1
EXHIBIT 13
CONSOLIDATED SELECTED FINANCIAL DATA
Dollars in millions, except per share data 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Sales $31,437 $31,713 $29,563 $28,039 $ 26,470
Cost of sales, buying and occupancy 24,390 24,675 22,331 20,732 19,087
Selling, general and administrative expenses 6,274 6,876 6,651 6,241 5,830
Interest expense, net 453 434 479 467 411
Continuing income (loss) before income taxes 330 (313) 102 (306) 1,142
Net income (loss) from continuing operations 231 (230) 96 (179) 745
Net income (loss) (220) (571) 296 (974) 941
PER SHARE OF COMMON
Continuing income (loss) $ 0.48 $ (0.51) $ 0.19 $ (0.41) $ 1.63
Dividends declared -- 0.36 0.96 0.96 0.92
Book value 10.51 10.99 13.15 13.39 16.64
FINANCIAL DATA
Working capital $ 4,131 $ 5,558 $ 3,562 $ 3,793 $ 5,014
Total assets 14,286 15,033 16,085 15,875 16,769
Long-term debt 2,121 3,922 1,989 2,209 2,995
Long-term capital lease obligations 1,478 1,586 1,666 1,609 1,612
Trust convertible preferred securities 980 -- -- -- --
Capital expenditures 343 540 1,021 793 1,187
Depreciation and amortization 654 685 639 650 566
Ending market capitalization - common stock 5,418 2,858 6,345 9,333 10,837
Inventory turnover 3.5 3.4 3.2 2.9 2.7
Current ratio 2.1 2.9 1.7 1.9 1.7
Long-term debt to capitalization 37.2% 51.1% 37.7% 38.5% 37.9%
Ratio of income from continuing operations to fixed charges 1.4 -- 1.1 -- 2.8
Primary weighted average shares outstanding (millions) 486 460 457 457 456
NUMBER OF STORES
United States 2,134 2,161 2,316 2,323 2,281
Canada 123 127 128 127 127
Other 4 22 37 36 27
------ ------ ------ ------ -------
Total Stores 2,261 2,310 2,481 2,486 2,435
U.S. Kmart store sales per comparable selling square foot $ 201 $ 195 $ 181 $ 182 $ 181
U.S. Kmart selling square footage (millions) 156 160 166 160 152
- ------------------------------------------------------------------------------------------------------------------------------
The above selected financial data has been restated to exclude discontinued
operations of Builders Square, Inc. ("Builders Square"), Borders Group, Inc.
("Borders Group"), OfficeMax, Inc. ("OfficeMax"), The Sports Authority, Inc.
("The Sports Authority"), PACE Membership Warehouse, Inc. ("PACE"), Thrifty
PayLess Holdings, Inc. ("TPH"), PayLess Drug Stores Northwest, Inc. ("PayLess")
and Coles Myer, Ltd. ("Coles Myer").
Kmart Corporation and subsidiaries ("the Company" or "Kmart") fiscal year ends
on the last Wednesday in January. Fiscal 1995 consisted of 53 weeks and ended
on January 31, 1996.
The net loss from continuing operations in 1993 included a pretax provision of
$904 million ($579 million net of tax) for store restructuring and other
charges.
Fixed charges represent total interest charges, a portion of operating rentals
representative of the interest factor, amortization of debt discount and
expense and preferred dividends of majority owned subsidiaries. The deficiency
of income from continuing retail operations versus fixed charges was $305 and
$315 million for 1995 and 1993, respectively.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Statements, other than those based on historical facts, which address
activities, events or developments that the Company expects or anticipates may
occur in the future are forward-looking statements which are based upon a
number of assumptions concerning future conditions that may ultimately prove to
be inaccurate. Actual events and results may materially differ from anticipated
results described in such statements. The Company's ability to achieve such
results is subject to certain risks and uncertainties, including, but not
limited to, economic and weather conditions which affect buying patterns of the
Company's customers, changes in consumer spending and the Company's ability to
anticipate buying patterns and implement appropriate inventory strategies,
continued availability of capital and financing, competitive factors and other
factors affecting the Company's business beyond the Company's control.
Consequently, all of the forward-looking statements are qualified by these
cautionary statements and there can be no assurance that the results or
developments anticipated by the Company will be realized or that they
will have the expected effects on the Company or its business or operations.
Kmart Corporation 1996 Annual Report 17
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
($ Millions) 1996 1995 1994
SALES
United States $30,378 $30,429 $28,386
International 1,059 1,284 1,177
------- ------- -------
Total $31,437 $31,713 $29,563
======= ======= =======
OPERATING INCOME (LOSS)
United States $ 780 $ 179 $ 558
International (7) (17) 23
------- ------- -------
Total $ 773 $ 162 $ 581
======= ======= =======
COMPARABLE SALES %
United States 2.6% 5.6% 1.4%
International (2.8%) 3.0% 4.2%
Total 2.5% 5.5% 1.5%
Operating income (loss) excludes other gains and losses in 1996 and 1995,
respectively.
Fiscal 1996 Compared to Fiscal 1995
Sales decreased 0.9% during 1996 primarily due to one less week in
fiscal 1996 compared to 1995, the sale of certain international operations and
the closing of 48 U.S. Kmart stores during the year, partially offset by the
opening of 21 new U.S. Kmart stores. Comparable sales per square foot in
U.S.Kmart stores reached $201, exceeding $200 for the first time in the
Company's history. Comparable store sales increased 2.5% as a result of
continued promotional activity, a larger average transaction size, improved
in-stock percentages and the conversion of 152 stores to the Company's new high
frequency format.
Gross margin, as a percentage of sales, was 22.4% and 22.2% in 1996 and
1995, respectively. The percentage increase reflected significantly lower
levels of markdowns related to clearance of discontinued merchandise and closure
of stores. Additionally, lower levels of buying and occupancy costs together
with an improved sales mix towards higher margin departments contributed to the
increase. This increase was partially offset by the effect of the sale of the
auto service business to Penske Auto Centers, Inc. in late 1995.
Selling, general and administrative expenses ("SG&A"), which include
advertising, as a percentage of sales were 19.9% and 21.7% in 1996 and 1995,
respectively. In 1996, SG&A as a percentage of sales was below 20% for the first
time in the past 25 years. The 1.8 percentage point reduction compared to 1995,
or $602 million, was a direct result of the Company's continuing focus on its
core business units and expense controls. Expense reductions were achieved in
the following major areas ($ millions): closed stores and sale of auto centers -
$325, reductions in comparable store expenses and overhead - $281, one less week
compared to 1995 - $75 and the sale of certain international operations - $62.
These reductions were partially offset by $141 million in expenses related to
new stores.
Operating income increased $611 million in 1996 compared to 1995,
excluding other gains and losses. Other gains and losses in 1996 included a $108
million gain on the sale of Rite Aid stock and a charge of $98 million related
to the valuation of international operations. In 1995, other gains and losses
included a charge of $162 million related to the adoption of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("FAS 121") and a pension
curtailment gain of $121 million.
