<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event report) March 21, 2000
--------------------------------------------
KMART CORPORATION
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN
(State or Other Jurisdiction of Incorporation)
1-327 38-0729500
(Commission File Number) I.R.S. Employer Identification No.)
3100 WEST BIG BEAVER ROAD, TROY MICHIGAN 48084
(Address of Principal Executive Offices) (zip Code)
(248) 643-1000
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ITEM 5. OTHER EVENTS.
Kmart is making available its audited consolidated financial statements for the
year ended January 26, 2000. Filed as Exhibit 99 to this 8-K is the following
information:
1. Report of Independent Accountants.
2. Consolidated Statements of Income for the Years Ended January 26, 2000,
January 27, 1999 and January 28, 1998.
3. Consolidated Balance Sheets at January 26, 2000 and January 27, 1999.
4. Consolidated Statements of Cash Flows for the Years Ended January 26,
2000, January 27, 1999 and January 28, 1998.
5. Consolidated Statements of Shareholders' Equity for the Years Ended
January 26, 2000, January 27, 1999 and January 28, 1998.
6. Notes to the Consolidated Financial Statements.
ITEM 7. EXHIBITS.
Exhibit 23 Consent of PricewaterhouseCoopers LLP
Exhibit 27 Financial data schedule.
Exhibit 99 Report of Independent Accountants and Consolidated
Financial Statements of Kmart Corporation for the year ended
January 26, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
KMART CORPORATION
(Registrant)
By: /s/ Martin E. Welch III
-----------------------
Martin E. Welch III
Senior Vice President and
Chief Financial Officer
Date: March 21, 2000
<PAGE> 3
Exhibit Index
Exhibit Number Description
- -------------- -----------
23 Consent of PricewaterhouseCoopers LLP
27 Financial data schedule
99 Report of Independent Accountants and Consolidated
Financial Statements of Kmart Corporation for the year ended
January 26, 2000.
<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, 33-61351, 33-28621, and 33-93023) and the
Prospectus constituting part of the Registration Statement on Form S-3
(Registration Statement No. 33-74665), our report dated March 1, 1999 relating
to the financial statements of Kmart Corporation (the "Company"), which is
incorporated by reference in the Company's Annual Report to Shareholders on Form
10-K for the year ended 1999. We also consent to the incorporation
by reference of our report dated March 6, 2000 relating to the Company's
financial statements, which appear in the Current Report on Form 8-K dated March
21, 2000.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Detroit, Michigan
March 21, 2000
<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-26-2000
<PERIOD-START> JAN-28-1999
<PERIOD-END> JAN-26-2000
<CASH> 344
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 7,101
<CURRENT-ASSETS> 8,160
<PP&E> 11,554
<DEPRECIATION> 5,144
<TOTAL-ASSETS> 15,104
<CURRENT-LIABILITIES> 4,076
<BONDS> 1,759
986
0
<COMMON> 481
<OTHER-SE> 5,823
<TOTAL-LIABILITY-AND-EQUITY> 15,104
<SALES> 35,925
<TOTAL-REVENUES> 35,925
<CGS> 28,102
<TOTAL-COSTS> 28,102
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 280
<INCOME-PRETAX> 1,020
<INCOME-TAX> 337
<INCOME-CONTINUING> 633
<DISCONTINUED> 230
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 403
<EPS-BASIC> .82
<EPS-DILUTED> .81
</TABLE>
<PAGE> 1
EXHIBIT 99
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF KMART CORPORATION
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of Kmart
Corporation and its subsidiaries at January 26, 2000 and January 27, 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended January 26, 2000, in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States 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 6, 2000
<PAGE> 2
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 26, 2000, JANUARY 27, 1999 AND JANUARY 28, 1998 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 35,925 $ 33,674 $ 32,183
Cost of sales, buying and occupancy 28,102 26,319 25,152
-------- -------- --------
Gross margin 7,823 7,355 7,031
Selling, general and administrative expenses 6,523 6,245 6,136
Voluntary early retirement programs -- 19 114
-------- -------- --------
Continuing income before interest, income taxes and dividends
on convertible preferred securities of subsidiary trust 1,300 1,091 781
Interest expense, net 280 293 363
Income tax provision 337 230 120
Dividends on convertible preferred securities of subsidiary trust,
net of income taxes of $27, $27 and $26 50 50 49
-------- -------- --------
Net income from continuing operations 633 518 249
Discontinued operations, net of income taxes of $(124) (230) -- --
