Form 10-K

UNITED STATES

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 29, 2005

 

or

 

  ¨    Transition   Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
          For   the Transition period from                        to                       

 

Commission File No. 1-11084

 

KOHL’S CORPORATION

(Exact name of registrant as specified in its charter)

 

WISCONSIN   39-1630919

(State or other jurisdiction of

  (I.R.S. Employer Identification No.)

incorporation or organization)

   
N56 W17000 Ridgewood Drive,   53051
Menomonee Falls, Wisconsin   (Zip Code)

(Address of principal executive offices)

   

 

Registrant’s telephone number, including area code (262) 703-7000

 

Securities registered pursuant to section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered

Common Stock, $.01 Par Value

  New York Stock Exchange

 
Securities registered pursuant to Section 12(g) of the Act:   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 (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes    X        No             

 

At July 30, 2004, the aggregate market value of the voting stock of the Registrant held by stockholders who were not affiliates of the Registrant was approximately $15,610,000,000 (based upon the closing price of Registrant’s Common Stock on the New York Stock Exchange on such date). At March 2, 2005, the Registrant had issued and outstanding an aggregate of 343,398,331 shares of its Common Stock.

 

Documents Incorporated by Reference:

 

Portions of the Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held on April 27, 2005 are incorporated into Part III.

 

 


PART I

 

Item 1. Business

 

Overview

 

The Company operates family-oriented, specialty department stores that feature quality, exclusive and national brand merchandise priced to provide value to customers. The Company’s stores sell moderately priced apparel, footwear, accessories and home products targeted to middle-income customers shopping for their families and homes. Kohl’s offers a convenient shopping experience through easily accessible locations, well laid out stores, central checkout and good in-stock position which allows the customer to get in and out quickly. Kohl’s stores have fewer departments than traditional, full-line department stores but offer customers dominant assortments of merchandise displayed in complete selections of styles, colors and sizes. Central to the Company’s pricing strategy and overall profitability is a culture focused on maintaining a low cost structure. Critical elements of this low cost structure are the Company’s unique store format, lean staffing levels, sophisticated management information systems and operating efficiencies resulting from centralized buying, advertising and distribution. As of January 29, 2005, the Company operated 637 stores in 40 states. In March 2005, the Company opened 15 additional stores across all regions of the country and currently operates 652 stores.

 

As used herein, the terms “Company” and “Kohl’s” refer to Kohl’s Corporation, its consolidated subsidiaries and predecessors. The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal 2004 ended on January 29, 2005, and was a 52 week year. The Company was organized in 1988 and is a Wisconsin corporation.

 

Expansion

 

The Company’s expansion strategy is designed to achieve consistent growth. Since 1992, the Company has increased square footage an average of 21.9% per year, expanding from 79 stores located in the Midwest to a current total of 652 stores with a presence in six regions of the country: the Midwest, Mid-Atlantic, Northeast, South Central, Southeast and Southwest.

 

    

States


   Number of Stores

        At Fiscal Year End

  

As of March

2005


Region


      1992

   1997

   2002

   2004

  

Midwest

   IA, IL, IN, MI, MN, ND, NE, OH, SD, WI    79    136    196    221    224

Mid-Atlantic

   DE, MD, PA, VA, WV    —      28    57    65    68

Northeast

   CT, MA, ME, NH, NJ, NY, RI, VT    —      4    77    103    103

South Central

   AR, KS, MO, OK, TX    —      8    67    80    83

Southeast

   AL, GA, KY, MS, NC, SC, TN    —      6    49    64    67

Southwest

   AZ, CA, CO, NV, UT    —      —      11    104    107
         
  
  
  
  

Total

   79    182    457    637    652
         
  
  
  
  

 

In support of its geographic expansion, the Company has focused on providing the solid infrastructure needed to ensure consistent execution. Kohl’s proactively invests in distribution capacity and regional management to facilitate the growth in new and existing markets. The Company’s central merchandising organization tailors merchandise assortments to reflect regional climates and preferences. Management information systems support the Company’s low cost culture by enhancing productivity and providing the information needed to make key merchandising decisions.

 

The Kohl’s concept has proven to be transferable to markets across the country. The Company’s approach is to enter new markets with critical mass to establish a presence and to leverage marketing, regional management and distribution costs. New market entries are supported by extensive advertising and promotions designed to

 

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introduce new customers to the Kohl’s concept of brands, value and convenience. Additionally, the Company has been successful in acquiring, refurbishing and operating locations previously operated by other retailers. Of the 637 stores the Company operated as of January 29, 2005, 171 are take-over locations, which facilitated the entry into several markets including Chicago, Detroit, Minneapolis, Columbus, Boston, Philadelphia, St. Louis, the New York region and Hartford/New Haven. Once a new market is established, the Company adds additional fill-in stores to further strengthen market share and enhance profitability. As of January 29, 2005, the Company operated stores in the following large and intermediate sized markets:

 

     Number of stores
January 29, 2005


        Number of stores
January 29, 2005


Greater New York metropolitan area

   50    Washington DC    17

Chicago

   41    Denver    14

Los Angeles

   32    Indianapolis    14

Greater Philadelphia metropolitan area

   29    Cleveland/Akron    13

Dallas/Fort Worth

   21    Phoenix    12

Milwaukee

   21    Houston    12

Boston

   20    San Francisco    11

Minneapolis/St. Paul

Atlanta

   20
18
  

Columbus

St. Louis

   10
10

Detroit

   17    Hartford/New Haven    9

 

In fiscal 2004, Kohl’s successfully opened 95 new stores, significantly increasing its presence in the Southwest region. The Company made several new market entries into the Southwest region with 11 stores in the San Francisco, CA market; seven stores in the Sacramento, CA market; five stores in the Salt Lake City, UT market; five stores in the San Diego, CA market; three stores in the Fresno, CA market; two stores in the Bakersfield, CA market and two stores in the Reno, NV market. The Company opened 12 other stores throughout the Southwest region. In other regions of the country, the Company made new market entries into the Memphis, TN market with three stores; the Rochester, NY market with three stores; the Portland, ME market with two stores and the Montgomery, AL market with one store. In addition, the Company also added 14 stores in the Northeast region, 13 stores in the Midwest region, five stores in the South Central region, five stores in the Southeast region and two stores in the Mid-Atlantic region.

 

Management believes there is substantial opportunity for further growth and intends to open approximately 95 new stores in fiscal 2005. In the spring season, the Company will open approximately 33 stores in existing markets. The Company expects to open the balance of the 95 stores in the third quarter of fiscal 2005 with plans to enter the state of Florida with stores in the Orlando and Jacksonville markets. The remaining stores will be opened in existing markets and spread across all regions of the country.

 

Management believes the transferability of the Kohl’s retailing strategy, the Company’s experience in acquiring and converting pre-existing stores and in building new stores, combined with the Company’s substantial investment in management information systems, centralized distribution and headquarters functions provide a solid foundation for further expansion.

 

Merchandising

 

Kohl’s stores feature moderately priced, exclusive and national brand merchandise, which provide value to customers. Kohl’s merchandise is targeted to appeal to middle-income customers shopping for their families and homes. The Company’s stores generally carry a consistent merchandise assortment with some differences attributable to regional preferences. The Company’s stores emphasize apparel, accessories and footwear for women, men, and children, soft home products, such as towels, sheets and pillows, and housewares.

 

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Convenience

 

Convenience is another important cornerstone of Kohl’s business model. At Kohl’s, convenience begins before the customer enters the store, with a neighborhood location close to home. Other aspects of convenience include easily accessible entry, knowledgeable and friendly associates, wide aisles, a functional store layout, shopping carts/strollers and fast, centralized checkouts. The physical store layout coupled with the Company’s focus on strong in-stock position in color and size are aimed at providing a convenient shopping experience for an increasingly time starved customer. In addition, Kohl’s offers on-line shopping on the Company’s website. Designed as an added service for customers who prefer to shop from their homes, the website offers key items, best selling family apparel and home merchandise. The site is designed to provide an easy-to-navigate, on-line shopping environment that complements the Company’s in-store focus on convenience.

 

Distribution

 

The Company receives substantially all of its merchandise at seven distribution centers, with the balance delivered directly to the stores by vendors or their distributors. The distribution centers ship merchandise to each store by contract carrier several times a week.

 

The following table summarizes key information about each distribution center.

 

Location


   Fiscal
Year
Opened


   Square
Footage


  

States Serviced


   Approximate
Store
Capacity


Menomonee Falls, Wisconsin

   1981    530,000    Illinois, Wisconsin    90

Findlay, Ohio

   1994    780,000    Ohio, Michigan, Indiana, Kentucky, West Virginia    120

Winchester, Virginia

   1997    420,000    Pennsylvania, North Carolina, Virginia, Maryland, South Carolina, Delaware    100

Blue Springs, Missouri

   1999    540,000    Minnesota, Colorado, Missouri, Tennessee, Iowa, Kansas, Arkansas, Nebraska, North Dakota, South Dakota, Mississippi    100

Corsicana, Texas

   2001    540,000    Texas, Georgia, Oklahoma, Alabama    110

Mamakating, New York

   2002    605,000    New York, New Jersey, Massachusetts, Connecticut, New Hampshire, Rhode Island, Maine, Vermont    100

San Bernardino, California

   2002    575,000    California, Arizona, Nevada, Utah    110

 

The Company plans to open its eighth distribution center in Macon, Georgia in the spring of 2005 to support the Company’s growth in the Southeast region. The Company expanded the Corsicana, Texas distribution center by 190,000 square feet in May 2004, which increased its capacity to 110 stores.

 

The Company operates a 500,000 square foot fulfillment center in Monroe, Ohio that services the Company’s e-commerce business.

 

Employees

 

As of January 29, 2005, the Company employed approximately 95,000 associates, including approximately 20,000 full-time and 75,000 part-time associates. The number of associates varies during the year, peaking during the back-to-school and holiday seasons. None of the Company’s associates are represented by a collective bargaining unit. The Company believes its relations with its associates are very good.

 

4


Competition

 

The retail industry is highly competitive. Management considers quality, value, merchandise mix, service and convenience to be the most significant competitive factors in the industry. The Company’s primary competitors are traditional department stores, upscale mass merchandisers and specialty stores. The Company’s specific competitors vary from market to market.

 

Merchandise Vendors

 

The Company purchases merchandise from many suppliers, none of which accounted for more than 5% of the Company’s net purchases during fiscal 2004. The Company has no long-term purchase commitments or arrangements with any of its suppliers, and believes that it is not dependent on any one supplier. The Company continues to have good working relationships with its suppliers.

 

Seasonality

 

The Company’s business, like that of most retailers, is subject to seasonal influences, with the major portion of sales and income typically realized during the last half of each fiscal year, which includes the back-to-school (August—September) and holiday (November—December) seasons. Approximately 15% and 30% of sales typically occur during the back-to-school and holiday seasons, respectively. Because of the seasonality of the Company’s business, results for any quarter are not necessarily indicative of the results that may be achieved for the fiscal year. In addition, quarterly results of operations depend significantly upon the timing and amount of revenues and costs associated with the opening of new stores.

 

Trademarks and Service Marks

 

The name “Kohl’s,” written in its distinctive block style, is a registered service mark of a wholly-owned subsidiary of the Company, and the Company considers this mark and the accompanying name recognition to be valuable to its business. This subsidiary has approximately 70 additional trademarks, trade names and service marks, most of which are used in its private label program.

 

Available Information

 

The Company’s internet website is www.kohls.com. Through the “Investor Relations-Financial Links-SEC Filings” portion of this website, the Company makes available, free of charge, its proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, SEC Forms 3, 4 and 5 and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after such material has been filed with, or furnished to, the Securities and Exchange Commission. The Company has also posted on its website, under the caption “Investor Relations—Corporate Governance,” the Company’s Corporate Governance Guidelines; Charters of its Board of Directors’ Audit Committee, Compensation Committee and Governance & Nominating Committee; and the Code of Ethical Standards and Responsibility that applies to all of the Company’s associates and, to the extent practicable, members of the Company’s Board of Directors. Any amendment to or waiver from the provisions of the Code of Ethical Standards and Responsibility that are applicable to the Company’s Chief Executive Officer, Chief Financial Officer or other key Finance associates will be disclosed on the “Corporate Governance” portion of the website. Information contained on the Company’s website is not part of this Annual Report on Form 10-K.

 

The above-referenced materials will also be provided without charge to any shareholder submitting a written request to the Company’s Investor Relations Department at N56 W17000 Ridgewood Drive, Menomonee Falls, Wisconsin 53051.

 

Item 2.  Properties

 

As of January 29, 2005, the Company operated 637 stores in 40 states. The Company owned 180 stores, owned 122 stores with ground leases and leased 335 stores. The Company’s typical lease has an initial term of 20-25 years plus five to eight renewal options for consecutive five or ten-year extension terms.

 

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Substantially all of the Company’s leases provide for a minimum annual rent that is fixed or adjusts to set levels during the lease term, including renewals. Approximately 32% of the leases provide for additional rent based on a percentage of sales to be paid when designated sales levels are achieved.

 

The Company’s stores are located in strip shopping centers (456), community and regional malls (53) and as free standing units (128). Of the Company’s stores, 586 are one-story facilities and 51 are multi-story facilities.

