
stores for over 45 years, the Kmart store program commenced with the opening of
the first Kmart store in March 1962. The principal executive offices of Kmart
are located at 3100 West Big Beaver Road, Troy, Michigan 48084, and its
telephone number is (248) 643-1000.
Operations
The Registrant operates in the general merchandise retailing industry
through 2,161 Kmart discount stores with locations in each of the 50 United
States, Puerto Rico, the U.S. Virgin Islands and Guam. Kmart's general
merchandise retail operations are located in 311 of the 316 Metropolitan
Statistical Areas in the United States. Kmart stores are generally one-floor,
free-standing units ranging in size from 40,000 to 180,000 square feet.
In 1995, Kmart converted 29 of its traditional stores to feature a new,
high-frequency format. In April 1997, this design was renamed Big Kmart. Big
Kmart offers customers an increased mix of frequently-purchased, everyday basics
and consumables in a "Kmart Pantry" area located near the front of each store. A
total of 1,245 traditional Kmart stores had been converted to the Big Kmart
format at year-end 1998, with another 586 stores scheduled for conversion during
fiscal 1999. At year-end 1999, including new stores built in the Big Kmart
format, it is expected that approximately 1,840 stores will be in the Big Kmart
format.
Super Kmart Centers represent the Registrant's supercenter concept.
Super Kmart Centers combine a full grocery assortment, including fresh and
frozen food, bakery, meats, and other items, with a broad selection of general
merchandise found at Big Kmart and traditional Kmart stores. Open 24 hours a
day, seven days a week, the 102 Super Kmart Centers are the third-largest
supercenter operation in the nation.
Information regarding the Registrant's analysis of consolidated
operations appearing in "Management's Discussion and Analysis of Results of
Operations and Financial Condition" on pages 18 through 20 of the Registrant's
1998 Annual Report to Shareholders, is incorporated herein by reference.
Information regarding the Registrant's discontinued operations and
dispositions appearing in Note 2 of the "Notes to Consolidated Financial
Statements" on page 27 of the Registrant's 1998 Annual Report to Shareholders,
is incorporated herein by reference.
Competition
Kmart has several major competitors on a national level, including
Dayton-Hudson's Target stores, J.C. Penney, Sears and Wal-Mart, and many
competitors on a local and regional level which compete with Kmart's individual
stores. Success in this competitive market is based on factors such as price,
quality, service, product mix and convenience.
Seasonality
The Registrant's business is highly seasonal and depends to a
significant extent on the results of operations for the last quarter of the
fiscal year.
Credit Sales
The Registrant offers a private label Kmart Credit Card, available in
all Kmart stores, through Beneficial National Bank USA ("BNB USA"), a unit of
Beneficial Corporation. BNB USA owns the receivables and retains the credit risk
associated with this program. In addition to the Kmart Credit Card program, all
of the Registrant's stores accept major bank credit cards as payment for
merchandise.
Employees
The Registrant employed approximately 278,525 persons as of January 27,
1999.
2
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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 27, 1999, Kmart operated a total of 2,161 general merchandise
stores which are located in the United States, Puerto Rico, the U.S. Virgin
Islands and Guam. With the exception of 110 store facilities which are wholly
owned, the Registrant leases its store facilities.
The Registrant owns its headquarters and one administrative building in
Troy, Michigan and leases administrative buildings in Royal Oak, Michigan and
North Bergen, New Jersey. The Registrant leases 18 United States distribution
and port centers for initial terms of 10 to 30 years with options to renew for
additional terms. In addition, the Registrant owns or leases 549 parcels not
currently used for store operations, the majority of which are rented to others.
A description of the Registrant's leasing arrangements, appearing in
Note 7 of the "Notes to Consolidated Financial Statements" on page 29 of the
Registrant's 1998 Annual Report to Shareholders, is incorporated herein by
reference.
Item 3. Legal Proceedings
The Registrant is a party to a substantial number of legal proceedings,
most of which are routine and all of which are incidental to its business. Some
matters involve claims for large amounts of damages as well as other relief.
Although the consequences of these proceedings are not presently determinable,
in the opinion of management, they will not have a material adverse affect on
the Registrant's liquidity, financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
3
<PAGE> 4
Executive Officers of the Registrant
The name, position, age and a description of the business experience for
each of the executive officers of the Registrant is listed below as of March 24,
1999. There is no family relationship among the executive officers. Executive
officers of the Registrant are elected each year at the Annual Meeting of the
Board of Directors to serve for the ensuing year and until their successors are
elected and qualified. The business experience for each of the executive
officers described below includes principal positions held since 1992. None of
the corporations or organizations listed below is a parent, subsidiary or other
affiliate of the Registrant.
Floyd Hall - Chairman of the Board, President and Chief Executive
Officer, 60.
Mr. Hall joined the Registrant under his current title in June 1995. Prior
thereto he served concurrently as Chairman and Chief Executive Officer of The
Museum Company, Alva Reproductions, Inc. and Glass Masters, Inc. from 1989 to
1995.
Michael Bozic - Vice Chairman, 58.
Mr. Bozic joined the Registrant under his current title in December 1998. Prior
thereto he was Chairman and Chief Executive Officer, Levitz Furniture
Corporation from 1995 to 1998 and President and Chief Executive Officer, Hills
Department Stores, Inc. from 1991 to 1995. Mr. Bozic was also with Sears Roebuck
& Company for 28 years, serving as Chairman and Chief Executive Officer, Sears
Merchandise Group, from 1987 to 1991.
Andrew A. Giancamilli - President and General Merchandise Manager, U.S.
Kmart, 48.
Mr. Giancamilli has been in his current position since January 1998. Prior
thereto he held the following positions at the Registrant: Senior Vice
President, General Merchandise Manager-Consumables and Commodities from 1996 to
1998; Vice President, Pharmacy Merchandising and Operations from 1995 to 1996.
Prior to joining the Registrant in 1995, he was President, Chief Operating
Officer, Perry Drug Stores, Inc. from 1993 to 1995; and Executive Vice
President, Chief Operating Officer, Perry Drug Stores, Inc. from 1992 to 1993.
Laurence L. Anderson - Executive Vice President and President, Super
Kmart, 57.
Mr. Anderson joined the Registrant under his current title in July 1997. Prior
thereto he was President and Chief Operating Officer, Retail Food, SuperValu
Inc. from 1995 to 1997; and Executive Vice President, SuperValu Inc. from 1992
to 1995.
Warren Cooper - Executive Vice President, Human Resources and
Administration, 54.
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.
Donald W. Keeble - Executive Vice President, Store Operations, 50.
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, 56.
Mr. Palizzi has served as an executive officer of the Registrant since 1985 and
has served in his current position since 1992.
William N. Anderson - Senior Vice President and General Merchandise
Manager - Hardlines, 51.
Mr. Anderson joined the Registrant under his current title in September 1996.
Prior thereto he was President and Chief Operating Officer, Oshman's Sporting
Goods, Inc. from 1994 to 1996; and Senior Vice President and General Manager,
Ames Department Stores, Inc. from 1992 to 1994. Mr. Anderson terminated
employment with the Registrant effective April 9, 1999.
Ernest L. Heether - Senior Vice President, Merchandise Planning and
Replenishment, 53.
Mr. Heether joined the Registrant under his current title in April 1996. Prior
thereto he served as Senior Vice President, Merchandise Operations, Bradlees,
Inc. from 1993 to 1996; and Vice President, Merchandise Planning and Control,
Caldor from 1990 to 1993.
4
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Paul J. Hueber - Senior Vice President, Store Operations, 50.
Mr. Hueber has served as an executive officer of the Registrant since 1991 and
has served in his current position since 1994. Prior thereto he was Vice
President, West/Central Region from 1991 to 1994.
Cecil B. Kearse - Senior Vice President and General Merchandise
Manager - Home, 46.
Mr. Kearse has served in his current position since November 1997. Prior thereto
he held the following positions with the Registrant: Vice President, Merchandise
Presentation and Communication from 1996 to 1997; Vice President and General
Merchandise Manager, Men's and Children's from 1995 to 1996; Divisional Vice
President, Merchandising Fashions from 1994 to 1995; and Senior Buyer, Bed, Bath
& Kitchen from 1990 to 1994.
Jerry J. Kuske - Senior Vice President and General Merchandise
Manager - Health and Beauty Care, Pharmacy,
Consumables, 47.
Effective April 1, 1999 Mr. Kuske assumed the position of Senior Vice President
and General Merchandise Manager - Hardlines. Mr. Kuske served in his previous
position from November 1997 to March 1999. Prior thereto he held the following
positions with the Registrant: Vice President, General Merchandise Manager,
Health and Beauty Care/Pharmacy from 1996 to 1997; Divisional Vice President,
Consumables and Commodities from 1995 to 1996. Prior to joining the Registrant,
he served as Senior Vice President, Merchandising and Marketing, Perry Drug
Stores, Inc. from 1994 to 1995; and Senior Vice President, Operations, Payless
Drug Stores, Inc. from 1992 to 1994.
James Mixon - Senior Vice President, Logistics, 54.
Mr. Mixon joined the Registrant in his current position in July 1997. Prior
thereto he served as Senior Vice President, Logistics/Service, Best Buy Stores
from 1994 to 1997; and Senior Vice President, Distribution/Transportation,
Marshall Stores from 1987 to 1994.
E. Jackson Smailes - Senior Vice President and General Merchandise
Manager - Apparel, 56.
Mr. Smailes joined the Registrant in his current position in July 1997. Prior
thereto he served as President, Chief Executive Officer, Hills Department Stores
from 1995 to 1997; and Executive Vice President, Merchandising and Marketing,
Hills Department Stores from 1992 to 1995.
William D. Underwood - Senior Vice President, Global Operations,
Corporate Brands and Quality Assurance, 58.
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. Mr.
Underwood announced his retirement effective May 1, 1999.
Martin E. Welch III - Senior Vice President and Chief Financial
Officer, 50.
Mr. Welch joined the Registrant under his current title in December 1995. Prior
thereto he was Senior Vice President, Chief Financial Officer, Federal-Mogul
Corporation from 1991 to 1995.
5
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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 14 of the "Notes to
Consolidated Financial Statements" on page 32 of the Registrant's 1998 Annual
Report to Shareholders, is incorporated herein by reference.
Item 6. Selected Financial Data
The "Consolidated Selected Financial Data" summary, insofar as it
relates to the five fiscal years ended January 27, 1999, appearing on page 17 of
the Registrant's 1998 Annual Report to Shareholders, is incorporated herein by
reference.
Sales and comparable store statistics for the three fiscal years ended
January 27, 1999, appearing in "Management's Discussion and Analysis of Results
of Operations and Financial Condition" on page 18 of the Registrant's 1998
Annual Report to Shareholders, are incorporated herein by reference.
U.S. Kmart selling square footage for the five fiscal years ended
January 27, 1999, appearing in the "Consolidated Selected Financial Data" on
page 17 of the Registrant's 1998 Annual Report to Shareholders, is incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The information appearing in "Management's Discussion and Analysis of
Results of Operations and Financial Condition" on pages 18 through 20 of the
Registrant's 1998 Annual Report to Shareholders, is incorporated herein by
reference.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Statements, other than those based on historical facts, including the
discussion of management's expectations for Year 2000 compliance, which address
activities, events or developments that the Registrant expects or anticipates
may occur in the future are forward-looking statements which are based upon a
number of assumptions concerning future conditions that may ultimately prove to
be inaccurate. Actual events and results may materially differ from anticipated
results described in such statements. The Registrant's ability to achieve such
results is subject to certain risks and uncertainties, including, but not
limited to, economic and weather conditions which affect buying patterns of the
Registrant's customers, changes in consumer spending and the Registrant's
ability to anticipate buying patterns and implement appropriate inventory
strategies, continued availability of capital and financing, competitive factors
and other factors affecting business beyond the Registrant's control.
Consequently, all of the forward-looking statements are qualified by these
cautionary statements and there can be no assurance that the results or
developments anticipated by the Registrant will be realized or that they will
have the expected effects on the Registrant or its business or operations.
STATEMENT REGARDING YEAR 2000 DISCLOSURE
For purposes of any action brought under the securities laws, as that
term is defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15
U.S.C. 78c(a)(47)), the Year 2000 Information and Readiness Disclosure Act does
not apply to any statements contained in any documents or materials filed with
the Securities and Exchange Commission, or with Federal banking regulators,
pursuant to section 12(i) of the Securities Exchange Act of 1934 (15 U.S.C.
78l(i)), or disclosures or writing that when made accompanied the solicitation
of an offer or sale of securities.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Not applicable
Item 8. Financial Statements and Supplementary Data
The financial statements of the Registrant consisting of the
consolidated balance sheets at January 27, 1999 and January 28, 1998 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three fiscal years ended January 27, 1999 and the notes to
consolidated financial statements, together with the report of
PricewaterhouseCoopers LLP, appearing on pages 21 through 32 of the Registrant's
1998 Annual Report to Shareholders, are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
6
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PART III
Item 10. Directors of the Registrant
The information set forth under the caption "Proposal 1 - Election of
Directors" on page 6 of the Registrant's Proxy Statement dated April 12, 1999
filed with the Securities and Exchange Commission pursuant to Regulation 14A is
incorporated herein by reference.
Item 11. Executive Compensation
The information set forth on pages 9 and 11 through 17 of the
Registrant's Proxy Statement dated April 12, 1999 filed with the Securities and
Exchange Commission pursuant to Regulation 14A is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Stock Ownership" on pages 4
through 6 of the Registrant's Proxy Statement dated April 12, 1999 filed with
the Securities and Exchange Commission pursuant to Regulation 14A is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "Section 16(a) Filings/Legal
Proceedings/Management Transactions" on page 6 of the Registrant's Proxy
Statement dated April 12, 1999 filed with the Securities and Exchange Commission
pursuant to Regulation 14A is incorporated herein by reference.
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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 1998
Annual Report to Shareholders:
<TABLE>
<CAPTION>
Page(s) in
Registrant's
Annual Report
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Report of Independent Accountants 21
Consolidated Statements of Operations for each of the
three fiscal years ended January 27, 1999 22
Consolidated Balance Sheets at January 27, 1999
and January 28, 1998 23
Consolidated Statements of Cash Flows for each
of the three fiscal years ended January 27, 1999 24
Consolidated Statements of Shareholders' Equity for
each of the three fiscal years ended January 27, 1999 25
Notes to Consolidated Financial Statements 26 through 32
</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 have been omitted because they are not
applicable or the required information is shown in the
Registrant's 1998 Annual Report to Shareholders, which is
incorporated herein by reference.
3. Exhibits
See Exhibit Index included in this report.
b) Reports On Form 8-K
The Registrant did not file a report on Form 8-K during the last quarter
of the fiscal year ended January 27, 1999.
8
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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 15, 1999.
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
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(Martin E. Welch III)
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: Lois M. Connelly
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(Lois M. Connelly)
Vice President, Controller
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, on behalf of the
Registrant and in the capacities indicated, on April 15, 1999.
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 Floyd Hall
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James B. Adamson, Director Floyd Hall,
Chairman of the Board,
Lilyan H. Affinito President and Chief Executive Officer
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Lilyan H. Affinito, Director (Principal Executive Officer
and Director)
Stephen F. Bollenbach
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Stephen F. Bollenbach, Director Robert D. Kennedy
---------------------------------------------
Robert D. Kennedy, Director
Joseph A. Califano, Jr.
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Joseph A. Califano, Jr., Director J. Richard Munro
---------------------------------------------
J. Richard Munro, Director
Richard G. Cline
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Richard G. Cline, Director Robin B. Smith
---------------------------------------------
Robin B. Smith, Director
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Willie D. Davis, Director William P. Weber
---------------------------------------------
William P. Weber, Director
Joseph P. Flannery
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Joseph P. Flannery, Director James O. Welch, Jr.
---------------------------------------------
James O. Welch, Jr., Director
</TABLE>
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EXHIBIT INDEX
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<CAPTION>
Exhibit
Number Description
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**** (3a) Restated Articles of Incorporation of Kmart Corporation
**** (3b) Bylaws of Kmart Corporation, as amended
* (10a) Kmart Corporation 1973 Stock Option Plan, as amended [10a][A]
* (10b) Kmart Corporation 1981 Stock Option Plan, as amended [10b][A]
**** (10c) Kmart Corporation Directors Retirement Plan, as amended [10d][A]
** (10d) Kmart Corporation Performance Restricted Stock Plan, as amended [10e][A]
(10e) Kmart Corporation Deferred Compensation Plan for Non-Employee Directors, as amended [A]
*** (10f) Kmart Corporation 1992 Stock Option Plan, as amended [10g][A]
(10g) Kmart Corporation Amended and Restated Directors Stock Plan [A]
** (10h) Form of Employment Agreement with Executive Officers [10j][A]
* (10i) Kmart Corporation Supplemental Executive Retirement Plan [10c][A]
*** (10j) Amended and Restated Kmart Corporation Annual Incentive Bonus Plan [10k][A]
*** (10k) Amended and Restated Kmart Corporation Management Stock Purchase Plan [10l][A]
*** (10l) Supplemental Pension Benefit Plan [10m][A]
****** (10m) Employment Agreement with Floyd Hall [10n][A]
******* (10n) Amendment to Employment Agreement [99][A]
***** (10o) Kmart Corporation 1997 Long-Term Equity Compensation Plan [10n][A]
(10p) Amended and Restated Kmart Corporation 1998 Management Deferred Compensation and Restoration Plan [A]
(11) Statement Regarding Computation of Per Share Earnings
(12) Statement Regarding Computation of Ratios
(13) Annual Report to Shareholders of Kmart Corporation for the Fiscal Year Ended January 27, 1999
(23) Consent of Independent Accountants
(27) Financial Data Schedule
</TABLE>
<TABLE>
Notes:
<S> <C>
* Filed as Exhibits to the Form 10-K Report of the Registrant for the fiscal year ended January 27, 1993 (file
number 1-327) and are incorporated herein by reference.
** Filed as Exhibits to the Form 10-K Report of the Registrant for the fiscal year ended January 26, 1994 (file
number 1-327) and are incorporated herein by reference.
*** Filed as Exhibits to the Form 10-K Report of the Registrant for the fiscal year ended January 25, 1995 (file
number 1-327) and are incorporated herein by reference.
**** Filed as Exhibits to the Form 10-K Report of the Registrant for the fiscal year ended January 31, 1996 (file
number 1-327) and are incorporated herein by reference.