Net interest expense was $453 and $434 million in 1996 and 1995,
respectively. The increase was a result of restrictions on the repayment of
certain indebtedness in the first half of 1996, prior to the Company's
refinancing of its bank lines and issuance of trust convertible preferred
securities in June 1996. Additionally, the Company's inability to borrow in
commercial paper markets beginning in the fall of 1995, as a result of its lower
corporate debt ratings, contributed to higher interest rates. This higher level
of interest was partially offset by higher levels of investment income from
accumulated cash balances prior to the refinancing and a significant improvement
in cash flow from operations.
Effective income tax rates were 20.5% and 26.6% in 1996 and 1995,
respectively. The 1996 rate was favorably impacted by recognition of tax
benefits related to foreign losses and basis differences. The 1995 rate
reflected the recognition of refundable taxes, at statutory rates, plus tax
credits partially offset by valuation allowances against certain deferred tax
assets. See Note 13 of Notes to Consolidated Financial Statements.
Discontinued operations, net of taxes, represented losses of $451 and
$290 million in 1996 and 1995, respectively. The 1996 loss was comprised of an
estimated loss of $385 million related to the Company's decision to sell its
Builders Square subsidiary, $5 million of current year net losses of Builders
Square and a loss of $61 million related to the sale of a portion of its
investment in TPH in the first quarter together with a revaluation of its
remaining holdings at that time. The 1995 loss included a $260 million loss
from Builders Square, including $240 million for the adoption of FAS 121, and a
$30 million loss related to the disposal of Borders Group and remaining equity
interests in OfficeMax and The Sports Authority. See Note 3 of Notes to
Consolidated Financial Statements.
Fiscal 1995 Compared to Fiscal 1994
Sales increased 7.3% during 1995 driven by comparable store sales growth
of 5.5% and the opening of 59 new U.S.Kmart stores during the year, partially
offset by the closing of 214 U.S.Kmart stores, primarily during the first and
third quarters. Comparable store sales increases were attributed to continued
maturation of domestic and international stores opened during and prior to
1994, increased levels of promotional activity and related customer traffic,
improved in-stock positions and a larger average transaction size.
Kmart Corporation 1996 Annual Report 18
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.)
Gross margin, as a percentage of sales, was 22.2% and 24.5% in 1995 and
1994, respectively. Gross margin in 1995 was significantly affected by the
aggressive clearance of discontinued inventory at stores closed during the
year. The decrease also reflected a mix of both apparel and hardline
merchandise more heavily weighted toward promotional items and lower margin
merchandise.
Selling, general and administrative expenses, which include advertising,
as a percentage of sales, were 21.7% and 22.5% in 1995 and 1994, respectively.
This decrease relative to sales was reflective of continued cost cutting
efforts, leveraging of fixed costs over a higher sales base and a number of
one-time charges taken in the fourth quarter of 1994.
Operating income decreased $419 million, excluding the effect of other
gains and losses in 1995. Other gains and losses included a charge of $162
million related to the adoption of FAS 121 and a pension curtailment gain of
$121 million. The decrease was primarily a result of the decrease in gross
margin discussed above.
Net interest expense for 1995 was $434 million, down from $479 million in
1994. The net decrease in interest expense was due primarily to the scheduled
retirement of $150 million of 12-1/8% notes and lower average short-term
borrowings due to the application of proceeds from the disposal of
discontinued operations. This decrease was partially offset by higher average
interest rates on short-term borrowings as a result of market conditions and
lower credit ratings.
Effective income tax rates were 26.6% and 5.7% in 1995 and 1994,
respectively. Effective tax rates in each year were favorably impacted by tax
credits and equity income relative to income levels. Due primarily to losses in
1993 and 1995, Kmart recognized net tax benefits comprised of significant
refundable taxes and future tax benefits. See Note 13 of Notes to Consolidated
Financial Statements.
Discontinued operations, net of taxes, represented a loss of $290 million
and income of $200 million in 1995 and 1994, respectively. The 1995 loss
included a $260 million loss from Builders Square, including $240 million
for the adoption of FAS 121, and a $30 million loss related to the disposal of
Borders Group and remaining equity interests in OfficeMax and The Sports
Authority. The 1994 amount included income of $83 million from discontinued
operations, including Builders Square, Borders Group, OfficeMax, The Sports
Authority and Coles Myer and a net gain from disposal of discontinued
operations of $117 million. The gain on disposal included a $101 million gain
from the Initial Public Offerings ("IPO's") of OfficeMax and The Sports
Authority and a $48 million gain from the sale of the Company's investment in
Coles Myer, partially offset by a charge of $32 million for sublease exposure
related to lease guarantees on properties sublet to Furr's/Bishop's, Inc. See
Note 3 of Notes to Consolidated Financial Statements for additional
information.
Analysis of Financial Condition
For the past five quarters, Kmart's primary sources of working capital
have been cash flow from operations and borrowings under its current or former
bank credit facilities. Prior to the fall of 1995, the Company also used the
commercial paper market as a source of working capital. The Company had
working capital of $4,131 and $5,558 million at year end 1996 and 1995,
respectively. Working capital fluctuates in relation to profitability,
seasonal inventory levels net of trade accounts payable and the level of store
openings and closings.
In June 1996, the Company restructured its credit facilities to enhance
its liquidity and financial flexibility. This restructuring consisted of a
secured three year $2.5 billion revolving credit facility ("Revolver") and a
secured three year $1.2 billion term loan facility ("Term Loan"),
(collectively, the "Credit Agreement"). Additionally, in June 1996, the
Company issued $1 billion of 7-3/4% Trust Convertible Preferred Securities
("TCPS") through a wholly owned subsidiary. The net proceeds from these
transactions were used to retire existing indebtedness, including certain
obligations related to real estate. The Company had no borrowings outstanding
on its Revolver as of year end 1996 and the Term Loan had been paid down to
$600 million.
The Credit Agreement contains several affirmative and negative covenants,
regarding among other items, the granting of liens, loans and guarantees;
mergers and sales of certain assets; dividends and other payments in respect of
capital stock; and the maintenance of certain leverage and coverage ratios and
limitations on indebtedness and capital expenditures. The Company was in
compliance with all covenants as of year end 1996.
In March 1997, the Company issued, through a subsidiary, $335 million in
Commercial Mortgage Pass Through Certificates ("CMBS"). The CMBS weighted
average floating interest rate was LIBOR plus 47 basis points. This rate
represents nearly a 200 basis point reduction compared to rates for Term Loan
borrowings. Net proceeds were used to repay a portion of the Term Loan. The
Company anticipates repaying the entire Term Loan by the end of the first half
of 1997.
In 1996, the Company achieved a significant improvement in liquidity and
operating cash flow performance. At the Company's peak borrowing level in
1996, over $1.2 billion remained available for borrowings under its Revolver.
In addition, cash flow from continuing operations improved by $835 million.
Management believes that its current financing arrangements will be sufficient
to meet the Company's liquidity needs for operations and capital demands for
1997.
Net cash provided from continuing operations was $738 million in 1996 as
compared to net cash used of $97 million in 1995. This improvement was
primarily the result of net income levels and a $253 million improvement in the
management of inventories net of trade accounts payable. Depreciation and
amortization, which
Kmart Corporation 1996 Annual Report 19
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.)
included $32 million in amortization expense related to the Credit Agreement,
were lower than prior year levels as a result of asset impairment charges taken
in 1995 and overall lower levels of capital spending in 1995 and 1996. The
overall improvement in the Company's balance sheet position resulted in the
remaining increases.