-------- -------- --------
Net income $ 403 $ 518 $ 249
======== ======== ========
Basic earnings per common share
Net income from continuing operations $ 1.29 $ 1.05 $ .51
Discontinued operations (.47) -- --
-------- -------- --------
Net income $ .82 $ 1.05 $ .51
======== ======== ========
Diluted earnings per common share
Net income from continuing operations $ 1.22 $ 1.01 $ .51
Discontinued operations (.41) -- --
-------- -------- --------
Net income $ .81 $ 1.01 $ .51
======== ======== ========
Basic weighted average shares (millions) 491.7 492.1 487.1
Diluted weighted average shares (millions) 561.7 564.9 491.7
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 3
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
AS OF JANUARY 26, 2000 AND JANUARY 27, 1999 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 344 $ 710
Merchandise inventories 7,101 6,536
Other current assets 715 584
------- -------
Total current assets 8,160 7,830
Property and equipment, net 6,410 5,914
Other assets and deferred charges 534 422
------- -------
Total Assets $15,104 $14,166
======= =======
Current Liabilities
Long-term debt due within one year $ 66 $ 77
Trade accounts payable 2,204 2,047
Accrued payroll and other liabilities 1,574 1,359
Taxes other than income taxes 232 208
------- -------
Total current liabilities 4,076 3,691
Long-term debt and notes payable 1,759 1,538
Capital lease obligations 1,014 1,091
Other long-term liabilities 965 883
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) 986 984
Common stock, $1 par value, 1,500,000,000 shares authorized;
481,383,569 and 493,358,504 shares issued, respectively 481 493
Capital in excess of par value 1,555 1,667
Retained earnings 4,268 3,819
------- -------
Total Liabilities and Shareholders' Equity $15,104 $14,166
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 26, 2000, JANUARY 27, 1999 AND JANUARY 28, 1998 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flow From Operating Activities
Net income from continuing operations $ 633 $ 518 $ 249
Adjustments to reconcile net income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 770 671 660
Cash used for store restructuring and other charges (80) (94) (105)
Increase in inventories (565) (169) (31)
(Increase) decrease in accounts receivable (62) (76) 18
Increase (decrease) in trade accounts payable 157 124 (86)
Deferred income taxes and taxes payable 258 308 72
Decrease in other long-term liabilities (116) (64) (27)
Changes in other assets and liabilities 92 60 15
Voluntary early retirement programs -- 19 114
------- ------- -------
Net cash provided by continuing operations 1,087 1,297 879
Net cash used for discontinued operations (83) (60) (38)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,004 1,237 841
------- ------- -------
Cash Flow From Investing Activities
Capital expenditures (1,277) (981) (678)
Acquisition of Caldor leases (86) -- --
Proceeds from divestitures -- 87 133
Decrease in property held for sale or financing and other -- 99 420
Other, net -- -- (60)
------- ------- -------
NET CASH USED FOR INVESTING ACTIVITIES (1,363) (795) (185)
------- ------- -------
Cash Flow From Financing Activities
Proceeds from issuance of long-term debt and notes payable 297 -- 337
Purchase of common shares (200) (30) --
Issuance of common shares 63 76 37
Payments on long-term debt (90) (188) (811)
Payments on capital lease obligations (77) (88) (112)
Refinancing costs related to long-term debt and notes payable -- -- (15)
------- ------- -------
NET CASH USED FOR FINANCING ACTIVITIES (7) (230) (564)
------- ------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (366) 212 92
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 710 498 406
------- ------- -------
Cash and cash equivalents, end of year $ 344 $ 710 $ 498
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
CAPITAL ACCUMULATED
IN EXCESS OTHER
COMMON OF PAR RETAINED COMPREHENSIVE
STOCK VALUE EARNINGS INCOME
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
Net income for the year -- -- 403 --
Shares reissued to retirement savings plan 3 40 -- --
Repurchased shares (17) (174) -- --
Common stock issued for stock option plans 2 18 -- --
Reduction of minimum pension liability -- -- -- 47
Other -- 4 (1) --
------- ------- ------- -------
Balance at January 26, 2000 $ 481 $ 1,555 $ 4,281 $ (13)
======= ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1) Summary of Significant Accounting Policies
The significant accounting policies followed by Kmart Corporation and
subsidiaries ("the Company" or "Kmart") in the preparation of these financial
statements, are summarized below.