 

    

Number of

Stores at

January 29,

2005


  

Retail

Square

Footage


California

   62    4,937,368

Illinois

   48    3,759,998

Texas

   46    3,538,491

Ohio

   41    3,125,890

Wisconsin

   35    2,582,434

Michigan

   34    2,601,940

New York

   31    2,484,996

Pennsylvania

   30    2,265,138

New Jersey

   29    2,245,903

Indiana

   25    1,903,821

Minnesota

   23    1,800,688

North Carolina

   19    1,419,456

Georgia

   18    1,382,120

Massachusetts

   18    1,450,997

Virginia

   18    1,381,000

Colorado

   17    1,327,305

Arizona

   15    1,179,873

Connecticut

   14    1,081,667

Missouri

   14    1,076,429

Maryland

   12    930,060

Tennessee

   10    756,609

Iowa

   9    639,697

Kansas

   7    516,320

Kentucky

   7    532,586

Oklahoma

   7    536,655

Arkansas

   6    466,310

New Hampshire

   6    461,538

Nevada

   5    393,975

South Carolina

   5    386,640

Utah

   5    393,129

Alabama

   4    310,325

Nebraska

   4    293,912

Delaware

   3    247,659

Maine

   2    157,582

Rhode Island

   2    154,815

West Virginia

   2    145,782

Mississippi

   1    78,322

North Dakota

   1    85,572

South Dakota

   1    90,674

Vermont

   1    77,302
    
  

Total

   637    49,200,978
    
  

 

The Company owns its distribution centers in Menomonee Falls, Wisconsin; Findlay, Ohio; Winchester, Virginia; Blue Springs, Missouri; Mamakating, New York and San Bernardino, California. The Company also owns its corporate headquarters in Menomonee Falls, Wisconsin and the e-commerce fulfillment center in Monroe, Ohio. The Company leases the distribution center in Corsicana, Texas.

 

6


Item 3.  Legal Proceedings

 

The Company and its subsidiaries are or may be subject to certain legal proceedings and claims from time to time that are incidental to their ordinary course of business. The Company will record a liability related to its legal proceedings and claims when it has determined that it is probable that the Company will be obligated to pay and the related amount can be reasonably estimated, and it will disclose the related facts in the footnotes to its financial statements, if material. If the Company determines that an obligation is reasonably possible, the Company will, if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of loss can be made.

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

No matters were submitted to a vote of the Company’s security holders during the last quarter of fiscal 2004.

 

PART II

 

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

(a) Market information

 

The Common Stock has been traded on the New York Stock Exchange since May 19, 1992, under the symbol “KSS.” The prices in the table set forth below indicate the high and low prices of the Common Stock for each quarter in fiscal 2004 and 2003

 

     Price Range

     High

   Low

Fiscal 2004

             

First Quarter

   $ 54.10    $ 39.59

Second Quarter

     48.83      40.10

Third Quarter

     52.86      43.70

Fourth Quarter

     53.24      45.40

Fiscal 2003

             

First Quarter

   $ 60.55    $ 46.18

Second Quarter

     60.26      48.04

Third Quarter

     65.44      50.49

Fourth Quarter

     56.30      40.83

 

(b) Holders

 

At March 2, 2005, there were 5,794 record holders of the Common Stock.

 

(c) Dividends

 

The Company has never paid a cash dividend, has no current plans to pay dividends on its Common Stock and intends to retain all earnings for investment in and growth of the Company’s business. The payment of future dividends, if any, will be determined by the Board of Directors in light of existing business conditions, including the Company’s earnings, financial condition and requirements, restrictions in financing agreements and other factors deemed relevant by the Board of Directors.

 

(d) Unregistered Sales of Equity Securities; Use of Proceeds from Registered Securities

 

During the fiscal year ended January 29, 2005, the Company did not sell any equity securities which were not registered under the Securities Act or repurchase any of its equity securities.

 

 

7


Item 6.  Selected Consolidated Financial Data

 

The selected consolidated financial data presented below should be read in conjunction with the consolidated financial statements of the Company and related notes included elsewhere in this document. The selected consolidated financial data, except for the operating data, has been derived from the audited consolidated financial statements of the Company, which have been audited by Ernst & Young LLP, independent registered public accounting firm, and have been restated to reflect adjustments discussed in Note 2, “Restatement of Financial Statements,” to the consolidated financial statements.

 

     Fiscal Year Ended (a)

 
     January 29,
2005


    January 31,
2004
(Restated)


    February 1,
2003
(Restated)


    February 2,
2002
(Restated)


    February 3,
2001
(Restated)


 
     (Dollars in Thousands, Except Per Share and Per Square Foot Data)  

Statement of Operations Data:

                                        

Net sales

   $ 11,700,619     $ 10,282,094     $ 9,120,287     $ 7,488,654     $ 6,151,996  

Cost of merchandise sold

     7,586,992       6,887,033       5,981,219       4,923,527       4,056,139  
    


 


 


 


 


Gross margin

     4,113,627       3,395,061       3,139,068       2,565,127       2,095,857  

Selling, general and administrative expenses

     2,539,621       2,101,672       1,826,707       1,534,998       1,288,577  

Depreciation and amortization

     288,173       239,558       193,497       158,417       127,917  

Preopening expenses

     49,131       47,029       41,198       33,360       36,631  
    


 


 


 


 


Operating income

     1,236,702       1,006,802       1,077,666       838,352       642,732  

Interest expense, net

     62,452       72,931       56,009       50,111       46,201  
    


 


 


 


 


Income before income taxes

     1,174,250       933,871       1,021,657       788,241       596,531  

Provision for income taxes

     443,870       352,974       386,187       299,768       229,662  
    


 


 


 


 


Net income

   $ 730,380     $ 580,897     $ 635,470     $ 488,473     $ 366,869  
    


 


 


 


 


Net income per share (b):

                                        

Basic

   $ 2.14     $ 1.71     $ 1.89     $ 1.46     $ 1.11  

Diluted

   $ 2.12     $ 1.69     $ 1.85     $ 1.43     $ 1.09  

Operating Data:

                                        

Comparable store sales growth (c)

     0.3 %     (1.6 %)     5.3 %     6.8 %     9.0 %

Net sales per selling square foot (d)

   $ 255     $ 268     $ 284     $ 283     $ 281  

Total square feet of selling space (in thousands; end of period)

     49,201       41,447       34,507       28,576       23,610  

Number of stores open (end of period)

     637       542       457       382       320  

Balance Sheet Data (end of period):

                                        

Working capital

   $ 2,187,379     $ 1,902,280     $ 1,776,029     $ 1,584,103     $ 1,198,699  

Property and equipment, net

     3,987,945       3,316,486       2,734,228       2,196,490       1,724,697  

Total assets

     7,979,299       6,690,750       6,310,636       4,926,582       3,853,401  

Long-term debt and capital leases

     1,103,441       1,075,973       1,058,784       1,095,420       803,081  

Shareholders’ equity

     4,966,728       4,148,509       3,479,342       2,766,742       2,185,178  

(a)   All years presented contain 52 weeks except fiscal 2000, which contained 53 weeks.
(b)   All per share data has been adjusted to reflect the 2 for 1 stock split effected in April 2000.
(c)   Comparable store sales growth for each period is based on sales of stores (including relocated or expanded stores) open throughout the full period and throughout the full prior period. Fiscal 2001 comparable store sales growth compares the 52 weeks of fiscal 2001 to the 52 weeks ended January 27, 2001.
(d)   Net sales per selling square foot is calculated using net sales of stores that have been open for the full year divided by their square footage of selling space.

 

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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Executive Summary

 

Kohl’s mission is to be the leading family-focused, value-oriented, specialty department store offering quality, exclusive and national brand merchandise to the customer in an environment that is convenient, friendly and exciting.

 

Kohl’s operates from coast to coast, having grown from 76 stores in six states at the time of its initial public offering (IPO) in 1992 to 637 stores in 40 states at January 29, 2005. In fiscal 2004, the Company continued its expansion into the Southwest region with entries into San Francisco, Sacramento and San Diego.

 

Kohl’s concentrates on profitable expansion. The Company increased its square footage by 18.7% in fiscal 2004. In fiscal 2005, the Company plans to open approximately 95 new stores, including its entry into Florida with stores opening in Orlando and Jacksonville, increasing square footage by approximately 15%. The Company’s disciplined approach to new store selection ensures that new store locations achieve an appropriate return on investment.

 

The Company’s capital structure is well positioned to continue to support its expansion plans. Internally generated cash flows will continue to be the primary source of the funding required for future growth. In addition, the Company has maintained its long-term debt ratings of A3 by Moody’s, A- by Standard & Poor’s and A by Fitch.

 

The Company’s future growth plans are to increase its presence in all of the regions it currently serves and to expand into new markets. The Company’s revenues are generated through sales from existing stores and through sales from new stores opened as a result of its expansion program. Sales projections are built with the expectations of generating 70%-80% of the sales volume of an average store in new stores in their first full year of operations as well as achieving comparable store sales increases in existing stores. In order to increase sales productivity in existing stores and attract new customers, the Company strives to add freshness in its assortments through the addition of new brands and extension of existing brands into new classifications. The Company also continues to invest in updating its stores with a goal of remodeling stores approximately every 8-9 years.

 

Critical to the Company’s successful growth is the infrastructure that has been developed and refined since becoming a public company in 1992. Over the past five years, sales have grown at a compound annual growth rate (CAGR) of 21% and net income has grown at a CAGR of 23%. This growth was achieved through a combination of comparable store sales increases, square footage growth, gross margin expansion and selling, general and administrative (S,G&A) leverage. In fiscal 2004, the Company earned $730.4 million in net income, an increase of 25.7%, with a sales increase of 13.8% over fiscal 2003. In fiscal 2004, the Company achieved the highest gross margin rate in its history. The Company’s S,G&A expenses increased 20.8% over fiscal 2003 which was in line with the Company’s square footage growth of 18.7%. Store expenses and advertising expenses did not leverage for the fiscal year due to the flat comparable store sales. The credit, corporate and distribution functional areas did leverage in fiscal 2004. Looking forward, the Company expects to leverage S,G&A expenses with an approximately 3% comparable store sales increase in fiscal 2005.

 

Fiscal 2004 was a solid year from an earnings and operational perspective. The Company’s net sales increased 13.8% while comparable store sales were up 0.3%. The goal for 2005 is to return to the mid single-digit comparable store sales increases achieved in the past. In order to achieve this goal, the Company will continue to focus on the four initiatives it introduced in fiscal 2004:

 

    Merchandise content

 

    Inventory management

 

    In-store shopping experience

 

    Differentiation in marketing

 

The Company progressed on these initiatives in fiscal 2004. The merchandise content was improved by adding new national, exclusive and private brands. The Company reduced its overall inventory levels and

 

9


increased its effectiveness of being in-stock by flowing goods more frequently and closer to the time of sale. Ease of shopping for the Company’s customer improved with the lower inventory levels and the focus on providing wide aisles throughout the store. The Company made innovative marketing enhancements that motivated the customer to shop at Kohl’s.

 

In 2005, the Company is focused on attracting new customers and increasing the shopping frequency of its existing customers. In order to achieve this goal, the Company has developed a fully integrated marketing approach using circulars, direct mail, radio, magazines, internet and, especially, television to brand Kohl’s. The Company’s marketing strategies will continue to evolve as it seeks new and exciting ways to reach its customers. The Company has developed a new positioning statement, expect great things, which is a commitment to its customers, associates, business partners and shareholders.

 

The Company’s goal remains to increase net income approximately 20% annually through a combination of new store and comparable store sales growth, maintenance of the gross margin rate, and modest S,G&A leverage on the increasing sales base.

 

Restatement of Financial Statements

 

Following a review of the Company’s lease accounting practices in the fourth quarter of fiscal 2004, the Company corrected its method of accounting for leases related to stores that are located on leased land as well as for certain stores with operating leases. To reflect this correction, the Company restated its consolidated financial statements beginning with fiscal 1998.

 

Historically, when accounting for leases with renewal options, the Company recorded rent expense on a straight-line basis over the initial non-cancelable lease term, with the term commencing when actual rent payments began. Depreciation of the buildings, leasehold improvements and other long-lived assets on those properties occurred over a period that may have included both the initial non-cancelable lease and the option periods provided for in the lease. Kohl’s previously believed that their audited financial statements, which reflected longstanding lease accounting treatments, were appropriate under generally accepted accounting principles.

 

The Company revised its accounting to recognize rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty. This accounting adjustment resulted in the Company using a time period for its straight-line rent expense calculation that equals or exceeds the time period used for depreciation. In addition, the commencement date of the lease term will be the earlier of the date when the Company becomes legally obligated for the rent payments or the date when the Company takes possession of the building for initial setup of fixtures and merchandise. These adjustments are further discussed in Note 2, “Restatement of Financial Statements,” to the consolidated financial statements.

 

The correction of this accounting requires the Company to record additional deferred rent in “Other long-term liabilities” and to adjust “Deferred income taxes” and “Retained earnings” on the consolidated balance sheets, as well as to correct rent expense included in S,G&A expense, depreciation expense and preopening expense, and the resulting effect on the provision for income taxes on the consolidated statements of income. The cumulative effect of these accounting changes is a reduction of retained earnings of $24.7 million as of the beginning of fiscal 2002 and decreases to retained earnings of $7.9 million and $10.3 million for the fiscal years ended 2002 and 2003, respectively.