***** Filed as part of the 1997 Proxy Statement and is incorporated herein by reference.
****** Filed as Form 8-K dated June 4, 1995 and is incorporated herein by reference.
******* Filed as Exhibit to the Form 10-Q Report of the Registrant for the quarter ended October 28, 1998 (file number
1-327) and is incorporated herein by reference.
[#] Exhibit numbers in the Form 10-K or 10-Q Reports for the periods indicated.
[A] This document is a management contract or compensatory plan.
</TABLE>
In reliance upon Item 601(b)(4)(iii)(A) of Regulation S-K,
various instruments defining the rights of holders of long-term
debt of the Registrant are not being filed herewith because
the total amount of securities authorized under each such
instrument does not exceed 10% of the total assets of the
Registrant.
The Registrant agrees to furnish a copy to the Commission upon
request of the following instruments defining the rights of
holders of long-term debt:
Indenture dated as of February 1, 1985, between Kmart
Corporation and The Bank of New York, Trustee, as
supplemented by the First Supplemental Indenture
dated as of March 1, 1991
12-1/2% Debentures Due 2005
8-1/8% 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)
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EXHIBIT 10e
KMART CORPORATION
DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS
-----------------------------------------------------
SECTION 1. ELIGIBILITY
Each member of the Board of Directors (the "Board") of Kmart Corporation
(the "Company") who is not an employee of the Company or any of its subsidiaries
(an "Eligible Director") is eligible to participate in the Kmart Corporation
Deferred Compensation Plan for Non-Employee Directors (the "Plan").
SECTION 2. PARTICIPATION
(a) Prior to the beginning of any calendar year, commencing with the
calendar year 1991, each Eligible Director may elect to participate in the Plan
by directing that all or any part of the compensation otherwise payable in cash
for services as an Eligible Director (including services as non-executive
Chairman or Vice-Chairman of the Board) during such calendar year and subsequent
calendar years shall be credited to a deferred compensation account subject to
the terms of the Plan.
(b) An election to participate in the Plan shall be in the form of a
document executed by the director and filed with the Secretary of the Company.
An election related to cash compensation otherwise payable currently in any
calendar year shall become irrevocable on the last day prior to the beginning of
such calendar year. An election shall continue until the director ceases to be a
director of the Company or until he or she terminates or modifies such election
by written notice. Any such termination or modification shall become effective
as of the end of the calendar year in which such notice is given with respect to
all cash compensation otherwise payable in subsequent calendar years.
(c) A director who has filed a termination of election may thereafter
again file an election to participate for any calendar year or years subsequent
to the filing of such election.
SECTION 3. DEFERRED CASH COMPENSATION ACCOUNTS
All deferred cash compensation shall be held in the general funds of the
Company and shall be credited to the director's account and shall bear interest
from the date such cash compensation would otherwise be payable. The interest
credited to the account shall be compounded quarterly at the end of each
calendar quarter. For all amounts whenever credited, the rate of interest
credited thereon shall be equal to the average ten-year U.S. Treasury note rate
for the previous calendar quarter plus 5%.
<PAGE> 2
SECTION 4. DISTRIBUTION
(a) At the time of election to participate in the Plan, a director shall
also make an election with respect to the distribution (during the director's
lifetime or in the event of the director's death) of amounts deferred under the
Plan plus accumulated interest. Such an election shall be contained in the
document referred to in Section 2(b) hereof, executed by the director and filed
with the Secretary of the Company. Such an election related to cash compensation
otherwise payable currently in any calendar year shall become irrevocable on the
last day prior to the beginning of such calendar year.
(b) A director may elect to receive amounts credited to his or her account
in one lump sum or in some other number of equal annual installments (not
exceeding ten), with the first installment (or lump sum if the director has so
elected) 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.
(c) Notwithstanding an election pursuant to Section 4(b) hereof: (i) if,
as determined by the Board in its sole discretion, the director (during or
following his or her membership on the Board) engaged in any activity or
association in competition with or adverse or detrimental to the interest of the
Company, the entire balance of the director's deferred cash compensation
hereunder, including interest, shall be distributed immediately in a lump sum
payment; (ii) upon the occurrence of a Change in Control (as defined below), the
entire balance of all deferred cash compensation hereunder, including interest,
shall be distributed immediately in a lump sum payment.
A Change in Control shall have occurred if (i) the "beneficial ownership"
(as defined in Rule 13d-3 under the Securities Exchange Act of 1934 as amended
(the "Exchange Act")) of securities representing more than 50% of the combined
voting power of the Company is acquired by any "person" as defined in Sections
13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or
other fiduciary holding securities under an employee benefit plan of the
Company, or any corporation owned, directly or indirectly, by the stockholders
of the Company in substantially the same proportions as their ownership of stock
of the Company), or (ii) the stockholders of the Company approve a definitive
agreement to merge or consolidate the Company with or into another corporation
or to sell or otherwise dispose of all or substantially all of its assets, or
adopt a plan of liquidation, or (iii) during any period of two consecutive
years, individuals who at the beginning of such period were members of the Board
cease for any reason to constitute at least a majority thereof (unless the
election or the nomination for election by the Company's stockholders of each
new director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of such period).
(d) Installments subsequent to the first installment to the director shall
be distributed on the tenth day of each succeeding calendar year until the
entire amount credited to the director's deferred account shall have been
distributed. Deferred amounts held pending distribution shall continue to be
credited with interest, determined in accordance with Section 3 hereof.
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<PAGE> 3
(e) In the event the director should die before full distribution of all
amounts credited to the director's account, the balance of the deferred amounts
shall be distributed in a lump sum payment to the beneficiary or beneficiaries
designated in writing by the director, or if no designation has been made, to
the estate of the director.
(f) The Committee shall have the authority to alter the timing or manner
of payment of deferred cash compensation in the event an Eligible Director
establishes, to the satisfaction of the Committee, severe financial or medical
hardship. In such event, the Committee may, in its discretion:
(a) Authorize the cessation of deferrals of cash compensation;
and/or
(b) Provide that all, or a portion of such deferred cash
compensation payable over a period of time shall immediately
be paid in a lump sum; and/or
(c) Provide for such other payment schedule as deemed appropriate
by the Committee under the circumstances.
However, any amount paid pursuant to this Section 4(f) shall not exceed
that amount which the Committee determines to be reasonably necessary for the
Eligible Director to meet the financial or medical hardship at the time of such
payment. The severity of the financial or medical hardship shall be judged by
the Committee. Severe financial or medical hardship shall be deemed to exist in
the event of the Eligible Director's long and serious illness, impending
bankruptcy or similar unforeseeable and extraordinary circumstances arising as a
result of events beyond the control of the Eligible Director. The Committee's
decision with respect to the severity of financial or medical hardship and the
manner which the distribution of deferred cash compensation to an Eligible
Director is altered shall be final, conclusive and not subject to appeal.
SECTION 5. MISCELLANEOUS
(a) The right of a director to any deferred cash compensation and/or
interest thereon shall be non-assignable and shall not be subject in any manner
to the debts or other obligations of the director or any other person.
(b) The Company shall not be required to reserve or otherwise set aside
funds to meet any obligations of the Plan.
(c) The Plan shall remain in effect until the earlier to occur of a Change
in Control or the termination of the Plan by the Board; provided, however, that,
except as provided in Section 4(c)(ii) hereof, distribution may be made pursuant
to a deferral election after such date.
(d) The Plan may be amended or discontinued by the Board at any time in
its sole judgment. In the event the Plan is terminated, amounts credited to
directors' accounts shall be
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<PAGE> 4
distributed at such time and in such manner as the Board shall determine, no
later than they would have been made as elected under Section 4 hereof.
(e) Nothing in the Plan shall be construed as conferring any right upon
any director to continuance as a member of the Board.
(f) The Plan and all rights hereunder shall be construed in accordance
with and governed by the laws of the State of Michigan.
6. RABBI TRUST
(a) Establishment of a Rabbi Trust. As soon as practicable following
December 16, 1997, the Company shall establish an irrevocable Rabbi Trust,
governed by a Rabbi Trust Agreement (which shall be a grantor trust within the
meaning of Code Sections 671-678) for the benefit of Eligible Directors and
beneficiaries of Eligible Directors, as appropriate and applicable. The Rabbi
Trust shall have an independent Trustee (such Trustee to have a fiduciary duty
to carry out the terms and conditions of the Trust) as selected by the Company,
and shall have restrictions as to the Company's ability to amend the Trust or to
cancel benefits provided thereunder.
Assets contained in the Rabbi Trust shall at all times be specifically
subject to the claims of the Company's general creditors in the event of
insolvency, which term shall be specifically defined within the provisions of
the Rabbi Trust, along with a required procedure for notifying the Trustee of
any such insolvency.
All benefits hereunder, shall be paid first from the Rabbi Trust, to the
extent assets exist in the Rabbi Trust and then, as necessary, by the Company
from general assets.
(b) Funding of the Rabbi Trust. At the discretion of the Committee, the
Company may contribute cash and/or cash equivalents to the Rabbi Trust, for the
benefit of Eligible Directors and beneficiaries of Eligible Directors as the
Committee deems appropriate. It is intended that the Rabbi Trust will be fully
funded at all times to cover the accrued obligations of the Company under the
Plan. Upon a Change in Control (as defined in Section 4.c), the Company shall be
required to make an immediate contribution to the Rabbi Trust to cause all such
accrued obligations to be fully or overfunded as of that date.
The Committee reserves the right to invest the Trust assets in any
investment deemed appropriate by the Committee.
Dated: December 18, 1990 (Amended as of December 16, 1991, March 28, 1995,
September 19, 1995, December 16, 1997 and March 16, 1999)
4
<PAGE> 1
EXHIBIT 10g
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.
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
<PAGE> 2
business day of each calendar quarter of each such calendar year (the "Normal
Stock Payment Date"), except to the extent that a Deferral Election (as defined
in Section 4.3 hereof) shall be in effect with respect to such shares or that
Section 4.6 hereof applies.
Each such share shall be valued at the closing price per share of Stock as
reported on the Composite Transactions reporting system, or if not so reported,
as reported by the New York Stock Exchange (the "Closing Price") on the last
business day preceding each Normal Stock Payment Date (the "Share Value Price").
The value of fractional shares shall be paid to the director in cash.
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.
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 treated in the same manner as any other Deferred Shares under the Plan.
Dividend
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<PAGE> 3
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
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<PAGE> 4
approve a definitive agreement to merge or consolidate the Company with or into
another corporation or to sell or otherwise dispose of all or substantially all
of its assets, or adopt a plan of liquidation, or (iii) during any period of two
consecutive years, individuals who at the beginning of such period were members
of the Board cease for any reason to constitute at least a majority thereof
(unless the election or the nomination for election by the Company's
stockholders of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of
such period).
The provisions of this Section 4.6 shall not apply to the extent
inconsistent with the requirements of Rule 16b-3, as the same may be interpreted
from time to time.
5. RESTRICTED STOCK UNITS
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 the
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.
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<PAGE> 5
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 any 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 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.
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<PAGE> 6
5.7 Financial or Medical Hardship. The Committee shall have the authority
to alter the timing or manner of distribution of Deferred Shares and/or
Restricted Stock Units in the event that the Eligible Director establishes, to
the satisfaction of the Committee, severe financial or medical hardship. In such
event, the Committee may, in its discretion:
(a) Authorize the cessation of the deferral of Deferred
Shares; and/or
(b) Provide that all, or a portion, of the Deferred Shares
distributable over a period of time shall instead be
immediately distributed; and/or
(c) Provide that all, or a portion, of the Restricted Stock
Units shall be immediately distributed; and/or
(d) Provide for such other distribution schedule as deemed
appropriate by the Committee under the circumstances.
However, the Deferred Shares/Restricted Stock Units distributed pursuant
to this Section 5.7 shall not exceed that amount which the Committee determines
to be reasonably necessary for the Eligible Director to meet the financial or
medical hardship at the time of such payment. The severity of the financial or
medical hardship shall be judged by the Committee. Severe financial or medical
hardship shall be deemed to exist in the event of the Eligible Director's long
and serious illness, impending bankruptcy or similar unforeseeable and
extraordinary circumstances arising as a result of events beyond the control of
the Eligible Director. The Committee's decision with respect to the severity of
financial or medical hardship and the manner which the distribution of Deferred
Shares and/or Restricted Stock Units to an Eligible Director is altered shall be
final, conclusive and not subject to appeal.
6. TERM OF PLAN
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.
7. AMENDMENT; TERMINATION
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.
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<PAGE> 7
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
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.
9. RABBI TRUST
9.1 Establishment of a Rabbi Trust. As soon as practicable following
December 16, 1997, the Company shall establish an irrevocable Rabbi Trust,
governed by a Rabbi Trust Agreement (which shall be a grantor trust within the
meaning of Code Sections 671-678) for the benefit of Eligible Directors and
beneficiaries of Eligible Directors, as appropriate and applicable. The Rabbi
Trust shall have an independent Trustee (such Trustee to have a fiduciary duty
to carry out the terms and conditions of the Trust) as selected by the Company,
and shall have restrictions as to the Company's ability to amend the Trust or to
cancel benefits provided thereunder.
Assets contained in the Rabbi Trust shall at all times be specifically
subject to the claims of the Company's general creditors in the event of
insolvency, which term shall be specifically defined within the provisions of
the Rabbi Trust, along with a required procedure for notifying the Trustee of
any such insolvency.
All benefits hereunder, shall be paid first from the Rabbi Trust, to the
extent assets exist in the Rabbi Trust and then, as necessary, by the Company
from general assets.
9.2 Funding of the Rabbi Trust. At the discretion of the Committee, the
Company may contribute cash and/or cash equivalents to the Rabbi Trust, for the
benefit of Eligible Directors and beneficiaries of Eligible Directors as the
Committee deems appropriate. It is intended that the Rabbi Trust will be fully
funded at all times to cover the accrued obligations of the Company under the
Plan. Upon a Change in Control (as defined in Section 4.6 hereof), the Company
shall be required to make an immediate contribution to the Rabbi Trust to cause
all such accrued obligations to be fully or overfunded as of that date.
The Committee reserves the right to invest the Trust assets in any
investment deemed appropriate by the Committee.
Dated: December 16, 1991 (Amended as of March 28, 1995, January 1, 1996,
August 20, 1996, December 16, 1997 and March 16, 1999)
7
<PAGE> 1
EXHIBIT 10p
AMENDED AND RESTATED
KMART CORPORATION
1998 MANAGEMENT DEFERRED
COMPENSATION AND RESTORATION PLAN
(Effective January 1, 1998; as amended
and restated as of September 1, 1998)
<PAGE> 2
CONTENTS
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Article 1. Establishment and Purpose 1
Article 2. Definitions 1
Article 3. Administration 7
Article 4. Eligibility and Participation 7
Article 5. Voluntary Deferrals 8
Article 6. Mandatory Deferrals 9
Article 7. Voluntary Stock Unit Deferrals 9
Article 8. Savings Plan Deferral Restoration 10
Article 9. Company 401(k) Match Restoration 11
Article 10. Company Profit Sharing Restoration 12
Article 11. Discretionary Company Credits 13
Article 12. Participant Accounts and the Rabbi Trust 13
Article 13. Allocation of Prior Deferrals and Company Credits 15
Article 14. Beneficiary Designation 16
Article 15. Withholding of Taxes 17
Article 16. Employment/Misconduct 17
Article 17. Amendment and Termination 17
Article 18. Miscellaneous 18
</TABLE>
<PAGE> 3
AMENDED AND RESTATED KMART CORPORATION 1998 MANAGEMENT
DEFERRED COMPENSATION AND RESTORATION PLAN
ARTICLE 1. ESTABLISHMENT AND PURPOSE
1.1 ESTABLISHMENT. Kmart Corporation, a Michigan corporation (together
with its participating subsidiaries and affiliates, the "Company"), hereby
establishes, effective as of January 1, 1998 (the "Effective Date"), a deferred
compensation and savings restoration plan for key management employees as
described herein, which shall be known as the "Kmart Corporation 1998 Management
Deferred Compensation and Restoration Plan" (the "Plan").
1.2 PURPOSE. The primary purpose of the Plan is to provide key management
employees of the Company with the opportunity to defer a portion of their
compensation and to restore certain retirement benefits lost due to statutory
limits imposed by the Code, subject to the terms of the Plan. By adopting the
Plan, the Company desires to enhance its ability to attract and retain key
management employees.
ARTICLE 2. DEFINITIONS
2.1 DEFINITIONS. Whenever used herein, the following terms shall have the
meanings set forth below, and when the meaning is intended, the term is
capitalized:
(a) "Accrued Account Balances" means the then current aggregate
account balances of a Participant through a specific date
in question, including Voluntary Deferrals (as described in
Article 5 hereof), Mandatory Deferrals (as described in
Article 6 hereof), Voluntary Stock Unit Deferrals (as
described in Article 7 hereof); Savings Plan Deferral
Restoration (as described in Article 8 hereof), Company
401(k) Match Restoration (as described in Article 9
hereof), Company Profit Sharing Restoration (as described
in Article 10 hereof), Discretionary Company Credits (as
described in Article 11 hereof), and earnings thereon (as
described in Article 12 hereof).
(b) "Accrued Rabbi Trust Obligations" means the then current
Accrued Account Balances of all Participants through a
specific date in question, except for amounts credited to
Treasury Note Accounts.
(c) "Base Salary" means all regular basic wages earned by a
Participant for services rendered during a Plan Year,
before any deductions. (See Section 5.2 for an explanation
of the amount of Base Salary that may be deferred by a Tier
I Participant.)
(d) "Beneficial Ownership" has the same meaning ascribed to
such term in Rule 13d-3 of the General Rules and
Regulations under the Exchange Act.
(e) "Board" or "Board of Directors" means the Board of
Directors of Kmart Corporation.
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(f) "Change in Control" of Kmart Corporation is deemed to have
occurred as of the first day that any one or more of the
following conditions shall have been satisfied:
(i) The "Beneficial Ownership" of securities
representing more than thirty-three percent (33%)
of the combined voting power of Kmart Corporation
is acquired by any "person" as defined in Sections
13(d) and 14(d) of the Exchange Act (other than
Kmart Corporation, any trustee or other fiduciary
holding securities under an employee benefit plan
of Kmart Corporation, or any corporation owned,
directly or indirectly, by the stockholders of
Kmart Corporation in substantially the same
proportions as their ownership of stock of Kmart
Corporation); or
(ii) The stockholders of Kmart Corporation approve a
definitive agreement to merge or consolidate Kmart
Corporation with or into another corporation or to
sell or otherwise dispose of all or substantially
all of its assets, or adopt a plan of liquidation;
or
(iii) During any period of three consecutive years,
individuals who at the beginning of such period
were members of the Board cease for any reason to
constitute at least a majority thereof (unless the
election, or the nomination for election by the
stockholders of Kmart Corporation, of each new
director was approved by a vote of at least a
majority of the directors then still in office who
were directors at the beginning of such period or
whose election or nomination was previously so
approved).