Net cash used for investing was $471 million in 1996 as compared to net
cash provided of $400 million in 1995. Cash used for investing in 1996 was the
result of an increase in property held for sale of $632 million as a result of
refinancing certain real estate debt and current year capital additions of $343
million. These items were partially offset by the receipt of proceeds from the
sale of the Company's investment in Rite Aid common stock, the sale of its
Czech and Slovak Republics operations and the IPO of TPH. Cash provided by
investing in 1995 was primarily comprised of proceeds from asset sales and
subsidiary public offerings.
Net cash used for financing was $974 million in 1996 as compared to net
cash provided of $525 million in 1995. Cash used for financing in 1996 was the
result of the refinancing of the Company's former credit facilities and certain
real estate debt with net proceeds from the Term Loan, TCPS and Revolver. Cash
provided from financing in 1995 was the result of higher outstanding borrowings
due to repayment restrictions in the Company's former bank agreements. In
December 1995, the common stock dividend was eliminated.
Restructuring Reserve Status
In 1993, Kmart recorded a pretax charge of $904 million, $579 million
after tax, primarily for anticipated costs associated with Kmart stores which
were to be closed or relocated, enlarged or refurbished in the U.S. and Canada.
The restructuring program is expected to be completed during fiscal 1997. The
cost of completing the plan is expected to approximate the original estimate.
The 1993 restructuring plan assumed closure of 503 U.S. Kmart stores and
expansion or refurbishment of the remaining 500 unmodernized stores. Kmart
closed 48, 214 and 120 U.S. Kmart stores in 1996, 1995 and 1994, respectively.
This compares to the original closing plan of 175, 150 and 100 for the same
years. The original plan called for 503 store closings through 1997 as compared
to projected actual closings of 402 through 1997, which includes 20 planned
closings for 1997. The overall decrease in the number of stores closed or
relocated is due to new management's re-evaluation of closing criteria and a
reduction of capital spending due to lower levels of earnings. The number of
new U.S. Kmart stores opened were 21, 59 and 113 in 1996, 1995 and 1994,
respectively.
During 1995, U.S. Kmart effectively canceled its expansion and
refurbishment program related to the restructuring reserve due in part to new
management's re-evaluation of its store design and merchandise assortments. The
roll-out of a new store format began in 1996 and included refurbishment of
unmodernized stores outside of the restructuring reserve.
1996 Activity
-----------------
Original Net Change in
($ Millions) Reserve 1994 1995 Charge Estimate 1996
- -----------------------------------------------------------------------
Lease costs $479 $500 $ 397 $100 $ -- $297
Asset writedowns 148 107 23 68 50 5
Inventory 201 130 79 17 (50) 12
Other charges 76 25 9 5 -- 4
---- ---- ---- ---- ---- ----
$904 $762 $508 $190 $ -- $318
==== ==== ==== ==== ==== ====
Net charges included $25, $32 and $33 million for interest expense accreted
during 1996, 1995 and 1994, respectively.
The primary components of the reserve consist of: cash outlays for future
lease obligations once a store is closed until it can be assigned, bought-out or
terminated, offset by any sublease income; asset writedowns relating to
furniture and fixtures and leasehold improvements and inventory disposition
costs. Changes in estimates are representative of management's assessments in
the fourth quarters of 1996, 1995 and 1994 that based on actual experiences to
date, certain charges will be higher than originally planned while others will
be less than planned.
Due to favorable sublease and termination experience for stores closed to
date, Kmart lowered the estimate of net lease obligation costs for domestic and
Canadian stores by $44 and $13 million in 1995 and 1994, respectively. These
favorable results have been offset by increased fixed asset disposition costs
for domestic stores primarily due to the acceleration of the closing of stores
originally planned to be closed in later years. As a result, Kmart increased the
reserve for fixed asset disposal writedowns by $50, $31 and $18 million in 1996,
1995 and 1994, respectively. A $17 million addition to the provision was made in
1994 for increased asset disposal writedowns. Excess reserves for the canceled
projects were allocated to asset writedowns for closing stores.
The 1993 charge also included $45 million for severance and related
benefits as part of the re-engineering programs. Cash payments under these
programs totaled $22 and $23 million in 1995 and 1994, respectively. During
1995, the Company allocated an additional $12 million to re-engineering and
other non-recurring charges.
Kmart anticipates that pretax cash outflows will approximate $90, $70 and
$50 million in 1997 through 1999, respectively. At January 29, 1997, the total
remaining gross lease obligations related to the U.S. Kmart 1993 restructuring
plan aggregated approximately $1.1 billion, of which it is management's
estimate, based upon historical results, approximately $700 million will be
recovered primarily through subleasing. Kmart has discounted the future net
cash flow using a 7% discount rate which resulted in an aggregate remaining
effect of discounting of approximately $80 million. Future cash outlays are
based upon management's estimate of the period of time between store closing
and the ultimate disposition of the lease obligation, the remaining charge
being substantially noncash in nature.
Kmart Corporation 1996 Annual Report 20
5
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the Company's
consolidated financial statements and related information appearing in this
annual report. These financial statements have been prepared in conformity with
generally accepted accounting principles on a consistent basis applying certain
estimates and judgments based upon currently available information and
management's view of current conditions and circumstances. On this basis, we
believe that these financial statements reasonably present the Company's
financial position and results of operations.
To fulfill our responsibility, we maintain comprehensive systems of
internal controls designed to provide reasonable assurance that assets are
safeguarded and transactions are executed in accordance with established
procedures. The concept of reasonable assurance is based upon a recognition
that the cost of the controls should not exceed the benefit derived. We believe
our systems of internal controls provide this reasonable assurance.
The Company has adopted a code of conduct to guide our management in the
continued observance of high ethical standards of honesty, integrity and
fairness in the conduct of the business and in accordance with the law.
Compliance with the guidelines and standards is periodically reviewed and is
acknowledged in writing by all management associates.
The Board of Directors of the Company has an Audit Committee, consisting
solely of outside directors. The duties of the Committee include keeping
informed of the financial condition of the Company and reviewing its financial
policies and procedures, its internal accounting controls and the objectivity
of its financial reporting. Both the Company's independent accountants and the
internal auditors have free access to the Audit Committee and meet with the
Committee periodically, with and without management present.
/s/ Floyd Hall
Floyd Hall
Chairman of the Board,
President and Chief Executive Officer
/s/ M. E. Welch
Martin E. Welch III
Senior 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 29, 1997 and January 31, 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended January 29, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in the notes to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" in fiscal 1995.