 

See Note 2, “Restatement of Financial Statements” to the consolidated financial statements for a summary of the effects of these changes on the Company’s consolidated balance sheets as of January 31, 2004, as well as on the Company’s consolidated statements of income and cash flows for fiscal years 2003 and 2002. The accompanying Management’s Discussion and Analysis gives effect to these corrections.

 

The discussion and analysis below further explains the Company’s results of operations for fiscal 2004.

 

10


Results of Operations

 

The Company’s net income was $730.4 million in fiscal 2004 compared to $580.9 million in fiscal 2003, an increase of $149.5 million or 25.7%. Fiscal 2003 net income decreased 8.6% over fiscal 2002 net income of $635.5 million. Fiscal 2002 net income increased 30.1% over fiscal 2001 net income of $488.5 million.

 

Components of net income.    The following table sets forth statement of operations data as a percentage of net sales for each of the last three fiscal years:

 

     Fiscal Year

 
     2004

    2003
(Restated)


    2002
(Restated)


 

Net sales

   100.0 %   100.0 %   100.0 %

Cost of merchandise sold

   64.8     67.0     65.6  
    

 

 

Gross margin

   35.2     33.0     34.4  

Selling, general and administrative expenses

   21.7     20.4     20.0  

Depreciation and amortization

   2.5     2.3     2.1  

Preopening expenses

   0.4     0.5     0.5  
    

 

 

Operating income

   10.6     9.8     11.8  

Interest expense, net

   0.6     0.7     0.6  
    

 

 

Income before income taxes

   10.0     9.1     11.2  

Provision for income taxes

   3.8     3.5     4.2  
    

 

 

Net income

   6.2 %   5.6 %   7.0 %
    

 

 

 

Net sales.    Net sales, number of stores, sales growth, net sales per selling square foot and comparable store base for the last three fiscal years were as follows:

 

     Fiscal Year

 
     2004

    2003

    2002

 

Net sales (in thousands)

   $ 11,700,619     $ 10,282,094     $ 9,120,287  

Number of stores open (end of period)

     637       542       457  

Sales growth—all stores

     13.8 %     12.7 %     21.8 %

Sales growth—comparable stores (a)

     0.3 %     (1.6 )%     5.3 %

Net sales per selling square foot (b)

   $ 255     $ 268     $ 284  

Comparable store base

     457       382       320  

(a)   Comparable store sales growth for each period is based on sales of stores (including relocated or expanded stores) open throughout the full period and throughout the full prior period.
(b)   Net sales per selling square foot is calculated using net sales of stores that have been open for the full year divided by their square footage of selling space.

 

Net sales increased $1,418.5 million, or 13.8%, from $10,282.1 million in fiscal 2003 to $11,700.6 million in fiscal 2004. Net sales increased $1,395.1 million due to the opening of 95 new stores in fiscal 2004 and to the inclusion of a full year of operating results for the 85 stores opened in fiscal 2003. Comparable store sales increased $23.4 million, or 0.3%, in fiscal 2004. The number of transactions in comparable stores decreased 2.2% while the average transaction value increased 2.5%. The Accessories business had the strongest sales performance while the Men’s business was the most difficult. The Northeast region had the strongest comparable store sales performance while the Midwest region, which is the most mature region, was the most difficult.

 

Net sales increased $1,161.8 million, or 12.7%, from $9,120.3 million in fiscal 2002 to $10,282.1 million in fiscal 2003. Net sales increased $1,294.2 million due to the opening of 85 new stores in fiscal 2003 and to the inclusion of a full year of sales for the 75 stores opened in fiscal 2002. Comparable store sales decreased $132.4 million, or 1.6%, in fiscal 2003.

 

11


Gross margin.    The Company’s gross margin as a percent of net sales was 35.2% for fiscal 2004 compared to 33.0% for fiscal 2003. Approximately 50 basis points of the increase is attributable to the adoption of Emerging Issues Task Force (“EITF”) No. 02-16, “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor” (see Note 1 to the consolidated financial statements for further discussion). Gross margin increased $718.5 million from $3,395.1 million in fiscal 2003 to $4,113.6 million in fiscal 2004. Gross margin increased $501.5 million due to the opening of 95 new stores in fiscal 2004 and to the inclusion of a full year of operating results for the 85 stores opened in fiscal 2003. Comparable store gross margin increased $217.0 million due mainly to lower levels of clearance sales, improved gross margin on the clearance sales and the EITF No. 02-16 effect. The merchandise category that was the largest contributor to the gross margin rate increase was women’s apparel.

 

Gross margin increased $256.0 million from $3,139.1 million in fiscal 2002 to $3,395.1 million in fiscal 2003. Gross margin increased $389.8 million due to the opening of 85 new stores in fiscal 2003 and to the inclusion of a full year of operating results for the 75 stores opened in fiscal 2002. Comparable store gross margin decreased $133.8 million due to increased markdowns. The Company’s gross margin as a percent of net sales was 33.0% for fiscal 2003 compared to 34.4% for fiscal 2002. The largest contributor to the gross margin rate decline was women’s apparel.

 

The Company’s merchandise mix is reflected in the table below:

 

     Fiscal Year

 
     2004

    2003

    2002

 

Women’s

   32.5 %   32.1 %   32.6 %

Men’s

   18.5 %   19.0 %   19.3 %

Home

   18.5 %   18.4 %   18.0 %

Children’s

   13.4 %   13.5 %   13.2 %

Accessories

   9.0 %   8.7 %   8.6 %

Footwear

   8.1 %   8.3 %   8.3 %

 

Selling, general and administrative expenses.    S,G&A expenses include all direct store expenses such as payroll, occupancy and store supplies and all costs associated with the Company’s distribution centers, advertising and corporate functions, but exclude depreciation and amortization. S,G&A expenses increased $437.9 million, or 20.8%, to $2,539.6 million in fiscal 2004 compared to $2,101.7 million in fiscal 2003. S,G&A expenses as a percent of net sales increased from 20.4% in fiscal 2003 to 21.7% in fiscal 2004, an increase of 126 basis points. Store operating expenses increased 19.1%, which is consistent with the Company’s square footage growth of 18.7%. As a percent of sales, store operating expenses increased 63 basis points in fiscal 2004. Advertising expenses increased 85 basis points primarily due to the adoption of EITF No. 02-16 (see Note 1 to the consolidated financial statements for further discussion), which had an unfavorable impact of approximately 60 basis points. These increases were offset by a 10 basis point reduction in distribution expenses attributable to increased productivity on a units per hour basis at the distribution centers, a 10 basis point reduction in credit operations and a 2 basis point reduction in corporate expenses.

 

S,G&A expenses increased $275.0 million, or 15.1%, to $2,101.7 million in fiscal 2003 compared to $1,826.7 million in fiscal 2002. S,G&A expenses as a percent of net sales increased from 20.0% in fiscal 2002 to 20.4% in fiscal 2003. The 41 basis point rate increase consisted of a 75 basis point increase in store operating costs and an advertising expense increase of 18 basis points. This was offset by a 20 basis point reduction in corporate expenses, a 19 basis point reduction in distribution expenses and a 13 basis point reduction in credit operations.

 

Depreciation and amortization.    The total amount of depreciation and amortization increased from fiscal 2003 to fiscal 2004 due to the addition of new stores, the remodeling of existing stores and the mix of owned versus leased stores. Depreciation and amortization as a percentage of net sales was 2.5%, 2.3% and 2.1% for fiscal 2004, 2003 and 2002, respectively.

 

12


Preopening expenses.    Preopening expenses are expensed as incurred and relate to the costs incurred prior to new store openings which includes advertising, hiring, and training costs for new employees, processing and transporting initial merchandise and step rent expense. The average cost per store fluctuates based on the mix of stores opened in new markets versus fill-in markets, with new markets being more expensive. The average cost to open the 95 new stores in fiscal 2004 was $540,000, the average cost to open the 85 new stores in fiscal 2003 was $592,000 and the average cost to open the 75 new stores in fiscal 2002 was $429,000. The decrease in the average cost to open a store in fiscal 2004 was due to entries made into less expensive new markets.

 

Interest expense.    Net interest expense decreased $10.4 million from $72.9 million in fiscal 2003 to $62.5 million in fiscal 2004. Of the decrease, $6.1 million is attributed to the write-off of deferred financing fees related to the redemption of the Company’s Liquid Yield Option Subordinated Notes (LYONs) in the second quarter of 2003. The remaining decrease is primarily attributable to the redemption of the 2.75% LYONs during the second quarter of 2003. Net interest expense in fiscal 2003 increased $16.9 million from $56.0 million in fiscal 2002 to $72.9 million.

 

Income taxes.    The Company’s effective tax rate was 37.8% in fiscal 2004 , fiscal 2003 and in fiscal 2002.

 

Inflation

 

The Company does not believe that inflation has had a material effect on the results of operations during the periods presented. However, there can be no assurance that the Company’s business will not be affected by inflation in the future.

 

Liquidity and Capital Resources

 

The Company’s primary ongoing cash requirements are for capital expenditures in connection with the expansion and remodeling programs, seasonal and new store inventory purchases, and the growth in credit card accounts receivable. The Company’s primary sources of funds for its business activities are cash flow from operations and short-term trade credit.

 

Operating activities.    Cash flow provided by operations was $947.7 million in fiscal 2004 compared to $754.5 million in fiscal 2003, a $193.2 million increase. The primary sources of cash flow provided by operations were net income before depreciation and amortization and a $172.1 million increase in accounts payable, as discussed below. The primary uses of cash flow were $889.6 million of capital expenditures, a $340.0 million increase in merchandise inventories and a $239.5 million increase in the accounts receivable portfolio, as discussed below. Short-term trade credit, in the form of extended payment terms for inventory purchases, represents a significant source of financing for merchandise inventories. Seasonal cash needs are met by financing secured by proprietary accounts receivable and lines of credit available under its revolving credit facilities. The Company’s working capital and inventory levels typically build throughout the fall, peaking during the holiday selling season.

 

Key financial ratios that provide certain measures of the Company’s liquidity are as follows:

 

    

January 29,

2005


   

January 31,

2004

(Restated)


   

February 1,

2003

(Restated)


 
     ($ In Thousands)  

Working capital

   $ 2,187,379     $ 1,902,280     $ 1,776,029  

Current ratio

     2.50:1       2.69:1       2.18:1  

Debt / capitalization

     18.2 %     20.8 %     28.9 %

 

The decrease in the Company’s current ratio in fiscal 2004 is due to accounts payable increasing at a higher rate than inventory. The improvement in the debt / capitalization percentage in fiscal 2004 was due to an increase in retained earnings as a result of growth in net income in fiscal 2004 over fiscal 2003 of 25.7%. The improvement in the Company’s current ratio and debt / capitalization percentage in fiscal 2003 was due to the redemption of the Company’s LYONs for $346.6 million in the second quarter of fiscal 2003.

 

13


The Company’s accounts receivable at January 29, 2005 increased $239.5 million, or 20.8%, over the January 31, 2004 balance. The increase is primarily due to a 23.9% increase in proprietary credit card sales offset by increased payment rates. Net write-offs decreased to 0.9% of Kohl’s charge sales in fiscal 2004 from 1.1% in fiscal 2003. As a result, the allowance for doubtful accounts was reduced to 1.7% of gross accounts receivable in fiscal 2004 from 1.9% in fiscal 2003. The Company’s credit card program supports earnings growth by driving sales through promotional events and through the growth in the proprietary credit card financial performance. The following table summarizes information related to Kohl’s proprietary credit card receivables:

 

     January 29,
2005


    January 31,
2004


    February 1,
2003


 
     ($ In Thousands)  

Gross accounts receivable

   $ 1,414,289     $ 1,172,678     $ 1,011,690  

Allowance for doubtful accounts

   $ 24,657     $ 22,521     $ 20,880  

Allowance as a % of gross accounts receivable

     1.7 %     1.9 %     2.1 %

Accounts receivable turnover (rolling 4 quarters)*

     3.8 x     3.6 x     3.5 x

Proprietary credit card share

     39.2 %     36.0 %     34.3 %

Pre-tax credit card contribution

   $ 105,734     $ 84,644     $ 67,412  

Accounts over 60 days past due

     2.5 %     2.7 %     3.5 %
 
  *   Credit card sales divided by average quarterly gross accounts receivable

 

At January 29, 2005, the Company’s merchandise inventories increased $340.0 million, an increase of 21.2% from the January 31, 2004, balance of $1,607.0 million. On an average store basis, the inventory at January 29, 2005, was up approximately 3.1%. Accounts payable increased $172.1 million to $704.7 million at January 29, 2005, from the January 31, 2004, balance primarily due to the timing of new store receipts and an increase in spring transitional receipts in December and January.

 

Investing activities.    Capital expenditures include costs for new store openings, store remodels, distribution center openings, the expansion of the corporate office and other base capital needs. The Company’s capital expenditures, including favorable lease rights, were $889.6 million during fiscal 2004, $831.6 million during fiscal 2003 and $716.0 million during fiscal 2002. The Company opened 95 new stores and remodeled 26 stores in fiscal 2004 increasing total square footage by approximately 18.7%, which is consistent with management’s expansion strategy. In addition, the Company continued to make capital investments for information systems, distribution capacity and other infrastructure to support the Company’s growth.