(g) "Closing Price" means the last price at which the Common
Stock shall have been sold on the specific date in
question, or if no such sale was made on such date then on
the next preceding day on which there was such a sale of
Common Stock. The price shall be as reported on the
Composite Transactions reporting system, or if not so
reported, as reported by the New York Stock Exchange.
(h) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(i) "Committee" means the Compensation and Incentives Committee
of the Board (or such other committee as designated by the
Board as a successor thereto) which has the authority to
administer the Plan.
(j) "Common Stock" means the common stock of Kmart Corporation.
(k) "Company Stock Fund" has the same meaning ascribed to such
term in the Retirement Savings Plan.
(l) "Compensation" has the same meaning ascribed to such term
in the Retirement Savings Plan. (See Section 8.2 for an
explanation of the amount of Compensation that may be
deferred by a Tier II Participant.)
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(m) "Disability" has the same meaning ascribed to such term in
Kmart Corporation's long-term disability plan.
(n) "Discretionary Company Credits Account" has the meaning set
forth in Section 11.2 hereof.
(o) "Employee Directed Contributions" has the same meaning
ascribed to such term in the Retirement Savings Plan.
(p) "Employer Matching Contributions" has the same meaning
ascribed to such term in the Retirement Savings Plan.
(q) "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended from time to time, or any successor
thereto.
(r) "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time, or any successor act thereto.
(s) "Exercise Date" has the meaning set forth in Section 7.2
hereof.
(t) "Expiration Date" has the meaning set forth in Section 7.2
hereof.
(u) "Form of Payout" means a Participant's elected method of
payout. A Participant may choose from either (i) a Lump-Sum
Payment or (ii) Installment Payments. If no Form of Payout
is elected, then payment will be made in a Lump-Sum
Payment.
A Participant may at any time at least twelve (12) months
prior to a Payout Commencement Date, petition the Committee
to change the Form of Payout previously elected by such
Participant to a different Form of Payout otherwise
available under the Plan (i.e., a Lump-Sum Payment or
Installment Payments).
If a Participant remains employed with the Company through
a Payout Commencement Date, and if the Accrued Account
Balances payable on such Payout Commencement Date are less
than ten thousand dollars ($10,000), then, regardless of
any Form of Payout election(s) made by a Participant to
receive or continue to receive Installment Payments
thereon, such Accrued Account Balances shall be paid on
such Payout Commencement Date, or as soon as
administratively practicable thereafter, in a Lump-Sum
Payment.
If a Participant's employment with the Company terminates
for any reason and the Participant's Accrued Account
Balances payable on any coincident or future Payout
Commencement Date are less than ten thousand dollars
($10,000) at the time of such termination of employment,
then all Accrued Account Balances payable on such Payout
Commencement Date(s) shall be paid in a Lump-Sum Payment as
soon as administratively practicable, regardless of the
Participant's previous elections.
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If a Participant's employment with the Company terminates
due to Disability or death, and the Participant's Accrued
Account Balances payable on any coincident or future Payout
Commencement Date are individually equal to or greater than
ten thousand dollars ($10,000), such Participant, or such
Participant's estate, as the case may be, may petition the
Committee to pay out all such Accrued Account Balances in a
single Lump-Sum Payment as soon as administratively
practicable regardless of the Participant's previous
elections. In the case of employment termination due to
Disability, the termination shall be deemed to have
occurred on the day that the Committee, or the Committee's
designee, determines the Disability to be total and
permanent. The decision of whether to allow for an
accelerated Lump-Sum Payment shall be at the discretion of
the Committee.
(v) "Installment Payments" means a series of payments, from two
(2) up to twenty (20) approximately equal annual payments,
as elected by the Participant, to be made in cash or Common
Stock, as applicable, with the initial payment due within
thirty (30) calendar days after the applicable Payout
Commencement Date elected by the Participant. Each of the
remaining Installment Payments shall be made in cash or
Common Stock, as applicable, each year thereafter on the
anniversary of such Payout Commencement Date, until all
Accrued Account Balances deferred to such Payout
Commencement Date have been paid in full. Earnings shall
continue to accrue on any remaining Accrued Account
Balances in the manner provided in Section 12.2 hereof
until all Accrued Account Balances deferred to such Payout
Commencement Date have been paid in full. The amount of
each Installment Payment shall be equal to the applicable
portion of the Accrued Account Balances remaining
immediately prior to each such payment, multiplied by a
fraction, the numerator of which is one (1), and the
denominator of which is the number of Installment Payments
remaining to be paid (including such payment).
(w) "Investment Funds" has the same meaning ascribed to such
term in the Retirement Savings Plan.
(x) "Lump-Sum Payment" means a single payment to be made in
cash or Common Stock, as applicable, within thirty (30)
calendar days after the applicable Payout Commencement
Date.
(y) "Mandatory Deferral Account" has the meaning set forth in
Section 6.1 hereof.
(z) "Match Restoration Account" has the meaning set forth in
Section 9.2 hereof.
(aa) "Participant" means any Tier I Participant or Tier II
Participant.
(ab) "Payout Commencement Date" means a date irrevocably elected
by a Participant, or as otherwise provided herein, upon
which payment of Accrued Account Balances begins.
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<PAGE> 7
A Payout Commencement Date shall be no earlier than one
year following the end of the year in which amounts
deferred hereunder are otherwise earned, and no later than
the January following the Participant's sixty-fifth (65th)
birthday. No limit exists on the number of different Payout
Commencement Dates that can be elected by each Participant.
If no Payout Commencement Date is specified by a
Participant for any Voluntary Deferrals, Savings Plan
Deferral Restorations or Voluntary Stock Unit Deferrals,
then payout of these amounts shall occur in the January
following the Participant's termination of employment.
All Company Profit Sharing Restoration and Company 401(k)
Match Restoration shall automatically be paid out beginning
in the January following the Participant's termination of
employment.
(ac) "Plan Year" means the calendar year.
(ad) "Predecessory Deferral/Restoration Arrangements" has the
meaning set forth in Article 13 hereof.
(ae) "Profit Sharing Contributions" has the same meaning
ascribed to such term in the Retirement Savings Plan.
(af) "Profit Sharing Restoration Account" has the meaning set
forth in Section 10.2 hereof.
(ag) "Rabbi Trust" means a grantor trust, as intended by
Sections 671-678 of the Code, established by Kmart
Corporation for the benefit of Participants and their
beneficiaries.
(ah) "Retirement Savings Plan" means the Kmart Corporation
Retirement Savings Plan B.
(ai) "Retirement Savings Plan Deferral Restoration Account" has
the meaning set forth in Section 8.2 hereof.
(aj) "Stock Unit" means a bookkeeping entry which is the
equivalent of one share of Common Stock.
(ak) "Stock Unit Subaccount" means the bookkeeping account
established for a Participant which is credited with Stock
Units equal to the number of shares of Common Stock
(including fractions of a share) that could have been
purchased with the corresponding amount of Company 401(k)
Match Restoration (as provided under Article 9 hereof) at
the Closing Price of the shares of Common Stock on the date
as of which such Stock Unit Subaccount is so credited. The
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<PAGE> 8
Stock Unit Subaccount shall be reduced in a similar manner
as of the date that any Common Stock is distributed from
such Subaccount to the Particpant.
As of the date any dividend is paid to holders of shares of
Common Stock, a Participant's Stock Unit Subaccount shall
be credited with additional Stock Units equal to the number
of shares of Common Stock (including fractions of a share)
that could have been purchased, at the Closing Price of a
share of Common Stock on such date, with the amount that
would have been paid as dividends on that number of shares
of Common Stock (including fractions of a share) which is
equal to the number of Stock Units attributable to the
Participant's Stock Unit Subaccount as of the record date
of such dividend. In the case of dividends paid in
property, the amount of the dividend shall be deemed to be
the fair market value of the property at the time of the
payment thereof, as determined by the Committee. A
distribution from the Stock Unit Subaccount shall be paid
in a number of shares of Common Stock equal to the number
of Stock Units distributable.
(al) "Tier I Participant" means each key management employee
designated by the Board as a Senior Officer of the Company,
each Divisional Vice President, each Operations Vice
President, each Regional Vice President, and each other
person so designated by the Committee.
(am) "Tier II Participant" means each key management employee of
the Company, except for Tier I Participants, who (i) is
qualified to participate in the Retirement Savings Plan;
and (ii) experiences a cutback in Employee Directed
Contributions, Employer Matching Contributions, and/or
Profit Sharing Contributions due to the limitations imposed
by the Code; and (iii) meets such other qualification
standards (including pay level) as determined by the
Committee from time to time, and who is thereby selected
for participation in the Plan by the Committee.
(an) "Treasury Note Account" means a separate bookkeeping
account not funded by the Rabbi Trust, to be maintained by
the Company, that shall offer a rate of return equal to the
average ten (10) year U.S. Treasury Note rate for the most
recently ended calendar quarter plus five percent (5%).
(ao) "Voluntary Deferral Account" has the same meaning set forth
in Section 5.2 hereof.
(ap) "Voluntary Stock Unit Deferral Account" means the
bookkeeping account established for a Participant which is
credited with Stock Units equal to the number of shares of
Common Stock (including fractions of a share) that were
voluntarily deferred into the Voluntary Stock Unit Deferral
Account by a Participant in connection with a stock option
exercise, or the lapse of restrictions on a restricted
stock grant or purchase, pursuant to the provisions of a
Company stock plan. The Voluntary Stock Unit Deferral
Account shall be reduced in a similar manner as of the date
that any Common Stock is distributed from such account to
the Participant.
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<PAGE> 9
As of the date any dividend is paid to holders of shares of
Common Stock, a Participant's Voluntary Stock Unit Deferral
Account shall be credited with additional Stock Units equal
to the number of shares of Common Stock (including
fractions of a share) that could have been purchased, at
the Closing Price of a share of Common Stock on such date,
with the amount that would have been paid as dividends on
that number of shares of Common Stock (including fractions
of a share) which is equal to the number of Stock Units
attributable to the Participant's Voluntary Stock Unit
Deferral Account as of the record date of such dividend. In
the case of dividends paid in property, the amount of the
dividend shall be deemed to be the fair market value of the
property at the time of the payment thereof, as determined
by the Committee. A distribution from the Voluntary Stock
Unit Deferral Account shall be paid in a number of shares
of Common Stock equal to the number of Stock Units
distributable.
(aq) "Voluntary Stock Unit Deferral" has the same meaning
ascribed to such term in Article 7 hereof.
2.2 GENDER AND NUMBER. Except where otherwise indicated by the context,
any masculine term used herein shall include the feminine, the plural shall
include the singular, and the singular shall include the plural.
ARTICLE 3. ADMINISTRATION
3.1 ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Committee except as limited by law or by the Articles of Incorporation or the
Bylaws of Kmart Corporation. Subject to the terms hereof, the Committee shall
have full power to (a) determine the terms and conditions of each Participant's
participation in the Plan; (b) construe and interpret the Plan and any agreement
or instrument entered into under the Plan; (c) establish, amend, or waive rules
and regulations for the Plan's administration; (d) amend (subject to the
provisions of Article 17 hereof) the terms and conditions of the Plan and any
agreement or instrument entered into under the Plan; (e) designate one or more
persons to administer the Plan; and (f) make other determinations which may be
necessary or advisable for the administration of the Plan.
3.2 DECISIONS BINDING. All determinations and decisions of the Committee
as to any disputed question arising under the Plan, including questions of
construction and interpretation, shall be final, conclusive, and binding on all
parties.
ARTICLE 4. ELIGIBILITY AND PARTICIPATION
4.1 ELIGIBILITY. Eligibility to participate in the Plan will be limited to
Tier I Participants and Tier II Participants. In the event a Participant no
longer meets the requirements for eligibility to participate in the Plan, such
Participant shall become an inactive Participant retaining all of the rights
described under the Plan pertaining to such Participant's then Accrued Account
Balances, except the right to make any further deferrals hereunder and the right
to receive any further Company credits. An inactive Participant may become an
active Participant again in the future.
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<PAGE> 10
4.2 PARTICIPATION. When a Participant first becomes eligible to
participate in the Plan, such Participant shall, as soon as practicable
thereafter, be notified of his or her eligibility to participate. At such time,
or as soon as administratively practicable thereafter, all Participants shall be
provided with deferral and investment election form(s); such election forms must
be completed and returned, within the time period specified, to the Company in
order for the Participant to participate in the Plan.
ARTICLE 5. VOLUNTARY DEFERRALS
5.1 PARTICIPATION. Eligibility to defer Base Salary pursuant to the terms
of this Article 5 shall be limited to Tier I Participants.
5.2 DEFERRAL. Prior to the beginning of the Plan Year in which the Base
Salary is otherwise earned, each Tier I Participant may voluntarily elect to
defer up to one hundred percent (100%) of his or her Base Salary for that Plan
Year. Subject to the terms hereof, such election shall be irrevocable for the
Plan Year in question. Amounts deferred pursuant to this Section 5.2, and
earnings thereon, shall be credited to such Participant's Voluntary Deferral
Account. Each Participant shall be one hundred percent (100%) vested in amounts
deferred pursuant to this Section 5.2, and earnings thereon, at all times.
Notwithstanding anything herein to the contrary, the amount of Base Salary
that a Tier I Participant may defer pursuant to this Section 5.2 shall be
limited by (a) amounts deferred pursuant to the Retirement Savings Plan; (b)
amounts withheld for applicable federal, state, and local taxes; (c) amounts
deducted pursuant to any insurance or benefit program; (d) voluntary payroll
deductions (e.g., United Way contributions); (e) involuntary payroll deductions
(e.g., garnishments); and (f) all other proper deductions, as determined by the
Committee.
5.3 PARTIAL PLAN YEAR PARTICIPATION. In the event a Tier I Participant
first becomes eligible to participate in the Plan after the beginning of a Plan
Year, the Committee may, in its discretion, allow such Participant to complete a
deferral election form and investment election form within thirty (30) calendar
days of becoming eligible to participate.
5.4 DEFERRAL ELECTION. Tier I Participants shall make elections to defer
Base Salary prior to the beginning of the Plan Year in which the Base Salary is
otherwise earned, or not later than thirty (30) calendar days following
notification of initial eligibility to participate for a partial Plan Year, as
applicable. The deferral election shall apply only to Base Salary earned
subsequent to the first day of the month following the date on which a valid
deferral election form is received by the Committee or the Committee's designee.
Each such election shall indicate the following:
(a) The amount of Base Salary earned during the Plan Year to be
deferred, which shall be irrevocable pursuant to Section
5.2 hereof;
(b) The Payout Commencement Date for the deferred Base Salary,
and earnings thereon, which shall be irrevocable pursuant
to Section 5.5 hereof; and
(c) The Form of Payout pursuant to Section 2.1(u) hereof.
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<PAGE> 11
5.5 LENGTH OF DEFERRAL AND FORM OF PAYOUT. Subject to Section 2.1(ab)
hereof, each Tier I Participant may irrevocably elect the length of deferral of
Base Salary deferred each Plan Year by designating a corresponding Payout
Commencement Date for such deferral. The Form of Payout shall be as elected by
such Participant pursuant to Section 2.1(u) hereof.
ARTICLE 6. MANDATORY DEFERRALS
6.1 DEFERRAL. If the Committee in its discretion determines that, with
respect to any tax year, a Participant is a "covered employee" for purposes of
Section 162(m) of the Code, the Committee shall impose a mandatory deferral of
all amounts otherwise payable to such employee by the Company to the extent that
such amounts meet the definition of "applicable employee remuneration" (as such
term is defined in Section 162(m) of the Code) and such amounts exceed
$1,000,000 (or such other amount as may be specified by Section 162(m) from time
to time) as determined by the Committee.
Amounts required to be deferred pursuant to this Section 6.1 shall be
credited to such Participant's Mandatory Deferral Account. Each Participant
shall be one hundred percent (100%) vested in amounts deferred pursuant to this
Section 6.1, and earnings thereon, at all times.
6.2 LENGTH OF DEFERRAL. All amounts deferred pursuant to Section 6.1
hereof, and earnings thereon, shall be paid out to the Participant on the
earliest date on which such amounts can be received by such Participant without
subjecting the Company to a loss of deductibility (due to Section 162(m) of the
Code) with respect to any part of such amounts. However, subject to Section
2.1(ab) hereof, a Participant can make an irrevocable election to have these
amounts deferred to a later Payout Commencement Date at which time no loss of
the Company deduction would occur (due to Section 162(m)); such election must be
made prior to lapse of the restriction set forth in this Section 6.2.
6.3 FORM OF PAYOUT. Subject to Sections 6.2 and 6.4 hereof, the payout of
Mandatory Deferrals, and earnings thereon, will be in a Lump-Sum Payment to the
extent not deferred by the Participant to a Payout Commencement Date. If
deferred to a Payout Commencement Date, the Form of Payout will be as elected by
such Participant pursuant to Section 2.1(u) hereof.
6.4 COMMITTEE DISCRETION. In the event that any payment under this Plan
would cause the Company a loss of deductibility (due to Section 162(m)), the
Committee reserves the right hereunder to (i) delay such payment; (ii) require
additional mandatory deferrals to offset such payment; or (iii) to take any
other action necessary and appropriate to avoid such loss of deductibility.
ARTICLE 7. VOLUNTARY STOCK UNIT DEFERRALS
7.1 PARTICIPATION. Eligibility to defer the receipt of shares of Common
Stock which were voluntarily cancelled and Stock Units granted in lieu thereof
by the election of a Participant in connection with (a) the exercise of a stock
option under a Company stock plan, or (b) the lapse of restrictions on
restricted stock granted or purchased under a Company stock plan, shall be
limited to Tier I Participants.
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<PAGE> 12
7.2 DEFERRAL. At least six (6) months prior to the exercise of a stock
option (the "Exercise Date") under a Company stock plan or the lapse of
restrictions (the "Expiration Date") on restricted stock granted or purchased
under a Company stock plan, each Tier I Participant may voluntarily elect to
cancel the applicable shares of Common Stock and receive Stock Units in lieu
thereof and to defer such Stock Units pursuant to the terms hereof.