Price Waterhouse LLP
Price Waterhouse LLP
Detroit, Michigan
March 4, 1997
Kmart Corporation 1996 Annual Report 21
6
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 29, 1997, JANUARY 31, 1996 AND JANUARY 25, 1995
DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
Sales $ 31,437 $ 31,713 $ 29,563
Cost of sales, buying and occupancy 24,390 24,675 22,331
-------- -------- --------
Gross margin 7,047 7,038 7,232
Selling, general and administrative expenses 6,274 6,876 6,651
Other (gains) losses (10) 41 --
-------- -------- --------
Continuing income before interest, income taxes
and dividends on convertible preferred securities of subsidiary 783 121 581
Interest expense, net 453 434 479
Income tax provision (credit) 68 (83) 6
Dividends on convertible preferred securities of subsidiary,
net of income taxes of $16 31 -- --
-------- -------- --------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM 231 (230) 96
Discontinued operations, net of income taxes of $(3), $(139) and $64 (5) (260) 83
Gain (loss) on disposal of discontinued operations, net
of income taxes of $(240), $88 and $282 (446) (30) 117
Extraordinary item, net of income taxes of $(27) -- (51) --
-------- -------- --------
Net income (loss) $ (220) $ (571) $ 296
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE
Continuing retail operations $ .48 $ (.51) $ .19
Discontinued operations (.01) (.57) .19
Gain (loss) on disposal of discontinued operations (.92) (.06) .25
Extraordinary item -- (.11) --
-------- --------- --------
Net income (loss) $ (.45) $ (1.25) $ .63
======== ========= ========
Weighted average shares (millions) 486.1 459.9 456.6
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
THE CONSOLIDATED STATEMENTS OF OPERATIONS FOR PRIOR PERIODS HAVE BEEN RESTATED
FOR DISCONTINUED OPERATIONS.
Kmart Corporation 1996 Annual Report 22
7
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 29, 1997 AND JANUARY 31, 1996
DOLLARS IN MILLIONS 1996 1995
- ---------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 406 $ 1,083
Merchandise inventories 6,354 6,022
Other current assets 973 894
Net current assets of discontinued operations -- 554
--------- ---------
Total current assets 7,733 8,553
Property and equipment, net 5,740 5,365
Property held for sale or financing 200 434
Other assets and deferred charges 613 526
Net long-term assets of discontinued operations -- 155
--------- ---------
Total Assets $ 14,286 $ 15,033
========= =========
CURRENT LIABILITIES
Long-term debt due within one year $ 156 $ 7
Trade accounts payable 2,009 1,793
Accrued payroll and other liabilities 1,298 1,019
Taxes other than income taxes 139 176
--------- ---------
Total current liabilities 3,602 2,995
Long-term debt and notes payable 2,121 3,922
Capital lease obligations 1,478 1,586
Other long-term liabilities 1,013 1,250
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 at January 29, 1997) 980 --
Common stock, 1,500,000,000 shares authorized;
486,996,145 and 486,511,184 shares issued, respectively 486 486
Capital in excess of par value 1,608 1,624
Retained earnings 3,105 3,326
Treasury shares and restricted stock (37) (92)
Foreign currency translation adjustment (70) (64)
--------- ---------
Total Liabilities and Shareholders' Equity $ 14,286 $ 15,033
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
THE CONSOLIDATED BALANCE SHEET FOR THE PRIOR PERIOD HAS BEEN RESTATED FOR
DISCONTINUED OPERATIONS.
Kmart Corporation 1996 Annual Report 23
8
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED JANUARY 29, 1997, JANUARY 31, 1996 AND JANUARY 25, 1995
DOLLARS IN MILLIONS 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) from continuing operations before
extraordinary item $ 231 $ (230) $ 96
Adjustments to reconcile net income (loss) from continuing
operations to net cash from operating activities:
Depreciation and amortization 654 685 639
Cash used for store restructuring and other charges (129) (171) (93)
Deferred income taxes 68 76 17
Undistributed equity income 28 14 (15)
Increase (decrease) in other long-term liabilities (194) 9 116
(Increase) decrease in inventories (349) 222 (594)
Increase (decrease) in trade accounts payable 215 (609) 420
Changes in certain assets, liabilities and other items 214 (93) 258
------ ------- -------
Net cash provided by (used for) continuing operations 738 (97) 844
------ ------- -------
Discontinued Operations:
Income (loss) from discontinued operations (5) (260) 83
Gain (loss) on disposal of discontinued operations (446) (30) 117
Cash used for discontinued operations (1) (22) (362)
Items not affecting cash, net 482 220 (813)
------ ------- -------
Net cash provided by (used for) discontinued operations 30 (92) (975)
------ ------- -------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 768 (189) (131)
------ ------- -------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (343) (540) (1,021)
Increase in property held for sale or financing (632) (474) (66)
Proceeds from asset sales and subsidiary public offerings 461 1,658 2,429
Other, net 43 (244) (212)
------ ------- -------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (471) 400 1,130
------ ------- -------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt and notes payable 1,202 1,948 62
Refinancing costs related to long-term debt and notes payable (212) -- --
Payments and current maturities on long-term debt (2,855) (983) (513)
Proceeds from issuance of convertible preferred securities 971 -- --
Payments and current maturities on capital lease obligations (114) (160) (121)
Change in common stock 34 3 29
Dividends paid -- (283) (474)
------ ------- -------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (974) 525 (1,017)
------ ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (677) 736 (18)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,083 347 365
------ ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 406 $ 1,083 $ 347
====== ======= =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
THE CONSOLIDATED STATEMENTS OF CASH FLOW FOR PRIOR PERIODS HAVE BEEN RESTATED
FOR DISCONTINUED OPERATIONS.
KMART CORPORATION 1996 ANNUAL REPORT 24
9
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Series B, C Treasury Shares
Series A and D Capital and Performance Foreign
Conversion Convertible In Excess Restricted Stock Currency
Preferred Preferred Common of Par Retained Deferred Translation
DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA Stock Stock Stock Value Earnings Compensation Adjustment
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 26, 1994 $ 986 $ 157 $417 $ 538 $4,237 $ (112) $ (130)
Net income for the year 296
Cash dividends declared:
Common, $.96 per share (418)
Preferred (48)
Common issued from conversion
of Series A conversion preferred (986) 46 940
Common issued from redemption
of Series C convertible preferred (25) 2 23
Treasury shares reissued to the
retirement savings plan 3 23
Foreign currency translation adjustment 72
Other 1 7 3
----- ----- ---- ------ ------ ------ -----
BALANCE AT JANUARY 25, 1995 -- 132 465 1,505 4,074 (86) (58)
Net loss for the year (571)
Cash dividends declared:
Common, $.36 per share (165)
Series C convertible preferred (6)
Common Issued from redemption
of Series C and D convertible preferred (132) 20 112
Foreign currency translation adjustment (6)
Other 1 7 (6) (6)
----- ----- ---- ------ ------ ------ -----
BALANCE AT JANUARY 31, 1996 -- -- 486 1,624 3,326 (92) (64)
Net loss for the year (220)
Treasury shares reissued to retirement
savings plan (19) 53
Foreign currency translation adjustment (6)
Other 3 (1) 2
----- ----- ---- ------ ------ ------ -----
BALANCE AT JANUARY 29, 1997 $ -- $ -- $486 $1,608 $3,105 $ (37) $ (70)
===== ===== ==== ====== ====== ====== =====
COMMON STOCK, AUTHORIZED 1,500,000,000 SHARES, $1 PAR VALUE. PREFERRED STOCK,
AUTHORIZED 10,000,000 SHARES, NO PAR VALUE.