 

The Company plans to open approximately 95 new stores in fiscal 2005, which represents approximately a 15.0% growth in square footage. Total capital expenditures for fiscal 2005 are currently expected to be approximately $875 million. Capital expenditures include costs for new store openings, store remodels, the construction of a distribution center in Macon, GA, and other base capital needs. The amount of capital expenditures fluctuate as a result of the timing of new store capital spending, the mix of owned, leased and acquired stores, the number of stores remodeled and the timing of opening distribution centers. The Company does not anticipate that its planned expansion will be limited by any restrictive covenants in its financing agreements. The Company’s capital structure is well positioned to support its expansion plans. The Company anticipates that internally generated cash flows will be the primary source of funding for future growth.

 

Financing activities.    The Company anticipates that it will be able to satisfy its working capital requirements, planned capital expenditures and debt service requirements with available cash and short-term investments, proceeds from cash flows from operations, short-term trade credit, financing secured by its proprietary credit card accounts receivable, seasonal borrowings under its revolving credit facilities and other sources of financing. The Company expects to generate adequate cash flows from operating activities to sustain current levels of operations. The Company maintains favorable banking relationships and anticipates that the necessary credit agreements will be extended or new agreements will be entered into in order to provide future borrowing requirements as needed.

 

14


As of March 2, 2005, the Company maintains the following credit ratings:

 

     Credit Ratings

     Moody’s

   Standard
& Poor’s


   Fitch

Long-term debt

   A3    A-    A

 

The Company has a $225 million Receivable Purchase Agreement (RPA) with Preferred Receivables Funding Corporation, a certain investor and Bank One as agent, which is renewable annually, at the Company’s request and the investors’ option. Pursuant to the RPA, the Company periodically sells, generally with recourse, an undivided interest in the Company’s private label credit card receivables. At January 29, 2005, and January 31, 2004, no receivables were sold. For financial reporting purposes, receivables sold are accounted for on the consolidated balance sheet as secured borrowings.

 

In November 2002, the Company issued $300 million aggregate principal amount of non-callable 6% unsecured senior debentures due January 15, 2033. Net proceeds, excluding expenses, were $297.8 million and have been used for general corporate purposes, including continued store growth.

 

In July 2002, the Company executed two unsecured revolving bank credit facilities. The first is a $532 million facility maturing July 10, 2007. The second is a $133 million 364-day facility that is renewable at the Company’s request and at the banks’ option. The current term of this facility matures on July 8, 2005. Depending on the type of advance under these facilities, amounts borrowed bear interest at competitive bid rates; the LIBOR plus a margin, based on the Company’s long-term unsecured debt rating; or the agent bank’s base rate.

 

In June 2000, the Company issued $551.5 million aggregate principal amount of convertible debt in the form of LYONs due 2020. Net proceeds, excluding expenses, were $319.4 million. On June 13, 2003, the holders of approximately 99.5% of the Company’s outstanding LYONs exercised their options to redeem their notes, in accordance with the terms of the LYONs. The remaining LYONs were called by the Company on August 1, 2003. The Company elected to redeem all of these notes for cash. The total amount payable by the Company for the LYONs redeemed was $346.6 million, which was paid with available funds. In conjunction with the redemption, the Company wrote off the remaining deferred financing costs related to the LYONs during the second quarter of 2003. The write-off of $6.1 million is included in interest expense for fiscal 2003.

 

Outlook

 

The Company continues to be focused on delivering approximately 20% earnings growth per year. In fiscal 2005, the Company’s preliminary earnings guidance is based upon a mid single-digit comparable store sales increase. With the progress the Company made in fiscal 2004 on improving merchandise content, inventory management, in-store shopping experience and marketing, the Company feels it is well positioned to return to mid single-digit comparable store sales in 2005. As a result, after taking into account expensing of stock options and the change in lease accounting, the Company expects fiscal 2005 earnings to be in the range of $2.40 to $2.50 per diluted share.

 

Contractual Obligations

 

The Company has aggregate contractual obligations of $10,277.4 million related to debt repayments, capital leases, operating leases and royalties as follows:

 

     Fiscal Year

     2005

   2006

   2007

   2008

   2009

   Thereafter

   Total

     (In Thousands)

Long-term debt (a)

   $ 65,623    $ 162,543    $ 59,144    $ 59,104    $ 58,775    $ 1,809,949    $ 2,215,138

Capital leases (a)

     12,169      12,182      12,280      12,469      12,406      147,160      208,666

Operating leases

     314,572      324,013      316,966      311,076      311,128      6,218,443      7,796,198

Royalties

     5,045      5,286      10,087      10,500      12,075      14,438      57,431
    

  

  

  

  

  

  

Total

   $ 397,409    $ 504,024    $ 398,477    $ 393,149    $ 394,384    $ 8,189,990    $ 10,277,433
    

  

  

  

  

  

  


(a)   Annual commitments on long-term debt and capital leases are inclusive of related interest costs which total $1,218.5 million and $98.4 million, respectively.

 

15


The Company has entered into future capital lease commitments for buildings and equipment that total approximately $72.8 million at January 29, 2005, which have not been recorded as the related buildings are under construction and the equipment is not in use.

 

The Company also has outstanding letters of credit and stand-by letters of credit that total approximately $42.5 million at January 29, 2005. If certain conditions were met under these arrangements, the Company would be required to satisfy the obligations in cash. Due to the nature of these arrangements and based on historical experience, the Company does not expect to make any significant payments. Therefore, they have been excluded from the preceding table.

 

Off-Balance Sheet Arrangements

 

The Company has not provided any financial guarantees as of January 29, 2005. All purchase obligations are cancelable and therefore are not included in the above table.

 

The Company has not created, and is not party to, any special-purpose or off balance sheet entities for the purpose of raising capital, incurring debt or operating the Company’s business. The Company does not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect the Company’s liquidity or the availability of capital resources.

 

Critical Accounting Policies and Estimates

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts. A discussion of the more significant estimates follows. Management has discussed the development, selection and disclosure of these estimates and assumptions with the Audit Committee of the Board of Directors.

 

Allowance for Doubtful Accounts

 

The Company records an allowance for doubtful accounts as an estimate of the accounts receivable balance that may not be collected. The Company evaluates the collectibility of accounts receivable based on the aging of accounts, historical write off experience and specific review for potential bad debts. Delinquent accounts are written off automatically after the passage of 180 days without receiving a full scheduled monthly payment. Accounts are written off sooner in the event of customer bankruptcy or other circumstances that make further collection unlikely. For all other accounts, the Company recognizes reserves for bad debts based on the length of time the accounts are past due and the anticipated future write-offs based on historical experience.

 

Factors that would cause this allowance to increase primarily relate to increased customer bankruptcies or other difficulties that make further collection unlikely. Conversely, improved write-off experience and aging of receivables would result in a decrease in the provision.

 

Retail Inventory Method and Inventory Valuation

 

The Company values its inventory at the lower of cost or market with cost determined on the last-in, first-out (LIFO) basis using the retail inventory method (RIM). Under RIM, the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value inventories. RIM is an averaging method that has been widely used in the retail industry due to its practicality. The use of the retail inventory method will result in inventories being valued at the lower of cost or market as markdowns are currently taken as a reduction of the retail value of inventories.

 

16


Based on a review of historical clearance markdowns, current business trends, expected vendor funding and discontinued merchandise categories, an adjustment to inventory is recorded to reflect additional markdowns which are estimated to be necessary to liquidate existing clearance inventories and reduce inventories to the lower of cost or market. Management believes that the Company’s inventory valuation approximates the net realizable value of clearance inventory and results in carrying inventory at the lower of cost or market.

 

Vendor Allowances

 

The Company records vendor allowances and discounts in the income statement when the purpose for which those monies were designated is fulfilled. Allowances provided by vendors generally relate to profitability of inventory recently sold and, accordingly, are reflected as reductions to cost of merchandise sold as negotiated. Vendor allowances received for advertising or fixture programs reduce the Company’s expense or expenditure for the related advertising or fixture program. Vendors participation in the selling of merchandise will fluctuate based on the amount of promotional and clearance markdowns necessary to liquidate the inventory. See Note 1 to the consolidated financial statements, “Business and Summary of Accounting Policies.”

 

Insurance Reserve Estimates

 

The Company uses a combination of insurance and self-insurance for a number of risks including workers’ compensation, general liability and employee-related health care benefits, a portion of which is paid by its associates. The Company determines the estimates for the liabilities associated with these risks by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. A change in claims frequency and severity of claims from historical experience as well as changes in state statutes and the mix of states in which the Company operates could result in a change to the required reserve levels. Under its workers’ compensation and general liability insurance policies, the Company retains the initial risk of $500,000 and $250,000, respectively, per occurrence.

 

Impairment of Assets and Closed Store Reserves

 

The Company has a significant investment in property and equipment and favorable lease rights. The related depreciation and amortization is computed using estimated useful lives of up to 50 years. The Company reviews long-lived assets held for use (including favorable lease rights) for impairment annually or whenever an event, such as decisions to close a store, indicate the carrying value of the asset may not be recoverable. The Company has historically not experienced any significant impairment of long-lived assets or closed store reserves. Decisions to close a store can also result in accelerated depreciation over the revised useful life. If the store is leased, a reserve is set up for the discounted difference between the rent and the expected sublease rental income when the location is no longer in use. A significant change in cash flows, market valuation, demand for real estate or other factors, could result in an increase or decrease in the reserve requirement or impairment charge.

 

Income Taxes

 

The Company pays income taxes based on tax statutes, regulations and case law of the various jurisdictions in which it operates. At any one time, multiple tax years are subject to audit by the various taxing authorities. The Company’s effective income tax rate was 37.8% in fiscal 2004, 2003 and 2002. The effective rate is impacted by changes in law, location of new stores, level of earnings and the result of tax audits.

 

Operating Leases

 

The Company leases retail stores under operating leases. Many lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions. The Company recognizes rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty. The Company uses a time period for its straight-line rent expense calculation that equals or exceeds the time period used for depreciation. In addition, the commencement date of the lease term is the earlier of the date when the Company becomes legally obligated for the rent payments or the date when the Company takes possession of the building for initial setup of fixtures and merchandise.

 

17


New Accounting Pronouncements

 

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004) (SFAS No. 123R), “Share Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows”. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

 

As of January 29, 2005, the Company had two long-term compensation plans, which are described in Note 9, “Preferred and Common Stock,” to the consolidated financial statements. The Company currently accounts for share-based payments to employees using APB No. 25 and related interpretations in accounting for those plans. No stock-based employee compensation expense is reflected in fiscal 2004, 2003 and 2002 net income as all options granted under those plans had an exercise price equal to the market value of the underlying common stock at the date of grant and the number of shares is fixed. Accordingly, the adoption of SFAS No. 123R’s fair value method will have an impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position. The impact of the adoption of SFAS No. 123R is expected to reduce diluted net income per share by approximately $0.08—$0.09 in fiscal 2005 with the expense being incurred in approximately equal quarterly amounts throughout the year. If the Company had adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and net income per share in the table in Note 1, “Business and Summary of Accounting Policies,” to the consolidated financial statements. SFAS No. 123R also requires the benefit of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future, the amount of operating cash flows recognized in prior periods for such excess tax deductions were $40,745,000, $42,013,000 and $45,831,000 in fiscal 2004, 2003 and 2002, respectively.

 

SFAS No. 123R must be adopted no later than August 1, 2005 with early adoption permitted in periods in which the financial statements have not yet been issued. Effective the beginning of fiscal 2005, the Company will adopt SFAS No. 123R using the “modified retrospective” method. The Company will restate its financial statements based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosure in the 2005 quarterly releases and 2005 Forms 10-Q.

 

Forward-Looking Information/Risk Factors

 

Items 1, 3, 5, 7 and 7A of this Form 10-K contain “forward-looking statements,” subject to protections under federal law. The Company intends words such as “believes,” “anticipates,” “plans,” “may,” “will,” “should,” “expects” and similar expressions to identify forward-looking statements. In addition, statements covering the Company’s future sales or financial performance and the Company’s plans, performance and other objectives, expectations or intentions are forward-looking statements, such as statements regarding the Company’s liquidity, debt service requirements, planned capital expenditures, future store openings and adequacy of capital resources and reserves. There are a number of important factors that could cause the Company’s results to differ materially from those indicated by the forward-looking statements, including among others, those risk factors described in Exhibit 99.1 attached to this Form 10-K and incorporated herein by this reference. Forward-looking statements relate to the date made, and the Company undertakes no obligations to update them.

 

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

 

The Company’s primary exposure to market risk consists of changes in interest rates or borrowings. At January 29, 2005, the Company’s long-term debt, excluding capital leases, was $996.6 million, all of which is fixed rate debt.

 

18


Long-term fixed rate debt is utilized as a primary source of capital. When these debt instruments mature, the Company may refinance such debt at then existing market interest rates, which may be more or less than interest rates on the maturing debt. If interest rates on the existing fixed rate debt outstanding at January 29, 2005 and January 31, 2004 changed by 100 basis points, the Company’s annual interest expense would change by $10.0 million and $10.1 million, respectively.