Nature of Operations: The Company's operations consist principally of
discount department stores located in all 50 states, Puerto Rico, the U.S.
Virgin Islands, and Guam. Kmart's equity investments consist of its 59% interest
in BlueLight.com and its 49% interest in 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, except for BlueLight.com, which is
accounted for under the equity method. Investments in affiliated retail
companies owned 20% or more are accounted for under 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 1999, 1998 and 1997 each consisted of 52 weeks and ended
on January 26, 2000, January 27, 1999 and January 28, 1998, respectively.
Cash: Cash and cash equivalents include all highly liquid investments with
maturities of three months or less. Included are temporary investments of $50
and $437, at year end 1999 and 1998, 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 $6,690,
$6,148 and $5,990 of inventory as of year end 1999, 1998 and 1997, respectively.
Inventories valued on LIFO were $360, $407 and $457 lower than amounts that
would have been reported using the first-in, first-out (FIFO) method at year end
1999, 1998 and 1997, 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.
Capitalized Software Costs: Costs associated with the acquisition or
development of software for internal use are capitalized in accordance with the
provisions of AICPA Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," and amortized using
the straight-line method over the expected useful life of the software, which
ranges from 3 to 7 years.
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.
Layaway Sales: In consideration of guidance issued by the Securities and
Exchange Commission under Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"), the Company has retroactively
changed its method of accounting for layaway sales effective January 28, 1999.
Based upon the new guidance, the Company defers recognition of layaway sales and
profit to the accounting period when the merchandise is delivered to the
customer. Under the prior method of accounting, sales and profits were
recognized at the time the customer put the merchandise into layaway, with a
reserve for anticipated merchandise to be returned to stock. The Company has
recorded a one-time, non-cash after-tax earnings reduction of $7, or $0.01 per
share, in the fourth quarter of 1999 to reflect the cumulative effect of the
accounting change.
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" ("APB 25").
Pre-Opening and Closing Costs: Effective for fiscal 1999, Kmart expensed
pre-opening costs in the period in which they occurred in conformity with
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities". In
prior years, costs associated with the opening of a new store were expensed
during the first full month of operations. When the decision to close a retail
unit is made, any future net lease obligation and non-recoverable 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 $453, $443
and $420 in 1999, 1998 and 1997, 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 its pro rata share 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.
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Reclassifications: Certain reclassifications of prior year amounts have
been made to conform to the 1999 presentation.
2) Discontinued Operations and Dispositions
Discontinued operations relate to Builders Square, Inc. ("Builders Square").
1999 Activity
On June 11, 1999, Hechinger Company ("Hechinger"), which had previously
acquired substantially all of the operating assets of Builders Square, filed for
Chapter 11 bankruptcy protection. In the second quarter of 1999, the Company
recorded a non-cash charge of $354, $230 after tax, which reflected Kmart's best
estimate of the impact of Hechinger's default on lease obligations for up to 117
former Builders Square locations which are guaranteed by Kmart. The foregoing
non-cash charge does not reflect an amount, if any, which Kmart may ultimately
recover on account of any claims previously filed by Kmart or an amount, if any,
which may be sought by others against Kmart.