See accompanying Notes to Consolidated Financial Statements.
Kmart Corporation 1996 Annual Report 25
10
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 also operates discount stores in Canada and has a
joint venture in Mexico. Kmart's equity investments consist of 49% of
substantially all of the Meldisco subsidiaries of Footstar, Inc. ("FTS"), which
operate the footware departments in domestic Kmart stores.
BASIS OF CONSOLIDATION: Kmart includes all majority owned subsidiaries in
the consolidated financial statements. Investments in affiliated retail
companies owned 20% or more are accounted for by the equity method. Intercompany
transactions and accounts have been eliminated in consolidation.
FISCAL YEAR: The Company's fiscal year ends on the last Wednesday in
January. Fiscal years 1996 and 1994 each consisted of 52 weeks and ended on
January 29, 1997 and January 25, 1995, respectively. Fiscal year 1995 consisted
of 53 weeks and ended on January 31, 1996.
CASH: Cash and cash equivalents include all highly liquid investments with
maturities of three months or less. Included are temporary investments of $131
and $637, at year end 1996 and 1995, 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 cost for $5,883,
$5,518 and $5,910 of inventory as of year end 1996, 1995 and 1994, respectively.
Inventories valued on LIFO were $440, $485 and $528 lower than amounts that
would have been reported using the first-in, first-out (FIFO) method at year end
1996, 1995 and 1994, 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 extending beyond one year are
included in property held for sale or financing.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization, including
amortization of property held under capital leases over various lease terms, are
computed based upon the estimated useful lives of the respective assets using
the straight-line method for financial statement purposes and accelerated
methods for tax purposes. The general range of lives are 25 to 50 years for
buildings, 5 to 25 years for leasehold improvements, and 3 to 17 years for
furniture and fixtures.
FINANCIAL INSTRUMENTS: Cash and cash equivalents, accounts receivable,
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 10 and 12.
FOREIGN CURRENCY TRANSLATIONS: Foreign currency assets and liabilities are
translated into U.S. dollars at the exchange rates in effect at the balance
sheet date and revenue and expenses are translated at average exchange rates
during the period.
STOCK-BASED COMPENSATION: Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("FAS 123"), encourages, but does
not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock. See Note 18.
PRE-OPENING AND CLOSING COSTS: Costs associated with the opening of a new
store are expensed during the first full month of operations. When the decision
to close a retail unit is made, any future net lease obligation and
nonrecoverable investment in fixed assets directly related to discontinuance of
operations are expensed.
ADVERTISING COSTS: Advertising costs, net of co-op recoveries from vendors,
are expensed the first time the advertising occurs and amounted to $385, $459
and $396 in 1996, 1995 and 1994, respectively.
INCOME TAXES: Deferred income taxes are provided for temporary differences
between financial statement and taxable income. Kmart accrues U.S. and foreign
taxes payable on all of the earnings of subsidiaries, except with respect to
earnings that are intended to be permanently reinvested, or are expected to be
distributed free of additional tax by operation of relevant statutes currently
in effect and by utilization of available tax credits and deductions.
EARNINGS (LOSS) PER COMMON SHARE: Kmart computes earnings (loss) per common
share by dividing net income (loss) less certain dividends paid on preferred
stock by the weighted average number of shares of common stock and dilutive
common stock equivalents outstanding ("weighted average common shares") during
each year.
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 1996 presentation.
Kmart Corporation 1996 Annual Report 26
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
2) SUBSEQUENT EVENTS
In the first quarter of 1997, the Company announced agreements to sell its
interest in Kmart Mexico, S.A. de C.V. to Controladora Comercial Mexicana, S.A.
de C.V. ("CCM"). Under the terms of the sale, CCM will purchase Kmart's
interest in the company, which operates four stores in Mexico, for
approximately $74.
In the first quarter of 1997, the Company issued, through a subsidiary,
$335 in Commercial Mortgage Pass Through Certificates ("CMBS"). The CMBS
weighted average floating interest rate was LIBOR plus 47 basis points. This
rate represents nearly a 200 basis point reduction compared to rates for Term
Loan borrowings. Net proceeds were used to repay a portion of the Term Loan.
As a result of this financing, certain properties formerly classified as
property held for sale or financing have been included in property and
equipment, net.
3) DISCONTINUED OPERATIONS AND DISPOSITIONS
Discontinued operations include Builders Square, Inc. ("Builders Square"),
Borders Group, Inc. ("Borders Group"), OfficeMax, Inc. ("OfficeMax"), The
Sports Authority, Inc. ("The Sports Authority"), Thrifty PayLess Holdings, Inc.
("TPH"), Coles Myer, Ltd. ("Coles Myer"), and Furr's/Bishop's, Inc. ("Furr's").
1996 ACTIVITY
The Company began discussions with Waban Inc. and Leonard Green &
Partners, L.P. to combine Waban's Homebase business and Builders Square to form
a new home improvement company. Upon completion of the proposed transaction,
Kmart expects to retain a minority interest in the newly formed company. Based
on the Company's plan to dispose of Builders Square, an after tax loss on
disposal of discontinued operations of $385 was recorded and all periods
presented herein have been restated to classify Builders Square as a
discontinued operation. During 1996, Builders Square had a net loss from
operations of $5.
In the first quarter, the Company received $62 from the sale of
approximately 30% of its investment in the common stock of TPH and revalued its
remaining investment by recording a $61 loss from discontinued operations, net
of income taxes. The Company sold an additional 3% of its investment in TPH and
received $8 in net proceeds in the second quarter.
In the fourth quarter of 1996, Rite Aid Corporation ("Rite Aid"), reached
an agreement with TPH to merge TPH into Rite Aid. As part of the merger, Rite
Aid exchanged 0.65 of its shares for each share of TPH. Kmart sold the shares
received in the exchange resulting in net proceeds of approximately $257 and
recorded a pretax gain of $108, included in other gains and losses.
In the first quarter, the Company completed the sale of its Czech and
Slovak Republics operations and received net proceeds of $115.
1995 ACTIVITY
The 1995 loss included a $260 net loss from Builders Square, including a
net of tax charge of $240 related to the adoption of Financial Accounting
Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("FAS121").
Borders Group's initial public offering ("IPO") was completed in the
second quarter of 1995. In this IPO, Kmart sold 87% of its equity interest for
net proceeds of approximately $493. Borders Group agreed to purchase all of
Kmart's remaining 13% interest in the second quarter which resulted in net
proceeds of approximately $73. As a result of these transactions, the Company
recorded an after tax loss of $185.
OfficeMax completed the public offering of Kmart's remaining equity
interest in OfficeMax in the second quarter. Kmart received net proceeds of
approximately $360 and recorded an after tax gain of $107.
The Sports Authority completed the public offering of Kmart's remaining
equity interest in The Sports Authority in the third quarter. Kmart received
approximately $151 in net proceeds and recorded an after tax gain of $48.
In the fourth quarter, Kmart sold the assets of its automotive service
centers to Penske Auto Centers, Inc. for $84. Under the terms of the agreement,
the centers continue to operate at Kmart locations in exchange for various
rents and fees for services provided by Kmart.