 

During fiscal 2004, average borrowings under the Company’s variable rate revolving credit facilities and its short-term financing of its proprietary accounts receivable were $76.1 million. If interest rates on the average fiscal 2004 and fiscal 2003 variable rate debt changed by 100 basis points, the Company’s annual interest expense would change by $761,000 and $797,000, respectively, assuming comparable borrowing levels.

 

During fiscal 2004 and fiscal 2003, the Company did not enter into any derivative financial instruments.

 

Item 8.  Financial Statements and Supplementary Data

 

The financial statements are included in this report beginning on page F-3.

 

Item 9.  Changes In and Disagreements with Accountants on Accounting and Financial Disclosures

 

None

 

Item 9A. Controls and Procedures

 

(a) The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (the “Evaluation”) as of the last day of the period covered by this Report. Based upon the Evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective, alerting them to material information required to be disclosed in our periodic reports filed with the SEC. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

(b) There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls during the last fiscal quarter, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Management Report on Internal Control over Financial Reporting

 

The management of Kohl’s Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Kohl’s Corporation’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

 

All internal control systems, no matter how well designed, have inherit limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Kohl’s Corporation management assessed the effectiveness of the Company’s internal control over financial reporting as of January 29, 2005. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment we believe that, as of January 29, 2005, the Company’s internal control over financial reporting is effective based on those criteria.

 

Kohl’s Corporation’s independent registered public accounting firm issued an audit report on our assessment of the Company’s internal control over financial reporting. This report appears on the following page.

 

19


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Shareholders of

Kohl’s Corporation

 

We have audited management’s assessment, included in the accompanying Management Report on Internal Control over Financial Reporting, that Kohl’s Corporation maintained effective internal control over financial reporting as of January 29, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Kohl’s Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, management’s assessment that Kohl’s Corporation maintained effective internal control over financial reporting as of January 29, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Kohl’s Corporation maintained, in all material respects, effective internal control over financial reporting as of January 29, 2005, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Kohl’s Corporation as of January 29, 2005 and January 31, 2004, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended January 29, 2005 and our report dated March 4, 2005 expressed an unqualified opinion thereon.

 

ERNST & YOUNG LLP

 

Milwaukee, Wisconsin

March 4, 2005

 

20


Item 9B.  Other Information

 

None

 

PART III

 

Item 10.  Directors and Executive Officers of Registrant

 

The information set forth under “Election of Directors” on pages 1-3, under “Board of Directors’ Meetings, Attendance and Compensation” on pages 3-4, under “Corporate Governance Guidelines and Code of Ethics” on page 6 under “Committees of the Board of Directors” on pages 4-6 and under “Section 16(a) Beneficial Ownership Reporting Compliance” on page 12 of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on April 27, 2005 is incorporated herein by reference.

 

The executive officers of the Company as of March 2, 2005 are as follows:

 

Name


   Age

  

Position


R. Lawrence Montgomery

   56    Chairman, Chief Executive Officer and Director

Kevin Mansell

   52    President and Director

Arlene Meier

   52    Chief Operating Officer, Treasurer and Director

Kenneth Bonning

   47    Executive Vice President—Logistics

Donald A. Brennan

   44    Executive Vice President—General Merchandise Manager

Chris Capuano

   45    Executive Vice President—General Merchandise Manager

Peggy Eskenasi

   49    Executive Vice President—Product Development

Telvin Jeffries

   36    Executive Vice President—Human Resources

John Lesko

   52    Executive Vice President—Administration

Wesley S. McDonald

   42    Executive Vice President—Chief Financial Officer

Jon Nordeen

   49    Executive Vice President—Planning and Allocation

Richard D. Schepp

   44    Executive Vice President—General Counsel and Secretary

Gary Vasques

   57    Executive Vice President—Marketing

 

Mr. Montgomery was elected Chairman of the Board in February 2003. He was promoted to Chief Executive Officer in February 1999. He was appointed to the Board of Directors in 1994 and served as Vice Chairman from March 1996 to November 2000. Mr. Montgomery has served as Executive Vice President of Stores from February 1993 to February 1996 after joining the Company as Senior Vice President—Director of Stores in 1988. Mr. Montgomery has 34 years of experience in the retail industry.

 

Mr. Mansell has served as President and Director since February 1999. Mr. Mansell served as Executive Vice President—General Merchandise Manager from 1987 to 1998. Mr. Mansell joined the Company as a Divisional Merchandise Manager in 1982, and has 30 years of experience in the retail industry.

 

Ms. Meier has served as Chief Operating Officer since November 2000. Ms. Meier served as Executive Vice President—Chief Financial Officer from October 1994 to November 2000 and was appointed to the Board of Directors in March 2000. Ms. Meier joined the Company as Vice President—Controller in 1989. Ms. Meier has 29 years of experience in the retail industry.

 

Mr. Bonning has served as Executive Vice President, Logistics since February 2004. He joined the Company in January 2001 as Senior Vice President, Logistics. Prior to joining the Company, Mr. Bonning was Senior Vice President, Supply Chain for Zany Brainy, an educational toy retailer, from 1998 through 2000. From 1996 to 1998, Mr. Bonning was an Associate Partner of Accenture, Ltd. Mr. Bonning has 20 years of experience in the retail industry.

 

21


Mr. Brennan has served as Executive Vice President—General Merchandise Manager of Men’s and Children’s since April 2004. He joined the Company in April 2001 as Executive Vice President—Merchandise Planning and Allocation. Prior to joining the Company, Mr. Brennan served in a variety of management positions with Burdines Department Stores, a division of Federated Department Stores, Inc., since 1982. Mr. Brennan has 23 years of experience in the retail industry.

 

Ms. Capuano has served as Executive Vice President—General Merchandise Manager of Home and Footwear since September 2004. Prior to joining the Company, Ms. Capuano served in a variety of management positions with various subsidiaries of Federated Department Stores, Inc. since 1980. Ms. Capuano has 24 years of experience in the retail industry.

 

Ms. Eskenasi has served as Executive Vice President—Product Development since October 2004. Prior to joining the Company, Ms. Eskenasi served in a variety of management positions with Saks, Inc., since 1997, most recently President of Private Brand and Product Development. From 1977 to 1996, Ms. Eskenasi served in a variety of management positions with Frederick Atkins, Inc., a buying cooperative. Ms. Eskenasi has 27 years of experience in the retail industry.

 

Mr. Jeffries has served as Executive Vice President—Human Resources since August 2003 and has served in a variety of executive human resources positions since joining the Company in 1993. Mr. Jeffries has 18 years of experience in the retail industry.

 

Mr. Lesko has served as Executive Vice President—Administration since November 2000 and in other management positions since joining the Company in November 1997. Mr. Lesko has 30 years of experience in the retail industry.

 

Mr. McDonald has served as Executive Vice President—Chief Financial Officer since August 2003. Prior to joining the Company, Mr. McDonald held the position of Vice President—Chief Financial Officer at Abercrombie & Fitch from 2000 to 2003. Additionally, Mr. McDonald had served for 12 years in various executive positions at Target Corporation. Mr. McDonald has 17 years of experience in the retail industry.

 

Mr. Nordeen has served as Executive Vice President—Planning and Allocation since July 2004. He joined the Company in January 2001 as Senior Vice President and Chief Information Officer. Prior to joining the Company, Mr. Nordeen served in a variety of management positions with Spiegel, Inc., from 1996 to 2001, most recently as Senior Vice President and Chief Information Officer. Prior to that, he spent 14 years in a variety of management positions with Target Corporation. Mr. Nordeen has 28 years of experience in the retail industry.

 

Mr. Schepp has served as Executive Vice President—General Counsel since August 2001. Mr. Schepp joined the Company in 2000 as Senior Vice President, General Counsel. Prior to joining the Company, Mr. Schepp held various managerial positions at ShopKo Stores, Inc. from 1992 to 2000, most recently as Senior Vice President, General Counsel. Mr. Schepp has 13 years of experience in the retail industry.

 

Mr. Vasques has served as Executive Vice President—Marketing since 1997. He joined the Company in December 1995 as Senior Vice President, Marketing. Mr. Vasques has 35 years of experience in the retail industry.

 

Item 11.  Executive Compensation

 

The information set forth under “Executive Compensation” on pages 9-14 and “Compensation Committee Interlocks and Insider Participation” on page 6 and Stock Price Performance Graph on page 18 of the Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held on April 27, 2005 is incorporated herein by reference. A description of the Company’s compensation of directors as set forth under “Board of Directors Meetings, Attendance and Compensation” on pages 3-4 of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on April 27, 2005 is incorporated herein by reference.

 

22


Item 12.  Beneficial Ownership of Stock and Related Stockholder Matters

 

The information set forth under “Beneficial Ownership of Shares” on pages 7-8 and under “Equity Compensation Plan Information” on page 12 of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on April 27, 2005 is incorporated herein by reference.

 

Item 13.  Certain Relationships and Related Transactions

 

The information set forth under “Other Transactions” on page 6 of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on April 27, 2005 is incorporated herein by reference.

 

Item 14.  Principal Accountant Fees and Services

 

The information set forth under “Fees Paid to Ernst & Young LLP” on page 20 of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on April 27, 2005 is incorporated herein by reference.

 

PART IV

 

Item 15.  Exhibits and Financial Statement Schedules

 

(a) Documents filed as part of this report:

 

1. Consolidated Financial Statements:

 

See “Index to Consolidated Financial Statements and Schedule of Kohl’s Corporation” on page F-1, the Report of Independent Registered Public Accounting Firm on page F-2 and the Consolidated Financial Statements and Schedule on pages F-3 to F-23, all of which are incorporated herein by reference.

 

2. Financial Statement Schedule:

 

See “Index to Consolidated Financial Statements and Schedule of Kohl’s Corporation” on page F-1 and the “Financial Statement Schedule” on page F-23, all of which are incorporated herein by reference.

 

3. Exhibits:

 

See “Exhibit Index” of this Form 10-K, which is incorporated herein by reference.

 

The Exhibit Index has been omitted from this printed shareholder report. Shareholders may obtain the Exhibit Index without charge by calling Kohl’s investor relations at 262-703-1440 or by accessing the Company’s website at www.kohls.com, selecting “Investor Relations,” then “Financial Links,” then “SEC Filings.”

 

23


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND SCHEDULE OF KOHL’S CORPORATION

 

     Page

Consolidated Financial Statements

    

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Balance Sheets

   F-3

Consolidated Statements of Income

   F-4

Consolidated Statement of Changes in Shareholders’ Equity

   F-5

Consolidated Statements of Cash Flows

   F-6

Notes to Consolidated Financial Statements

   F-7

Financial Statement Schedule

    

Schedule II—Valuation and Qualifying Accounts

   F-23

 

All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

 

F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Shareholders of

Kohl’s Corporation

 

We have audited the accompanying consolidated balance sheets of Kohl’s Corporation and subsidiaries (the Company) as of January 29, 2005 and January 31, 2004, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended January 29, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kohl’s Corporation at January 29, 2005 and January 31, 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 29, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

As discussed in Note 2 of the consolidated financial statements, the consolidated financial statements as of January 31, 2004, and for each of the two years in the period then ended have been restated.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Kohl’s Corporation internal control over financial reporting as of January 29, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2005, expressed an unqualified opinion thereon.