On September 9, 1999, Hechinger announced that it would liquidate its
stores. During the third and fourth quarters of 1999, certain locations with
leases guaranteed by Kmart were auctioned by Hechinger as part of its
liquidation. As of January 26, 2000, the Company had new lease agreements for 38
locations and planned to convert approximately 6 locations to Big Kmarts or
Super Kmarts, leaving approximately 73 vacant locations to be remarketed. The
Company is currently assessing its remarketing efforts for these vacant stores
and believes its reserve to be adequate.
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 operating assets of its subsidiary, Builders Square, to
Hechinger, an affiliate of Leonard Green and Partners, LP. The net proceeds from
the sale approximated book value.
3) Property and Equipment
<TABLE>
<CAPTION>
YEAR END
-------------------
1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Land $ 374 $ 334
Buildings 1,008 944
Leasehold improvements 2,502 2,156
Furniture and fixtures 5,509 5,142
Construction in progress 123 62
-------- --------
9,516 8,638
Property under capital leases 2,038 2,140
-------- --------
11,554 10,778
Less:
Accumulated depreciation
and amortization (3,977) (3,674)
Accumulated depreciation-
capital leases (1,167) (1,190)
-------- --------
Total $ 6,410 $ 5,914
======== ========
</TABLE>
The following table provides a breakdown of the number of stores leased compared
to owned:
<TABLE>
<CAPTION>
YEAR END
-------------
1999 1998
- -------------------------------------------------
<S> <C> <C>
Number of U.S.Kmart Stores Owned 120 110
Number of U.S.Kmart Stores Leased 2,051 2,051
</TABLE>
4) Investments in Affiliated Retail Companies
Meldisco
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 $245,
$225 and $210 in 1999, 1998 and 1997, respectively. The Company received
dividends from Meldisco in 1999, 1998 and 1997 of $38, $36 and $36,
respectively.
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------
MELDISCO INFORMATION 1999 1998 1997
- -----------------------------------------------
<S> <C> <C> <C>
Net sales $1,212 $1,139 $1,142
Gross profit 544 499 491
Net income 91 78 74
Inventory $ 138 $ 147 $ 142
Other current assets 63 22 17
Non-current assets -- -- --
------ ------ ------
Total assets 201 169 159
Current liabilities 47 29 24
------ ------ ------
Net assets $ 154 $ 140 $ 135
====== ====== ======
Equity of Kmart $ 74 $ 68 $ 65
====== ====== ======
</TABLE>
Unremitted earnings included in consolidated retained earnings were $44, $38 and
$42 at year end 1999, 1998, and 1997, respectively.
BlueLight.com
In December 1999, BlueLight.com was formed as an independent e-commerce
company, based in San Francisco, by a group of investors led by Kmart (59%
ownership interest), SOFTBANK Venture Capital (18.5%), BlueLight.com management
and employees
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(15%) and others, including Martha Stewart Living Omnimedia and Yahoo!.
For its capital, BlueLight.com issued $62.5 of Series A Preferred shares
for cash to SOFTBANK and other investors. Kmart issued return of capital puts
relating to the initial cash paid for the Series A Preferred stock. The puts are
payable in cash, expire in December 2002, and are exercisable in the nine-month
period prior to expiration. Kmart did not make an initial cash investment in
BlueLight.com.
Kmart also issued 4.4 million warrants for Kmart common stock to SOFTBANK
and other investors. The warrants have a strike price of $14.32, expire in
December 2002, and are exercisable at any time prior to expiration provided that
SOFTBANK has cancelled the Company's return of capital puts.
Kmart accounts for its investment in BlueLight.com under the equity method.
As of January 26, 2000, the Company's investment in BlueLight.com amounted to
$62.8, including the issuance of return of capital puts and direct acquisition
costs. Kmart's portion of BlueLight.com's 1999 loss was insignificant.
Penske
In November 1995, Kmart sold its auto service center business to a new
corporation controlled by Penske Corporation ("Penske"). In connection with the
sale, Kmart and Penske entered into a multi-year master sublease agreement for
the auto service center locations that are operated by Penske as Penske Auto
Centers.
To strengthen the auto center operation, Kmart and Penske entered into an
agreement in January 2000 to restructure and recapitalize the Penske Auto Center
business. As part of the recapitalization, Kmart received a 22 percent interest
in a limited liability company that now owns and operates the Penske Auto Center
business. The Company accounts for its investment in the Penske Auto Center
business under the equity method and has recorded no initial investment.
5) Other Commitments and Contingencies
Kmart has outstanding guarantees for property leased by certain former
subsidiaries as follows:
<TABLE>
<CAPTION>
Present Value Gross
at 7% Lease
------------- ------------
1999 1999 1998
- -----------------------------------------------
<S> <C> <C> <C>
The Sports Authority $218 $369 $397
Borders Group 104 176 194
OfficeMax 96 141 156
---- ---- ----
Total $418 $686 $747
==== ==== ====
</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.
The Sports Authority
- --------------------
On April 13, 1999, The Sports Authority, Inc. ("TSA") replaced its existing
revolving credit facility with a new three year, $200 revolving credit
agreement. The new agreement is secured by inventory and contains no financial
covenants related to operating results. For its third quarter 1999, TSA
announced a year-to-date same store sales decrease of 4.3 percent, and a
year-to-date operating loss of $9.9, as compared to an operating loss of $94.5
for the same period of the prior year.
On December 16, 1999, TSA announced that it expected to take a non-cash
charge of approximately $130, net of taxes, in its fiscal fourth quarter as a
result of the write-down of long-lived assets, including goodwill and deferred
tax assets, and the closing of its Canadian subsidiary. TSA also announced that
it had increased its revolving credit facility to $275 and extended the maturity
to 2003. The amendments to the facility required no changes in the
collateralization.
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.
Other
- -----
As of January 26, 2000, Kmart had guaranteed $93 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 1999 1998
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Debentures 2005-2023 7.8%-12.5% $ 1,166 $ 867
Medium-term
notes 2000-2020 7%-9% 371 438
CMBS 2002 Floating 288 310
--------- -------
Total 1,825 1,615
Current portion (66) (77)
--------- -------
Long-term debt $ 1,759 $ 1,538
========= =======
</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 $253 on the
scheduled maturity date in February 2002. The CMBS weighted average interest
rate is 1 month LIBOR plus 47 basis points.
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
On December 6, 1999, the Company entered into new financing agreements
aggregating $1.7 billion with a group of financial institutions ("New
Facilities") which replaced a $2.5 billion revolving credit facility. The New
Facilities provide for a 3-year, $1.1 billion revolving credit facility and a
364-day $600 revolving credit facility. The 3-year revolving credit facility
matures in December 2002 and has a commitment fee of 25 basis points and
interest rate of LIBOR plus 100 basis points during the first year. The 364-day
revolving credit facility has a commitment fee of 20 basis points and interest
rate of LIBOR plus 100 basis points.
On January 12, 2000, the Company entered into an agreement for a $40.6
revolving line of credit ("Minority Facility") with a consortium of 26
minority-owned banks in 20 states and the District of Columbia. The 364-day
revolving credit facility has a commitment fee of 20 basis points and interest
rate of LIBOR plus 100 basis points.
The New Facilities and the Minority Facility contain certain affirmative
and negative covenants customary to these types of agreements. The Company is in
compliance with all such covenants. As of January 26, 2000 and January 27, 1999,
there were no outstanding amounts under any of these credit agreements.
On December 8, 1999, the Company sold in an underwritten offering $300 of
8 3/8% Notes due December 1, 2004 ("Notes"). Interest is payable semiannually on
June 1 and December 1. The Company expects to use the net proceeds from the
Notes for property acquisition and development, including the purchase of
existing leased properties, and for other general corporate purposes.
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 $1,752 and $1,664 at year end
1999 and 1998, respectively.
The principal maturities of long-term debt for the five years subsequent to
1999 are: 2000-$66; 2001-$68; 2002-$343; 2003-$350; 2004-$27 and 2005 and
later-$971. Cash paid for interest was $262, $278 and $333 in 1999, 1998 and
1997, respectively.
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. and the Meldisco subsidiaries of FTS.
<TABLE>
<CAPTION>
MINIMUM LEASE COMMITMENTS
--------------------------
AS OF JANUARY 26, 2000 CAPITAL OPERATING
- -----------------------------------------------------------
<S> <C> <C>
Fiscal Year:
2000 $ 254 $ 627
2001 243 623
2002 235 606
2003 225 578
2004 210 552
Later years 1,624 6,928
--------- ---------
Total minimum lease payments 2,791 9,914
Less-minimum sublease income -- (2,654)
--------- ---------
Net minimum lease payments 2,791 $ 7,260
Less: ========= =========
Estimated executory costs (773)
Amount representing interest (923)
---------
1,095
Current (81)
---------
Long-term $ 1,014
=========
</TABLE>
<TABLE>
<CAPTION>
RENT EXPENSE 1999 1998 1997
- -------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $ 784 $ 711 $ 673
Percentage rentals 41 40 39
Less-sublease rentals (253) (227) (234)
-------- -------- --------
Total $ 572 $ 524 $ 478
======== ======== ========
</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 Preferred Securities accrue and pay cash distributions
quarterly at a rate of 7-3/4% per annum. 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 were callable beginning June 15, 1999.
Based on the quoted market prices, the fair value of the Preferred
Securities was approximately $844 and $1,199 as of the years ended 1999 and
1998, respectively.
9) Share Repurchase Programs
In the first quarter of 1999, the Company completed a year-long program to
repurchase an aggregate of 2,000,000 shares of the Company's common stock to
fund certain employee benefit plans. On May 18, 1999, the Board of Directors
approved a common stock repurchase program to acquire up to $1 billion of the
Company's common shares over a period of up to three years. For 1999, the
Company repurchased 17 million shares of common stock at a cost of approximately
$200. In addition, the Company received $8.7 in proceeds from the sale of put
options on its common stock. As of January 26, 2000,
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
the Company had outstanding put options on 5 million shares of its common stock.
In February 2000, the Company announced plans to extend its repurchase program
to include up to $200 of its Preferred Securities.
10) Income Taxes
<TABLE>
<CAPTION>
INCOME BEFORE
INCOME TAXES 1999 1998 1997
- ------------------------------------------------------------
<S> <C> <C> <C>
U.S. $ 992 $ 766 $ 390
Foreign 28 32 28
-------- -------- -------
Total $ 1,020 $ 798 $ 418
======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
INCOME TAX
PROVISION (CREDIT) 1999 1998 1997
- --------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 133 $ 70 $ (126)
State and local 17 21 (5)
Foreign 11 12 11
-------- --------- -------
161 103 (120)
Deferred:
Federal 169 124 240
State 7 3 --
-------- --------- -------
Total $ 337 $ 230 $ 120
======== ========= =======
</TABLE>
<TABLE>
<CAPTION>
EFFECTIVE TAX RATE
RECONCILIATION 1999 1998 1997
- ----------------------------------------------------------------
<S> <C> <C> <C>
Federal income
tax rate 35.0% 35.0% 35.0%
State and local taxes,
net of federal tax benefit 1.5 1.9 (0.8)
Tax credits (0.7) (0.7) (1.9)
Equity in net income
of affiliated companies (1.2) (1.4) (2.3)
Adjustments to prior
year's accruals -- (6.0) --
Other (1.6) -- (1.3)
---- ---- ----
33.0% 28.8% 28.7%
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
YEAR END
DEFERRED TAX --------------
ASSETS AND LIABILITIES 1999 1998
- -------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Federal benefit for
state and foreign taxes $ 44 $ 36
Discontinued operations 239 129
Accruals and other liabilities 176 197
Capital leases 86 98
Store restructuring 48 69
Other 14 84
----- -----
Total deferred tax assets 607 613
----- -----
Deferred tax liabilities:
Inventory 336 279
Property and equipment 389 367
Other 19 24
----- -----
Total deferred tax liabilities 744 670
----- -----
Net deferred tax liabilities $(137) $ (57)
===== =====
</TABLE>
In 1998, the Internal Revenue Service 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 $59, $(99) and $7 in 1999, 1998
and 1997, respectively.