The Company also sold certain senior notes of TPH acquired in 1993 in
connection with the sale of PayLess Drug Stores Northwest, Inc. for
approximately $102.
1994 Activity
OfficeMax completed its IPO in the fourth quarter of 1994. This IPO
reduced Kmart's interest in OfficeMax from over 90% to approximately 25% and
resulted in net proceeds of approximately $642. The IPO of The Sports Authority
was also completed in the fourth quarter, reducing Kmart's interest from 100%
to approximately 30% and resulted in net proceeds of approximately $254. These
transactions resulted in an after tax gain of $101.
In the fourth quarter, Kmart completed the sale of its 21.5% equity
interest in Coles Myer, an Australian retailer which operates department and
general merchandise stores including certain stores using the "Kmart" name. Net
cash proceeds of $928 were realized from the sale resulting in an after tax
gain of $48. As part of the transaction, Kmart extended a long-term license
agreement that allows Coles Myer to use the "Kmart" name in Australia and New
Zealand.
In the fourth quarter, Kmart charged $32 to loss on disposal of
discontinued operations for sublease exposure related to lease guarantees on
properties sublet to Furr's, which was sold by Kmart in 1986.
Kmart Corporation 1996 Annual Report 27
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
4) STORE RESTRUCTURING AND OTHER CHARGES
In 1993, the Board of Directors approved a restructuring plan involving
domestic and Canadian Kmart stores. The restructuring provision included
anticipated costs of $904 associated with Kmart stores which were to be closed
and relocated, enlarged or refurbished in the U.S. and Canada. These costs
included lease obligations for store closings as well as fixed asset
writedowns, primarily furniture and fixtures, inventory dispositions and
related operating losses for all affected stores.
Cash costs related to the 1993 restructuring reserve amounted to $129,
$117 and $40 for 1996, 1995 and 1994, respectively. Noncash charges were $61,
$134 and $119 for the same periods, respectively. The remaining restructuring
obligation is included primarily in "other long-term liabilities" in the
consolidated balance sheets.
5) ASSET IMPAIRMENT CHARGES
Kmart adopted FAS 121 in the fourth quarter of 1995. Based on management's
consideration of the current and expected operating cash flow together with a
judgment as to the fair value the Company could receive upon sale of its
investment, the Company recorded a $162 pretax charge, $150 after tax, included
in other gains and losses, relating to certain international operations in
1995.
In the fourth quarter of 1996, the Company recorded a $98 pretax charge,
$34 after tax, included in other gains and losses, to reserve for anticipated
losses on the disposal of certain international operations.
6) EXTRAORDINARY ITEM
In 1995, the Company entered into agreements whereby holders of
approximately $550 of certain real estate related debt agreed to eliminate put
features which would have required Kmart to purchase the debt from the holders
if Kmart's long-term debt rating was lowered to non-investment grade. In the
fourth quarter of 1995, the Company recorded an extraordinary noncash charge of
$51, net of income taxes, relating to various expenses and make whole premiums
payable under such agreements.
7) PROPERTY AND EQUIPMENT
YEAR END
-------------------
1996 1995
- ---------------------------------------------------------------------
Property owned:
Land $ 346 $ 153
Buildings 995 440
Leasehold improvements 1,470 1,438
Furniture and fixtures 5,050 5,132
Construction in progress 87 78
Property under capital leases 2,820 2,875
------- -------
10,768 10,116
Less-accumulated depreciation
and amortization:
Property owned (3,487) (3,262)
Property under capital leases (1,541) (1,489)
------- -------
Total $ 5,740 $ 5,365
======= =======
8) INVESTMENTS IN AFFILIATED RETAIL COMPANIES
All U.S. 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. During 1996, Melville Corporation transferred
its 51% interest in the Meldisco subsidiaries to FTS. This transaction had no
impact on Kmart's ownership interest in the Meldisco subsidiaries. Income
earned under various agreements were $211, $220 and $256, in 1996, 1995 and
1994, respectively. The Company received dividends from Meldisco in 1996, 1995
and 1994 of $64, $52 and $38, respectively.
FISCAL YEAR
MELDISCO INFORMATION 1996 1995 1994
- ---------------------------------------------------------------------
Net sales $1,109 $1,141 $1,235
Gross profit 476 487 548
Net income 74 79 107
Inventory $ 134 $ 135 $ 148
Other current assets 24 74 117
Non-current assets 1 1 2
------ ------ ------
Total assets 159 210 267
Current liabilities 25 15 42
------ ------ ------
Net assets $ 134 $ 195 $ 225
====== ====== ======
Equity of Kmart $ 65 $ 94 $ 108
====== ====== ======
Unremitted earnings included in consolidated retained earnings were $41, $72
and $86 at year end 1996, 1995 and 1994, respectively.
Kmart Corporation 1996 Annual Report 28
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
9) NOTES PAYABLE, LINES OF CREDIT AND OTHER COMMITMENTS AND CONTINGENCIES
Kmart has outstanding guarantees of approximately $1,087 for leases of
certain previously sold subsidiaries including Furr's, Borders Group, OfficeMax
and The Sports Authority as of January 29, 1997. Builders Square has lease
obligations of approximately $2.2 billion as of January 29, 1997, substantially
all of which have been guaranteed by Kmart.
Kmart has guaranteed indebtedness of other parties related to certain of
its leased properties financed by industrial revenue bonds. At January 29,
1997, the total amount of such guaranteed indebtedness was $198, of which $73
was included in capital lease obligations. The remaining $125 represents
Kmart's exposure to credit loss in the event of nonperformance by the other
parties to the agreements. The agreements will expire during fiscal years 2004
to 2009. However, no concentration of credit risk exists and Kmart does not
anticipate nonperformance by the other parties.
There are various claims, lawsuits and pending actions against Kmart
incident to its operations. It is the opinion of management that the ultimate
resolution of these matters will not have a material adverse effect on Kmart's
liquidity, financial position or results of operations.
10) LONG-TERM DEBT AND NOTES PAYABLE
FISCAL YEAR INTEREST YEAR END
TYPE MATURITY RATES 1996 1995
- ---------------------------------------------------------
Bank note 1997 7.8% $ -- $1,998
Term loan 1999 7.9% 600 --
Debentures 2005-2023 7.8%-12.5% 995 995
Medium-term
notes 1997-2020 7.0%-9.8% 605 605
Other Varies Varies 77 331
------ ------
Total 2,277 3,929
Current portion (156) (7)
------ ------
Long-term debt $2,121 $3,922
====== ======
In the second quarter of 1996, the Company entered into a $3.7 billion
credit agreement with a group of financial institutions which provides for (i) a
three year $2.5 billion secured revolving credit facility ("Revolver") and (ii)
a three year $1.2 billion secured term loan ("Term Loan"). See Note 12 for use
of proceeds.
The Revolver bears interest, at the Company's option, based on a specified
margin over a base rate, currently LIBOR plus 250 basis points. There is a
commitment fee of 0.5% on the unused portion of the Revolver. The Term Loan
bears interest at rates determined in the same manner as the Revolver, subject
to an increase of 0.5% over the applicable interest rate margin after the first
anniversary of the Term Loan. The Revolver and Term Loan contain certain
affirmative and negative covenants customary to these types of agreements and
are guaranteed by the Company's principal domestic subsidiaries.