 

ERNST & YOUNG LLP

 

Milwaukee, Wisconsin

March 4, 2005

 

F-2


KOHL’S CORPORATION

 

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Per Share Data)

 

     January 29,
2005


   January 31,
2004
(Restated)


ASSETS              

Current assets:

             

Cash and cash equivalents

   $ 116,717    $ 112,748

Short-term investments

     88,767      34,285

Accounts receivable trade, net of allowance for doubtful accounts of $24,657 and $22,521, respectively

     1,389,632      1,150,157

Merchandise inventories

     1,946,977      1,606,990

Deferred income taxes

     54,050      49,822

Other

     47,294      70,894
    

  

Total current assets

     3,643,437      3,024,896

Property and equipment, net

     3,987,945      3,316,486

Favorable lease rights, net

     224,903      235,491

Goodwill

     9,338      9,338

Other assets

     113,676      104,539
    

  

Total assets

   $ 7,979,299    $ 6,690,750
    

  

LIABILITIES AND SHAREHOLDERS’ EQUITY

             

Current liabilities:

             

Accounts payable

   $ 704,655    $ 532,599

Accrued liabilities

     570,757      441,961

Income taxes payable

     177,182      135,527

Current portion of long-term debt and capital leases

     3,464      12,529
    

  

Total current liabilities

     1,456,058      1,122,616

Long-term debt and capital leases

     1,103,441      1,075,973

Deferred income taxes

     296,551      209,893

Other long-term liabilities

     156,521      133,759

Shareholders’ equity:

             

Common stock-$.01 par value, 800,000 shares authorized, 343,345 and 340,141 shares issued and outstanding, respectively

     3,433      3,401

Paid-in capital

     1,258,326      1,170,519

Retained earnings

     3,704,969      2,974,589
    

  

Total shareholders’ equity

     4,966,728      4,148,509
    

  

Total liabilities and shareholders’ equity

   $ 7,979,299    $ 6,690,750
    

  

 

See accompanying notes

 

F-3


KOHL’S CORPORATION

 

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Data)

 

     Fiscal Year Ended

 
     January 29,
2005


    January 31,
2004
(Restated)


    February 1,
2003
(Restated)


 

Net sales

   $ 11,700,619     $ 10,282,094     $ 9,120,287  

Cost of merchandise sold

     7,586,992       6,887,033       5,981,219  
    


 


 


Gross margin

     4,113,627       3,395,061       3,139,068  

Operating expenses:

                        

Selling, general and administrative

     2,539,621       2,101,672       1,826,707  

Depreciation and amortization

     288,173       239,558       193,497  

Preopening expenses

     49,131       47,029       41,198  
    


 


 


Total operating expenses

     2,876,925       2,388,259       2,061,402  
    


 


 


Operating income

     1,236,702       1,006,802       1,077,666  

Other expense (income):

                        

Interest expense

     64,147       75,240       59,449  

Interest income

     (1,695 )     (2,309 )     (3,440 )
    


 


 


Income before income taxes

     1,174,250       933,871       1,021,657  

Provision for income taxes

     443,870       352,974       386,187  
    


 


 


Net income

   $ 730,380     $ 580,897     $ 635,470  
    


 


 


Net income per share:

                        

Basic

   $ 2.14     $ 1.71     $ 1.89  

Diluted

   $ 2.12     $ 1.69     $ 1.85  

 

 

See accompanying notes

 

F-4


KOHL’S CORPORATION

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(In Thousands)

 

    Common Stock

  Paid-In
Capital


  Retained
Earnings


   

Total

Shareholders’
Equity


 
    Shares

  Amount

     

Balance at February 2, 2002 (previously reported)

  335,138   $ 3,351   $ 1,005,169   $ 1,782,886     $ 2,791,406  

Cumulative effect of restatement on prior years (see Note 2)

  —       —       —       (24,664 )     (24,664 )
   
 

 

 


 


Balance at February 2, 2002 (as restated, see Note 2)

  335,138     3,351     1,005,169     1,758,222       2,766,742  

Exercise of stock options

  2,184     22     31,277     —         31,299  

Income tax benefit from exercise of stock options

  —       —       45,831     —         45,831  

Net income

  —       —       —       635,470       635,470  
   
 

 

 


 


Balance at February 1, 2003 (as restated, see Note 2)

  337,322     3,373     1,082,277     2,393,692       3,479,342  

Exercise of stock options

  2,819     28     46,229     —         46,257  

Income tax benefit from exercise of stock options

  —       —       42,013     —         42,013  

Net income

  —       —       —       580,897       580,897  
   
 

 

 


 


Balance at January 31, 2004 (as restated, see Note 2)

  340,141     3,401     1,170,519     2,974,589       4,148,509  

Exercise of stock options

  3,204     32     47,062     —         47,094  

Income tax benefit from exercise of stock options

  —       —       40,745     —         40,745  

Net income

  —       —       —       730,380       730,380  
   
 

 

 


 


Balance at January 29, 2005

  343,345   $ 3,433   $ 1,258,326   $ 3,704,969     $ 4,966,728  
   
 

 

 


 


 

 

See accompanying notes

 

F-5


KOHL’S CORPORATION

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 

     Fiscal Year Ended

 
     January 29,
2005


    January 31,
2004
(Restated)


    February 1,
2003
(Restated)


 

Operating activities

                        

Net income

   $ 730,380     $ 580,897     $ 635,470  

Adjustments to reconcile net income to net cash provided by operating activities:

                        

Depreciation and amortization

     288,892       246,594       194,468  

Deferred income taxes

     82,430       65,259       48,412  

Amortization of debt discount

     216       3,576       9,381  

Changes in operating assets and liabilities:

                        

Accounts receivable trade, net

     (239,475 )     (159,347 )     (154,864 )

Merchandise inventories

     (339,987 )     20,006       (428,689 )

Other current assets

     23,600       (27,180 )     (2,781 )

Other long-term assets

     (4,412 )     —         —    

Accounts payable

     172,056       (118,132 )     171,861  

Accrued and other long-term liabilities

     151,558       107,471       133,326  

Income taxes

     82,400       35,317       62,999  
    


 


 


Net cash provided by operating activities

     947,658       754,461       669,583  

Investing activities

                        

Acquisition of property and equipment and favorable lease rights

     (889,598 )     (831,599 )     (715,968 )

Net (purchases) sales of short-term investments

     (54,482 )     441,706       (246,614 )

Acquisition of software and other

     (33,411 )     (25,624 )     (32,473 )
    


 


 


Net cash used in investing activities

     (977,491 )     (415,517 )     (995,055 )

Financing activities

                        

Proceeds from public debt offering, net

     —         —         297,759  

Payments of convertible and other long-term debt

     (13,213 )     (362,353 )     (16,771 )

Payments of financing fees on debt

     (79 )     (185 )     (3,452 )

Net proceeds from issuance of common shares

     47,094       46,257       31,299  
    


 


 


Net cash provided by (used in) financing activities

     33,802       (316,281 )     308,835  
    


 


 


Net increase (decrease) in cash and cash equivalents

     3,969       22,663       (16,637 )

Cash and cash equivalents at beginning of year

     112,748       90,085       106,722  
    


 


 


Cash and cash equivalents at end of year

   $ 116,717     $ 112,748     $ 90,085  
    


 


 


 

See accompanying notes

 

F-6


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.    Business and Summary of Accounting Policies

 

Business

 

As of January 29, 2005, Kohl’s Corporation (the Company) operated 637 family oriented, specialty department stores located in 40 states that feature exclusive and national brand apparel, footwear, accessories, soft home products and housewares targeted to middle-income customers.

 

Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated.

 

Accounting Period

 

The Company’s fiscal year end is the Saturday closest to January 31. The financial statements reflect the results of operations and cash flows for the fiscal years ended January 29, 2005 (fiscal 2004), January 31, 2004 (fiscal 2003) and February 1, 2003 (fiscal 2002). Fiscal 2004, 2003 and 2002 each include 52 weeks.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

Reclassifications

 

Certain reclassifications have been made to prior years’ financial statements to conform to the fiscal 2004 presentation.

 

Cash Equivalents

 

Cash equivalents represent money market funds and are stated at cost, which approximates fair value.

 

Short-term Investments

 

Short-term investments are classified as available-for-sale securities and are highly liquid. These securities generally have a put option feature that allows the Company to liquidate the investments at par. These investments are stated at cost, which approximates market value.

 

Accounts Receivable Trade, Net

 

The Company evaluates the collectibility of accounts receivable based on a combination of factors, namely aging and historical trends. Delinquent accounts are written off automatically after the passage of 180 days without receiving a full scheduled monthly payment. Accounts are written off sooner in the event of customer bankruptcy or other circumstances that make further collection unlikely. For all other accounts, the Company recognizes reserves for bad debts based on the length of time the accounts are past due and the anticipated future write-offs based on historical experience.

 

F-7


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

1.    Business and Summary of Accounting Policies (continued)

 

Merchandise Inventories

 

Merchandise inventories are valued at the lower of cost or market, with cost determined by the last-in, first-out (LIFO) method. Inventories would have been $2,415,000 higher at January 29, 2005 if they would have been valued using the first-in, first-out (FIFO) method. At January 31, 2004, the LIFO cost of merchandise was equal to the FIFO cost of merchandise.

 

Property and Equipment

 

Property and equipment is carried at cost and generally depreciated on a straight-line basis over the estimated useful lives of the assets. Property rights under capital leases and improvements to leased property are amortized on a straight-line basis over the term of the lease or useful life of the asset, whichever is less. The annual provisions for depreciation and amortization have been principally computed using the following ranges of useful lives:

 

Buildings and improvements

   8-40 years

Store fixtures and equipment

   3-15 years

Property under capital leases

   5-40 years

 

Construction in progress includes land and improvements for locations not yet opened and for the expansion and remodeling of existing locations in process at the end of each fiscal year.

 

Capitalized Software

 

The Company capitalizes purchased and internally developed software and amortizes such costs on a straight-line basis over 3 to 5 years depending on the estimated life of the software. Capitalized software is included in other long-term assets.

 

Capitalized Interest

 

The Company capitalizes interest on the acquisition and construction of new locations and expansion of existing locations and depreciates that amount over the lives of the related assets. The total interest capitalized was $13,297,000, $9,861,000 and $9,820,000 in fiscal 2004, 2003 and 2002, respectively.

 

Favorable Lease Rights

 

Favorable lease rights are generally amortized on a straight-line basis over the remaining base lease term plus certain options with a maximum of 50 years. Accumulated amortization was $59,014,000 at January 29, 2005, and $48,487,000 at January 31, 2004. Amortization begins when the respective stores are opened. Amortization expense was $10,288,000, $9,115,000 and $8,556,000 for the years ended January 29, 2005, January 31, 2004 and February 1, 2003, respectively. The estimated amortization expense for the current favorable lease assets for each of the next five years is expected to be approximately $12,500,000.

 

Long-Lived Assets

 

The Company annually considers whether indicators of impairment of long-lived assets held for use (including favorable lease rights) are present and, if such indicators are present, determines whether the sum of the estimated undiscounted future cash flows attributable to such assets is less than their carrying amounts. The

 

F-8


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

1.    Business and Summary of Accounting Policies (continued)

 

Company evaluated the ongoing value of its property and equipment and other long-lived assets as of January 29, 2005, and January 31, 2004, and determined that there was no significant impact on the Company’s results of operations.

 

Goodwill

 

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” in fiscal 2002. Under SFAS No. 142, goodwill is no longer amortized and instead is subject to fair value based impairment tests that need to be performed at least annually. The Company completed the impairment test for its fiscal 2004, 2003 and 2002 annual audits and determined there was no impairment of existing goodwill. In accordance with SFAS No. 142, the Company ceased amortization of its remaining goodwill and the remaining balance of goodwill is $9,300,000. There has been no change in the goodwill balance since fiscal 2002.

 

Long-term Liabilities

 

The major components of other long-term liabilities at January 29, 2005 and January 31, 2004 were property related liabilities and obligations for deferred compensation plan liabilities. The increase in the other long-term liabilities balance primarily represents an increase in property related accruals of $20,211,000.

 

Comprehensive Income

 

Net income for all years presented is the same as comprehensive income.

 

Revenue Recognition

 

Revenue from sales of the Company’s merchandise at its stores is recognized at the time of sale, net of any returns. E-Commerce sales are recorded upon the shipment of merchandise.

 

Vendor Allowances

 

In November 2002, the Emerging Issues Task Force (“EITF”) released No. 02-16, “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor,” applicable to fiscal years beginning after December 15, 2002 and is effective for contracts entered into after December 31, 2002. The adoption of EITF No. 02-16 did not have a material impact on net income in fiscal 2003, as the Company entered into substantially all of its fiscal 2003 vendor contracts prior to December 31, 2002. Because substantially all new vendor contracts for new store advertising had been put in place for fiscal 2004, the Company adopted the provisions of EITF No. 02-16 and accounted for these allowances as a reduction of inventory and cost of merchandise sold in fiscal 2004. This change in accounting reduced fiscal year 2004 diluted net income per share by approximately $0.03 per diluted share with the majority of the impact on net income occurring during the first and third quarters of fiscal 2004 in conjunction with the Company’s new store openings and build in inventory. This change in accounting did not impact the Company’s cash flow or the amount of contributions received from the Company’s vendors.

 

Advertising

 

Advertising costs are expensed as incurred and are included in selling, general and administrative expenses. Total advertising costs, net of cooperative advertising agreements, were $521,033,000, $373,956,000 and

 

F-9


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

1.    Business and Summary of Accounting Policies (continued)

 

$314,901,000 in fiscal 2004, 2003 and 2002, respectively. Approximately half of the increase in total advertising costs in fiscal 2004 was due to the change in accounting for vendor allowances discussed above.

 

Preopening Costs

 

Preopening expenses, which are expensed as incurred, relate to the costs associated with new store openings, including advertising, hiring and training costs for new employees, processing and transporting initial merchandise and step rent expenses.

 

Income Taxes

 

Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes.

 

Net Income Per Share

 

The information required to compute basic and diluted net income per share is as follows:

 

     Fiscal Year

     2004

   2003
(Restated)


   2002
(Restated)


     (In Thousands)

Numerator for basic net income per share—net income

   $ 730,380    $ 580,897    $ 635,470

Interest expense related to convertible notes, net of tax

     —        2,090      5,739
    

  

  

Numerator for diluted net income per share

   $ 730,380    $ 582,987    $ 641,209
    

  

  

Denominator for basic net income per share—weighted average shares

     341,724      339,199      336,676

Impact of dilutive employee stock options (a)

     3,049      4,263      6,106

Shares issued upon assumed conversion of convertible notes

     —        1,445      3,946
    

  

  

Denominator for diluted net income per share

     344,773      344,907      346,728
    

  

  


(a)   In fiscal 2004, 2003 and 2002, 7,527,000, 4,919,000 and 4,201,000 options, respectively, were not included in the net income per share calculation as the impact of such options was antidilutive.