Subject to the terms hereof, such election shall be irrevocable. Such
Stock Units deferred pursuant to this Section 7.2, and earnings thereon, shall
be credited to the Participant's Voluntary Stock Unit Deferral Account. A
Participant shall be one hundred percent (100%) vested in such Stock Units, and
earnings thereon, at all times.
7.3 DEFERRAL ELECTION. Tier I Participants shall make elections to defer
Stock Units described in Section 7.2 hereof by submitting a valid deferral
election form to the Committee, or the Committee's designee, at least six (6)
months prior to the Exercise Date or Expiration Date, as applicable, and by
entering into a written agreement with the Company under the applicable Company
stock plan. Each such election shall indicate the following:
(a) The number of restricted shares, or the option shares, as
applicable, to be deferred as Voluntary Stock Unit
Deferrals, which shall be irrevocable pursuant to Section
7.2 hereof;
(b) The Payout Commencement Date for the Voluntary Stock Unit
Deferrals, and earnings thereon, which shall be irrevocable
pursuant to Section 7.4 hereof; and
(c) The Form of Payout pursuant to Section 2.1(u) hereof.
7.4 LENGTH OF DEFERRAL AND FORM OF PAYOUT. Subject to Section 2.1(ab)
hereof, each Tier I Participant may irrevocably elect the length of deferral of
each Voluntary Stock Unit Deferral by designating a corresponding Payout
Commencement Date for each such Deferral. Any Stock Units credited to a
Participant's Voluntary Stock Unit Deferral Account shall be paid out to the
Participant in shares of Common Stock. The Form of Payout shall be as elected by
such Participant pursuant to Section 2.1(u) hereof.
ARTICLE 8. SAVINGS PLAN DEFERRAL RESTORATION
8.1 PARTICIPATION. Eligibility to defer Compensation pursuant to the terms
of this Article 8 shall be limited to Tier II Participants.
8.2 DEFERRAL. Prior to the beginning of the Plan Year in which the
Compensation is otherwise earned, each Tier II Participant may voluntarily elect
to defer up to ten percent (10%) of his or her Compensation for that Plan Year.
Subject to the terms hereof, such election shall be irrevocable for the Plan
Year in question. Amounts deferred pursuant to this Section 8.2, and earnings
thereon, shall be credited to such Participant's Retirement Savings Plan
Deferral Restoration Account. Each Participant shall be one hundred percent
(100%) vested in amounts deferred pursuant to this Section 8.2, and earnings
thereon, at all times.
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<PAGE> 13
8.3 PARTIAL PLAN YEAR PARTICIPATION. In the event a Tier II Participant
first becomes eligible to participate in the Plan after the beginning of a Plan
Year, such Participant must wait until the following Plan Year to be eligible to
make deferrals pursuant to this Article 8.
8.4 DEFERRAL ELECTION. Tier II Participants shall make elections to defer
Compensation prior to the beginning of the Plan Year in which the Compensation
is otherwise earned. Each such election shall indicate the following:
(a) The amount of Compensation (up to ten percent (10%) earned
during the Plan Year to be deferred, which shall be
irrevocable pursuant to Section 8.2 hereof;
(b) The Payout Commencement Date for the deferred Compensation,
and earnings thereon, which shall be irrevocable pursuant
to Section 8.5 hereof; and
(c) The Form of Payout, pursuant to Section 2.1(u) hereof.
8.5 LENGTH OF DEFERRAL AND FORM OF PAYOUT. Subject to Section 2.1(ab)
hereof, each Tier II Participant may irrevocably elect the length of deferral of
Compensation deferred each Plan Year by designating a corresponding Payout
Commencement Date for such deferral, and earnings thereon. The Form of Payout
will be as elected by such Participant pursuant to Section 2.1(u) hereof.
ARTICLE 9. COMPANY 401(K) MATCH RESTORATION
9.1 PARTICIPATION. Subject to Section 9.3 hereof, Tier I Participants, who
are eligible to participate in the Retirement Savings Plan and experience a
cutback in Employer Matching Contributions due to the limitations imposed by the
Code, and Tier II Participants, who are employed with the Company at the
beginning of a Plan Year, shall be eligible to receive Company credits pursuant
to this Article 9 for such Plan Year.
9.2 COMPANY 401(K) MATCH RESTORATION. For each Plan Year in which an
employee is eligible to receive Company credits pursuant to this Article 9, the
Company shall credit to such Participant's Match Restoration Account an amount
equal to the excess of (a) over (b):
(a) The Employer Matching Contribution that would have been
credited to the Participant's account for that Plan Year
under the Retirement Savings Plan had the contribution been
based on the Participant's total Compensation for the Plan
Year (including all deferred compensation), unreduced by
tax-qualified plan limits of the Code, and increased by
amounts deferred pursuant to the Retirement Savings Plan.
(b) The actual Employer Matching Contribution credited to the
Participant's account for that Plan Year under the
Retirement Savings Plan.
Each Participant hired before April 1, 1997 shall be one hundred percent
(100%) vested in amounts credited to such Participant's Match Restoration
Account pursuant to this Section 9.2, and earnings thereon, at all times; each
Participant hired on or after April 1, 1997 shall become one hundred percent
(100%) vested in amounts credited to such Participant's Match Restoration
Account pursuant to this Section 9.2, and earnings thereon, upon the date such
Participant becomes one
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<PAGE> 14
hundred percent (100%) vested in Employer Matching Contributions credited to
such Participant under the Retirement Savings Plan. Notwithstanding the
immediately preceding sentence, a Participant, who is an active employee of the
Company, automatically becomes one hundred percent (100%) vested in amounts
credited to such Participant's Match Restoration Account pursuant to this
Section 9.2, and earnings thereon, upon such Participant's sixty-fifth (65th)
birthday or death.
9.3 PARTIAL PLAN YEAR PARTICIPATION. In the event a Participant first
becomes eligible to participate in the Plan after the beginning of a Plan Year,
such Participant must wait until the following Plan Year to be eligible to
accrue Company credits pursuant to this Article 9. Notwithstanding the
immediately preceding sentence, the Committee may, in its discretion, allow such
Participant to participate during such partial Plan Year.
9.4 LENGTH OF DEFERRAL AND FORM OF PAYOUT. Subject to Section 2.1(ab)
hereof, any vested amounts credited to a Participant's Match Restoration Account
pursuant to Section 9.2 hereof, and earnings thereon, shall be paid out to the
Participant in shares of Common Stock beginning in the January following such
Participant's termination of employment with the Company. The Form of Payout
will be as elected by such Participant pursuant to Section 2.1(u) hereof.
ARTICLE 10. COMPANY PROFIT SHARING RESTORATION
10.1 PARTICIPATION. Subject to Section 10.3 hereof, Tier I Participants,
who are eligible to participate in the Retirement Savings Plan and experience a
cutback in Profit Sharing Contributions due to the limitations imposed by the
Code, and Tier II Participants, who are employed with the Company on December 31
of a Plan Year, shall be eligible to receive Company credits pursuant to this
Article 10 for such Plan Year.
10.2 COMPANY PROFIT SHARING RESTORATION. For each Plan Year in which an
employee is eligible to receive Company credits pursuant to this Article 10, the
Company will credit to such Participant's Profit Sharing Restoration Account an
amount equal to the excess of (a) over (b):
(a) The Profit Sharing Contribution that would have been
credited to the Participant's account for the Plan Year
under the Retirement Savings Plan had the contribution been
based on the Participant's total Compensation for the Plan
Year (including all deferred compensation), unreduced by
tax-qualified plan limits of the Code, and increased by
amounts deferred pursuant to the Retirement Savings Plan.
(b) The actual Profit Sharing Contribution credited to the
Participant's account for that Plan Year under the
Retirement Savings Plan.
Each Participant shall become one hundred percent (100%) vested in amounts
credited to such Participant's Profit Sharing Restoration Account pursuant to
this Section 10.2, and earnings thereon, automatically upon the first to occur
of (a) five (5) years of service with the Company; (b) such Participant's
sixty-fifth (65th) birthday; or (c) such Participant's death.
Company credits credited to Participants pursuant to this Section 10.2
shall in no way reduce amounts available to the Company to make Profit Sharing
Contributions under the Retirement Savings Plan.
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<PAGE> 15
10.3 PARTIAL PLAN YEAR PARTICIPATION. In the event a Participant first
becomes eligible to participate in the Plan after the beginning of a Plan Year,
such Participant must wait until the following Plan Year to be eligible to
accrue Company credits pursuant to this Article 10. Notwithstanding the
immediately preceding sentence, the Committee may, in its discretion, allow such
Participant to participate during such partial Plan Year.
10.4 LENGTH OF DEFERRAL AND FORM OF PAYOUT. Subject to Section 2.1(ab)
hereof, any vested amounts credited to a Participant's Profit Sharing
Restoration Account pursuant to Section 10.2 hereof, and earnings thereon, shall
be paid out to the Participant beginning in the January following such
Participant's termination of employment with the Company. The Form of Payout
will be as elected by such Participant pursuant to Section 2.1(u) hereof.
ARTICLE 11. DISCRETIONARY COMPANY CREDITS
11.1 PARTICIPATION. Employees designated by the Committee in its
discretion are eligible to receive Company credits pursuant to this Article 11.
11.2 DISCRETIONARY COMPANY CREDITS. In addition to the Company 401(k)
Match Restoration and Company Profit Sharing Restoration, as set forth in
Sections 9.2 and 10.2 hereof, the Committee in its discretion may cause
additional Company credits to be credited to the Discretionary Company Credits
Account of any Participant, or group of Participants, for any reason whatsoever.
The Committee shall establish rules and procedures for, and the terms of, such
credits.
ARTICLE 12. PARTICIPANT ACCOUNTS AND THE RABBI TRUST
12.1 PARTICIPANT ACCOUNTS. The Company shall establish and maintain
individual bookkeeping accounts for each Participant's Accrued Account Balances.
Each component of a Participant's Accrued Account Balances shall be credited to
such Participant's bookkeeping account as soon as administratively practicable
following the date such credits can first be calculated. The establishment and
maintenance of such accounts, however, shall not be construed as entitling any
Participant to any specific asset of the Company.
Each Participant who has a balance in any account will be furnished a
statement of his or her Accrued Account Balances at least annually.
12.2 INVESTMENT ELECTIONS. All Accrued Account Balances shall be credited
with earnings based upon the rate of return actually achieved by the underlying
investments, as described in this Section 12.2.
(a) Amounts credited to a Participant's Voluntary Deferral Account
shall be invested as elected by such Participant in one or more Investment
Funds, except the Company Stock Fund and other investment choices excluded
due to applicable law or regulation or by action of the Committee.
(b) Amounts credited to a Participant's Mandatory Deferral Account
shall be invested as elected by the Participant in one or more Investment
Funds, except the Company Stock Fund and other investment choices excluded
due to applicable law or regulation or by action of the
13
<PAGE> 16
Committee. Notwithstanding the immediately preceding sentence, amounts
credited to the Mandatory Deferral Account of a Participant who has a
preexisting Treasury Note Account balance, due to credits to such Treasury
Note Account pursuant to Section 13(b) hereof, shall continue to be
invested in such Participant's Treasury Note Account, unless the
Participant elects to voluntarily have such amounts invested in one or
more Investment Funds, except the Company Stock Fund and other investment
choices excluded due to applicable law or regulation or by action of the
Committee. Amounts deferred into the Treasury Note Account shall be
general asset obligations of the Company, and shall not be eligible for
payment out of Rabbi Trust assets. Once a Participant who has a balance in
his or her Treasury Note Account elects to have amounts deferred pursuant
to Section 6.1 hereof invested in anything other than the Treasury Note
Account, then such Participant may never again elect to have amounts
deferred pursuant to Section 6.1 hereof invested in the Treasury Note
Account. Notwithstanding anything herein to the contrary, once the
restriction set forth in Section 6.2 hereof is no longer applicable to a
Participant, any amounts invested in the Treasury Note Account shall
thereafter be invested as elected by such Participant in one or more
Investment Funds, except the Company Stock Fund and other investment
choices excluded due to applicable law or regulation or by action of the
Committee.
(c) Stock Units credited to a Participant's Match Restoration
Account shall be automatically credited to the Stock Unit Subaccount. Once
a Participant reaches age fifty-five (55), all or any part of the Stock
Units credited both before or after age fifty-five (55), to such
Participant's Match Restoration Account shall be invested as elected by
each Participant in either (i) the Stock Unit Subaccount; or (ii) one or
more Investment Funds, except the Company Stock Fund and other investment
choices excluded due to applicable law or regulation or by action of the
Committee. No such transfer is allowed prior to a Participant's
fifty-fifth (55th) birthday. A Participant may not make transfers into the
Stock Unit Subaccount from any other account. Once amounts are transferred
out of the Stock Unit Subaccount, they cannot be transferred back into
this investment choice.
(d) Voluntary Stock Unit Deferrals shall be credited to a
Participant's Voluntary Stock Unit Deferral Account. A Participant may not
make transfers into or out of the Voluntary Stock Unit Deferral Account.
(e) Amounts credited to a Participant's Profit Sharing Restoration
Account shall be invested as elected by such Participant in one or more
Investment Funds, except the Company Stock Fund and other investment
choices excluded due to applicable law or regulation or by action of the
Committee.
(f) Amounts credited to a Participant's Retirement Savings Plan
Deferral Restoration Account shall be invested as elected by such
Participant in one or more Investment Funds, except the Company Stock Fund
and other investment choices excluded due to applicable law or regulation
or by action of the Committee.
(g) Amounts credited to a Participant's Discretionary Company
Credits Account shall be invested pursuant to the rules and procedures
determined by the Committee in its discretion.
14
<PAGE> 17
Participants shall be permitted to change their investment elections in
the same frequency as participants under the Retirement Savings Plan. Investment
elections are not permitted with respect to the Voluntary Stock Unit Deferral
Account, or, except as provided in Section 12.2(c), with respect to the Match
Restoration Account.
Notwithstanding anything herein to the contrary, the Committee reserves
the right to (a) change the number and availability of the investment
alternatives at any time; and (b) not actually invest deferrals and/or Company
credits into the investment alternatives elected by each Participant.
12.3 CHARGES AGAINST ACCOUNTS. There shall be charged against each
Participant's Accrued Account Balances any payments made thereunder to the
Participant or to his or her beneficiary.
12.4 ESTABLISHMENT OF A RABBI TRUST. As soon as administratively
practicable following the Effective Date, Kmart Corporation shall establish an
irrevocable Rabbi Trust, governed by a Rabbi Trust Agreement (which shall be a
grantor trust within the meaning of Code Sections 671-678) for the benefit of
Participants and beneficiaries of Participants, as appropriate and applicable.
The Rabbi Trust shall have an independent Trustee (such Trustee to have a
fiduciary duty to carry out the terms and conditions of the Trust) as selected
by the Company, and shall have restrictions as to the Company's ability to amend
the Trust or to cancel benefits provided thereunder.
Assets contained in the Rabbi Trust shall at all times be specifically
subject to the claims of Kmart Corporation's general creditors in the event of
insolvency; such term shall be specifically defined within the provisions of the
Rabbi Trust, along with a required procedure for notifying the Trustee of any
such insolvency.
All benefits hereunder, except for benefits associated with the Treasury
Note Account, shall be paid first from the Rabbi Trust, to the extent assets
exist in the Rabbi Trust and then, as necessary, by Kmart Corporation from
general assets. All amounts payable pursuant to the Treasury Note Account shall
be paid by Kmart Corporation from general assets.
12.5 FUNDING OF THE RABBI TRUST. At the discretion of the Committee, Kmart
Corporation may contribute cash, cash equivalents, and/or Kmart Stock to the
Rabbi Trust, for the benefit of Participants and beneficiaries of Participants,
as the Committee deems appropriate. It is intended that the Rabbi Trust will be
fully funded at all times to cover the Accrued Rabbi Trust Obligations of Kmart
Corporation. Upon a Change in Control, Kmart Corporation shall be required to
make an immediate contribution to the Rabbi Trust to cause all Accrued Rabbi
Trust Obligations to be fully or overfunded as of that date.
ARTICLE 13. ALLOCATION OF PRIOR DEFERRALS AND COMPANY CREDITS
Any outstanding Participant deferrals and Company 401(k) match or profit
sharing restoration amounts, and earnings thereon, credited to any Participant
account under either the Kmart Corporation Supplemental Savings Plan or the
Kmart Corporation Executive Deferred Compensation Plan (together the
"Predecessory Deferral/Restoration Arrangements"), as of the Effective Date of
this Plan, shall be withdrawn and automatically transferred to such
Participant's account under this Plan within ninety (90) calendar days from the
Effective Date, or as soon as otherwise administratively practicable.
15
<PAGE> 18
Amounts transferred pursuant to this Article 13 shall be invested as
follows:
(a) Amounts transferred, and earnings thereon, that meet the
definition of Employer Matching Contributions and that were
originally credited to a Participant under the Kmart Corporation
Supplemental Savings Plan shall be invested pursuant to Section
12.2(c) hereof;
(b) Amounts transferred, and earnings thereon, that meet the
definition of Mandatory Deferrals and that were originally
credited to a Participant pursuant to Section 2(b) of the Kmart
Corporation Executive Deferred Compensation Plan shall be invested
as elected by the Participant either (i) solely in the Treasury
Note Account; or (ii) in one or more Investment Funds, except the
Company Stock Fund and other investment choices excluded due to
applicable law or regulation or by action of the Committee; and
(c) All other amounts transferred, and earnings thereon, shall be
invested as elected by the Participant in one or more Investment
Funds, except the Company Stock Fund and other investment choices
excluded due to applicable law or regulation or by action of the
Committee.
By no later than the end of the first Plan Year, Kmart Corporation shall
contribute cash, cash equivalents, and/or Common Stock of Kmart Corporation to
the Rabbi Trust for the benefit of Participants in an amount equal to the amount
of all deferrals and Company credits, and earnings thereon, accrued in prior
years under Predecessory Deferral/Restoration Arrangements except outstanding
credits to the Treasury Note Account.
It is intended that this Plan replace the Predecessory
Deferral/Restoration Arrangements. No Participant will be allowed to defer any
amounts or accrue any benefits under the Predecessory Deferral/Restoration
Arrangements after the Effective Date hereof.