As of January 29, 1997, there were no outstanding amounts under the
Revolver and $600 outstanding under the Term Loan.
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 approximates book value at year end 1996 and was
approximately $3,453 at year end 1995.
The principal maturities of long-term debt for the five years subsequent
to 1996 are: 1997-$156, 1998-$62, 1999-$670, 2000-$58, 2001-$59 and 2002 and
later-$1,272.
Cash paid for interest was $459, $467 and $505 in 1996, 1995 and 1994,
respectively.
11) LEASES
Kmart conducts operations primarily in leased facilities. Kmart store
leases are generally for terms of 25 years with multiple five-year renewal
options which allow the Company the option to extend the life of the lease up
to 50 years beyond the initial noncancelable term.
Selling space has been sublet to other retailers, including Penske Auto
Centers, Inc. and the Meldisco subsidiaries of FTS, in certain of Kmart's
leased facilities.
MINIMUM LEASE COMMITMENTS
-------------------------
AS OF JANUARY 29, 1997 CAPITAL OPERATING
- -----------------------------------------------------
Fiscal Year:
1997 $ 367 $ 556
1998 352 544
1999 337 519
2000 318 499
2001 304 491
Later years 2,508 6,140
------ -------
Total minimum lease payments 4,186 8,749
Less-minimum sublease income -- (3,892)
------ -------
Net minimum lease payments 4,186 $ 4,857
=======
Less:
Estimated executory costs (1,155)
------
Amount representing interest (1,438)
------
1,593
Current (115)
------
Long-Term $ 1,478
======
RENT EXPENSE 1996 1995 1994
- -------------------------------------------------
Minimum rentals $ 642 $ 649 $ 618
Percentage rentals 36 35 33
Less-sublease rentals (236) (232) (253)
----- ----- -----
Total $ 442 $ 452 $ 398
===== ===== =====
Kmart incurred capital lease obligations to obtain store facilities and
equipment of $21 and $186 in 1995 and 1994, respectively. There were no capital
lease obligations incurred in 1996.
Kmart Corporation 1996 Annual Report 29
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
12) Convertible Preferred Securities
In June 1996, a trust sponsored and wholly owned by the Company issued
20,000,000 shares of trust convertible preferred securities ("Preferred
Securities") the proceeds of which were invested by the trust in $1 billion
aggregate principal amount of the Company's newly issued 7-3/4% Convertible
Junior Subordinated Debentures ("Debentures"). The aggregate principal amount
of the Debentures represents the sole asset of the trust. The proceeds from the
issuance of the Debentures were used by the Company together with (i) the
proceeds of borrowing under the credit agreement discussed in Note 10 and (ii)
available cash balances resulting from the removal of payment restrictions
contained in the Company's then existing bank credit facilities and certain
real estate related debt, to repay such bank credit facilities and certain real
estate related debt. The Debentures and related income statement effects were
eliminated in the Company's consolidated financial statements.
The Preferred Securities accrue and pay cash distributions quarterly at a
rate of 7-3/4% per annum of the stated liquidation amount of $50 per Preferred
Security. Kmart has guaranteed, on a subordinated basis, distributions and
other payments due on the Preferred Securities. The Preferred Securities are
convertible at the option of the holder at any time at the rate of 3.3333
shares of Kmart common stock for each Preferred Security, and are mandatorily
redeemable upon the maturity of the Debentures on June 15, 2016, or to the
extent of any earlier redemption of any Debentures by Kmart and are callable
beginning June 15, 1999.
Based on the quoted market prices, the fair value of the Preferred
Securities approximates book value at fiscal year end 1996.
13) Income Taxes
INCOME (LOSS) BEFORE
INCOME TAXES 1996 1995 1994
- ----------------------------------------------------------------------------
U.S. $ 351 $(114) $ 76
Foreign (21) (199) 26
----- ----- -----
Total $ 330 $(313) $ 102
===== ===== =====
INCOME TAX
PROVISION (CREDIT) 1996 1995 1994
- ----------------------------------------------------------------------------
Current:
Federal $ 54 $(164) $ (33)
State and local 5 -- 7
Foreign 17 (3) 8
----- ----- -----
76 (167) (18)
Deferred:
Federal (7) 96 17
Foreign (1) (12) 7
----- ----- -----
Total $ 68 $ (83) $ 6
===== ===== =====
EFFECTIVE TAX RATE
RECONCILIATION 1996 1995 1994
- ----------------------------------------------------------------------------
Federal income
tax rate 35.0% (35.0%) 35.0%
State and local taxes,
net of federal tax benefit 0.9 -- 3.3
Tax credits -- (2.5) (10.2)
Equity in net income
of affiliated companies (3.1) (3.4) (14.3)
Valuation allowance -- 18.4 --
International tax rate
and basis differential (13.9) (4.2) 4.9
ESOP dividend -- (1.0) (4.9)
Other 1.6 1.1 (8.1)
----- ----- -----
20.5% (26.6%) 5.7%
===== ===== =====
Year End
DEFERRED TAX --------------------
ASSETS AND LIABILITIES 1996 1995
- ----------------------------------------------------------------------------
Deferred tax assets:
Federal benefit for
state and foreign deferred $ 28 $ 30
Discontinued operations 413 228
Accruals and other liabilities 174 203
Capital leases 132 136
Store restructuring 136 211
Other 129 69
----- -----
Total deferred tax assets 1,012 877
----- -----
Deferred tax liabilities:
Inventory 281 223
Property and equipment 455 477
Valuation allowance 50 57
Other 9 42
----- -----
Total deferred tax liabilities 795 799
----- -----
Net deferred tax assets $ 217 $ 78
====== =====
Kmart has not recorded deferred income taxes applicable to undistributed
earnings of foreign subsidiaries that are indefinitely reinvested in foreign
operations. There were no undistributed earnings as of year end 1996.
Undistributed earnings totaled $7 and $181 at year end 1995 and 1994,
respectively.
The Company has available alternative minimum tax credit carryforwards of
approximately $74 which may be carried forward indefinitely.
Cash paid (received) for income taxes was $(238), $80 and $83 in 1996,
1995 and 1994, respectively.
Kmart Corporation 1996 Annual Report 30
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
14) Common and Treasury Stock
SHARES (000's) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
Common Shares:
Beginning of the year 486,511 464,550 416,547
Sold under stock option plan 49 293 237
Issued under performance
restricted stock plan 420 504 95
Issued under directors stock plan 21 9 3
Common issued from conversion
of Series A conversion preferred -- -- 46,000
Common issued from redemption
of Series C and D convertible
preferred -- 21,314 1,875
Forfeited or withheld under
performance restricted stock plan (5) (37) (178)
Retirement of shares -- (122) (29)
------- ------- -------
End of the year 486,996 486,511 464,550
======= ======= =======
Treasury Shares:
Beginning of the year 5,883 5,883 7,469
Reissue of shares for
the retirement savings plan (3,622) -- (1,586)
------- ------- -------
End of the year 2,261 5,883 5,883
======= ======= =======
All of the outstanding shares of Series C convertible preferred stock
issued in 1994 were exchanged for the same number of shares of Series D
convertible preferred stock in 1995. The Series D shares were then redeemed for
shares of Kmart common stock in 1995.