 

Stock Options

 

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004) (SFAS No. 123R), “Share Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

 

As of January 29, 2005, the Company had three long-term compensation plans, which are described in Note 9. The Company currently accounts for share-based payments to employees using APB No. 25 and related interpretations in accounting for those plans. No stock-based employee compensation expense is reflected in

 

F-10


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

1.    Business and Summary of Accounting Policies (continued)

 

fiscal 2004, 2003 and 2002 net income as all options granted under those plans had an exercise price equal to the market value of the underlying common stock at the date of grant and the number of shares is fixed. Accordingly, the adoption of SFAS No. 123R’s fair value method will have an impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position. The impact of the adoption of SFAS No. 123R cannot be predicted at this time because it will depend on the levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and net income per share in the following table. SFAS No. 123R also requires the benefit of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future, the amount of operating cash flows recognized in prior periods for such excess tax deductions were $40,745,000, $42,013,000 and $45,831,000 in fiscal 2004, 2003 and 2002, respectively.

 

SFAS No. 123R must be adopted no later than August 1, 2005 with early adoption permitted in periods in which the financial statements have not yet been issued. Effective at the beginning of fiscal 2005, the Company will adopt SFAS No. 123R using the “modified retrospective” method. The Company will restate its financial statements based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosure in the 2005 quarterly releases and 2005 Forms 10-Q.

 

The following table illustrates the pro forma effect on net income and net income per share assuming the fair value recognition provisions of SFAS No. 123 would have been adopted for options granted since fiscal 1995.

 

     Fiscal Year

     2004

   2003
(Restated)


   2002
(Restated)


     (In Thousands, Except Per Share Data)

Net income as reported

   $ 730,380    $ 580,897    $ 635,470

Less total stock-based employee compensation expense determined under fair value method for all awards, net of tax

     26,979      34,434      34,945
    

  

  

Pro forma net income

     703,401      546,463      600,525

Impact of interest on convertible debt, net of tax

     —        2,090      5,739
    

  

  

Pro forma diluted net income

   $ 703,401    $ 548,553    $ 606,264
    

  

  

Net income per share:

                    

Basic-as reported

   $ 2.14    $ 1.71    $ 1.89

Basic-pro forma

   $ 2.06    $ 1.61    $ 1.78
                      

Diluted-as reported

   $ 2.12    $ 1.69    $ 1.85

Diluted-pro forma

   $ 2.04    $ 1.59    $ 1.75

 

F-11


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

1.    Business and Summary of Accounting Policies (continued)

 

The Black-Scholes model was used to estimate the fair value of options at grant date based on the following assumptions:

 

     Fiscal Year

 
     2004

    2003

    2002

 

Dividend yield

     0 %     0 %     0 %

Volatility

     0.339       0.339       0.320  

Risk-free interest rate

     3.5 %     3.5 %     4.0 %

Expected life in years

     6.2       6.0       6.1  

Weighted average fair value at grant date

   $ 19.16     $ 20.49     $ 26.24  

 

The SFAS No. 123 expense reflected above only includes options granted since fiscal 1995 and, therefore, may not be representative of future expense.

 

2.    Restatement of Financial Statements

 

Following a review of the Company’s lease accounting practices in the fourth quarter of fiscal 2004, the Company corrected its method of accounting for leases related to stores that are located on leased land as well as for certain stores with operating leases. To reflect this correction, the Company restated its consolidated financial statements beginning with fiscal 1998.

 

Historically, when accounting for leases with renewal options, the Company recorded rent expense on a straight-line basis over the initial non-cancelable lease term, with the term commencing when actual rent payments began. Depreciation of the buildings, leasehold improvements and other long-lived assets on those properties occurred over a period that may have included both the initial non-cancelable lease and the option periods provided for in the lease.

 

The Company revised its accounting to recognize rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty. This accounting adjustment resulted in the Company using a time period for its straight-line rent expense calculation that equals or exceeds the time period used for depreciation. In addition, the commencement date of the lease term will be the earlier of the date when the Company becomes legally obligated for the rent payments or the date when the Company takes possession of the building for initial setup of fixtures and merchandise.

 

F-12


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

2.    Restatement of Financial Statements (continued)

 

Below is a summary of the effects of these changes on the Company’s consolidated balance sheet as of January 31, 2004, as well as the effects of these changes on the Company’s consolidated statements of income for fiscal years 2003 and 2002. The cumulative effect of the restatement relating to fiscal year 1988 through 2001 is an increase in the deferred rent liability of $37,223,000, an increase in depreciation and amortization expense of $3,004,000 and a decrease in deferred income tax liabilities of $15,563,000. As a result, retained earnings at February 2, 2002 decreased by $24,664,000. The Company did not present a summary of the impact of the restatement on the consolidated statements of cash flows for any of the above referenced fiscal years as the net impact for each fiscal year is zero.

 

     Consolidated Balance Sheets

     As Previously
Reported


   Adjustments

    As Restated

     (In Thousands)

January 31, 2004


               

Property and equipment, net

   $ 3,324,243    $ (7,757 )   $ 3,316,486

Income taxes payable

     135,327      200       135,527

Deferred income taxes liability

     236,712      (26,819 )     209,893

Other long-term liabilities

     72,069      61,690       133,759

Retained earnings

     3,017,419      (42,830 )     2,974,589

 

     Consolidated Statements of Income

     As previously
reported


   Adjustments

    As Restated

     (In Thousands, Except per Share Data)

Fiscal year ended January 31, 2004


               

Selling, general and administrative expenses

   $ 2,091,374    $ 10,298     $ 2,101,672

Depreciation and amortization

     236,864      2,694       239,558

Preopening expenses

     43,519      3,510       47,029

Operating income

     1,023,304      (16,502 )     1,006,802

Income before income taxes

     950,373      (16,502 )     933,871

Provision for income taxes

     359,221      (6,247 )     352,974

Net income

     591,152      (10,255 )     580,897

Net income per share:

                     

Basic

   $ 1.74    $ (0.03 )   $ 1.71

Diluted

   $ 1.72    $ (0.03 )   $ 1.69

 

F-13


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

2.    Restatement of Financial Statements (continued)

 

     Consolidated Statements of Income

     As previously
reported


   Adjustments

    As Restated

     (In Thousands, Except per Share Data)

Fiscal year ended February 1, 2003


               

Selling, general and administrative expenses

   $ 1,817,968    $ 8,739     $ 1,826,707

Depreciation and amortization

     191,439      2,058       193,497

Preopening expenses

     39,278      1,920       41,198

Operating income

     1,090,383      (12,717 )     1,077,666

Income before income taxes

     1,034,374      (12,717 )     1,021,657

Provision for income taxes

     390,993      (4,806 )     386,187

Net income

     643,381      (7,911 )     635,470

Net income per share:

                     

Basic

   $ 1.91    $ (0.02 )   $ 1.89

Diluted

   $ 1.87    $ (0.02 )   $ 1.85

 

See Note 11 for the impact of the restatement on fiscal 2004 and 2003 quarterly information.

 

3.    Selected Balance Sheet Information

 

Property and equipment consist of the following:

 

     January 29,
2005


   January 31,
2004
(Restated)


     (In Thousands)

Land

   $ 469,851    $ 360,765

Buildings and improvements

     2,819,162      2,259,691

Store fixtures and equipment

     1,218,858      1,062,956

Property under capital leases

     120,240      88,840

Construction in progress

     345,040      327,460
    

  

Total property and equipment

     4,973,151      4,099,712

Less accumulated depreciation

     985,206      783,226
    

  

     $ 3,987,945    $ 3,316,486
    

  

 

Depreciation expense for property and equipment, including property under capital leases, totaled $249,839,000, $207,053,000 and $167,231,000 for fiscal 2004, 2003 and 2002, respectively.

 

Accrued liabilities consist of the following:

 

     January 29,
2005


   January 31,
2004


     (In Thousands)

Payroll and related fringe benefits

   $ 72,521    $ 52,351

Sales and use taxes

     121,620      93,103

Various liabilities to customers

     124,325      99,139

Accrued construction costs

     140,243      99,291

Other accruals

     112,048      98,077
    

  

     $ 570,757    $ 441,961
    

  

 

F-14


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

4.    Accounts Receivable Financing

 

The Company has an agreement with Preferred Receivables Funding Corporation, a certain investor and Bank One, as agent, under which the Company periodically sells, generally with recourse, an undivided interest in the revolving pool of its private label credit card receivables up to a maximum of $225 million. The agreement runs through December 15, 2005, and is renewable for one year intervals at the Company’s request and the investors’ option. No receivables were sold as of January 29, 2005, or January 31, 2004. For financial reporting purposes, receivables sold are treated as secured borrowings.

 

The cost of the current financing program is based on the bank’s conduit commercial paper rate, approximately 2.5% and 1.1% at January 29, 2005 and January 31, 2004, respectively, plus certain fees. The agreement is secured by interests in the receivables and contains covenants which require the Company to maintain a minimum portfolio quality and meet certain financial tests (see discussion of financial covenants in Note 5). As of January 29, 2005, the Company was in compliance with all financial tests.

 

Revenues from the Company’s credit program, net of operating expenses, are summarized in the following table:

 

     Fiscal Year

     2004

   2003

   2002

     (In Thousands)

Finance charges and other income

   $ 214,772    $ 182,525    $ 155,580

Operating expenses:

                    

Provision for doubtful accounts

     44,641      43,945      43,739

Other credit and collection expenses

     64,397      53,936      44,429
    

  

  

Total operating expenses

     109,038      97,881      88,168
    

  

  

Net revenue of credit program included in selling, general and administrative expenses

   $ 105,734    $ 84,644    $ 67,412
    

  

  

 

5.    Debt

 

Long-term debt consists of the following:

 

     January 29, 2005

    January 31, 2004

 
Maturing

   Weighted Average
Effective Rate


    Amount

    Weighted Average
Effective Rate


    Amount

 
     ($ In Thousands)  

Notes and debentures:

                            

Senior debt

                            

2004

         $ —       6.57 %   $ 10,000  

2006 (a)

   6.70 %     100,000     6.70 %     100,000  

2011 (a)

   6.59 %     400,000     6.59 %     400,000  

2029 (a)

   7.36 %     200,000     7.36 %     200,000  

2033 (a)

   6.05 %     300,000     6.05 %     300,000  
          


       


Total notes and debentures

   6.59 %     1,000,000     6.59 %     1,010,000  

Capital lease obligations

           110,256             81,936  

Unamortized debt discount

           (4,606 )           (4,822 )

Other

           1,255             1,388  

Less current portion

           (3,464 )           (12,529 )
          


       


Long-term debt and capital leases

         $ 1,103,441           $ 1,075,973  
          


       



(a)   Non-callable and unsecured notes and debentures.

 

F-15


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

5.    Debt (continued)

 

Using discounted cash flow analyses based upon the Company’s current incremental borrowing rates for similar types of borrowing arrangements, the Company estimates the fair value of long-term debt, including current portion and excluding capital leases, to be approximately $1,124.4 million at January 29, 2005, and $1,104.2 million at January 31, 2004.

 

In July 2002, the Company executed two unsecured revolving bank credit facilities. The first is a $532 million facility maturing July 10, 2007. The second is a $133 million 364-day facility that is renewable at the Company’s request and at the banks’ option. The current term of this facility matures on July 8, 2005. Depending on the type of advance under these facilities, amounts borrowed bear interest at competitive bid rates; the LIBOR plus a margin, based on the Company’s long-term unsecured debt rating; or the agent bank’s base rate. No amounts were outstanding on these facilities as of January 29, 2005 and January 31, 2004. Borrowings can fluctuate significantly during the year due to seasonal financing needs. The average amount of borrowings during fiscal 2004 was $76.1 million at a weighted average interest rate of 2.1%. The Company reached its highest short-term borrowing level for the year of $460.0 million on November 26, 2004.

 

The various debt agreements contain certain covenants that limit, among other things, additional indebtedness, as well as requiring the Company to meet certain financial tests including a minimum coverage ratio of 2.5:1 and a maximum leverage ratio of 0.65:1. The coverage ratio is basically defined as net income before interest, taxes, depreciation, amortization and rent expense to rent plus net interest and the leverage ratio is defined as included indebtedness to capitalization. As of January 29, 2005, the Company was in compliance with all financial covenants of the debt agreements. The Company achieved a coverage ratio of 4.95:1 and a leverage ratio of 0.18:1.

 

The Company also has outstanding letters of credit and stand-by letters of credit that total approximately $42.5 million and $52.0 million at January 29, 2005 and January 31, 2004, respectively.

 

Interest payments, net of amounts capitalized, were $63,750,000, $67,785,000 and $42,539,000 in fiscal 2004, 2003 and 2002, respectively.

 

Annual maturities of long-term debt, excluding capital lease obligations, for the next five years are: $142,000 in 2005; $100,416,000 in 2006; $369,000 in 2007; $328,000 in 2008 and $0 in 2009.

 

6.    Commitments

 

The Company leases certain property and equipment. The Company recognizes rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty. The lease term commences on the earlier of the date when the Company becomes legally obligated for the rent payments or, in the case of buildings, the date when the Company takes possession of the building for initial setup of fixtures and merchandise. Rent expense charged to operations was $308,608,000, $262,574,000 and $218,325,000 in fiscal 2004, 2003 and 2002, respectively. Rent expense includes contingent rents, based on sales, of $3,432,000, $3,265,000 and $4,025,000 in fiscal 2004, 2003 and 2002, respectively. In addition, many of the store leases obligate the Company to pay real estate taxes, insurance and maintenance costs. These items are not included in the rent expenses listed above. Many store leases include multiple renewal options, exercisable at the Company’s option, that generally range from two additional five-year periods to eight ten-year periods.

 

F-16


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

6.    Commitments (continued)

 

Property under capital leases consists of the following:

 

 

    

January 29,

2005


  

January 31,

2004


     (In Thousands)

Buildings and improvements

   $ 118,014    $ 87,543

Equipment

     2,225      1,297

Less accumulated amortization

     21,621      16,788
    

  

     $ 98,618    $ 72,052
    

  

 

Amortization expense related to capital leases totaled $4,833,000, $3,226,000 and $1,864,000 for fiscal 2004, 2003 and 2002, respectively.

 

Future minimum lease payments at January 29, 2005, are as follows:

 

     Capital
Leases


   Operating
Leases


     (In Thousands)

Fiscal Year:

             

2005

   $ 12,169    $ 314,572

2006

     12,182      324,013

2007

     12,280      316,966

2008

     12,469      311,076

2009

     12,406      311,128

Thereafter

     147,160      6,218,443
    

  

       208,666    $ 7,796,198
           

Less amount representing interest

     98,410       
    

      

Present value of minimum lease payments

   $ 110,256       
    

      

 

Included in the operating lease schedule above is $841.3 million of minimum lease payments for stores that will open in fiscal 2005 and 2006. The operating lease schedule includes $2,478.2 million for option periods on leases with cancellable options where failure to exercise such options would result in the recognition of accelerated depreciation expense of the related assets.

 

The Company recorded capital leases totaling $31.4 million and $33.0 million during fiscal 2004 and 2003, respectively. As of January 29, 2005, the Company had entered into capital leases of approximately $32.0 million related to stores to be opened in fiscal 2005 and 2006 which had not been recorded as the related buildings are under construction. The Company had also entered into capital leases of approximately $5.6 million related to equipment not yet in service as of January 29, 2005.

 

7.    Benefit Plans

 

The Company has an Employee Stock Ownership Plan (ESOP) for the benefit of its associates other than executive officers. Contributions are made at the discretion of the Board of Directors. The Company recorded expenses of $12,583,000, $10,053,000 and $10,933,000 in fiscal 2004, 2003 and 2002, respectively. Shares of Company common stock held by the ESOP are included as shares outstanding for purposes of the net income per share computations.

 

F-17


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

7.    Benefit Plans (continued)

 

The Company also has a defined contribution savings plan covering all full-time and certain part-time associates which provides for monthly employer contributions based on a percentage of qualifying contributions made by participating associates. The participants direct their contributions and/or their account balances among any of the Plan’s twelve investment alternatives. Total expense, net of forfeitures, was $3,743,000, $3,979,000 and $3,805,000 in fiscal 2004, 2003 and 2002, respectively.

 

The Company also made defined annual contributions to the savings plan on the behalf of all qualifying full-time and part-time associates based on a percentage of qualifying payroll earnings. The participants direct these contributions and/or their account balances among any of the Plan’s twelve investment alternatives. The total contribution expense was $9,712,000, $8,420,000 and $7,316,000 in fiscal 2004, 2003 and 2002, respectively.

 

The Company also has a non-qualified deferred compensation plan offered to a group of executives which provides for pre-tax compensation deferrals up to 100% of salary and/or bonus. Deferrals and credited investment returns are 100% vested. At January 29, 2005 and January 31, 2004 the liability under the plan, which is reflected in other long-term liabilities, was $25,967,000 and $22,717,000, respectively. The expense for fiscal 2004, 2003 and 2002 was immaterial.

 

8.    Income Taxes

 

Deferred income taxes consist of the following:

 

     January 29,
2005


   January 31,
2004
(Restated)


     (In Thousands)

Deferred tax liabilities:

             

Property and equipment

   $ 361,695    $ 264,572

Deferred tax assets:

             

Merchandise inventories

     34,320      35,040

Accrued and other liabilities

     43,392      32,435

Accrued step rent liability

     41,482      37,026
    

  

       119,194      104,501
    

  

Net deferred tax liability

   $ 242,501    $ 160,071
    

  

 

The components of the provision for income taxes are as follows:

 

     Fiscal Year

     2004

   2003
(Restated)


   2002
(Restated)


     (In Thousands)

Current federal

   $ 319,589    $ 258,357    $ 300,221

Current state

     41,851      29,358      37,554

Deferred

     82,430      65,259      48,412
    

  

  

     $ 443,870    $ 352,974    $ 386,187
    

  

  

 

F-18


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

8.    Income Taxes (continued)

 

The provision for income taxes differs from the amount that would be provided by applying the statutory U.S. corporate tax rate due to the following items:

 

     Fiscal Year

 
     2004

    2003

    2002

 

Provision at statutory rate

     35.0 %     35.0 %     35.0 %

State income taxes, net of federal tax benefit

     3.0       2.9       2.9  

Other

     (0.2 )     (0.1 )     (0.1 )
    


 


 


Provision for income taxes

     37.8 %     37.8 %     37.8 %
    


 


 


Amounts paid for income taxes (in thousands)

   $ 279,547     $ 253,552     $ 274,724  
    


 


 


 

9.    Preferred and Common Stock

 

The Company’s authorized capital stock consists of 800,000,000 shares of $0.01 par value common stock and 10,000,000 shares of $0.01 par value preferred stock.

 

The Company’s 1994 and 2003 Long-Term Compensation Plans provide for the granting of various forms of equity-based awards, including restricted stock and options to purchase shares of the Company’s common stock, to officers and key employees. In January 2005, the Company issued 99,500 shares of restricted stock at a price of $49.27 to certain key executives. Compensation expense is recognized ratably over the three-year vesting period. The 1997 Stock Option Plan for Outside Directors provides for granting of equity-based awards to outside directors.

 

The following table presents the number of options and restricted stock initially authorized and available to grant under each of the plans:

 

     1994 Plan

   1997 Plan

   2003 Plan

   Total

Options and restricted stock initially authorized

   24,000,000    400,000    15,000,000    39,400,000

Options and restricted stock available for grant:

                   

January 31, 2004

   5,606,190    276,000    15,000,000    20,882,190

January 29, 2005

   —      267,000    14,208,750    14,475,750

 

The majority of options granted vest in four equal annual installments. Remaining options granted vest in five to ten year increments. The restricted stock vests in three equal installments over three years. Options that are surrendered or terminated without issuance of shares are available for future grants.

 

F-19


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

9.    Preferred and Common Stock (continued)

 

The following table summarizes the Company’s stock option activity from February 2, 2002 through January 29, 2005:

 

    

Number

Of Options


    Weighted
Average
Exercise
Price


Balance at February 2, 2002

   21,253,796     $ 29.87

Granted

   333,788       67.30

Surrendered

   (494,711 )     53.75

Exercised

   (2,183,605 )     14.36
    

 

Balance at February 1, 2003

   18,909,268       31.70

Granted

   2,919,739       51.71

Surrendered

   (1,094,219 )     56.78

Exercised

   (2,818,879 )     16.41
    

 

Balance at January 31, 2004

   17,915,909       35.85

Granted

   2,177,589       47.84

Surrendered

   (1,726,688 )     47.67

Exercised

   (3,203,495 )     14.66
    

 

Balance at January 29, 2005

   15,163,315     $ 40.70
    

 

 

In fiscal 2001, annual stock option awards were granted by the Company in the month of January. Beginning in fiscal 2002, the Company determined that annual awards to eligible associates would be considered in the first quarter of the subsequent fiscal year. All awards to outside directors during fiscal 2002, 2003 and 2004 were granted under the 1997 plan.

 

Options exercisable at:

 

     Shares

   Weighted
Average
Exercise
Price


January 29, 2005

   9,816,584    $ 35.26

January 31, 2004

   12,012,527    $ 29.23

February 1, 2003

   12,851,841    $ 24.33

 

Additional information related to options outstanding at January 29, 2005, segregated by grant price range, is summarized below:

 

     Exercise Price Range

     $5.02 to
$30.50


  

$30.51 to

$50.39


   $50.40 to
$77.62


Options outstanding

   4,791,778    5,987,363    4,384,174

Weighted average exercise price of options outstanding

   $16.05    $43.54    $63.77

Weighted average remaining contractual life of options outstanding (years)

   3.1    12.5    12.1

Options exercisable

   4,525,778    2,636,748    2,654,058

Weighted average exercise price of options exercisable

   $16.58    $37.74    $64.66

 

F-20


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

10.    Contingencies

 

The Company is involved in various legal matters arising in the normal course of business. In the opinion of management, the outcome of such proceedings and litigation will not have a material adverse impact on the Company’s financial position or results of operations.

 

11.    Quarterly Financial Information (Unaudited)

 

Financial Information

 

     Fiscal Year 2004

 
     First
(Restated)


   Second
(Restated)


   Third
(Restated)


   Fourth

   Total

 
     (In Thousands, Except Per Share Data)  

Net sales

   $ 2,380,173    $ 2,497,858    $ 2,743,882    $ 4,078,706    $ 11,700,619  

Gross margin

     847,437      910,049      985,551      1,370,590      4,113,627  

Net income:

                                    

As previously reported

     113,794      155,775      143,776      NA      NA  

As restated

     110,783      153,727      140,933      324,937      730,380  

Basic shares

     340,434      341,030      342,312      343,160      341,724  

Basic net income per share:

                                    

As previously reported

   $ 0.33    $ 0.46    $ 0.42      NA      NA  

As restated

   $ 0.33    $ 0.45    $ 0.41    $ 0.95    $ 2.14  

Diluted shares

     343,858      344,195      344,896      345,678      344,773  

Diluted net income per share:

                                    

As previously reported

   $ 0.33    $ 0.45    $ 0.42      NA      NA  

As restated

   $ 0.32    $ 0.45    $ 0.41    $ 0.94    $ 2.12  
     Fiscal Year 2003 (Restated)

 
     First

   Second

   Third

   Fourth

   Total

 
     (In Thousands, Except Per Share Data)  

Net sales

   $ 2,117,744    $ 2,208,459    $ 2,393,950    $ 3,561,941    $ 10,282,094  

Gross margin

     741,265      736,803      815,342      1,101,651      3,395,061  

Net income:

                                    

As previously reported

     111,013      112,145      121,170      246,824      591,152  

As restated

     108,157      110,124      117,850      244,766      580,897  

Basic shares

     338,013      338,954      339,751      340,043      339,199  

Basic net income per share:

                                    

As previously reported

   $ 0.33    $ 0.33    $ 0.36    $ 0.73    $ 1.74  

As restated

   $ 0.32    $ 0.32    $ 0.35    $ 0.72    $ 1.71  

Diluted shares

     342,847      343,665      344,447      343,998      344,907 (a)

Diluted net income per share:

                                    

As previously reported

   $ 0.32    $ 0.33    $ 0.35    $ 0.72    $ 1.72 (b)

As restated

   $ 0.32    $ 0.32    $ 0.34    $ 0.71    $ 1.69 (b)

(a)   Diluted shares include 1,445,000 shares related to the assumed conversion of convertible debt securities.
(b)   For the period noted, the net income per share is calculated using the “if converted” method. The net income in the calculation of fiscal 2003 diluted net income per share includes interest on convertible debt securities, net of tax, of $2,090,000.

 

F-21


KOHL’S CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

11.    Quarterly Financial Information (Unaudited) (continued)

 

Due to changes in stock prices during the year and timing of issuance of shares, the cumulative total of quarterly net income per share amounts may not equal the net income per share for the year.

 

12.    Related Party

 

A director of the Company is also a shareholder of a law firm which performs legal services for the Company.

 

F-22


KOHL’S CORPORATION

 

SCHEDULE II

 

Valuation and Qualifying Accounts

 

     Fiscal Year Ended

 
     January 29,
2005


    January 31,
2004


    February 1,
2003


 
     (In Thousands)  

Accounts Receivable—Allowances:

                        

Balance at Beginning of Year

   $ 22,521     $ 20,880     $ 17,780  

Charged to Costs and Expenses

     44,641       43,945       43,739  

Deductions—Bad Debts Written off, Net of Recoveries and
Other Allowances

     (42,505 )     (42,304 )     (40,639 )
    


 


 


Balance at End of Year

   $ 24,657     $ 22,521     $ 20,880  
    


 


 


 

F-23


SIGNATURES

 

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Kohl’s Corporation
By:    

/S/    R. LAWRENCE MONTGOMERY

 

   

R. Lawrence Montgomery

   

Chairman, Chief Executive Officer and Director

   

(Principal Executive Officer)

 

Dated: March 18, 2005

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

 

/S/    R. LAWRENCE MONTGOMERY

 

     

/S/    WILLIAM S. KELLOGG

 

R. Lawrence Montgomery

Chairman, Chief Executive Officer and Director

(Principal Executive Officer)

     

William S. Kellogg

Director

/S/    KEVIN MANSELL

 

     

/S/    ARLENE MEIER

 

Kevin Mansell

President and Director

     

Arlene Meier

Chief Operating Officer, Treasurer and Director

/S/    JAY H. BAKER

 

       

Jay H. