Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Form 10-K Pursuant to Item 405 29 173K
2: EX-10.(A) 1973 Stock Option Plan, as Amended 6 35K
3: EX-10.(B) 1981 Stock Option Plan, as Amended 4 29K
4: EX-10.(F) 1992 Stock Option Plan, as Amended 5 32K
5: EX-10.(K) Amended and Restated Management Stock Purchase Pl. 5 32K
6: EX-10.(M) 1997 Long-Term Equity Compensation Plan 14 72K
7: EX-10.(O) Amended and Restated Special Severance Plan 12 40K
8: EX-10.(P) Amend. and Restat. Managmt. Defrd. Comp./Rest. Pl. 21 82K
9: EX-11 Statement Re- Computation of Per Share Earnings 4± 22K
10: EX-12 Statement Regarding Computaiton of Ratios 1 10K
11: EX-23 Consent of Independent Accountants 1 8K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934 For the fiscal year ended January 31, 2001
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or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File No. 1-327
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KMART CORPORATION
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(Exact name of registrant as specified in its charter)
Michigan 38-0729500
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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) 463-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE SECURITIES EXCHANGE
ACT OF 1934:
Name of each Exchange
Title of each class on which registered
------------------- -------------------
Common Stock, $1.00 par value New York, Pacific and Chicago Exchanges
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE SECURITIES
EXCHANGE ACT OF 1934: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. [X]
The aggregate market value of voting stock including common stock held by
non-affiliates on February 28, 2001 was $4,553,233,865. The market value of
Kmart common stock is based on the closing price on the New York Stock Exchange
on such date.
As of February 28, 2001, 486,976,884 shares of Kmart common stock were
outstanding.
Portions of our Proxy Statement for the 2001 Annual Meeting of Stockholders,
which will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A, not later than 120 days after the end of the fiscal year, are
incorporated by reference into Part III of this report.
1
PART I
Item 1. Business
History
Kmart Corporation ("Kmart," "We" or "Our") is the nation's second
largest discount retailer and the third largest general merchandise retailer. We
were incorporated under the laws of the State of Michigan on March 9, 1916, as
the successor to the business developed by our founder, S. S. Kresge, who opened
his first store in 1899. After operating Kresge department stores for over 45
years, our store program commenced with the opening of the first Kmart store in
March 1962. Our principal executive offices are located at 3100 West Big Beaver
Road, Troy, Michigan 48084.
Operations
We operate in the general merchandise retailing industry through 2,105
Kmart discount stores with locations in each of the 50 United States, Puerto
Rico, the U.S. Virgin Islands and Guam. Our general merchandise retail
operations are located in 321 of the 331 Metropolitan Statistical Areas in the
United States. Our stores are generally one-floor, free-standing units ranging
in size from 40,000 to 190,000 square feet.
We have a nationwide base of newly remodeled stores with 99% of our
chain new or remodeled within the last five years. We completed our Big Kmart
conversion process in early 2000. Nearly all of our stores are in the Big Kmart
format.
We currently have 104 Kmart Supercenters that combine a full grocery,
deli, bakery, one-hour photo and 24 hour/seven-days-a-week availability along
with the general merchandise selection of a Kmart discount store. Kmart
Supercenters represent the third largest supercenter operation in the United
States.
In February 2001, we entered into a strategic alliance with Fleming
Companies, Inc. ("Fleming") whereby Fleming will be our sole provider of food
and consumable products in all current and future Kmart and Kmart Supercenter
stores. Fleming will begin supplying merchandise under the new agreement in
early fiscal 2001.
Information regarding our discontinued operations and dispositions
appears in Note 3 of the "Notes to Consolidated Financial Statements" on page 18
of this Form 10-K.
Information regarding our analysis of operations and financial
condition appears in "Management's Discussion and Analysis of Results of
Operations and Financial Condition" on pages 8-11 of this Form 10-K.
Competition
We have several major competitors on a national level, which include
Wal-Mart, Target, Sears and J.C. Penney, and many competitors on a local and
regional level which compete with our individual stores. Success in this
competitive market is based on factors such as price, quality, service, product
mix and convenience.
Seasonality
Our 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
Kmart and Capital One Financial Corporation ("Capital One") launched a
new Kmart MasterCard on September 25, 2000. The new Kmart MasterCard combines
the exclusivity of private label card benefits along with MasterCard's global
acceptance at more than 18 million locations. The former private label Kmart
Credit Card through Household Bank (SB), N.A., a unit of Household
International, Inc., was discontinued in October 2000. In addition to the Kmart
Credit Card program, which is owned and operated by Capital One, all of our
stores accept major bank credit cards as payment for merchandise.
2
Employees
We employed approximately 252,000 persons as of January 31, 2001.
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 (15%) and others, including Martha Stewart Living Omnimedia and
Yahoo!. BlueLight.com is the number two Internet service provider in the world,
providing easy-to-use Internet service to over 6 million subscribers.
BlueLight.com offers Kmart products for direct on-line sale. During fiscal year
2000, we increased our investment in BlueLight.com by $55 million, increasing
our ownership interest to 60%.
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 our capital expenditures, earnings or
competitive position.
Item 2. Properties
At January 31, 2001, we operated a total of 2,105 general merchandise
stores which are located in the United States, Puerto Rico, the U.S. Virgin
Islands and Guam. We lease our store facilities, with the exception of 121
stores that we own. Store leases are generally for terms of 25 years with
multiple five-year renewal options which allow us the option to extend the life
of the lease up to 50 years beyond the initial non-cancelable term.
We own our headquarters and one administrative building in Troy,
Michigan and lease an administrative building in Royal Oak, Michigan. We lease
18 United States distribution centers for initial terms of 10 to 30 years with
options to renew for additional terms. In addition, we own or lease 513 parcels
not currently used for store operations, the majority of which are rented to
others.
A description of our leasing arrangements appears in Note 9 of the
"Notes to Consolidated Financial Statements" on page 20 of this Form 10-K.
Item 3. Legal Proceedings
We are party to a substantial number of legal proceedings, most of
which are routine and all of which are incidental to our 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 effect on our
liquidity, financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
3
Executive Officers
The name, position, age and a description of the business experience
for each of the executive officers of Kmart is listed below as of February 28,
2001. There is no family relationship among the executive officers. Executive
officers 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 Kmart.
Charles C. Conaway - Chairman of the Board and Chief Executive Officer,
40.
Mr. Conaway joined Kmart under his current title in May 2000. Prior to joining
Kmart he served in the following positions at CVS Corporation: President and
Chief Operating Officer from 1998 to 2000; Executive Vice President and Chief
Financial Officer from 1995 to 1998; and Senior Vice President of Pharmacy from
1992 to 1995.
Andrew A. Giancamilli - President and Chief Operating Officer, 50.
Mr. Giancamilli was promoted to his current position in 2000. Prior thereto he
held the following positions at Kmart: President and General Merchandise
Manager, U.S. Kmart from 1998 to 2000; 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 Kmart 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.
Randy L. Allen - Executive Vice President, Strategic Planning and Chief
Information Officer, 54.
Ms. Allen joined Kmart under her current title in 2000. Prior thereto she was a
partner at Deloitte & Touche from 1996 to 2000; Chief Administrative and
Information Officer at Phillips Van Heusen Corporation from 1993 to 1996; and a
partner at Deloitte & Touche from 1992 to 1993.
Anthony B. D'Onofrio - Executive Vice President, Chief Supply Chain
Officer, 46.
Mr. D'Onofrio joined Kmart under his current title in 2000. Prior thereto he was
Senior Vice President, Global Supply Chain, Logistics and Distribution for
Michaels Stores from 1999 to 2000; Vice President, Operations at Merck from 1997
to 1999; and Director and Senior Director Technology at Pepsico International
from 1992 to 1994.
Cecil B. Kearse -- Executive Vice President, Merchandising, 48. Mr.
Kearse was promoted to his current position in 2000. Prior thereto he held the
following positions at Kmart: Senior Vice President and General Merchandise
Manager, Home from 1997 to 2000; 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 1992 to 1994.
David P. Rots - Executive Vice President, Human Resources and
Administration, 41.
Mr. Rots joined Kmart under his current title in 2000. Prior thereto he was Vice
President, Human Resources at Parke-Davis, Warner-Lambert from 1998 to 2000;
Vice President, Human Resources at Schick & Wilkinson Sword Division
Warner-Lambert from 1996 to 1998; Corporate Director, Executive and Global
Compensation at Whirlpool from 1995 to 1996 and Director, Human Resources at
SmithKline Beechham from 1992 to 1995.
Mark S. Schwartz - Executive Vice President, Store Operations, 40. Mr.
Schwartz joined Kmart under his current title in 2000. Prior thereto he was
President and Chief Executive Officer for Big V Supermarkets, Inc. from 1999 to
2000; President and Chief Executive Officer of Hechinger Corporation from 1998
to 1999; and held the following positions at Wal-Mart: President and Director
General, Wal-Mart Supercenters/Aurrea Stores 1996 to 1998; Senior Vice
President, Supercenters from 1995 to 1996; and Vice President, Supercenters from
1992 to 1995.
Martin E. Welch III -- Executive Vice President and Chief Financial
Officer, 52.
Mr. Welch was promoted to his current position in 2000. Prior thereto he held
the position of Senior Vice President and Chief Financial Officer from 1995 to
2000. Prior to joining Kmart he was Senior Vice President, Chief Financial
Officer, Federal-Mogul Corporation from 1992 to 1995.
Brent Willis -- Executive Vice President and Chief Marketing Officer,
40.
Mr. Willis joined Kmart under his current title in 2000. Prior thereto he was
President, Latin American division for The Coca-Cola Company from 1997 to 2000;
Vice President of Marketing-International and Vice President and General Manager
in Venezuela for Nabisco from 1994 to 1997; and Vice President of
Marketing-International for Kraft General Foods from 1992 to 1994.
4
PART II
Item 5. Market for Kmart's Common Equity and Related Stockholder Matters
Our common stock is listed on the New York, Pacific and Chicago Stock
Exchanges. There were approximately 73,892 shareholders of record of Kmart
common stock as of February 28, 2001.
The quarterly high and low sales prices for Kmart's common stock for
the two most recent fiscal years is set forth in Note 17 of the "Notes to
Consolidated Financial Statements" on page 23 of this Form 10-K.
Item 6. Selected Financial Data
The table below summarizes our recent financial information. For
further information, refer to our consolidated financial statements and notes
thereto presented under Item 8 of this Form 10-K.
5
Consolidated Selected Financial Data
(Dollars in millions, except per share data)
[Enlarge/Download Table]
2000 1999 1998 1997 1996
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Summary of Operations (1)
Sales $ 37,028 $ 35,925 $ 33,674 $ 32,183 $ 31,437
Comparable sales %(2) 1.1% 4.8% 4.8% 4.8% 2.5%
Total sales % 3.1% 6.6% 4.6% 2.4% (0.9%)
U.S. Kmart total sales % 3.1% 6.6% 5.6% 5.0% (0.2%)
Cost of sales, buying and occupancy 29,658 28,111 26,319 25,152 24,390
Selling, general and administrative expenses 7,415 6,514 6,245 6,136 6,274
Interest expense, net 287 280 293 363 453
Continuing income (loss) before income taxes (332) 1,020 798 418 330
Net income (loss) from continuing operations(3) (244) 633 518 249 231
Net income (loss) (244) 403 518 249 (220)
Per Common Share
Basic continuing income (loss) $ (0.48) $ 1.29 $ 1.05 $ 0.51 $ 0.48
Diluted continuing income (loss)(4) $ (0.48) $ 1.22 $ 1.01 $ 0.51 $ 0.48
Book value $ 12.50 $ 13.10 $ 12.12 $ 11.15 $ 10.51
Financial Data
Working capital $ 3,825 $ 4,084 $ 4,139 $ 4,202 $ 4,131
Total assets 14,630 15,104 14,166 13,558 14,286
Long-term debt 2,084 1,759 1,538 1,725 2,121
Long-term capital lease obligations 943 1,014 1,091 1,179 1,478
Trust convertible preferred securities 887 986 984 981 980
Capital expenditures 1,087 1,277 981 678 343
Depreciation and amortization 777 770 671 660 654
Current ratio 2.0 2.0 2.1 2.3 2.1
Long-term debt to capitalization 31.3% 28.6% 28.6% 32.4% 37.2%
Ratio of income from continuing operations to fixed charges(5) -- 2.5 2.1 1.5 1.4
Basic weighted average shares outstanding (millions) 483 492 492 487 484
Diluted weighted average shares outstanding (millions)(4) 483 562 565 492 486
Number of Stores
United States 2,105 2,171 2,161 2,136 2,134
International and other -- -- -- -- 127
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Total Stores 2,105 2,171 2,161 2,136 2,261
U.S. Kmart store sales per comparable selling square foot $ 236 $ 233 $ 222 $ 211 $ 201
U.S. Kmart selling square footage (millions) 153 155 154 151 156
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(1) Kmart Corporation and subsidiaries ("Kmart," "We" or "Our") fiscal year ends
on the last Wednesday in January. Fiscal 2000 consisted of 53 weeks.
(2) Comparable store sales for 2000 are based on the 52 week period ended
January 24, 2001.
(3) Net income from continuing operations in 2000 includes non-recurring charges
related to strategic initiatives of $728 ($463 net of tax). Net income from
continuing operations in 1999 includes a one-time, non-cash earnings reduction
of $11 ($7 net of tax) to reflect the cumulative effect of a change in
accounting method for layaway sales. Net income from continuing operations in
1998 and 1997 includes non-recurring charges related to Voluntary Early
Retirement Programs of $19 ($13 net of tax) and $114 ($81 net of tax),
respectively.
(4) 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 2000, 1997 and 1996 due to their anti-dilutive
effect.
(5) 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. Due to Kmart's
loss from continuing operations for the fiscal year ended January 31, 2001, the
ratio of coverage was less than 1:1. Excluding the $728 pre-tax charge for
strategic initiatives, the ratio of earnings from continuing operations to fixed
charges was 1.5 for the fiscal year ended January 31, 2001.
6
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto presented under
Item 8 of this Form 10-K.
7
Management's Discussion and Analysis
of Results of Operations and Financial Condition
(Dollars in millions, except per share data)
RESULTS OF OPERATIONS
[Download Table]
2000 1999 1998
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Sales $ 37,028 $ 35,925 $ 33,674
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Operating Income (Loss) $ (45) $ 1,300 $ 1,110
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Comparable Sales % 1.1% 4.8% 4.8%
Operating income (loss) excludes the voluntary early retirement charges
in 1998 totaling $19, on a pre-tax basis.
FISCAL 2000 COMPARED TO FISCAL 1999
Fiscal 2000, which ended on January 31, 2001, included 53 weeks, while
fiscal 1999 and 1998, which ended on January 26, 2000 and January 27, 1999,
respectively, included 52 weeks.
Sales and comparable store sales for 2000 increased 3.1% and 1.1%,
respectively. The increase in comparable store sales reflects the completion of
our discount store conversion initiative in 2000 and evidences our progress on
our three strategic imperatives: world-class execution, our customer-centric
culture and differentiated market position. In addition, total sales increased
due to the net effect of store openings and closings, and to an additional week
of sales in 2000 due to the 53 week fiscal year.
Gross margin, as a percentage of sales, was 19.9% in 2000 and 21.8% in
1999. The decline was partially due to the effect of the strategic actions
charge in 2000. Excluding the one-time charge, gross margin, as a percentage
of sales, was 20.9% in 2000. In addition, the gross margin rate was negatively
affected by a shift to clearance sales and promotional sales from regular sales,
by growth in lower margin food and consumables sales categories, and to
incremental expenses for the distribution of these grocery and consumable goods.
Selling, general and administrative expenses ("SG&A"), which includes
advertising, was 20.0% of sales in 2000 versus 18.2% in 1999. The increase was
partially due to the effect of the strategic actions charge in 2000. Excluding
the one-time charge, SG&A, as a percentage of sales, was 19.1% in 2000. The
increase is primarily attributable to normal wage increases, an investment
made in store labor in support of our customer-centric culture, severance
costs associated with initiatives to build a world-class team and to Kmart's
share of operating losses at its BlueLight.com subsidiary.
Operating loss was $45 for 2000 compared to operating income of $1,300
for 1999. The significant decline is due to the 2000 strategic actions charge, a
lower gross margin rate and higher SG&A expenses.
Net interest expense was $287 and $280 in 2000 and 1999, respectively. The
increase primarily relates to additional borrowings under our credit facilities
and lower investment income.
Effective income tax rate was (40.4%) and 33.0% in 2000 and 1999,
respectively. See Note 12 of the Notes to Consolidated Financial Statements.
FISCAL 1999 COMPARED TO FISCAL 1998
Sales and comparable store sales for 1999 increased 6.6% and 4.8%,
respectively, improving sales per square foot to $233 in 1999. The increased
productivity is attributed to the continued successful rollout of the Big Kmart
format into 587 additional locations during the year for a cumulative total of
1,860 locations or nearly 90% of the chain. In addition, the increased
productivity was driven by increased promotional activity, continued execution
of our competitive pricing strategy and expansion of our exclusive brands such
as Thom McAnn, Route 66, Sesame Street and Martha Stewart Everyday home, baby
and garden products.
Gross margin, as a percentage of sales, was 21.8% in both 1999 and 1998.
The impact of our competitive pricing strategy and growth in lower margin sales
categories, such as consumables, was offset by improved margins resulting from
increased import and private label goods.
Selling, general and administrative expenses, which includes advertising,
declined for the fifth consecutive year as a percentage of sales improving to
18.2% in 1999 from 18.5% in 1998. This was the fourth consecutive year that SG&A
as a percentage of sales was below 20%. The 0.3 percentage point reduction
compared to 1998 was the result of the increased leverage from additional sales
volume and the decrease in Year 2000 compliance expenses versus 1998, offset
by the net addition of new stores.
Operating income increased $190 in 1999 compared to 1998, excluding the
1998 charge for Voluntary Early Retirement Programs. This increase was the
direct result of the 6.6% increase in sales over 1998 partially offset by the
increase in SG&A expenses versus 1998.
A Voluntary Early Retirement Program offered to certain hourly associates
during the second quarter of 1998 resulted in a charge of $19 based on actual
acceptance.
Net interest expense was $280 and $293 in 1999 and 1998, respectively. The
reduction in net interest expense was primarily due to lower outstanding debt
balances in capitalized lease obligations, medium "-" term notes and mortgages
resulting from normal pay-down activity partially offset by an increase in
interest associated with revolving credit borrowings.
Effective income tax rate was 33.0% and 28.8% in 1999 and 1998,
respectively. See Note 12 of the Notes to Consolidated Financial Statements.
Discontinued operations relate to Hechinger Company ("Hechinger"), which
had previously acquired substantially all of the operating assets of Builders
Square, Inc. On June 11, 1999, Hechinger filed for Chapter 11 bankruptcy
protection. As a result, Kmart recorded a non-cash charge of $354, $230 after
tax, which reflected our 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.
8
Management's Discussion and Analysis
of Results of Operations and Financial Condition (cont.)
(Dollars in millions, except per share data)
ANALYSIS OF FINANCIAL CONDITION
Our primary sources of working capital are cash flows from operations and
borrowings under our credit facilities. We had working capital of $3,825 and
$4,084 at year end 2000 and 1999, respectively. Working capital fluctuates in
relation to profitability, seasonal inventory levels net of trade accounts
payable, and the level of store openings and closings.
Net cash provided by operating activities was $1,039 in 2000 versus $1,004
in 1999. Improvements in working capital management offset our reduced earnings.
Net cash used for investing activities was $1,142 in 2000 compared to
$1,363 in 1999. Cash used for investing in 2000 was the result of $1,087 in
capital expenditures primarily related to information technology projects and
new stores, as well as a $55 investment in BlueLight.com. Cash used for
investing in 1999 was the result of $1,277 in capital expenditures and $86 for
lease acquisitions.
Net cash provided by financing activities was $160 in 2000 compared to net
cash used for financing of $7 in 1999. Cash provided by financing during 2000
was the result of proceeds from the issuance of new debt of $397, partially
offset by the repurchase of common shares and convertible preferred securities,
and payments on long-term debt and capital lease obligations. Cash used for
financing during 1999 was the result of repurchases of common stock of $200
under our stock repurchase program, payments on long-term debt and capital lease
obligations offset by the proceeds from the issuance of long-term debt and
common shares.
On December 4, 2000, the 364-day $600 revolving credit facility of our
existing Revolving Credit Agreement ("Revolver") was rolled over into a new
364-day $465 revolving credit facility. The pricing and covenants under this
facility were unchanged.
On January 30, 2001, we sold in an underwritten offering $400 of 9.375%
Notes due February 1, 2006 ("Notes"). Interest is payable semiannually on
February 1 and August 1. We expect to use the net proceeds from the Notes for
working capital and other general purposes.
Management believes that its current financing arrangements will be
sufficient to meet our liquidity needs for operations and capital demands.
NEW STORE ACTIVITY
We ended the year with a decrease in our number of stores. We ended 2000
with 2,105 U.S. Kmart stores versus 2,171 in 1999. During 2000, we opened 17
stores (16 Kmart stores and 1 Kmart Supercenter) and closed 83 stores (77 Kmart
stores and 6 Kmart Supercenters).
We expect to open 15 to 20 Kmart stores and 5 Kmart Supercenters during
2001. Capital expenditures relating to these projects will be funded through
operating cash flows.
OTHER MATTERS
Implementation of Strategic Actions
During the second quarter, we announced a series of strategic actions aimed
at strengthening financial performance by achieving improvements in return on
invested capital. These actions included deciding to close certain Kmart and
Kmart Supercenter stores, accelerating certain inventory reductions and
redefining our information technology strategy. As a result of these actions, we
recorded a pre-tax charge of $740 during the second quarter of 2000. During the
third quarter, the charge was reduced by $12 (pre-tax) due to revising the
number of scheduled store closings from 72 to 69, thus reducing the reserve for
the closed stores from $300 to $288.
The impact of the charge for strategic actions on our statement of
operations and effective tax rate for the fifty-three week period ended January
31, 2001 is summarized in the following table:
[Download Table]
Charge Excluding
2000 for Charge for
As Strategic Strategic
Reported Actions Actions
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Sales $ 37,028 $ -- $ 37,028
Cost of sales,
buying and occupancy 29,658 (365) 29,293
-------- -------- --------
Gross margin 7,370 365 7,735
Selling, general and
administrative expense 7,415 (363) 7,052
-------- -------- --------
Income (loss) before interest,
income taxes and dividends
on convertible preferred
securities of subsidiary trust (45) 728 683
Interest expense - net 287 -- 287
Income taxes (134) 265 131
Preferred dividends of
subsidiary, net of income
taxes 46 -- 46
-------- -------- --------
Net income (loss) $ (244) $ 463 $ 219
======== ======== ========
Effective income tax rate (40.4%) 36.4% 33.0%
Basic and diluted earnings
(loss) per share $ (0.48) $ 0.95 $ 0.47
======== ======== ========
Investment in 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 (15%) and others, including Martha Stewart Living Omnimedia and
Yahoo!. BlueLight.com provides easy-to-use Internet service to over 6 million
subscribers and offers Kmart products for direct on-line sale. During the third
quarter of 2000, we increased our investment in BlueLight.com by $55, increasing
our ownership interest to 60%.
9
Management's Discussion and Analysis
of Results of Operations and Financial Condition (cont.)
(Dollars in millions, except per share data)
Share Repurchase Programs
On May 18, 1999, our Board of Directors approved a common stock repurchase
program to acquire up to $1 billion of Kmart's common shares over a period of up
to three years. During fiscal year 2000, we repurchased approximately 5 million
shares of our common stock at a cost of approximately $55 pursuant to the
exercise of previously outstanding put options. There were no outstanding put
options remaining as of January 31, 2001.
In February 2000, we extended our existing stock repurchase program to
include up to $200 of trust convertible preferred securities. Through fiscal
year 2000, we repurchased approximately 2 million shares of convertible
preferred securities at a cost of approximately $84. For purposes of computing
earnings per share, the discount on the repurchase, net of tax, was added to net
income to arrive at income available to common shareholders.
Food & Consumable Products Distribution Contract
In February 2001, we reached an agreement with Fleming Companies, Inc. to
supply substantially all of our food and consumable products for all current and
future Kmart and Kmart Supercenter stores. Fleming will begin supplying
merchandise under the new agreement in early 2001. We do not anticipate that
there will be a material impact on our results of operations in 2001.
Lease Guarantees
We have guaranteed leases for properties operated by certain former
subsidiaries including Borders Group, Inc., OfficeMax, Inc. and The Sports
Authority, Inc. The present value of the lease obligations we have guaranteed is
approximately $373. The possibility of Kmart having to honor our contingent
obligations is dependent upon the future operating results of the former
subsidiaries.
The Sports Authority
For its third quarter ended October 28, 2000, The Sports Authority (TSA)
reported an increase in same store sales of 5.0% and operating income of $0.4,
as compared to an operating loss of $14 for the third quarter of 1999. For the
nine months ended October 28, 2000, TSA reported an increase in same store sales
of 2.5% and operating income of $9, as compared to an operating loss of $11 for
the same period in 1999.
Kmart's rights and obligations with respect to our guarantee of TSA leases
are governed by a Lease Guaranty, Indemnification and Reimbursement Agreement
dated as of November 23, 1994, as may be amended from time to time.
OfficeMax
For its fiscal fourth quarter 2000 ended January 27, 2001, OfficeMax
reported a decrease in comparable store sales of 6.0% and an operating loss of
$132, as compared to operating income of $42 for fourth quarter of 1999. For its
year ended January 27, 2001, OfficeMax reported a decrease in comparable store
sales of 1.0% and an operating loss of $194, as compared to operating income of
$32 for fiscal 1999.
During the fourth quarter, OfficeMax announced plans to close 50 stores and
recorded a $110 pre-tax charge for store closings, lease dispositions and fixed
asset impairments, along with an $8 pre-tax charge for inventory liquidations in
the stores that are closing. In addition, on December 1, 2000, OfficeMax
replaced its existing $400 revolving credit facility with a new $700 revolving
credit agreement.
Kmart's rights and obligations with respect to our guarantee of OfficeMax
leases are governed by a Lease Guaranty, Indemnification and Reimbursement
Agreement dated as of November 9, 1994, as may be amended from time to time.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). The new standard requires all derivatives to be recorded
on the balance sheet at fair value and establishes accounting treatment for
various types of hedges. In July 1999, the FASB issued Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
effective date of FASB Statement No. 133," which postponed the effective date of
SFAS 133 for one year. SFAS 133 will become effective for Kmart on February 1,
2001. Since we currently do not engage in these types of transactions, there
will not be an impact to our financial statements upon the adoption of SFAS 133.
Penske
In November 1995, we sold our 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 sub-lease 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, we received a 22 percent interest in
a limited liability company that now owns and operates the Penske Auto Centers.
We account for our investment in Penske Auto Centers LLC under the equity method
and we have recorded no initial investment.
Other
There are various claims, lawsuits and pending actions against Kmart
incident to our operations. It is the opinion of management that the ultimate
resolution of these matters will not have a material adverse effect on our
liquidity, financial position, or results of operations.
10
Cautionary Statement Regarding Forward-looking Information
Statements, other than those based on historical facts, including the Year
2000 statements, which address activities, events, or developments that Kmart
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. Our 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 our customers, changes in consumer spending and our 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 Kmart 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 us
will be realized or that they will have the expected effects on our business or
operations.
11
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
12
Consolidated Statements of Operations
(Dollars in millions, except per share data)
[Enlarge/Download Table]
YEARS ENDED JANUARY 31, 2001, JANUARY 26, 2000 AND JANUARY 27, 1999 2000 1999 1998
---------------------------------------------------------------------------------------------------------
Sales $ 37,028 $ 35,925 $ 33,674
Cost of sales, buying and occupancy 29,658 28,111 26,319
-------- -------- --------
Gross margin 7,370 7,814 7,355
Selling, general and administrative expenses 7,415 6,514 6,245
Voluntary early retirement programs -- -- 19
-------- -------- --------
Continuing income (loss) before interest, income taxes and dividends
on convertible preferred securities of subsidiary trust (45) 1,300 1,091
Interest expense, net 287 280 293
Income tax provision (benefit) (134) 337 230
Dividends on convertible preferred securities of subsidiary trust,
net of income taxes of $25, $27 and $27, respectively 46 50 50
-------- -------- --------
Net income (loss) from continuing operations (244) 633 518
Discontinued operations, net of income taxes of $(124) -- (230) --
-------- -------- --------
Net income (loss) $ (244) $ 403 $ 518
======== ======== ========
Basic earnings (loss) per common share
Net income (loss) from continuing operations $ (0.48) $ 1.29 $ 1.05
Discontinued operations -- (0.47) --
-------- -------- --------
Net income (loss) $ (0.48) $ 0.82 $ 1.05
======== ======== ========
Diluted earnings (loss) per common share
Net income (loss) from continuing operations $ (0.48) $ 1.22 $ 1.01
Discontinued operations -- (0.41) --
-------- -------- --------
Net income (loss) $ (0.48) $ 0.81 $ 1.01
======== ======== ========
Basic weighted average shares (millions) 482.8 491.7 492.1
Diluted weighted average shares (millions) 482.8 561.7 564.9
See accompanying Notes to Consolidated Financial Statements.
13
Consolidated Balance Sheets
(Dollars in millions)
[Enlarge/Download Table]
AS OF JANUARY 31, 2001 AND JANUARY 26, 2000 2000 1999
------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 401 $ 344
Merchandise inventories 6,412 7,101
Other current assets 811 715
------- -------
Total current assets 7,624 8,160
Property and equipment, net 6,557 6,410
Other assets and deferred charges 449 534
------- -------
Total Assets $14,630 $15,104
======= =======
Current Liabilities
Long-term debt due within one year $ 68 $ 66
Trade accounts payable 2,288 2,204
Accrued payroll and other liabilities 1,256 1,574
Taxes other than income taxes 187 232
------- -------
Total current liabilities 3,799 4,076
Long-term debt and notes payable 2,084 1,759
Capital lease obligations 943 1,014
Other long-term liabilities 834 965
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 $898 and $1,000, respectively) 887 986
Common stock, $1 par value, 1,500,000,000 shares authorized;
486,509,736 and 481,383,569 shares issued, respectively 487 481
Capital in excess of par value 1,578 1,555
Retained earnings 4,018 4,268
------- -------
Total Liabilities and Shareholders' Equity $14,630 $15,104
======= =======
See accompanying Notes to Consolidated Financial Statements.
14
Consolidated Statements of Cash Flows
(Dollars in millions)
[Enlarge/Download Table]
YEARS ENDED JANUARY 31, 2001, JANUARY 26, 2000 AND JANUARY 27, 1999 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income (loss) from continuing operations $ (244) $ 633 $ 518
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by operating activities:
One-time charge for strategic actions 728 -- --
Depreciation and amortization 777 770 671
Equity loss in BlueLight.com 64 -- --
Decrease (increase) in inventories 324 (565) (169)
Increase in trade accounts payable 84 157 124
Increase in accounts receivable (103) (62) (76)
Deferred income taxes and taxes payable (204) 258 308
Decrease in other long-term liabilities (113) (116) (64)
Changes in other assets and liabilities (57) 92 60
Cash used for store closings and other charges (102) (80) (94)
Voluntary early retirement programs -- -- 19
------- ------- -------
Net cash provided by continuing operations 1,154 1,087 1,297
Net cash used for discontinued operations (115) (83) (60)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,039 1,004 1,237
------- ------- -------
Cash Flows From Investing Activities
Capital expenditures (1,087) (1,277) (981)
Investment in BlueLight.com (55) -- --
Acquisition of Caldor leases -- (86) --
Proceeds from divestitures -- -- 87
Decrease in property held for sale or financing and other -- -- 99
------- ------- -------
NET CASH USED FOR INVESTING ACTIVITIES (1,142) (1,363) (795)
------- ------- -------
Cash Flows From Financing Activities
Proceeds from issuance of debt 397 297 --
Issuance of common shares 53 63 76
Purchase of convertible preferred securities (84) -- --
Purchase of common shares (55) (200) (30)
Payments on debt (73) (90) (188)
Payments on capital lease obligations (78) (77) (88)
------- ------- -------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 160 (7) (230)
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS 57 (366) 212
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 344 710 498
------- ------- -------
Cash and cash equivalents, end of year $ 401 $ 344 $ 710
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
15
Consolidated Statements of Shareholders' Equity
(Dollars in millions)
[Enlarge/Download Table]
Capital Accumulated
In Excess Other
Common of Par Retained Comprehensive
Stock Value Earnings Income
------------------------------------------------------------------------------------------------------------------------
Balance at January 28, 1998 $ 489 $ 1,605 $ 3,363 $ (23)
Net income for the year -- -- 518 --
Shares issued to employee benefit plans 2 (9) -- --
Repurchased shares (2) -- -- --
Shares 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 issued to employee benefit plans 3 40 -- --
Repurchased shares (17) (174) -- --
Shares 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)
Net loss for the year -- -- (244) --
Shares issued to employee benefit plans 11 59 -- --
Repurchased shares (5) (50) -- --
Discount on redemption of preferred securities -- 13 (3) --
Shares issued for stock option plans -- 1 -- --
Other -- -- (3) --
------- ------- ------- -------
Balance at January 31, 2001 $ 487 $ 1,578 $ 4,031 $ (13)
======= ======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
16
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
1) Summary of Significant Accounting Policies
Nature of Operations: Kmart Corporation together with its subsidiaries
("Kmart," "We" or "Our") operates discount department stores located in all 50
states, Puerto Rico, the U.S. Virgin Islands, and Guam. Kmart's equity
investments consist of our 60% interest in BlueLight.com, our 49% interest in
substantially all of the Meldisco subsidiaries of Footstar, Inc. ("FTS"), which
operate the footwear departments in Kmart stores and our 22% interest in Penske
Auto Centers LLC.
Basis of Consolidation: The Consolidated Financial Statements include all
majority-owned subsidiaries in which we exercise control. Investments in which
we exercise significant influence, but which we do not control (generally 20% to
50% ownership interest), are accounted for under the equity method of
accounting. All material intercompany transactions and balances have been
eliminated.
Fiscal Year: Our fiscal year ends on the last Wednesday in January. Fiscal
year 2000 consisted of 53 weeks and ended on January 31, 2001. Fiscal years 1999
and 1998 each consisted of 52 weeks and ended on January 26, 2000 and January
27, 1999, respectively.
Cash: Cash and cash equivalents include all highly liquid investments with
maturities of three months or less. Included are temporary investments of $71
and $50, at year end 2000 and 1999, respectively.
Merchandise 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 $6,104,
$6,690 and $6,148 of inventory as of fiscal year end 2000, 1999 and 1998,
respectively. Inventories valued on LIFO were $194, $202 and $249 lower than
amounts that would have been reported using the first in, first out (FIFO)
method at fiscal year end 2000, 1999 and 1998, respectively. We recorded a LIFO
credit of $8, $47 and $50 for the fiscal years ended 2000, 1999 and 1998,
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 we intend 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 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 17 years for furniture and fixtures and 3 to 5
years for computer systems and equipment.
Financial Instruments: Cash and cash equivalents, trade accounts payable
and accrued liabilities are reflected in our financial statements at cost, which
approximates fair value. The fair value of our debt and other financial
instruments are discussed in Notes 8 and 11.
Derivative Instruments and Hedging Activities: In June 1998, the Financial
Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). The new standard
requires all derivatives to be recorded on the balance sheet at fair value and
establishes accounting treatment for various types of hedges. In July 1999, the
FASB issued Statement No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the effective date FASB Statement No. 133,"
which postponed the effective date of SFAS 133 for one year. SFAS 133 will
become effective for Kmart on February 1, 2001. Since we currently do not engage
in these types of transactions, there will not be an impact to our financial
statements upon the adoption of SFAS 133.
Revenue Recognition: We recognize revenue from the sale of merchandise at
the time the merchandise is sold, net of anticipated returns. We defer the
recognition of layaway sales and profit until the period the merchandise is
delivered to the customer. Our deferred revenue is recorded in Accrued payroll
and other liabilities in the consolidated balance sheets. In 1998, sales and
profits were recognized at the time the customer put the merchandise into
layaway, net of a reserve for anticipated returns. We 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.
Pre-Opening and Closing Costs: We expense pre-opening costs in the period
in which they occur. Prior to fiscal 1999, 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 $508, $453
and $443 in 2000, 1999 and 1998, respectively. These costs are included in SG&A
in the consolidated statements of operations.
Income Taxes: Deferred income taxes are provided for temporary differences
between financial statement and taxable income. We accrue U.S. and foreign taxes
payable on our 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.
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.
17
Notes to Consolidated Financial Statements (cont.)
(Dollars in millions, except per share data)
Reclassifications: Certain reclassifications of prior year amounts have
been made to conform to the 2000 presentation.
2) Implementation of Strategic Actions
During the second quarter, we announced a series of strategic actions aimed
at strengthening financial performance by achieving improvements in return on
invested capital. These actions included deciding to close certain Kmart and
Kmart Supercenter stores, accelerating certain inventory reductions and
redefining our information technology strategy. As a result of these
initiatives, we recorded a pre-tax charge totaling $740. During the third
quarter, this charge was reduced by $12 (pre-tax) due to revising the number of
scheduled store closings from 72 to 69, thus reducing the reserve for closed
stores from $300 to $288.
The following table summarizes the significant components of the charge for
strategic actions taken during the second quarter and presentation in the
statements of operations for the 53 week period ended January 31, 2001:
[Download Table]
Cost of
sales,
buying and
occupancy SG&A Total
-----------------------------------------------------------------------
Store closings:
Lease obligations and
maintenance $ -- $191 $191
Asset impairments -- 97 97
Inventory write-down 75 -- 75
Inventory reduction 290 -- 290
Information technology -- 60 60
Contractual employment
obligations -- 15 15
---- ---- ----
Total $365 $363 $728
==== ==== ====
At January 31, 2001, the lease obligations and maintenance reserve was $177
and there were no contractual employment obligations remaining.
3) Discontinued Operations and Dispositions
Discontinued operations relate to Builders Square, Inc. ("Builders
Square").
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, we recorded a
non-cash charge of $354 ($230 after tax) which reflected our 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 non-cash charge did
not reflect an amount, if any, which we 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. During fiscal 2000, we had new lease agreements for 28
locations leaving approximately 45 vacant locations to be remarketed. We
continue our aggressive remarketing efforts for these vacant stores.
4) Property and Equipment
[Download Table]
Year End
----------------------------
2000 1999
-------------------------------------------------------------------
Land $ 389 $ 374
Buildings 1,064 1,008
Leasehold improvements 2,644 2,502
Furniture and fixtures 5,730 5,509
Construction in progress 245 123
-------- --------
10,072 9,516
Property under capital leases 1,870 2,038
-------- --------
11,942 11,554
Less:
Accumulated depreciation
and amortization (4,289) (3,977)
Accumulated depreciation-
capital leases (1,096) (1,167)
-------- --------
Total $ 6,557 $ 6,410
======== ========
The following table provides a breakdown of the number of stores leased compared
to owned:
[Download Table]
Year End
-------------
2000 1999
---------------------------------------------------------------------
Number of U.S.Kmart Stores Owned 121 120
Number of U.S.Kmart Stores Leased 1,984 2,051
5) 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 $270,
$245 and $225 in 2000, 1999 and 1998, respectively. We received dividends from
Meldisco in 2000, 1999 and 1998 of $44, $38 and $36, respectively.
[Download Table]
Fiscal Year
---------------------------------------
Meldisco Information 2000 1999 1998
-----------------------------------------------------------------------
Net sales $1,291 $1,212 $1,139
Gross profit 592 544 499
Net income 105 91 78
Inventory $ 118 $ 138 $ 147
Other current assets 101 63 22
------ ------ ------
Total assets 219 201 169
Current liabilities 50 47 29
------ ------ ------
Net assets $ 169 $ 154 $ 140
====== ====== ======
Kmart's share of Equity $ 82 $ 74 $ 68
====== ====== ======
Unremitted earnings included in consolidated retained earnings were $51, $44 and
$38 at year end 2000, 1999 and 1998, 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 (15%) and others, including Martha Stewart Living Omnimedia and
Yahoo!.
18
Notes to Consolidated Financial Statements (cont.)
(Dollars in millions, except per share data)
For its capital, BlueLight.com issued $62.5 of Series A Preferred shares
for cash to SOFTBANK and other investors. We 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. We did not make an initial cash investment in
BlueLight.com.
We 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 Kmart's return of capital puts.
In fiscal year 2000, BlueLight.com issued $80 of series B Preferred shares
to Kmart and SOFTBANK. We increased our investment in BlueLight.com by $55 and
our ownership interest to 60%.
We account for our investment in BlueLight.com under the equity method, as
we do not have the ability to exercise unilateral control. Our portion of
BlueLight.com's loss for fiscal year 2000 was $64. Our portion of
BlueLight.com's 1999 loss was insignificant.
6) Other Commitments and Contingencies
We have outstanding guarantees for property leased by certain former
subsidiaries as follows:
[Download Table]
Present Value Gross
at 7% Lease
------------- -----------------------
2000 2000 1999
-----------------------------------------------------------------
The Sports Authority $201 $341 $369
Borders Group 96 163 176
OfficeMax 76 111 141
---- ---- ----
Total $373 $615 $686
==== ==== ====
The possibility of Kmart having to honor our contingent obligations is
largely dependent upon the future operations of the former subsidiaries. Should
a reserve be required, it would be recorded at the time the obligation was
determined to be probable.
Our rights and obligations with respect to our guarantee of TSA and
OfficeMax leases are governed by Lease Guaranty, Indemnification and
Reimbursement Agreements dated as of November 23, 1994 and November 9, 1994,
respectively, as may be amended from time to time.
Other
As of January 31, 2001, we had guaranteed $103 of indebtedness of other
parties related to certain of our 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 our operations. It is the opinion of management that the ultimate
resolution of these matters will not have a material adverse effect on our
liquidity, financial position or results of operations.
7) Liabilities
Accrued payroll and other liabilities and Other long-term liabilities
included in the balance sheets consist of the following:
[Download Table]
Year End
-----------------------------------------------------
2000 1999
----------------------- -----------------------
Current Long-Term Current Long-Term
-------------------------------------------------------------------------------
Closed store
reserves $ 236 $ 566 $ 181 $ 587
Accrued payroll
and related 265 -- 337 --
Deferred income
taxes 197 -- 233 --
Income taxes
payable 73 -- 249 --
Other liabilities 485 268 574 378
------ ------ ------ ------
Total $1,256 $ 834 $1,574 $ 965
====== ====== ====== ======
8) Long-Term Debt and Notes Payable
[Download Table]
Year End
Fiscal Year Interest --------------------
Type Maturity Rates 2000 1999
--------------------------------------------------------------------
Debentures 2005-2023 7.8%-12.5% $1,567 $1,166
Medium-term
notes 2000-2020 7%-9% 316 371
CMBS 2002 Floating 269 288
------ ------
Total 2,152 1,825
Current portion (68) (66)
====== ======
Long-term debt $2,084 $1,759
====== ======
On January 30, 2001, we sold in an underwritten offering $400 of 9.375%
Notes due February 1, 2006 ("Notes"). Interest is payable semi-annually on
February 1 and August 1. We expect to use the proceeds from the Notes for
working capital and other general corporate purposes.
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.
On December 8, 1999, we 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.
At January 31, 2001, we have a $1.1 billion credit facility ("Credit
Facility") and a $465 credit facility ("364-day Facility") due in December 2002
and 2001, respectively. The Credit Facility has pricing determined based on our
interest coverage ratio which was a commitment fee of 30 basis points and
interest rate of LIBOR plus 125 basis points at January 31, 2001. The 364-day
Facility has a commitment fee of 20 basis points and interest rate of LIBOR plus
100 basis points.
On January 12, 2001, we renewed our agreement for a revolving line of
credit of up to $41 with a consortium of minority-owned banks. The consortium is
currently comprised
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(Dollars in millions, except per share data)
of 18 banks in 14 states, Puerto Rico and the District of Columbia, for a
renewed commitment of $35. Additional minority-owned banks may join the
consortium as desired, up to the $41 limit. This 364-day revolving credit
facility has a commitment fee of 20 basis points and interest rate of LIBOR plus
100 basis points.
The various facilities contain certain affirmative and negative covenants
customary to these types of agreements. We are in compliance with all such
covenants. As of January 31, 2001 and January 26, 2000, there were no
outstanding amounts under any of these credit agreements.
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 $2,016 and $1,752 at year end
2000 and 1999, respectively.
The principal maturities of long-term debt for the five years subsequent to
2000 are: 2001-$68; 2002-$336; 2003- $50; 2004-$327; 2005-$110 and 2006 and
later-$1,261. Cash paid for interest was $285, $262 and $278 in 2000, 1999 and
1998, respectively.
9) Leases
We conduct operations primarily in leased facilities. Kmart store leases
are generally for terms of 25 years with multiple five-year renewal options
which allow us 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 LLC, and the Meldisco
subsidiaries of FTS.
[Download Table]
Minimum Lease Commitments
-------------------------
As of January 31, 2001 Capital Operating
--------------------------------------------------------
Fiscal Year:
2001 $ 243 $ 651
2002 234 639
2003 225 613
2004 209 586
2005 188 558
Later years 1,390 6,435
------ -------
Total minimum lease payments 2,489 9,482
Less-minimum sublease income -- (2,482)
------ -------
Net minimum lease payments 2,489 $ 7,000
=======
Less:
Estimated executory costs (685)
Amount representing interest (776)
------
1,028
Current (85)
------
Long-term $ 943
======
[Download Table]
Rent Expense 2000 1999 1998
------------------------------------------------------------------
Minimum rentals $ 773 $ 784 $ 711
Percentage rentals 46 41 40
Less-sublease rentals (257) (253) (227)
----- ----- -----
Total $ 562 $ 572 $ 524
===== ===== =====
Penske
In November 1995, Kmart sold our 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.
10) Share Repurchase Programs
On May 18, 1999, our Board of Directors approved a common stock repurchase
program to acquire up to $1 billion of Kmart's common shares over a period of up
to three years. During fiscal 2000, we repurchased 5 million shares of common
stock at a cost of approximately $55. In February 2000, we announced plans to
extend our repurchase program to include up to $200 of our Preferred Securities.
11) Convertible Preferred Securities
In June 1996, a trust sponsored and wholly owned by Kmart 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. We have 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.
During fiscal year 2000, we repurchased approximately 2 million shares of
convertible preferred securities at a cost of approximately $84. For purposes of
computing earnings per share ("EPS"), the discount on the repurchase, net of
tax, was added to net income to arrive at income available to common
shareholders. Based on the quoted market prices, the fair value of the Preferred
Securities was approximately $714 and $844 as of fiscal year end 2000 and 1999,
respectively.
20
Notes to Consolidated Financial Statements (cont.)
(Dollars in millions, except per share data)
12) Income Taxes
[Download Table]
INCOME (LOSS) BEFORE
INCOME TAXES 2000 1999 1998
----------------------------------------------------------
U.S. $ (369) $ 992 $ 766
Foreign 37 28 32
------- ------ ------
Total $ (332) $1,020 $ 798
====== ====== ======
[Download Table]
INCOME TAX
PROVISION (CREDIT) 2000 1999 1998
-------------------------------------------------------------------
Current:
Federal $(149) $ 133 $ 70
State and local 2 17 21
Foreign 14 11 12
----- ----- -----
(133) 161 103
----- ----- -----
Deferred:
Federal (5) 169 124
State 4 7 3
----- ----- -----
Total $(134) $ 337 $ 230
===== ===== =====
[Download Table]
EFFECTIVE TAX RATE
RECONCILIATION 2000 1999 1998
------------------------------------------------------------------------------
Federal income tax rate (35.0%) 35.0% 35.0%
State and local taxes,
net of federal tax benefit 1.1 1.5 1.9
Tax credits (2.2) (0.7) (0.7)
Equity in net income
of affiliated companies (4.2) (1.2) (1.4)
Adjustments to prior
year accruals -- -- (6.0)
Other (0.1) (1.6) --
----- ---- ----
(40.4%) 33.0% 28.8%
===== ==== ====
[Download Table]
YEAR END
DEFERRED TAX ---------------------------
ASSETS AND LIABILITIES 2000 1999
-------------------------------------------------------------------
Deferred tax assets:
Federal benefit for
state and foreign taxes $ 45 $ 44
Discontinued operations 196 239
Accruals and other liabilities 118 176
Capital leases 81 86
Store closings 90 48
Credit carryforwards 172 3
Other 23 11
----- -----
Total deferred tax assets 725 607
----- -----
Deferred tax liabilities:
Inventory 402 336
Property and equipment 412 389
Other 32 19
----- -----
Total deferred tax liabilities 846 744
----- -----
Net deferred tax liabilities $(121) $(137)
===== =====
We have available foreign tax credit carryforwards of approximately
$43 which would expire in 2003 ($24) and 2005 ($19), general business tax credit
carryforwards of approximately $27 which would expire in 2020 and alternative
minimum tax credit carryforwards of approximately $102 which may be carried
forward indefinitely.
In 1998, the Internal Revenue Service completed its examination of Kmart's
federal income tax returns through 1994. We believe that adequate tax accruals
have been provided for all years.
Cash paid (received) for income taxes was $50, $59 and $(99) in 2000, 1999
and 1998, respectively.
13) Earnings Per Share
[Download Table]
2000 1999 1998
-----------------------------------------------------------------------------
Continuing net income (loss) $(244) $ 633 $ 518
Discount on redemption of
Preferred Securities, net 10 -- --
----- ----- -----
Continuing net income (loss)
available to common
shareholders (234) 633 518
Discontinued operations -- (230) --
----- ----- -----
Net income (loss) available
to common shareholders $(234) $ 403 $ 518
===== ===== =====
Preferred dividends $ -- $ 50 $ 50
===== ===== =====
[Enlarge/Download Table]
2000 1999 1998
----------------------------------------------------------------------------------------
Basic weighted average shares 482.8 491.7 492.1
Dilutive effect of stock options -- 3.3 6.1
Convertible preferred securities -- 66.7 66.7
--------- --------- ----------
Diluted weighted average shares 482.8 561.7 564.9
========= ========= ==========
Basic earnings (loss) per share:
Continuing net income (loss)
available to common
shareholders $ (0.48) $ 1.29 $ 1.05
Discontinued operations -- (0.47) --
Net income (loss) available --------- --------- ----------
to common shareholders $ (0.48) $ 0.82 $ 1.05
========= ========= ==========
Diluted earnings (loss) per share:
Adjusted continuing net income
(loss) available to
common shareholders $ (0.48) $ 1.22 $ 1.01
Discontinued operations -- (0.41) --
--------- --------- ----------
Adjusted net income (loss)
available to common
shareholders $ (0.48) $ 0.81 $ 1.01
========= ========= ==========
Dividends on the convertible preferred securities of $46, shares relating
to the convertible preferred securities of 59.9 million and incremental shares
relating to stock options of 0.3 million were not included in the calculation of
diluted EPS for 2000 due to their anti-dilutive effect.
14) Pension Plans and Other Post-Retirement Benefits
In the second quarter of 1998, we 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 we recorded a charge of $19 ($13 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
21
Notes to Consolidated Financial Statements (cont.)
(Dollars in millions, except per share data)
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.
The plans' assets consist primarily of equity and fixed income securities.
Contributions to the plans were not required for fiscal years 2000, 1999 and
1998. Total consolidated pension income was $71, $68 and $63 in 2000, 1999 and
1998, respectively.
The following tables summarize the change in benefit obligation, change in
plan assets, funded status, amounts recognized and actuarial assumptions for
our employee pension plans.
[Download Table]
YEAR END
------------------------
2000 1999
--------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,944 $ 2,208
Interest costs 142 141
Actuarial gain (6) (300)
Benefits paid including VERP (106) (105)
------- -------
Benefit obligation at end of year $ 1,974 $ 1,944
======= =======
Change in plan assets:
Fair value of plan assets at
beginning of year $ 2,105 $ 2,098
Actual return on plan assets 142 145
Benefits paid including VERP (106) (138)
------- -------
Fair value of plan assets at
end of year $ 2,141 $ 2,105
======= =======
[Download Table]
YEAR END
------------------------
2000 1999
--------------------------------------------------------------------------------
Funded status $ 167 $ 161
Unrecognized net gain (53) (110)
Unrecognized transition asset (40) (48)
----- -----
Net prepaid benefit recognized in the
statement of financial position $ 74 $ 3
===== =====
Weighted-average assumptions as of January 31
Discount rate 7.5% 7.5%
Expected return on plan assets 10.0% 10.0%
[Download Table]
YEAR END
------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
Components of Net Periodic Benefit (Income)/Expense
Interest costs $ 142 $ 141 $ 139
Expected return on plan assets (206) (202) (195)
Amortization of unrecognized
transition asset (7) (7) (7)
----- ----- -----
Net periodic benefit $ (71) $ (68) $ (63)
===== ===== =====
We have non-qualified plans for directors and officers which were
partially funded as of years ended 2000 and 1999. Benefits under the plans
totaled $32 and $34 at the end of 2000 and 1999, respectively, which have been
accrued in the accompanying balance sheets. Plan assets totaled $15 and $13 as
of year end 2000 and 1999, 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 our expressed intent to increase the retiree contribution
rate annually. The accrued post-retirement benefit costs were $49 and $54 at the
end of 2000 and 1999, respectively.
15) 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 their choice of various investments. For each dollar
the participant contributes, up to 6% of earnings, we 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 we
make contributions based on profits, with minimum yearly contributions required
of $30. Our total expense related to the Retirement Savings Plan was $73, $94
and $68 in 2000, 1999 and 1998, respectively.
16) Stock Option Plans
We use the intrinsic value method of accounting for our stock
option and restricted stock plans. Since stock options were granted at exercise
prices equal to the stock price on the grant date, no compensation cost has been
recognized for stock options granted under our stock based compensation plans.
Had the compensation cost for our 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.
[Download Table]
PRO FORMA INCOME 2000 1999 1998
--------------------------------------------------------------------------------
Net income (loss) - as reported $ (244) $ 403 $ 518
EPS - as reported (0.48) 0.81 1.01
Net income (loss) - pro forma (279) 376 496
EPS - pro forma (0.56) 0.76 0.97
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 generally vest over 3 years on a
straight-line basis with a term of 10 years.
[Download Table]
2000 1999 1998
--------------------------------------------------------------------------------
Expected volatility .4672 .4506 .4230
Risk-free interest rates 6.43 4.93 5.32
Expected life in years 5 5 5
Weighted-average fair
value per share $ 3.90 $ 7.90 $ 7.11
22
Notes to Consolidated Financial Statements (cont.)
(Dollars in millions, except per share data)
[Download Table]
STOCK OPTION PLANS (000'S) SHARES OPTION PRICE
--------------------------------------------------------------------------------
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
Granted 22,026 $ 5.34 - $ 9.59
Exercised (103) $ 7.81 - $ 7.81
Forfeited (3,561) $ 6.84 - $26.03
-------
January 31, 2001:
Outstanding 46,255 $ 5.34 - $26.03
Exercisable 26,504 $ 6.84 - $26.03
Available for grant 38,243
The following table summarizes information about stock options outstanding as of
January 31, 2001.
[Enlarge/Download Table]
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
-------------------------------------------------------------------------------------
$ 5.34 to $10.00 24,477 8.2 $ 7.85 8,371 $ 8.34
$10.01 to $15.00 11,483 5.1 $12.31 11,351 $12.29
$15.01 to $26.03 10,295 6.6 $17.00 6,782 $16.93
-------------------------------------------------------------------------------------
$ 5.34 to $26.03 46,255 7.1 $10.99 26,504 $12.23
17) 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.
[Enlarge/Download Table]
-------------------------------------------------------------------------------------
2000 First Second Third Fourth
-------------------------------------------------------------------------------------
Sales $ 8,195 $ 8,998 $ 8,199 $ 11,636
Cost of sales 6,494 7,518 6,518 9,128
Net income (loss) $ 22 $ (448) $ (67) $ 249
================================================
Basic earnings (loss) per share:
Net income (loss) $ 0.06 $ (0.93) $ (0.14) $ 0.51
================================================
Diluted earnings (loss) per share:
Net income (loss) $ 0.06 $ (0.93) $ (0.14) $ 0.48
================================================
Common stock price
High $ 10.06 $ 8.63 $ 7.50 $ 8.75
Low 7.94 6.75 5.75 5.06
[Enlarge/Download Table]
-------------------------------------------------------------------------------------
1999 First Second Third Fourth
-------------------------------------------------------------------------------------
Sales $ 8,078 $ 8,780 $ 7,962 $ 11,105
Cost of sales 6,370 6,854 6,248 8,639
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 $ 0.11 $ 0.28 $ 0.05 $ 0.85
Discontinued operations -- (0.47) -- --
------------------------------------------------
Net income (loss) $ 0.11 $ (0.19) $ 0.05 $ 0.85
================================================
Diluted earnings (loss) per share:
Continuing net income $ 0.11 $ 0.26 $ 0.05 $ 0.77
Discontinued operations -- (0.41) -- --
------------------------------------------------
Net income (loss) $ 0.11 $ (0.15) $ 0.05 $ 0.77
================================================
Common stock price
High $ 17.88 $ 17.63 $ 14.94 $ 12.25
Low 16.07 14.88 9.38 9.00
23
Management's Responsibility
for Financial Statements
Management is responsible for the preparation of our 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 our 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.
We have 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.
Our Board of Directors have an Audit Committee, consisting solely of
outside directors. The duties of the Committee include keeping informed of the
financial condition of Kmart and reviewing our financial policies and
procedures, our internal accounting controls, and the objectivity of our
financial reporting. Both our independent accountants and the internal auditors
have free access to the Audit Committee and meet with the Committee
periodically, with and without management present.
/s/ Charles C. Conaway
Charles C. Conaway
Chairman of the Board
and Chief Executive Officer
/s/ Martin E. Welch
Martin E. Welch III
Executive Vice President
and Chief Financial Officer
Report of Independent
Accountants
To the Shareholders and Board of Directors
of Kmart Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Kmart
Corporation and its subsidiaries at January 31, 2001 and January 26, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended January 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. 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 of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Detroit, Michigan
March 13, 2001
24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Items 10, 11, 12 and 13
Information required by Part III (Items 10, 11, 12 and 13) of this Form
10-K is incorporated herein by reference from Kmart Corporation's definitive
Proxy Statement for its 2001 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission, pursuant to Regulation 14A, not
later than 120 days after the end of the fiscal year, except that the
information required by Item 10 with respect to executive officers of Kmart is
included in Part 1 of this report.
25
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
Financial statements filed as part of this Form 10-K are listed
under Part II, Item 8.
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 Kmart 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
required under the instructions contained in Regulation S-X or
because the information called for is shown in the financial
statements and notes thereto.
3. Exhibits
See Exhibit Index included in this report.
b) No reports on Form 8-K were filed during the fiscal quarter ended
January 31, 2001.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, we have duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on March 21, 2001.
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: /s/ Charles C. Conaway
----------------------------------
(Charles C. Conaway)
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Martin E. Welch III
----------------------------------
(Martin E. Welch III)
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Matthew F. Hilzinger
----------------------------------
(Matthew F. Hilzinger)
Vice President and 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 Kmart
and in the capacities indicated, on March 21, 2001.
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.
/s/ James B. Adamson /s/ Joseph P. Flannery
---------------------------------- --------------------------------
James B. Adamson, Director Joseph P. Flannery, Director
/s/ Lilyan H. Affinito /s/ Robert D. Kennedy
---------------------------------- --------------------------------
Lilyan H. Affinito, Director Robert D. Kennedy, Director
/s/ Joseph A. Califano, Jr. /s/ J. Richard Munro
---------------------------------- --------------------------------
Joseph A. Califano, Jr., Director J. Richard Munro, Director
/s/ Richard G. Cline /s/ Robin B. Smith
---------------------------------- --------------------------------
Richard G. Cline, Director Robin B. Smith, Director
/s/ Charles C. Conaway /s/ Thomas T. Stallkamp
---------------------------------- --------------------------------
Charles C. Conaway, Director Thomas T. Stallkamp, Director
/s/ Willie D. Davis /s/ James O. Welch, Jr.
---------------------------------- --------------------------------
Willie D. Davis, Director James O. Welch, Jr., Director
27
EXHIBIT INDEX
[Enlarge/Download Table]
Exhibit
Number Description
------ -----------
**** (3a) Restated Articles of Incorporation of Kmart Corporation
**** (3b) Bylaws of Kmart Corporation, as amended
(10a) Kmart Corporation 1973 Stock Option Plan, as amended [A]
(10b) Kmart Corporation 1981 Stock Option Plan, as amended [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 [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 [A]
*** (10l) Supplemental Pension Benefit Plan [10m] [A]
(10m) Kmart Corporation 1997 Long-Term Equity Compensation Plan [A]
****** (10n) Employment Agreement with Charles C. Conaway [10n] [A]
(10o) Amended and Restated Kmart Corporation Special Severance Plan [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
(23) Consent of Independent Accountants
Notes:
------
* Filed as Exhibits to the Form 10-K Report of Kmart 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 Kmart 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 Kmart 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 Kmart for the fiscal year
ended January 31, 1996 (file number 1-327) and are incorporated herein
by reference.
***** Filed as Exhibits to the Form 10-K Report of Kmart for the
fiscal year ended January 27, 1999 (file number 1-327) and are
incorporated herein by reference.
****** Filed as Exhibit to the Form 10-Q Report of Kmart for the fiscal
quarter ended July 26, 2000 (file number 1-327) and 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.
28
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 Kmart 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 Kmart.
Kmart 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
8-3/8% Notes Due 2004
12-1/2% Debentures Due 2005
8-1/8% Notes Due 2006
9.375% 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)
7-3/4% Trust Convertible Preferred Securities
29
Dates Referenced Herein and Documents Incorporated by Reference
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