ARTICLE 14. BENEFICIARY DESIGNATION
14.1 DESIGNATION OF BENEFICIARY. Each Participant may designate or change
a beneficiary or beneficiaries who, upon the Participant's death, will receive
the amounts that otherwise would have been paid to the Participant under the
Plan. All such designations and any changes thereto shall be signed by the
Participant, and shall be in such form as prescribed by the Committee. Each
designation shall be effective as of the date delivered to a Company employee so
designated by the Committee. The payment of an amount equal to the amount that
otherwise would have been paid to the Participant shall be paid in accordance
with the last unrevoked written designation of beneficiary that has been signed
by the Participant and delivered by the Participant to the Company's designee
prior to the Participant's death.
14.2 DEATH OF BENEFICIARY. In the event that all the beneficiaries named
by a Participant, pursuant to Section 14.1 hereof, predecease the Participant,
the amount that otherwise would have been paid to the Participant or the
Participant's beneficiaries under the Plan shall be paid to the Participant's
estate or the person designated by the Participant's estate.
16
<PAGE> 19
14.3 INEFFECTIVE DESIGNATION. In the event a Participant does not
designate a beneficiary, or for any reason such designation is ineffective, in
whole or in part, the amounts that otherwise would have been paid to the
Participant or the Participant's beneficiaries under the Plan shall be paid to
the person or persons the Participant designated as the beneficiary or
beneficiaries under the Retirement Savings Plan, and if no such designation was
made, then to the Participant's estate or the person designated by the
Participant's estate.
14.4 INDEMNITY. The Company may require an indemnity and/or evidence or
other assurances as it deems necessary in connection with any payment hereunder
to a Participant's beneficiary, estate, legal representative, or guardian.
ARTICLE 15. WITHHOLDING OF TAXES
The Company shall have the right to require Participants to remit to the
Company, or any person or entity designated by the Committee to administer the
Plan, an amount sufficient to satisfy federal, state, and local tax withholding
requirements, or to deduct from all payments made pursuant to the Plan amounts
sufficient to satisfy such withholding requirements.
ARTICLE 16. EMPLOYMENT/MISCONDUCT
16.1 EMPLOYMENT. No provision of the Plan, nor any action taken by the
Committee or the Company pursuant to the Plan, shall give or be construed as
giving a Participant any right to be retained in the employ of the Company, or
affect or limit in any way the right of the Company to terminate his or her
employment.
16.2 MISCONDUCT. Notwithstanding anything hereof to the contrary, all
rights with respect to the Accrued Account Balances of a Participant are subject
to the conditions that the Participant not engage or have engaged (a) in fraud,
dishonesty, conduct in violation of Company policy, or similar acts at any time
while an employee of the Company; or (b) in activity directly or indirectly in
competition with any business of the Company, or in other conduct inimical to
the best interests of the Company during or following the Participant's
employment with the Company. If it is determined by the Committee, either before
or after termination of employment of a Participant, that there has been a
failure of any such conditions, the Committee shall:
(a) Withhold, and such Participant shall forfeit all rights
with respect to, all amounts then remaining in such
Participant's Match Restoration Account, Profit Sharing
Restoration Account, and/or Discretionary Company Credits
Account; and
(b) Accelerate the payout amounts of all then remaining in such
Participant's Voluntary Deferral Account, Mandatory
Deferral Account, Voluntary Stock Unit Deferral Account
and/or the Retirement Savings Plan Deferral Restoration
Account to a date to be determined by the Committee in its
discretion.
ARTICLE 17. AMENDMENT AND TERMINATION
The Company hereby reserves the right to amend, suspend, or terminate the
Plan at any time by action of the Board, in its sole discretion. No such
amendment, suspension, or termination shall in
17
<PAGE> 20
any material manner adversely affect any Participant's rights to amounts
theretofore accrued and payable hereunder, without the written consent of the
Participant.
ARTICLE 18. MISCELLANEOUS
18.1 FINANCIAL OR MEDICAL HARDSHIP. The Committee shall have the authority
to alter the timing or manner of payment of Accrued Account Balances in the
event that the Participant establishes, to the satisfaction of the Committee,
severe financial or medical hardship. In such event, the Committee may, in its
discretion:
(a) Authorize the cessation of Voluntary Deferrals pursuant to
Section 5.2 hereof, and Savings Plan Deferral Restoration
amounts pursuant to Section 8.2 hereof;
(b) Provide that all, or a portion, of the Accrued Account
Balances shall immediately be paid in cash in a Lump-Sum
Payment; and/or
(c) Provide that all, or a portion of, Installment Payments
payable over a period of time shall instead be paid
immediately in cash in a Lump-Sum Payment; and/or
(d) Provide for such other payment schedule as deemed
appropriate by the Committee under the circumstances.
However, the amount paid pursuant to this Section 18.1 shall not exceed
that amount which the Committee determines to be reasonably necessary for the
Participant to meet the financial or medical hardships at the time of such
payment. The severity of the financial or medical hardship shall be judged by
the Committee. Severe financial or medical hardship will be deemed to exist in
the event of the Participant's long and serious illness, impending bankruptcy,
or similar unforeseeable and extraordinary circumstances arising as a result of
events beyond the control of the Participant. The Committee's decision with
respect to the severity of financial or medical hardship and the manner in
which, if at all, the Participant's future deferral opportunities hereunder
shall cease, and/or the manner in which, if at all, the payment of Accrued
Account Balances to the Participant shall be altered or modified, shall be
final, conclusive, and not subject to appeal.
18.2 NOTICE. Any notice or filing required or permitted to be given to the
Company under the Plan shall be sufficient if in writing and hand delivered, or
sent by registered or certified mail to the Chairman of the Committee or the
Committee's designee. Such notice, if mailed, shall be addressed to the
principal executive offices of Kmart Corporation. Notice mailed to a Participant
shall be at the last known address as is given in the records of Kmart
Corporation. Notices shall be deemed given as of the date of delivery or, if
delivery is made by mail, as of the date shown on the postmark on the receipt
for registration or certification.
18.3 UNFUNDED PLAN. This Plan is intended to be an unfunded plan
maintained primarily to provide deferred compensation benefits for "a select
group of management or highly compensated employees" within the meaning of
Sections 201, 301, and 401 of ERISA, and therefore is further intended to be
exempt from the provisions of Parts 2, 3, and 4 of Title I of ERISA.
Accordingly, the Committee may terminate the Plan for any or all Participants,
subject to Article 17 hereof, in order to achieve and maintain this intended
result.
18
<PAGE> 21
18.4 SUCCESSORS. All obligations of Kmart Corporation under the Plan shall
be binding on any successor to Kmart Corporation, whether the existence of such
successor is the result of a direct or indirect purchase, merger, consolidation,
or otherwise, of all or substantially all of the business and/or assets of Kmart
Corporation.
18.5. EFFECT OF CERTAIN CHANGES. In the event of any extraordinary
dividend, stock dividend, recapitalization, merger, consolidation, stock split,
warrant or rights issuance, or combination or exchange of shares, or other
similar transactions with respect to the Common Stock, the number of Stock Units
credited to the Stock Unit Subaccount, the number of Stock Units credited to the
Voluntary Stock Unit Deferral Account, and the number of shares of Common Stock
to be distributed hereunder pursuant to Articles 6, 7, 9, 11 and 12 (as
applicable) shall be equitably adjusted by the Committee to reflect such event
and to preserve the value of such Stock Units, and the Committee may make such
other adjustments to the terms of outstanding Stock Units as it may deem
equitable under the circumstances; provided, however, that any fractional shares
resulting from such adjustment shall be disregarded.
18.6 NONTRANSFERABILITY. Participants' rights to Accrued Account Balances
under the Plan may not be sold, transferred, assigned, or otherwise alienated or
hypothecated, other than pursuant to Article 14 hereof or by will or by the laws
of descent and distribution. In no event shall Kmart Corporation make any
payment under the Plan to any assignee or creditor of a Participant.
18.7 SEVERABILITY. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
18.8 COSTS OF THE PLAN. All costs of implementing and administering the
Plan shall be borne by Kmart Corporation.
18.9 OTHER PERMITTED DEFERRAL OPPORTUNITIES. The Committee may, in its
discretion, permit a Participant to defer such Participant's receipt, if any, of
the payment of cash or the delivery of capital stock of Kmart Corporation that
would otherwise be due to such Participant pursuant to the terms of the 1997
Kmart Corporation Long-Term Equity Compensation Plan, or any other stock plan of
the Company, and any successor plans thereto. The Committee shall establish
rules and procedures for such deferrals.
18.10 GOVERNING LAW. The Plan shall be governed by and construed in
accordance with the laws of the State of Michigan without giving effect to any
choice or conflict of law provision or rule.
Effective Date: January 1, 1998; amended and restated as of September 1, 1998.
19
<PAGE> 1
EXHIBIT 11
KMART CORPORATION
INFORMATION ON COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
($ MILLIONS) Fiscal Year Ended
-----------------------------------------
January 27, January 28, January 29,
1999 1998 1997
-----------------------------------------
I. Basic earnings per common share:
<S> <C> <C> <C>
Income (loss) from continuing operations before
extraordinary item and the effect of accounting changes $ 518 $ 249 $ 231
Less: Series B and C convertible preferred shares dividend
payment - - -
-----------------------------------------
(a) Income (loss) available to common shareholders from continuing
operations before extraordinary item and the effect of accounting changes 518 249 231
(b) Discontinued operations including the effect of accounting
changes, net of income taxes - - (5)
(c) Gain (loss) on disposal of discontinued operations,
net of income taxes - - (446)
(d) Extraordinary item, net of income taxes - - -
-----------------------------------------
(e) Adjusted net income (loss) (1) $ 518 $ 249 $ (220)
=========================================
(f) Weighted average common shares outstanding 492.1 487.1 483.6
=========================================
Basic earnings per common share:
Income (loss) available to common shareholders from continuing operations
before extraordinary item and the effect of accounting changes (a)/(f) $ 1.05 $ 0.51 $ 0.48
Discontinued operations including the effect of accounting
changes, net of income taxes (b)/(f) - - (0.01)
Gain (loss) on disposal of discontinued operations,
net of income taxes (c)/(f) - - (0.92)
Extraordinary item, net of income taxes (d)/(f) - - -
-----------------------------------------
Net income (loss) (e)/(f) $ 1.05 $ 0.51 $ (0.45)
=========================================
<CAPTION> Fiscal Year Ended
-------------------------
January 31, January 25,
1996* 1995*
-------------------------
I. Basic earnings per common share:
<S> <C> <C>
Income (loss) from continuing operations before
extraordinary item and the effect of accounting changes $ (230) $ 96
Less: Series B and C convertible preferred shares dividend
payment (6) (9)
---------------------
(a) Income (loss) available to common shareholders from continuing
operations before extraordinary item and the effect of accounting changes (236) 87
(b) Discontinued operations including the effect of accounting
changes, net of income taxes (260) 83
(c) Gain (loss) on disposal of discontinued operations,
net of income taxes (30) 117
(d) Extraordinary item, net of income taxes (51) -
---------------------
(e) Adjusted net income (loss) (1) $ (577) $ 287
=====================
(f) Weighted average common shares outstanding 459.8 427.2
=====================
Basic earnings per common share:
Income (loss) available to common shareholders from continuing operations
before extraordinary item and the effect of accounting changes (a)/(f) $ (0.51) $ 0.20
Discontinued operations including the effect of accounting
changes, net of income taxes (b)/(f) (0.57) 0.20
Gain (loss) on disposal of discontinued operations,
net of income taxes (c)/(f) (0.06) 0.27
Extraordinary item, net of income taxes (d)/(f) (0.11) -
---------------------
Net income (loss) (e)/(f) $ (1.25) $ 0.67
=====================
</TABLE>
- --------------------------------------------------------------------------------
* Prior year amounts have been restated for the effect of discontinued
operations.
(1) Adjusted net income (loss) included an after-tax provision of $13 million or
$0.03 per share for fiscal 1998 and $81 million or $0.17 per share for fiscal
1997 related to non recurring charges for voluntary early retirement programs
and an after tax provision of $150 million or $0.33 per share for fiscal 1995
related to the adoption of Financial Accounting Standard No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of".
- --------------------------------------------------------------------------------
1
<PAGE> 2
EXHIBIT 11
<TABLE>
<CAPTION>
($ Millions) Fiscal Year Ended
--------------------------------------------
January 27, January 28, January 29,
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
II. Earnings per common and common equivalent share
assuming dilution:
Income (loss) from continuing operations before extraordinary item
and the effect of accounting changes $ 518 $ 249 $ 231
Add: Dividends trust convertible preferred, net 50 49 31
--------------------------------------------
(h) Adjusted Income (loss) from continuing operations before
extraordinary item and the effect of accounting changes 568 298 262
(i) Discontinued operations including the effect of accounting
changes, net of income taxes - - (5)
(j) Gain (loss) on disposal of discontinued operations,
net of income taxes - (446)
(k) Extraordinary item, net of income taxes - - -
--------------------------------------------
(1) Adjusted net income (loss) (1) $ 568 $ 298 $ (189)
============================================
Weighted average common shares outstanding 492.1 487.1 483.6
Weighted average $3.41 depository shares outstanding
(each representing 1/4 share Series A conversion preferred) - - -
Weighted average Series B and C convertible preferred shares outstanding - - -
Weighted average trust convertible preferred 66.7 66.7 41.4
Stock Options:
Common shares assumed issued 21.2 16.3 13.0
Less: common shares assumed repurchased (15.1) (11.7) (10.5)
--------------------------------------------
6.1 4.6 2.5
--------------------------------------------
(m) Applicable common shares, as adjusted 564.9 558.4 527.5
============================================
Diluted earnings per common and common equivalent share:
Adjusted income (loss) from continuing operations before
extraordinary item and the effect of accounting changes (h)/(m) $ 1.01 $ $ 0.53 $ 0.50
Discontinued operations including the effect of accounting
changes, net of income taxes (i)1(m) - - (0.01)
Gain (loss) on disposal of discontinued operations,
net of income taxes (j)/(m) - - (0.85)
Extraordinary item, net of income taxes (k)/(m) - - -
--------------------------------------------
Net income (loss) (l)/(m) $ 1.01 $ 0.53 $ (0.36)
============================================
(2) (2)
<CAPTION>
Fiscal Year Ended
---------------------------
January 31, January 25,
1996* 1995*
---------------------------
II. Earnings per common and common equivalent share
assuming dilution:
<S> <C> <C>
Income (loss) from continuing operations before extraordinary item
and the effect of accounting changes $ (230) $ 96
Add: Dividends trust convertible preferred, net - -
---------------------------
(h) Adjusted Income (loss) from continuing operations before
extraordinary item and the effect of accounting changes (230) 96
(i) Discontinued operations including the effect of accounting
changes, net of income taxes (260) 83
(j) Gain (loss) on disposal of discontinued operations,
net of income taxes (30) 117
(k) Extraordinary item, net of income taxes (51) -
---------------------------
(1) Adjusted net income (loss) (1) $ (571) 296
===========================
Weighted average common shares outstanding 459.8 427.2
Weighted average $3.41 depository shares outstanding
(each representing 1/4 share Series A conversion preferred) - 29.2
Weighted average Series B and C convertible preferred shares outstanding - 9.7
Weighted average trust convertible preferred - -
Stock Options:
Common shares assumed issued 1.6 2.2
Less: common shares assumed repurchased (1.5) (2.0)
---------------------------
0.1 0.2
---------------------------
(m) Applicable common shares, as adjusted 459.9 466.3
===========================
Diluted earnings per common and common equivalent share:
Adjusted income (loss) from continuing operations before
extraordinary item and the effect of accounting changes (h)/(m) $ (0.50) $ 0.21
Discontinued operations including the effect of accounting
changes, net of income taxes (i)1(m) (0.57) 0.17
Gain (loss) on disposal of discontinued operations,
net of income taxes (j)/(m) (0.06) 0.25
Extraordinary item, net of income taxes (k)/(m) (0.11) -
---------------------------
Net income (loss) (l)/(m) $ (1.24) 0.63
===========================
(2) (2)
</TABLE>
- --------------------------------------------------------------------------------
Prior year amounts have been restated for the effect of discontinued operations.
(1) Adjusted net income (loss) included an after tax provision of $13 million or
$0.02 per share for fiscal 1998 and $81 million or $0.15 per share for fiscal
1997 related to non recurring charges for voluntary early retirement programs
and an after tax provision of $150 million or $0.33 per share for fiscal 1995
related to the adoption of Financial Accounting Standard No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of".
(2) This calculation is submitted in accordance with Regulation S-K item 601(b)
(11) although it is contrary to paragraph 13 of SFAS 128 because it produces an
anti-dilutive result.
- --------------------------------------------------------------------------------
2
<PAGE> 1
EXHIBIT 12
KMART CORPORATION
INFORMATION ON RATIO OF EARNINGS
TO FIXED CHARGES COMPUTATION
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------
($ Millions) January 27, January 28, January 29,
1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
Net income (loss) from continuing retail operations before
extraordinary items and the effect of accounting changes $ 518 $ 249 $ 231
Dividends on trust convertible preferred, net 50 49 31
Income taxes 230 120 68
----------------------------------------
Pretax income (loss) from continuing retail operations $ 798 $ 418 $ 330
Distributions from unconsolidated affiliated
retail companies that exceed equity income (42) 1 28
Fixed charges per below 579 660 733
Less: Interest capitalized during the period (13) (8) (9)
Preferred dividends of wholly awned trust subsidiary
not deducted in the determination of pre-tax income (78) (75) (47)
----------------------------------------
Earnings (loss) from continuing retail operations $ 1,244 $ 996 $ 1,035
========================================
Fixed charges:
Interest expense 281 378 498
Rent expense - portion of operating rentals representative
of the interest factor 173 159 146
Preferred dividends of wholly owned trust subsidiary 78 75 47
Other 47 48 42
----------------------------------------
Total fixed charges $ 579 $ 660 $ 733
========================================
Ratio of income to fixed charges 2.1 1.5 1.4
========================================
</TABLE>
1
<PAGE> 1
CONSOLIDATED SELECTED FINANCIAL DATA EXHIBIT 13
<TABLE>
<CAPTION>
Dollars in millions, except per share data 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS (1)
Sales $ 33,674 $ 32,183 $ 31,437 $ 31,713 $ 29,563
Comparable sales % 4.8% 4.8% 2.5% 5.5% 1.5%
Total sales % 4.6% 2.4% (0.9%) 7.3% 5.4%
U.S. Kmart total sales % 5.6% 5.0% (0.2%) 7.2% 5.3%
Cost of sales, buying and occupancy 26,319 25,152 24,390 24,675 22,331
Selling, general and administrative expenses 6,245 6,136 6,274 6,876 6,651
Interest expense, net 293 363 453 434 479
Continuing income (loss) before income taxes 798 418 330 (313) 102
Net income (loss) from continuing operations(2) 518 249 231 (230) 96
Net income (loss) 518 249 (220) (571) 296
PER SHARE OF COMMON
Basic continuing income (loss) $ 1.05 $ 0.51 $ 0.48 $ (0.51) $ 0.20
Diluted continuing income (loss)(3) $ 1.01 $ 0.51 $ 0.48 $ (0.51) $ 0.19
Dividends declared -- -- -- $ 0.36 $ 0.96
Book value $ 12.12 $ 11.15 $ 10.51 $ 10.99 $ 13.15
FINANCIAL DATA
Working capital $ 4,139 $ 4,202 $ 4,131 $ 5,558 $ 3,562
Total assets 14,166 13,558 14,286 15,033 16,085
Long-term debt 1,538 1,725 2,121 3,922 1,989
Long-term capital lease obligations 1,091 1,179 1,478 1,586 1,666
Trust convertible preferred securities 984 981 980 -- --
Capital expenditures 981 678 343 540 1,021
Depreciation and amortization 671 660 654 685 639
Ending market capitalization - common stock 7,894 5,469 5,418 2,858 6,345
Current ratio 2.1 2.3 2.1 2.9 1.7
Long-term debt to capitalization 28.6% 32.4% 37.2% 51.1% 37.7%
Ratio of income from continuing operations to fixed charges(4) 2.1 1.5 1.4 -- 1.1
Basic weighted average shares outstanding (millions) 492 487 484 460 427
Diluted weighted average shares outstanding (millions)(3) 565 492 486 460 456
NUMBER OF STORES
United States 2,161 2,136 2,134 2,161 2,316
International and other -- -- 127 149 165
-------- -------- -------- -------- --------
Total Stores 2,161 2,136 2,261 2,310 2,481
U.S. Kmart store sales per comparable selling square foot $ 222 $ 211 $ 201 $ 195 $ 181
U.S. Kmart selling square footage (millions) 154 151 156 160 166
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Kmart Corporation and subsidiaries ("the Company" or "Kmart") fiscal year
ends on the last Wednesday in January. Fiscal 1995 consisted of 53 weeks.
(2) Net income from continuing operations in 1998 and 1997 include non-recurring
charges related to Voluntary Early Retirement Programs of $19 million ($13
million net of tax) and $114 million ($81 million net of tax), respectively.
(3) Consistent with the requirements of Statement of Financial Accounting
Standards No. 128, preferred securities were not included in the calculation of
diluted earnings per share for 1997, 1996 and 1994 due to their anti-dilutive
effect. Due to the Company's loss from continuing operations in 1995, diluted
earnings per share is equivalent to basic earnings per share.
(4) Fixed charges represent total interest charges, a portion of operating
rentals representative of the interest factor, amortization of debt discount and
expense and preferred dividends of majority owned subsidiaries. The deficiency
of income from continuing retail operations versus fixed charges was $305 for
1995.
Kmart Corporation 1998 Annual Report 17
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
($ MILLIONS) 1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
SALES
United States $33,674 $31,884 $30,378
International -- 299 1,059
------- ------- -------
Total $33,674 $32,183 $31,437
======= ======= =======
OPERATING INCOME (LOSS)
United States $ 1,110 $ 898 $ 780
International -- (3) (7)
------- ------- -------
Total $ 1,110 $ 895 $ 773
======= ======= =======
COMPARABLE SALES %
United States 4.8% 4.8% 2.6%
International -- -- (2.8%)
Total 4.8% 4.8% 2.5%
</TABLE>
Operating income (loss) excludes the voluntary early retirement charges in 1998
and 1997 totaling $19 and $114, respectively, on a pretax basis, and other gains
of $10 in 1996.
FISCAL 1998 COMPARED TO FISCAL 1997
SALES and comparable store sales for 1998 increased 4.6% and 4.8%,
respectively, improving sales per square foot to a record $222 in 1998. The
increased productivity can be attributed to the continued successful rollout of
the Big Kmart format, now 58% of the chain, the strong performance of key
brands, including Martha Stewart Everyday home fashions, Route 66 apparel and
accessories, Sesame Street children's apparel, and ladies apparel, and the
execution of the Company's competitive pricing strategy.
GROSS MARGIN, as a percentage of sales, was 21.8% in both 1998 and
1997. The impact of the Company's competitive pricing strategy and growth in
lower margined sales categories, such as consumables, was offset by improved
margins resulting from increased import and private label goods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"), which includes
advertising, declined for the fourth consecutive year as a percentage of sales
improving to 18.5% in 1998 from 19.1% in 1997. This was the third consecutive
year that SG&A as a percentage of sales was below 20%. The 0.6 percentage point
reduction compared to 1997 was the result of the sale of international
operations and the increased leverage from additional sales volume, offset by
increased Year 2000 compliance expenses and the addition of new stores.
OPERATING INCOME increased $215 million in 1998 compared to 1997,
excluding other gains and losses and the charges for Voluntary Early Retirement
Programs. This increase was the direct result of the improved profitability of
the apparel and consumables areas and the increased leverage of SG&A expenses
from higher sales.
A Voluntary Early Retirement Program offered to certain hourly
associates during the second quarter of 1998 resulted in a charge of $19 million
based on actual acceptance.
NET INTEREST EXPENSE was $293 and $363 million in 1998 and 1997,
respectively. The reduction in net interest expense was due to increased cash
flow from operations, resulting in lower borrowings and increased investment
income.
EFFECTIVE INCOME TAX RATE was 28.8% and 28.7% in 1998 and 1997,
respectively. See Note 9 of the Notes to Consolidated Financial Statements.
FISCAL 1997 COMPARED TO FISCAL 1996
SALES and comparable store sales increased 2.4% and 4.8%, respectively,
for 1997. Sales per square foot also continued its upward trend in 1997 to $211
from $201. The increase was primarily due to the successful conversion of an
additional 458 traditional Kmart locations to the Big Kmart format, increased
promotional activity, as well as the overall success of unique product offerings
such as Martha Stewart Everyday home fashions and Sesame Street children's
apparel, partially offset by soft performance in the ladies apparel segment and
the sale of all remaining international operations.
GROSS MARGIN, as a percentage of sales, was 21.8% and 22.4% in 1997 and
1996, respectively. The decrease in the percentage reflects increased
promotional activity, growth in consumables sales, soft performance of ladies
apparel, and increased distribution, buying and occupancy costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"), which includes
advertising, as a percentage of sales were 19.1% and 19.9% in 1997 and 1996,
respectively. This was the second consecutive year that SG&A as a percentage of
sales was below 20%. The 0.8 percentage point reduction compared to 1996 was the
result of the sale of all remaining international operations, increased leverage
from additional sales volume, and the Company's continued focus on its core
business units.
OPERATING INCOME increased $122 million in 1997 compared to 1996,
excluding other gains and losses and the charge for a Voluntary Early Retirement
Program. This increase was the direct result of the 2.4% increase in sales
during 1997 along with the $138 million savings in SG&A. These amounts were
partially offset by the 60 basis point decline in gross margin percentage.
A Voluntary Early Retirement Program offered to certain hourly
associates during the fourth quarter of 1997 resulted in a charge of $114
million based on actual acceptance. Other gains in 1996 included a $108 million
gain on the sale of Rite Aid stock and a charge of $98 million related to the
valuation of certain international operations.
NET INTEREST EXPENSE was $363 and $453 million in 1997 and 1996,
respectively. The reduction in net interest expense was due to reduced
borrowings including the paydown of the remaining balance of a $1.2 billion term
loan facility ("Term Loan") in the first quarter of 1997.
EFFECTIVE INCOME TAX RATES were 28.7% and 20.5% in 1997 and 1996,
respectively. The increase in the effective tax rate for 1997 was due to the
impact in 1996 of tax benefits resulting from foreign losses and basis
differences. See Note 9 of the Notes to Consolidated Financial Statements.
Kmart Corporation 1998 Annual Report 18
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ANALYSIS OF FINANCIAL CONDITION
Kmart's primary sources of working capital are cash flows from
operations and borrowings under its credit facilities. The Company had working
capital of $4,139 and $4,202 million at year end 1998 and 1997, respectively.
Working capital fluctuates in relation to profitability, seasonal inventory
levels net of trade accounts payable, and the level of store openings and
closings.
In March 1997, the Company issued, through a subsidiary, $335 million
in Commercial Mortgage Pass Through Certificates ("CMBS"). The CMBS weighted
average floating interest rate was LIBOR plus 47 basis points. Net proceeds were
used to repay a portion of the Term Loan.
In May 1997, the Company amended its $2.5 billion Revolving Credit
Agreement ("Revolver"). Under the terms of the amended agreement, the maturity
was extended to June 2000 and the commitment fee and interest rate spreads were
reduced from .25% and LIBOR plus 100 basis points to .225% and LIBOR plus 75
basis points.
In March 1998, the collateral securing the Company's borrowings under
the Revolver was released. The Revolver contains several affirmative and
negative covenants customary to these types of agreements. The Company was in
compliance with all covenants throughout 1998.
The Company had no borrowings outstanding on its Revolver as of year
ends 1998 and 1997. The Term Loan was repaid during 1997.
In 1998, the Company continued to achieve significant improvement in
liquidity and operating cash flow performance. At the Company's peak borrowing
level in 1998, over $1.4 billion remained available for borrowings under its
Revolver compared to $1.5 billion in 1997. In addition, cash flow from
continuing operations improved by $358 million over 1997. Management believes
that its current financing arrangements will be sufficient to meet the Company's
liquidity needs for operations and capital demands.
Net cash provided by operating activities was $1,237 million in 1998
compared to $841 million in 1997.
Net cash used for investing was $795 million in 1998 compared to $185
million in 1997. Cash used for investing in 1998 was primarily the result of
$981 million in capital expenditures partially offset by the proceeds from the
sale of the Company's remaining interest in Kmart Canada Co. Cash used for
investing in 1997 was the result of capital expenditures of $678 million
partially offset by the proceeds from sale leaseback transactions, as well as
proceeds from the sale of the Company's Canadian, Mexican, and Builders Square
operations.
Net cash used for financing was $230 million in 1998 compared to $564
million in 1997. Cash used for financing during 1998 was the result of payments
on long-term debt and capital lease obligations offset by increased stock option
activity. Cash used for financing in 1997 was the result of paying down the
Company's remaining balance on the Term Loan as well as payments on certain
mortgages and medium term notes. These amounts were partially offset by the
issuance of $335 million in CMBS securities.
NEW STORE ACTIVITY
For the first time in five years, Kmart ended the year with an increase
in its number of stores. The Company ended 1998 with 2,161 U.S. Kmart stores
versus 2,136 in 1997. During 1998, the Company opened 63 stores, 60 Big Kmarts
and 3 Super Kmarts. Of the 60 Big Kmarts opened during the year, 46 were stores
previously operated by Venture Stores, Inc., which the Company acquired in a
lease agreement with Kimco Realty Company.
The Company expects to open 24 Big Kmarts and 4 Super Kmarts during
1999. In addition, the Company will complete its Big Kmart program with the
conversion of another 586 stores. Capital expenditures relating to these
projects will be funded through operating cash flows.
YEAR 2000
The Company's Year 2000 Compliance Program consists of four phases, (I)
inventory and assessment, (II) remediation and unit testing, (III) return to
production and (IV) integration testing. For information technology systems, the
Company has substantially completed phases I, II and III. Phase IV has commenced
and is planned to continue in the second, third and, if necessary, the fourth
quarters of 1999. Substantially all business critical applications have been
returned to production. The non-information technology equipment at a
significant number of the Company's operating locations is already fully Year
2000 compliant. Non-information technology equipment at the remainder of the
Company's locations is expected to be Year 2000 compliant by the end of the
third quarter of 1999.
The Company has initiated a formal communication program with
significant vendors to evaluate their Year 2000 compliance, and is assessing
their responses to the Company's Year 2000 readiness questionnaire.
Approximately 90 percent of significant merchandise vendors have responded, most
indicating that their ability to supply the Company will not be affected by the
Year 2000 issue. Although the Company values its relationships with significant
vendors, should such a vendor become unable to deliver merchandise or services,
substitutes for many of the goods the Company sells and services it receives can
be obtained from other vendors. However, the Company cannot assure timely
compliance of vendors and may be adversely affected by failure of a significant
vendor to supply merchandise or services due to Year 2000 compliance failures.
In addition, the Company is currently conducting integration testing with third
parties' systems with which the Company's systems interface. The Company
anticipates that such testing will be substantially completed by the end of the
third quarter of 1999.
Kmart Corporation 1998 Annual Report 19
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.)
Should the Company not successfully complete a significant portion of
its Year 2000 Compliance Program, its financial condition may be materially
adversely impacted. Management does not consider the possibility of such
occurrences to be likely. The Company anticipates that the most reasonably
likely worst case scenarios include, but are not limited to, loss of
communication with stores, loss of electric power, and inability to process
transactions or engage in similar normal business activity. Certain contingency
plans have been or will be created, such as installation of backup power
supplies and around-the-clock support teams. Despite these contingency plans,
the Company may be adversely affected by failure of a significant third party
(such as suppliers of utilities, communication, transportation, banking, and
other services) to become Year 2000 compliant.
In addition, due to the uncertainty of the effect of Year 2000 failures
on Kmart's customers, the Company is unable to assess the effect these failures
will have on consumer spending, or on returns of merchandise that may contain
hardware or software components. As a result, the Company cannot estimate the
impact of these events on the Company's results of operations, liquidity, or
financial condition.
The total cost of the Company's Year 2000 Compliance Program is
estimated at $75 million, with $5 million incurred in 1997 and $46 million
incurred in 1998. Year 2000 Compliance Program costs are being funded through
operating cash flows. Certain information technology projects have been delayed
as a result of the Company's Year 2000 compliance effort. Estimated future
expenditures and the delay of information technology projects are not expected
to have a significant impact on the Company's financial position, results of
operations, or cash flows.
Estimated costs of the Company's Year 2000 Compliance Program and
projected completion dates are based on management's best estimates of future
events and are forward-looking statements which may be updated as additional
information becomes available. Readers are cautioned that forward-looking
statements contained herein should be read in conjunction with the Company's
disclosures under the heading "Cautionary Statement Regarding Forward-looking
Information" located on the back cover.
The Year 2000 statement set forth above is a Year 2000 Readiness
Disclosure, pursuant to the Year 2000 Information and Readiness Disclosure Act,
15 U.S.C. ss. 1 note.
OTHER MATTERS
Kmart has guaranteed leases for properties operated by certain former
subsidiaries including Borders Group, Inc., OfficeMax, Inc., The Sports
Authority, Inc., and Builders Square, Inc. The present value of the lease
obligations guaranteed by Kmart is approximately $1.2 billion. The possibility
of the Company having to honor its contingent obligations is dependent upon the
future operating results of the former subsidiaries. See Note 5 of the Notes to
Consolidated Financial Statements.
Builders Square
Builders Square is now part of Hechinger Company ("Hechinger"), an
affiliate of Leonard Green and Partners, LP ("LGP"). Hechinger operates in the
highly competitive "do-it-yourself" marketplace. To provide additional financial
flexibility as well as liquidity for seasonal requirements anticipated during
the first half of 1999, Hechinger amended certain aspects of its bank credit
agreement on December 31, 1998. As part of that amendment, Kmart guaranteed 80%
and GEI II, also an affiliate of LGP, guaranteed 20% of an additional secured
supplemental facility totaling $50 million and expiring June 30, 1999. At
January 27, 1999, there were no borrowings outstanding under the supplemental
facility.
On February 22, 1999, in its first quarter 10-Q filing, Hechinger
indicated that it may not be in compliance with the EBITDA covenant contained in
its bank agreement for its second quarter, ending April 3, 1999, and has
therefore arranged with its lenders for a temporary waiver, which expires April
30, 1999.
On March 1, 1999, Hechinger entered into a commitment letter for a new
three-year credit facility which would replace all existing credit facilities.
The Sports Authority
On October 6, 1998, The Sports Authority ("TSA") announced that it
would take a $55 million after-tax charge, as a result of store closings,
inventory writedowns and other charges and costs, and that operating results for
the third quarter of 1998 would be weaker than expected. In October 1998, TSA
announced that it amended certain aspects of its bank credit agreement,
including modifying certain financial covenants in light of the restructuring
charge. Pursuant to that amendment, TSA also granted its bank lenders a security
interest in its inventory and certain accounts receivable. On December 9, 1998,
in its third quarter 10-Q filing, TSA noted that its ability to satisfy ongoing
working capital and capital expenditure requirements depends on successfully
negotiating a new credit facility prior to the expiration of its bank credit
agreement in April 1999.
Kmart's rights and obligations with respect to its guarantee of TSA
leases are governed by a Lease Guaranty, Indemnification and Reimbursement
Agreement dated as of November 23, 1994 (the "LGIRA"). Kmart and TSA are
presently in discussions to amend and restate the LGIRA, the terms of which have
not been finalized, in connection with TSA's refinancing activities related to
the procurement of a new three-year credit facility prior to April 1999.
Other
There are various claims, lawsuits and pending actions against Kmart
incident to its operations. It is the opinion of management that the ultimate
resolution of these matters will not have a material adverse effect on Kmart's
liquidity, financial position, or results of operations.
Kmart Corporation 1998 Annual Report 20
<PAGE> 5
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the Company's
consolidated financial statements and related information appearing in this
annual report. These financial statements have been prepared in conformity with
generally accepted accounting principles on a consistent basis applying certain
estimates and judgments based upon currently available information and
management's view of current conditions and circumstances. On this basis, we
believe that these financial statements reasonably present the Company's
financial position and results of operations.
To fulfill our responsibility, we maintain comprehensive systems of
internal controls designed to provide reasonable assurance that assets are
safeguarded and transactions are executed in accordance with established
procedures. The concept of reasonable assurance is based upon a recognition that
the cost of the controls should not exceed the benefit derived. We believe our
systems of internal controls provide this reasonable assurance.
The Company has adopted a code of conduct to guide our management in
the continued observance of high ethical standards of honesty, integrity, and
fairness in the conduct of the business and in accordance with the law.
Compliance with the guidelines and standards is periodically reviewed and is
acknowledged in writing by all management associates.
The Board of Directors of the Company has an Audit Committee,
consisting solely of outside directors. The duties of the Committee include
keeping informed of the financial condition of the Company and reviewing its
financial policies and procedures, its internal accounting controls, and the
objectivity of its financial reporting. Both the Company's independent
accountants and the internal auditors have free access to the Audit Committee
and meet with the Committee periodically, with and without management present.
Floyd Hall
- ----------------------------------------
Floyd Hall
Chairman of the Board,
President and Chief Executive Officer
Martin E. Welch
- ----------------------------------------
Martin E. Welch III
Senior Vice President
and Chief Financial Officer
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 27, 1999 and January 28, 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended January 27, 1999, 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.
PricewaterhouseCoopers LLP
- ----------------------------------------
PricewaterhouseCoopers LLP
Detroit, Michigan
March 1, 1999
Kmart Corporation 1998 Annual Report 21
<PAGE> 6
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 27, 1999, JANUARY 28, 1998 AND JANUARY 29, 1997
DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 33,674 $ 32,183 $ 31,437
Cost of sales, buying and occupancy 26,319 25,152 24,390
-------- -------- --------
Gross margin 7,355 7,031 7,047
Selling, general and administrative expenses 6,245 6,136 6,274
Voluntary early retirement programs 19 114 --
Other gains, net -- -- (10)
-------- -------- --------
Continuing income before interest, income taxes
and dividends on convertible preferred securities of subsidiary 1,091 781 783
Interest expense, net 293 363 453
Income tax provision 230 120 68
Dividends on convertible preferred securities of subsidiary,
net of income taxes of $28, $26 and $16 50 49 31
-------- -------- --------
Net income from continuing operations 518 249 231
Loss on disposal of discontinued operations, net
of income taxes of $(243) -- -- (451)
-------- -------- --------
Net income (loss) $ 518 $ 249 $ (220)
======== ======== ========
Basic income (loss) per common share
Continuing operations $ 1.05 $ .51 $ .48
Loss on disposal of discontinued operations -- -- (.93)
-------- -------- --------
Net income (loss) $ 1.05 $ .51 $ (.45)
======== ======== ========
Diluted income (loss) per common share
Continuing operations $ 1.01 $ .51 $ .48
Loss on disposal of discontinued operations -- -- (.93)
-------- -------- --------
Net income (loss) $ 1.01 $ .51 $ (.45)
======== ======== ========
Basic weighted average shares (millions) 492.1 487.1 483.6
Diluted weighted average shares (millions) 564.9 491.7 486.1
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Kmart Corporation 1998 Annual Report 22
<PAGE> 7
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF JANUARY 27, 1999 AND JANUARY 28, 1998
DOLLARS IN MILLIONS 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 710 $ 498
Merchandise inventories 6,536 6,367
Other current assets 584 611
------- -------
Total current assets 7,830 7,476
Property and equipment, net 5,914 5,472
Other assets and deferred charges 422 610
------- -------
Total Assets $14,166 $13,558
======= =======
CURRENT LIABILITIES
Long-term debt due within one year $ 77 $ 78
Trade accounts payable 2,047 1,923
Accrued payroll and other liabilities 1,359 1,064
Taxes other than income taxes 208 209
------- -------
Total current liabilities 3,691 3,274
Long-term debt and notes payable 1,538 1,725
Capital lease obligations 1,091 1,179
Other long-term liabilities 883 965
Company obligated mandatorily redeemable convertible preferred securities
of a subsidiary trust holding solely 7-3/4% convertible junior subordinated
debentures of Kmart (redemption value of $1,000) 984 981
Common stock, $1 par value, 1,500,000,000 shares authorized;
493,358,504 and 488,811,271 shares issued, respectively 493 489
Capital in excess of par value 1,667 1,605
Retained earnings 3,819 3,340
------- -------
Total Liabilities and Shareholders' Equity $14,166 $13,558
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Kmart Corporation 1998 Annual Report 23
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 27, 1999, JANUARY 28, 1998 AND JANUARY 29, 1997
DOLLARS IN MILLIONS 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income from continuing operations $ 518 $ 249 $ 231
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 671 660 654
Voluntary early retirement programs 19 114 --
Cash used for store restructuring and other charges (94) (105) (129)
Increase in inventories (169) (31) (349)
Increase (decrease) in trade accounts payable 124 (86) 215
Deferred income taxes and taxes payable 308 72 228
Decrease in other long-term liabilities (138) (27) (194)
Changes in certain assets, liabilities and other items (2) 33 82
------- ------- -------
Net cash provided by continuing operations 1,237 879 738
Net cash provided by (used for) discontinued operations -- (38) 30
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,237 841 768
------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from divestitures 87 133 434
Decrease (increase) in property held for sale or financing and other 99 420 (605)
Capital expenditures (981) (678) (343)
Other, net -- (60) 43
------- ------- -------
NET CASH USED FOR INVESTING ACTIVITIES (795) (185) (471)
------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt and notes payable -- 337 1,202
Change in common stock 46 37 34
Proceeds from issuance of convertible preferred securities -- -- 971
Refinancing costs related to long-term debt and notes payable -- (15) (212)
Payments on capital lease obligations (88) (112) (114)
Payments on long-term debt (188) (811) (2,855)
------- ------- -------
NET CASH USED FOR FINANCING ACTIVITIES (230) (564) (974)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 212 92 (677)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 498 406 1,083
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 710 $ 498 $ 406
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Kmart Corporation 1998 Annual Report 24
<PAGE> 9
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL ACCUMULATED
IN EXCESS OTHER
COMMON OF PAR RETAINED COMPREHENSIVE
DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA STOCK VALUE EARNINGS INCOME
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 31, 1996 $ 486 $ 1,532 $ 3,336 $ (74)
Net loss for the year -- -- (220) --
Shares reissued to retirement savings plan -- 34 -- --
Foreign currency translation adjustment -- -- -- (6)
Other -- 5 (1) --
------- ------- ------- -------
BALANCE AT JANUARY 29, 1997 486 1,571 3,115 (80)
Net income for the year -- -- 249 --
Shares reissued to retirement savings plan -- 19 -- --
Foreign currency translation adjustment -- -- -- 67
Additional minimum pension liability -- -- -- (10)
Common stock issued for stock option plans 3 13 -- --
Other -- 2 (1) --
------- ------- ------- -------
BALANCE AT JANUARY 28, 1998 489 1,605 3,363 (23)
Net income for the year -- -- 518 --
Shares reissued to retirement savings plan 2 (9) -- --
Repurchased shares (2) -- -- --
Common stock issued for stock option plans 4 73 -- --
Additional minimum pension liability -- -- -- (37)
Other -- (2) (2) --
------- ------- ------- -------
BALANCE AT JANUARY 27, 1999 $ 493 $ 1,667 $ 3,879 $ (60)
======= ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Kmart Corporation 1998 Annual Report 25
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS PER SHARE DATA)
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by Kmart Corporation and
subsidiaries ("the Company" or "Kmart") in the preparation of these financial
statements, are summarized below.
NATURE OF OPERATIONS: The Company's operations consist principally of
discount department stores located in all 50 states, Puerto Rico, the U.S.
Virgin Islands, and Guam. Kmart's equity investment consists of 49% of
substantially all of the Meldisco subsidiaries of Footstar, Inc. ("FTS"), which
operate the footwear departments in Kmart stores.
BASIS OF CONSOLIDATION: Kmart includes all majority owned subsidiaries in
the consolidated financial statements. Investments in affiliated retail
companies owned 20% or more are accounted for by the equity method. Intercompany
transactions and accounts have been eliminated in consolidation.
FISCAL YEAR: The Company's fiscal year ends on the last Wednesday in
January. Fiscal years 1998, 1997, and 1996 each consisted of 52 weeks and ended
on January 27, 1999, January 28, 1998, and January 29, 1997, respectively.
CASH: Cash and cash equivalents include all highly liquid investments with
maturities of three months or less. Included are temporary investments of $437
and $241, at year end 1998 and 1997, respectively.
INVENTORIES: Inventories are stated at the lower of cost or market,
primarily using the retail method. The last-in, first-out (LIFO) method,
utilizing internal inflation indices, was used to determine the cost for $6,148,
$5,990, and $5,883 of inventory as of year end 1998, 1997, and 1996,
respectively. Inventories valued on LIFO were $407, $457, and $440 lower than
amounts that would have been reported using the first-in, first-out (FIFO)
method at year end 1998, 1997, and 1996, respectively.
PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost, less
any impairment losses. Capitalized amounts include expenditures which materially
extend the useful lives of existing facilities and equipment. Expenditures for
owned properties, which Kmart intends to sell and lease back within one year,
are included in other current assets, and those with expected transaction dates
extending beyond one year are included in other assets and deferred charges.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization, including
amortization of property held under capital leases, are computed based upon the
estimated useful lives of the respective assets using the straight-line method
for financial statement purposes and accelerated methods for tax purposes. The
general range of lives are 25 to 50 years for buildings, 5 to 25 years for
leasehold improvements, 3 to 5 years for computer systems and equipment, and 3
to 17 years for furniture and fixtures.
FINANCIAL INSTRUMENTS: Cash and cash equivalents, trade accounts payable,
and accrued liabilities are reflected in the financial statements at cost which
approximates fair value. The fair value of the Company's debt and other
financial instruments are discussed in Notes 6 and 8.
FOREIGN CURRENCY TRANSLATIONS: Foreign currency assets and liabilities are
translated into U.S. dollars at the exchange rates in effect at the balance
sheet date, and revenue and expenses are translated at average exchange rates
during the period.
STOCK-BASED COMPENSATION: The Company has elected under the provisions of
Statement of Financial Accounting Standards No. 123 ("FAS 123") to continue
using the intrinsic value method of accounting for employee stock based
compensation in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees".
PRE-OPENING AND CLOSING COSTS: In fiscal 1998 and prior years, costs
associated with the opening of a new store were expensed during the first full
month of operations. Effective for fiscal 1999, Kmart will expense pre-opening
costs in the period in which they are incurred in conformity with Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5").
Implementation of SOP 98-5 is not expected to have a material effect on the
Company's financial position, results of operations, or cash flows for a fiscal
year. However, since the Company generally opens new locations during the second
half of the year, the change in accounting for pre-opening costs could have an
effect on quarterly results. When the decision to close a retail unit is made,
any future net lease obligation and nonrecoverable investment in fixed assets
directly related to discontinuance of operations are expensed.
ADVERTISING COSTS: Advertising costs, net of co-op recoveries from vendors,
are expensed the first time the advertising occurs and amounted to $443, $420,
and $385 in 1998, 1997, and 1996, respectively.
INCOME TAXES: Deferred income taxes are provided for temporary differences
between financial statement and taxable income. Kmart accrues U.S. and foreign
taxes payable on all of the earnings of subsidiaries, except with respect to
earnings that are intended to be permanently reinvested, or are expected to be
distributed free of additional tax by operation of relevant statutes currently
in effect and by utilization of available tax credits and deductions.
COMPREHENSIVE INCOME: Effective for fiscal 1998, Kmart adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130") which establishes standards for reporting and display of changes in equity
from non-owner sources in the financial statements. Components of accumulated
other comprehensive income in shareholders' equity consists of foreign currency
translation adjustments and minimum pension liability adjustments.
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.
Kmart Corporation 1998 Annual Report 26
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(DOLLARS IN MILLIONS PER SHARE DATA)
RECLASSIFICATIONS: Certain reclassifications of prior year amounts have
been made to conform to the 1998 presentation.
2) DISCONTINUED OPERATIONS AND DISPOSITIONS
Discontinued operations for 1997 include Builders Square, Inc. ("Builders
Square"). Discontinued operations for 1996, include Builders Square, Borders
Group, Inc. ("Borders Group"), OfficeMax, Inc. ("OfficeMax"), The Sports
Authority, Inc. ("TSA"), Thrifty PayLess Holdings, Inc. ("TPH"), Coles Myer,
Ltd. ("Coles Myer"), and Furr's/Bishop's, Inc. ("Furr's").
1997 ACTIVITY
During the first and second quarters of 1997, the Company completed the
sale of its interests in the Mexico and Canada operations, respectively. Under
the terms of the Mexico agreement the Company received $74, which approximated
the book value of its interest. Under the terms of the Canada agreement, the
Company received $54 in cash, a $76 note receivable and retained a 12.5%
non-voting equity interest. The net proceeds from the sale approximated book
value. During the first quarter of 1998, the note receivable was collected and
the equity interest was sold at a gain of $7.
In the third quarter of 1997, the Company completed the sale of
substantially all of the assets of its subsidiary, Builders Square, to an
affiliate of Leonard Green and Partners, LP ("LGP"). The net proceeds from the
sale approximated book value.
1996 ACTIVITY
During the first half of 1996, the Company received $70 from the sale of
approximately 33% of its investment in the common stock of TPH and revalued its
remaining investment by recording a $61 loss from discontinued operations, net
of income taxes. In the fourth quarter, Rite Aid Corporation ("Rite Aid") merged
TPH into Rite Aid and exchanged 0.65 of its shares for each share of TPH. Kmart
sold its Rite Aid shares received resulting in net proceeds of approximately
$257 and a pretax gain of $108, which was included in other gains and losses.
In the first quarter, the Company completed the sale of its Czech and Slovak
Republic operations and received net proceeds of $115.
In the fourth quarter of 1996, the Company recorded a $385 after tax charge
as a result of its plan to dispose of Builders Square. This charge was included
in loss on disposal of discontinued operations. The Company also recorded a
pretax charge of $98, relating to the anticipated losses on the disposal of its
international operations. This charge was included in other gains and losses.
3) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
YEAR END
--------------------
1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Land $ 334 $ 319
Buildings 944 822
Leasehold improvements 2,156 1,834
Furniture and fixtures 5,142 4,832
Construction in progress 62 60
-------- --------
8,638 7,867
Property under capital leases 2,140 2,264
-------- --------
10,778 10,131
Less:
Accumulated depreciation
and amortization (3,674) (3,427)
Accumulated depreciation-
capital leases (1,190) (1,232)
-------- --------
Total $ 5,914 $ 5,472
======== ========
</TABLE>
The following table provides a breakdown of the number of stores leased compared
to owned:
<TABLE>
<CAPTION>
YEAR END
--------------------
1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Number of U.S. Kmart Stores Owned 110 105
Number of U.S. Kmart Stores Leased 2,051 2,031
</TABLE>
4) INVESTMENTS IN AFFILIATED RETAIL COMPANIES
All Kmart footwear departments are operated under license agreements with
the Meldisco subsidiaries of FTS, substantially all of which are 49% owned by
Kmart and 51% owned by FTS. Income earned under various agreements was $225,
$210, and $211, in 1998, 1997, and 1996, respectively. The Company received
dividends from Meldisco in 1998, 1997, and 1996 of $36, $36, and $64,
respectively.
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------
MELDISCO INFORMATION 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net sales $1,139 $1,142 $1,109
Gross profit 499 491 476
Net income 78 74 74
Inventory $ 147 $ 142 $ 134
Other current assets 22 17 24
Non-current assets -- -- 1
------ ------ ------
Total assets 169 159 159
Current liabilities 29 24 25
------ ------ ------
Net assets $ 140 $ 135 $ 134
====== ====== ======
Equity of Kmart $ 68 $ 65 $ 65
====== ====== ======
</TABLE>
Unremitted earnings included in consolidated retained earnings were $38, $42 and
$41 at year end 1998, 1997, and 1996, respectively.
Kmart Corporation 1998 Annual Report 27
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(DOLLARS IN MILLIONS PER SHARE DATA)
5) OTHER COMMITMENTS AND CONTINGENCIES
Kmart has outstanding guarantees for property leased by certain former
subsidiaries as follows:
<TABLE>
<CAPTION>
GROSS
PRESENT VALUE LEASE
AT 7% ------------------
1998 1998 1997
---- ---- ----
<S> <C> <C> <C>
Borders Group $ 112 $ 194 $ 205
OfficeMax 107 156 168
The Sports Authority 234 397 424
Builders Square 761 1,378 1,568
------ ------ ------
Total $1,214 $2,125 $2,365
====== ====== ======
</TABLE>
The possibility of the Company having to honor its contingent obligations
is dependent upon the future operating results of the former subsidiaries.
Should a reserve be required, it would be recorded at the time the obligation
was determined to be probable.
BUILDERS SQUARE
Builders Square is now part of Hechinger Company ("Hechinger"), an
affiliate of LGP. Hechinger operates in the highly competitive "do-it-yourself"
marketplace. To provide additional financial flexibility as well as liquidity
for seasonal requirements anticipated during the first half of 1999, Hechinger
amended certain aspects of its bank credit agreement on December 31, 1998. As
part of that amendment, Kmart guaranteed 80% and GEI II, also an affiliate of
LGP, guaranteed 20% of an additional secured supplemental facility totaling $50
and expiring June 30, 1999. At January 27, 1999, there were no borrowings
outstanding under the supplemental facility.
On February 22, 1999, in its first quarter 10-Q filing, Hechinger indicated
that it may not be in compliance with the EBITDA covenant contained in its bank
agreement for its second quarter, ending April 3, 1999, and has therefore
arranged with its lenders for a temporary waiver, which expires April 30, 1999.
On March 1, 1999, Hechinger entered into a commitment letter for a new
three-year credit facility which would replace all existing credit facilities.
THE SPORTS AUTHORITY
On October 6, 1998, TSA announced that it would take a $55 after-tax
charge, as a result of store closings, inventory writedowns and other charges
and costs, and that operating results for the third quarter of 1998 would be
weaker than expected. In October 1998, TSA announced that it amended certain
aspects of its bank credit agreement, including modifying certain financial
covenants in light of the restructuring charge. Pursuant to that amendment, TSA
also granted its bank lenders a security interest in its inventory and certain
accounts receivable. On December 9, 1998, in its third quarter 10-Q filing, TSA
noted that its ability to satisfy ongoing working capital and capital
expenditure requirements depends on successfully negotiating a new credit
facility prior to the expiration of its bank credit agreement in April 1999.
Kmart's rights and obligations with respect to its guarantee of TSA leases
are governed by a Lease Guaranty, Indemnification and Reimbursement Agreement
dated as of November 23, 1994 (the "LGIRA"). Kmart and TSA are presently in
discussions to amend and restate the LGIRA, the terms of which have not been
finalized, in connection with TSA's refinancing activities related to the
procurement of a new three-year credit facility prior to April 1999.
OTHER
As of January 27, 1999, Kmart has guaranteed $132 of indebtedness of other
parties related to certain of its leased properties financed by industrial
revenue bonds. These agreements expire from 2004 through 2009.
There are various claims, lawsuits, and pending actions against Kmart
incident to its operations. It is the opinion of management that the ultimate
resolution of these matters will not have a material adverse effect on Kmart's
liquidity, financial position, or results of operations.
6) LONG-TERM DEBT AND NOTES PAYABLE
<TABLE>
<CAPTION>
YEAR END
FISCAL YEAR INTEREST --------------------
TYPE MATURITY RATES 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debentures 2005-2023 7.8%-12.5% $ 867 $ 967
Medium-term
notes 1999-2020 6.8%-9% 438 512
CMBS 2002 Floating 310 324
------- -------
Total 1,615 1,803
Current portion (77) (78)
------- -------
Long-term debt $ 1,538 $ 1,725
======= =======
</TABLE>
The Commercial Mortgage Pass Through Certificates ("CMBS") mortgage loan is
subject to monthly payments of interest and principal, according to a schedule
which amortizes the initial outstanding principal amount of $335 over
approximately 15 years with a balloon payment of approximately $261 on the
scheduled maturity date in February 2002. The CMBS weighted average interest
rate is 1 month LIBOR plus 47 basis points.
The $2.5 billion Revolving Credit Agreement ("Revolver"), which expires in
June 2000, includes commitment fees and interest rate spreads of 0.225% and
LIBOR plus 75 basis points. The Revolver also contains certain affirmative and
negative covenants customary to these types of agreements. The Company is in
compliance with all such covenants. As of January 27, 1999 and January 28, 1998,
there were no outstanding amounts under the Revolver.
Based on the quoted market prices for the same or similar issues or on the
current rates offered to Kmart for debt of the same remaining maturities, the
fair value of long-term debt was approximately $1,664 and $1,817 at year end
1998 and 1997, respectively.
The principal maturities of long-term debt for the five years subsequent to
1998 are: 1999-$77, 2000-$66, 2001-$68, 2002-$351 and 2003-$50, and 2004 and
later- $1,003. Cash paid for interest was $278, $333, and $459 in 1998, 1997,
and 1996, respectively.
Kmart Corporation 1998 Annual Report 28
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(DOLLARS IN MILLIONS PER SHARE DATA)
7) LEASES
Kmart conducts operations primarily in leased facilities. Kmart store
leases are generally for terms of 25 years with multiple five-year renewal
options which allow the Company the option to extend the life of the lease up to
50 years beyond the initial noncancelable term.
In certain Kmart leased facilities, selling space has been sublet to other
retailers, including Olan Mills, Inc.; Penske Auto Centers, Inc.; and the
Meldisco subsidiaries of FTS.
<TABLE>
<CAPTION>
MINIMUM LEASE COMMITMENTS
AS OF JANUARY 27, 1999 CAPITAL OPERATING
- -------------------------------------------------------------
<S> <C> <C>
Fiscal Year:
1999 $ 271 $ 597
2000 256 586
2001 245 579
2002 236 567
2003 224 540
Later years 1,825 6,888
------- -------
Total minimum lease payments 3,057 9,757
Less-minimum sublease income -- (3,074)
------- -------
Net minimum lease payments 3,057 $ 6,683
=======
Less:
Estimated executory costs (846)
Amount representing interest (1,033)
-------
1,178
Current (87)
-------
Long-term $ 1,091
=======
<CAPTION>
RENT EXPENSE 1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $ 711 $ 673 $ 642
Percentage rentals 40 39 36
Less-sublease rentals (227) (234) (236)
----- ----- -----
Total $ 524 $ 478 $ 442
===== ===== =====
</TABLE>
8) CONVERTIBLE PREFERRED SECURITIES
In June 1996, a trust sponsored and wholly owned by the Company issued
20,000,000 shares of trust convertible preferred securities ("Preferred
Securities"), the proceeds of which were invested by the trust in $1 billion
aggregate principal amount of the Company's 7-3/4% Convertible Junior
Subordinated Debentures ("Debentures"). The Preferred Securities accrue and pay
cash distributions quarterly at a rate of 7-3/4% per annum of the stated
liquidation amount of $50 per Preferred Security. Kmart has guaranteed, on a
subordinated basis, distributions and other payments due on the Preferred
Securities.
The Preferred Securities are convertible at the option of the holder at any
time at the rate of 3.3333 shares of Kmart common stock for each Preferred
Security, and are mandatorily redeemable upon the maturity of the Debentures on
June 15, 2016, or to the extent of any earlier redemption of any Debentures by
Kmart and are callable beginning June 15, 1999.
Based on the quoted market prices, the fair value of the Preferred
Securities was approximately $1,199 and $1,040 as of year end 1998 and 1997,
respectively.
Kmart Corporation 1998 Annual Report 29
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(DOLLARS IN MILLIONS PER SHARE DATA)
9) INCOME TAXES
<TABLE>
<CAPTION>
INCOME BEFORE
INCOME TAXES 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. $ 766 $ 390 $ 351
Foreign 32 28 (21)
----- ----- -----
Total $ 798 $ 418 $ 330
===== ===== =====
<CAPTION>
INCOME TAX
PROVISION (CREDIT) 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 70 $(126) $ 54
State and local 21 (5) 5
Foreign 12 11 17
----- ----- -----
103 (120) 76
Deferred:
Federal and state 127 240 (7)
Foreign -- -- (1)
----- ----- -----
Total $ 230 $ 120 $ 68
===== ===== =====
<CAPTION>
EFFECTIVE TAX RATE
RECONCILIATION 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income
tax rate 35.0% 35.0% 35.0%
State and local taxes,
net of federal tax benefit 1.9 (0.8) 0.9
Tax credits (0.7) (1.9) --
Equity in net income
of affiliated companies (1.4) (2.3) (3.1)
International tax rate
and basis differential -- -- (13.9)
Adjustments to prior
year's accruals (6.0) -- --
Other -- (1.3) 1.6
----- ----- -----
28.8% 28.7% 20.5%
===== ===== =====
<CAPTION>
YEAR END
DEFERRED TAX -----------------
ASSETS AND LIABILITIES 1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Federal benefit for
state and foreign taxes $ 36 $ 27
Discontinued operations 129 135
Accruals and other liabilities 197 258
Capital leases 98 101
Store restructuring 69 94
Other 84 182
----- -----
Total deferred tax assets 613 797
----- -----
Deferred tax liabilities:
Inventory 279 272
Property and equipment 367 417
Other 24 23
----- -----
Total deferred tax liabilities 670 712
----- -----
Net deferred tax (liabilities) assets $ (57) $ 85
===== =====
</TABLE>
The Company has available alternative minimum tax credit carryforwards of
approximately $29 which may be carried forward indefinitely.
The Internal Revenue Service has completed its examination of the Company's
federal income tax returns through 1994. The Company believes that adequate tax
accruals have been provided for all years.
Cash paid (received) for income taxes was $(99), $7, and $(238) in 1998,
1997, and 1996, respectively.
10) EARNINGS PER SHARE
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS:
Net income (loss) $ 518 $ 249 $ (220)
Weighted average shares 492.1 487.1 483.6
-------- -------- -------
Basic earnings (loss)
per share $ 1.05 $ 0.51 $ (0.45)
======== ======== =======
Diluted EPS:
Net income (loss) $ 518 $ 249 $ (220)
Add back:
Preferred dividends 50 -- --
-------- -------- -------
Net income (loss) adjusted
for preferred dividends $ 568 $ 249 $ (220)
======== ======== =======
Weighted average shares 492.1 487.1 483.6
Dilutive effect of stock options 6.1 4.6 2.5
Convertible preferred securities 66.7 -- --
-------- -------- -------
Weighted average shares
and equivalents - diluted 564.9 491.7 486.1
======== ======== =======
Diluted earnings (loss)
per share $ 1.01 $ 0.51 $ (0.45)
======== ======== =======
</TABLE>
The Preferred Securities and preferred dividends were not included in the
calculation of diluted EPS for 1997 and 1996 due to the anti-dilutive effect on
EPS if converted. Had the Preferred Securities been included in the calculation,
diluted EPS would have been higher by $0.02 and $0.11 for fiscal 1997 and 1996,
respectively.
Kmart Corporation 1998 Annual Report 30
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(DOLLARS IN MILLIONS PER SHARE DATA)
11) PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS
In the second quarter of 1998, the Company announced a Voluntary Early
Retirement Program for certain Kmart distribution center associates over 45
years of age with at least 10 years of service by May 31, 1998. Of the 1,050
Kmart associates eligible for this program, 456 accepted the early retirement
offer, and the Company recorded a charge of $19 ($13 after tax). Payouts under
this program will be fully funded through existing pension plan assets.
In the fourth quarter of 1997, the Company announced a Voluntary Early
Retirement Program for certain Kmart hourly associates over 45 years of age with
at least 10 years of service by December 31, 1997. Of the 28,785 Kmart
associates eligible for this program, 11,587 accepted the early retirement
offer, and the Company recorded a charge of $114 ($81 after tax). Payouts under
this program will be fully funded through existing pension plan assets.
Prior to 1996, U.S. Kmart had defined benefit pension plans covering
eligible associates who met certain requirements of age, length of service, and
hours worked per year. Effective January 31, 1996, the pension plans were
frozen, and associates no longer earn additional benefits under the plans.
Benefits paid to retirees are based upon age at retirement and years of
credited service and earnings as of January 31, 1996. Kmart's policy is to fund
at least the minimum amounts required by the Employee Retirement Income Security
Act of 1974. The plans' assets consist primarily of equity securities, fixed
income securities, and real estate. No contributions were made in fiscal 1998,
1997, or 1996. The total consolidated pension income was $63, $63, and $32 in
1998, 1997, and 1996, respectively.
The following tables summarize the change in benefit obligation, change in
plan assets, funded status, amounts recognized and actuarial assumptions for
Kmart's employee pension plans.
<TABLE>
<CAPTION>
YEAR END
----------------------
1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,055 $ 1,791
Interest costs 139 139
Voluntary early retirement program(VERP) 19 114
Actuarial loss 131 378
Benefits paid including VERP (136) (367)
------- -------
Benefit obligation at end of year $ 2,208 $ 2,055
======= =======
Change in plan assets:
Fair value of plan assets at
beginning of year $ 1,942 $ 1,974
Actual return on plan assets 292 335
Benefits paid including VERP (136) (367)
------- -------
Fair value of plan assets at
end of year $ 2,098 $ 1,942
======= =======
<CAPTION>
YEAR END
----------------------
1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Funded status $ (110) $ (113)
Unrecognized net loss 99 72
Unrecognized transition asset (54) (63)
------- -------
Net recognized liability $ (65) $ (104)
======= =======
Amounts recognized in the statement of financial position consist of:
Accrued benefit liability $ (109) $ (113)
Accumulated other comprehensive income 44 9
------- -------
Net amount recognized $ (65) $ (104)
======= =======
Weighted-average assumptions as of January 31
Discount rate 6.5% 6.75%
Expected return on plan assets 10% 10%
<CAPTION>
YEAR END
-------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Components of Net Periodic Benefit (Income) Expense
Interest costs $ 139 $ 139 $ 132
Expected return on plan assets (195) (193) (165)
Amortization of unrecognized
transition asset (7) (9) (8)
------- ------- -------
Net periodic benefit $ (63) $ (63) $ (41)
======= ======= =======
</TABLE>
The Company has non-qualified plans for directors and officers which were
partially funded as of year end 1998 and were unfunded as of year end 1997.
Benefits under the plans totaled $37 and $36, at the end of 1998 and 1997,
respectively, which have been accrued in the accompanying balance sheets. Plan
assets totaled $11 as of year end 1998.
Full-time associates who have worked 10 years and who have retired after age
55, have the option of participation in Kmart's medical plan until age 65. The
plan is contributory, with retiree contributions adjusted annually. The
accounting for the plan anticipates future cost-sharing changes that are
consistent with Kmart's expressed intent to increase the retiree contribution
rate annually. The accrued post-retirement benefit costs were $62 and $70 at the
end of 1998 and 1997, respectively.
12) RETIREMENT SAVINGS PLAN
The Retirement Savings Plan provides that associates of Kmart who have
completed six months of service can invest from 1% to 16% of their earnings in
the associate's choice of various investments. For each dollar the participant
contributes, up to 6% of earnings, Kmart will contribute an additional 50 cents
which is invested in the Employee Stock Ownership Plan.
The Retirement Savings Plan has a profit sharing feature whereby the
Company makes contributions based on profits, with minimum yearly contributions
required of $30. Kmart's expense related to the Retirement Savings Plan was $68,
$69, and $71 in 1998, 1997, and 1996, respectively.
Kmart Corporation 1998 Annual Report 31
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(DOLLARS IN MILLIONS PER SHARE DATA)
13) STOCK OPTION PLANS
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock option and restricted stock plans. Since stock options
were granted at exercise prices equal to the stock price on the grant date,
under APB Opinion 25, no compensation cost has been recognized for the Company's
stock based compensation plans.
Had the compensation cost for the Company's stock based compensation plans
been determined based on the fair value at the grant dates consistent with the
method of FAS 123, net earnings would have been the pro forma amounts shown
below.
<TABLE>
<CAPTION>
PRO FORMA INCOME (LOSS) 1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - as reported $ 518 $ 249 $ (220)
EPS - as reported 1.01 .51 (.45)
Net income (loss) - pro forma 496 222 (242)
EPS - pro forma .97 .45 (.50)
</TABLE>
To determine these amounts, the fair value of each stock option has been
estimated on the date of the grant using a Black-Scholes option-pricing model
with a dividend yield of 0%. Options vest over 3 years on a straight- line basis
with a term of 10 years.
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Expected volatility .4230 .3902 .3788
Risk-free interest rates 5.32 6.47 6.05
Expected life in years 5 5 5
Weighted-average fair
value per share $ 7.11 $ 5.37 $ 3.37
</TABLE>
<TABLE>
<CAPTION>
STOCK OPTION PLANS (000'S) SHARES OPTION PRICE
- ----------------------------------------------------------------
<S> <C> <C>
January 29, 1997:
Outstanding 16,967 $ 6.31 - $26.03
Granted 7,233 $ 10.79 - $14.85
Exercised (1,507) $ 7.81 - $12.38
Forfeited (1,705) $ 7.81 - $21.94
------
January 28, 1998:
Outstanding 20,988 $ 6.31 - $26.03
Granted 10,495 $ 11.29 - $20.34
Exercised (4,679) $ 6.31 - $18.88
Forfeited (2,182) $ 7.81 - $26.03
------
January 27, 1999:
Outstanding 24,622 $ 7.00 - $26.03
Exercisable 11,983 $ 7.13 - $26.03
Available for grant 64,515
</TABLE>
The following table summarizes information about stock options outstanding
as of January 27, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- ------------------------
NUMBER WEIGHTED NUMBER WEIGHTED
RANGE OF OF SHARES AVERAGE WEIGHTED OF SHARES AVERAGE
EXERCISE OUTSTANDING REMAINING AVERAGE EXERCISABLE EXERCISE
PRICE (000'S) LIFE PRICE (000'S) PRICE
- -----------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 7.00 to $10.00 5,761 7.1 $ 7.85 4,398 $ 7.85
$10.01 to $15.00 12,223 7.7 $ 12.23 6,579 $ 12.24
$15.01 to $26.03 6,638 8.3 $ 16.99 1,006 $ 20.93
- -----------------------------------------------------------------------------
$ 7.00 to $26.03 24,622 7.7 $ 12.49 11,983 $ 11.36
</TABLE>
<PAGE> 17
14) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Earnings per share amounts for each quarter are required to be computed
independently and may not equal the amount computed for the total year.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 7,515 $ 8,116 $ 7,642 $ 10,401
Cost of sales 5,908 6,336 5,954 8,121
Net income 47 80 38 353
Basic earnings per share .10 .16 .08 .72
Diluted earnings per share .10 .16 .08 .65
Common stock price
High $18-11/16 $20-9/16 $18-11/16 $16-11/16
Low 11 16-7/16 11-1/16 13-12/16
<CAPTION>
- ------------------------------------------------------------------------------
1997 FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 7,263 $ 7,846 $ 7,315 $ 9,759
Cost of sales 5,637 6,197 5,683 7,635
Net income 14 31 18 186
Basic earnings per share .03 .06 .04 .38
Diluted earnings per share .03 .06 .04 .35
Common stock price
High $ 13-5/8 $ 14-1/2 $ 15-1/16 $13-13/16
Low 10-5/8 10-3/8 11-3/8 10-5/8
</TABLE>
The Preferred Securities were not included in the calculation of diluted EPS
for the first, second, and third quarters of 1998 and 1997, due to the
anti-dilutive effect on EPS if converted. Had the Preferred Securities been
included in the calculation, diluted EPS would have been higher by $0.01 for the
first and third quarters of 1998, and $0.02 for the first, second, and third
quarters of 1997. There was no effect during the second quarter of 1998.
Kmart Corporation 1998 Annual Report 32
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Registration Statement Nos. 33-54879, 33-48490,
33-48673, 33-52797, 33-52799 and 33-61351) and the Prospectus constituting part
of the Registration Statement on Form S-3 (Registration Statement No. 33-74665)
of Kmart Corporation of our report dated March 1, 1999 appearing on page 21 of
the Annual Report to Shareholders which is incorporated by reference in this
Annual Report on Form 10-K for the year ended January 27, 1999.
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Detroit, Michigan
April 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-27-1999
<PERIOD-START> JAN-29-1998
<PERIOD-END> JAN-27-1999
<CASH> 710
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 6,536
<CURRENT-ASSETS> 7,830
<PP&E> 10,778
<DEPRECIATION> 4,864
<TOTAL-ASSETS> 14,166
<CURRENT-LIABILITIES> 3,691
<BONDS> 1,538
984
0
<COMMON> 493
<OTHER-SE> 5,486
<TOTAL-LIABILITY-AND-EQUITY> 14,166
<SALES> 33,674
<TOTAL-REVENUES> 33,674
<CGS> 26,319
<TOTAL-COSTS> 26,319
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 293
<INCOME-PRETAX> 798
<INCOME-TAX> 230
<INCOME-CONTINUING> 518
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 518
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.01
</TABLE>