15) Pension Plans
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. As a
result of freezing the plans, the Company recorded a pretax curtailment gain of
$121, included in other gains and losses, in the first quarter of 1995.
Benefits paid to retirees are based upon age at retirement and years of
credited service and earnings as of January 31, 1996. Kmart Canada Co.
associates are covered by a defined contribution plan. Kmart's policy is to
fund at least the minimum amounts required by the Employee Retirement Income
Security Act of 1974. The plans' assets consist primarily of equity securities,
fixed income securities and real estate. Kmart contributed $6 and $64 to its
principal pension plan during fiscal 1995 and 1994, respectively. No
contributions were made in fiscal 1996. The total consolidated pension expense
(income) was $(32), $42 and $78 in 1996, 1995 and 1994, respectively.
The following tables summarize the funded status, components of pension
cost and actuarial assumptions for Kmart's employee pension plan. Certain
amounts are shown at present value (PV):
YEAR END
------------------------
1996 1995
- -----------------------------------------------------------------------------
Actuarial value of benefit obligations:
Estimated PV vested benefits $(1,699) $(1,742)
Estimated PV non-vested benefits (92) (127)
------- -------
Projected benefit obligation (PBO) (1,791) (1,869)
Market value of assets 1,974 1,778
------- -------
Plan assets over (under) PBO 183 (91)
Unrecognized transition asset (80) (89)
Unrecognized (gain) loss (157) 85
------- -------
Accrued pension costs $ (54) $ (95)
======= =======
PENSION COST (INCOME) 1996 1995 1994
- -----------------------------------------------------------------------------
Normal service cost $ -- $ 51 $ 77
Interest cost on PBO 132 133 137
Return on assets (273) (378) 29
Net amortization and
deferral 100 232 (169)
----- ------- -------
Total $ (41) $ 38 $ 74
===== ======= =======
Actuarial assumptions:
Discount rates 7.75% 7.25% 8.25%
Expected return 9.50% 9.50% 9.50%
Salary increases -- 4.50% 4.50%
The Company has a non-qualified plan for directors and officers which was
unfunded by $35 and $37, at the end of 1996 and 1995, respectively.
16) Other Postretirement and Postemployment
Benefit Plans
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 postretirement benefit costs were $78 and $104 at
the end of 1996 and 1995, respectively.
17) Retirement Savings Plan
The Retirement Savings Plan provides that associates of Kmart and certain
subsidiaries who have completed one year of service can invest from 1% to 16%
of their earnings in the associate's choice of 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
(ESOP).
Effective January 1, 1995, a new profit sharing program was introduced as
part of the Retirement Savings Plan. The Company makes contributions based on
profits, with minimum yearly contributions required of $30.
Kmart Corporation 1996 Annual Report 31
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Kmart's expense related to the Retirement Savings Plan was $71 in 1996 and 1995
and $44 in 1994.
18) STOCK OPTION PLANS
The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock option and restricted stock plans. Accordingly, no
compensation cost has been recognized for its 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 for awards under
those plans consistent with the method of FAS 123, the Company's net income
would have been reduced by $22 and $3 for 1996 and 1995, respectively, and
earnings per share would have been reduced by $0.05 and $0.01 for 1996 and 1995,
respectively. 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 the following weighted-average assumptions used for grants in 1996
and 1995, respectively: expected volatility of .3788 and .2980, dividend yield
of 0%, risk-free interest rates of 6.05% and 5.98%; and expected lives of 5
years. The weighted-average fair value of options granted in 1996 and 1995 was
$3.37 and $4.52, respectively. The vesting period of the options generally
ranges from 2 to 3 years on a graduated basis with a term of 10 years.
Under the Performance Restricted Stock Plan, the Compensation and
Incentives Committee of the Board of Directors may grant awards of common stock
to officers and other key employees of Kmart and its subsidiaries. As of January
29, 1997, there were awards for 3,140,000 shares outstanding and shares
available for grant of 255,275.
In March 1996, certain non-executive officers and employees were offered
the opportunity to exchange options for which the exercise price was greater
than the market price into an economically equivalent lesser number of options
at the current market price as of the exchange date.
STOCK OPTION PLAN (000'S) SHARES OPTION PRICE
- -----------------------------------------------------
January 25, 1995
Outstanding 23,210 $ 9.90 - $26.03
Granted 4,962 6.31 - 15.44
Exercised (293) 10.94
Forfeited (1,413) 10.94 - 26.03
------
January 31, 1996
Outstanding 26,466 6.31 - 26.03
Granted 14,303 7.00 - 12.50
Exercised (49) 7.81
Forfeited (23,753) 6.31 - 26.03
------
JANUARY 29, 1997
Outstanding 16,967 6.31 - 26.03
Exercisable 1,003 7.81 - 26.03
Available for grant 3,641
19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Each of the quarters includes 13 weeks, except for the fourth quarter of
1995 which includes 14 weeks. Previously published quarterly financial data
have been restated for discontinued operations.
Earnings per share amounts for each quarter are required to be computed
independently and may not equal the amount computed for the total year.
- --------------------------------------------------------------------------
1996 FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------------------
[S] [C] [C] [C] [C]
Sales $ 6,975 $ 7,566 $ 7,212 $ 9,684
Cost of sales 5,398 5,875 5,528 7,589
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS (36) 23 8 236
Net income (loss) (99) 34 9 (164)
EARNINGS (LOSS) PER SHARE
Continuing $ (.08) $ .05 $ .02 $ .45
Net (.21) .07 .02 (.27)
Common stock price
High $10-5/8 $ 14 $11-1/8 $11-3/8
Low 6-5/8 9-3/4 9-1/4 9-1/2
- --------------------------------------------------------------------------
1995 FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------------------
Sales $ 6,813 $7,682 $ 7,317 $9,901
Cost of sales 5,245 5,887 5,722 7,821
Net income (loss) from
continuing operations (19) 21 (114) (118)
Net loss before
extraordinary items (28) (54) (69) (369)
Net loss (28) (54) (69) (420)
Earnings (loss) per share
Continuing $ (.04) $ .04 $ (.25) $ (.26)
Before extraordinary (.06) (.12) (.15) (.80)
Net (.06) (.12) (.15) (.91)
Common stock price
High $15-3/8 $16-1/8 $16-1/8 $9-1/2
Low 12 12-5/8 9 5-3/4
Dividends paid per
common share $ .24 $ .12 $ .12 $ .12
======= ======= ======= ======
The fourth quarters of 1996 and 1995 included LIFO credits of $52 and $43,
respectively.
The fourth quarter 1996 earnings per share are on a fully diluted basis.
As of January 29, 1997, there were 99,040 Kmart shareholders of record. In
addition, there were approximately 400,000 street name holders of Kmart stock.
Kmart common stock is listed on the New York, Pacific and Chicago stock
exchanges (trading symbol KM).
KMART CORPORATION 1996 ANNUAL REPORT 32