11) Earnings Per Share
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------
<S> <C> <C> <C>
Continuing net income $ 633 $ 518 $ 249
Discontinued operations (230) -- --
-------- --------- -------
Net income $ 403 $ 518 $ 249
======== ========= =======
Preferred dividends $ 50 $ 50 $ --
======== ========= =======
Basic weighted average shares 491.7 492.1 487.1
Dilutive effect of stock options 3.3 6.1 4.6
Convertible preferred securities 66.7 66.7 --
-------- --------- -------
Diluted weighted average shares 561.7 564.9 491.7
======== ========= =======
Basic earnings per share:
Continuing net income $ 1.29 $ 1.05 $ .51
Discontinued operations (.47) -- --
-------- --------- -------
Net income $ .82 $ 1.05 $ .51
======== ========= =======
Diluted earnings per share:
Continuing net income $ 1.22 $ 1.01 $ .51
Discontinued operations (.41) -- --
-------- --------- -------
Net income $ .81 $ 1.01 $ .51
======== ========= =======
</TABLE>
The Preferred Securities and preferred dividends were not included in the
calculation of diluted EPS for 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 $0.02 for fiscal 1997.
12) 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.
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The plans' assets consist primarily of equity and fixed income securities.
No contributions were made in fiscal 1999, 1998, or 1997. The total consolidated
pension income was $68, $63 and $63 in 1999, 1998 and 1997, 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
------------------
1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,208 $ 2,055
Interest costs 141 139
Voluntary early retirement program(VERP) -- 19
Actuarial (gain)/loss (300) 131
Benefits paid including VERP (105) (136)
------- -------
Benefit obligation at end of year $ 1,944 $ 2,208
======= =======
Change in plan assets:
Fair value of plan assets at
beginning of year $ 2,098 $ 1,942
Actual return on plan assets 145 292
Benefits paid including VERP (138) (136)
------- -------
Fair value of plan assets at
end of year $ 2,105 $ 2,098
======= =======
</TABLE>
<TABLE>
<CAPTION>
Year End
----------------
1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Funded status $ 161 $(110)
Unrecognized net (gain)/loss (110) 99
Unrecognized transition asset (48) (54)
----- -----
Net recognized prepaid benefit/(liability) $ 3 $ (65)
===== =====
Amounts recognized in the statement of financial position consist of:
Prepaid benefit cost/
(Accrued benefit liability) $ 3 $(109)
Accumulated other comprehensive income -- 44
----- -----
Net amount recognized $ 3 $ (65)
===== =====
Weighted-average assumptions as of January 31
Discount rate 7.5% 6.5%
Expected return on plan assets 10% 10%
</TABLE>
<TABLE>
<CAPTION>
Year End
------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of Net Periodic Benefit (Income)/Expense
Interest costs $ 141 $ 139 $ 139
Expected return on plan assets (202) (195) (193)
Amortization of unrecognized
transition asset (7) (7) (9)
----- ----- -----
Net periodic benefit $ (68) $ (63) $ (63)
===== ===== =====
</TABLE>
The Company has non-qualified plans for directors and officers which were
partially funded as of years ended 1999 and 1998 and were unfunded as of year
end 1997. Benefits under the plans totaled $34 and $37 at the end of 1999 and
1998, respectively, which have been accrued in the accompanying balance sheets.
Plan assets totaled $13 and $11 as of year end 1999 and 1998, respectively.
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 $54 and $62 at the
end of 1999 and 1998, respectively.
13) Retirement Savings Plan
The Retirement Savings Plan provides that associates of Kmart who have
completed 1,000 hours of service within a twelve month period 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 also has a profit sharing feature whereby the
Company makes contributions based on profits, with minimum yearly contributions
required of $30. Kmart's total expense related to the Retirement Savings Plan
was $94, $68 and $69 in 1999, 1998 and 1997, respectively.
14) Stock Option Plans
The Company applies APB 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 25, no
compensation cost has been recognized for stock options granted under 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 1999 1998 1997
- --------------------------------------------------------------
<S> <C> <C> <C>
Net income - as reported $ 403 $ 518 $ 249
EPS - as reported .81 1.01 .51
Net income - pro forma 376 496 222
EPS - pro forma .76 .97 .45
</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.
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------
<S> <C> <C> <C>
Expected volatility .4506 .4230 .3902
Risk-free interest rates 4.93 5.32 6.47
Expected life in years 5 5 5
Weighted-average fair
value per share $ 7.90 $ 7.11 $ 5.37
</TABLE>
<TABLE>
<CAPTION>
STOCK OPTION PLANS (000'S) SHARES OPTION PRICE
- ---------------------------------------------------------
<S> <C> <C>
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
Granted 6,376 $ 9.78 - $17.56
Exercised (1,723) $ 7.81 - $16.28
Forfeited (1,382) $ 7.81 - $26.03
------
January 26, 2000:
Outstanding 27,893 $ 7.00 - $26.03
Exercisable 15,638 $ 7.00 - $26.03
Available for grant 11,671
</TABLE>
The following table summarizes information about stock options outstanding as of
January 26, 2000.
<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
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 7.00 to $10.00 4,541 5.7 $ 7.86 4,533 $ 7.86
$ 10.01 to $15.00 11,847 6.6 $ 12.29 8,566 $ 12.18
$ 15.01 to $26.03 11,505 8.2 $ 17.12 2,539 $ 17.52
- -------------------------------------------------------------------------
$ 7.00 to $26.03 27,893 7.1 $ 13.56 15,638 $ 11.80
</TABLE>
15) 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>
- ----------------------------------------------------------------------------------
1999 Restated (A) First Second Third Fourth
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 8,078 $ 8,781 $ 7,962 $11,104
Cost of sales 6,368 6,851 6,246 8,637
Continuing net income 56 138 27 412
Discontinued operations -- (230) -- --
Net income (loss) 56 (92) 27 412
Basic earnings (loss) per share:
Continuing net income .11 .28 .05 .85
Discontinued operations -- (.47) -- --
---------------------------------------------
Net income (loss) .11 (.19) .05 .85
=============================================
Diluted earnings (loss) per share:
Continuing net income .11 .26 .05 .77
Discontinued operations -- (.41) -- --
---------------------------------------------
Net income (loss) .11 (.15) .05 .77
=============================================
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth (B)
1999 Reported Pro forma
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 8,144 $ 8,757 $ 8,057 $ 10,955
Cost of sales 6,417 6,835 6,317 8,510
Continuing net income 67 134 43 396
Discontinued operations - (230) - -
Net income (loss) 67 (96) 43 396
Basic earnings (loss) per share:
Continuing net income .14 .27 .09 .82
Discontinued operations - (.47) - -
------------------------------------
Net income (loss) .14 (.20) .09 .82
====================================
Diluted earnings (loss) per share:
Continuing net income .14 .26 .09 .74
Discontinued operations - (.41) - -
------------------------------------
Net income (loss) .14 (.15) .09 .74
====================================
Common stock price
High $ 17-7/8 $ 17-5/8 $14-15/16 $ 12-1/4
Low 16-1/16 14-7/8 9-3/8 9
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1998 Pro forma (C) First Second Third Fourth
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 7,458 $ 8,125 $ 7,539 $10,565
Cost of sales 5,868 6,341 5,876 8,245
Continuing net income 34 83 20 382
Net income 34 83 20 382
Basic earnings per share: .07 .17 .04 .77
Diluted earnings per share: .07 .17 .04 .70
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
1998 Reported 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
Continuing net income 47 80 38 353
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
</TABLE>
(A) In consideration of SAB 101, the Company has restated its first three
quarters of 1999.
(B) For comparability, pro forma results for the fourth quarter of 1999 exclude
the effects of SAB 101 and represent results as if the change in accounting
policy had not occurred.
(C) For informational purposes only, 1998 quarterly results have been presented
on a pro forma basis as if SAB 101 had been applied to 1998 quarterly results.
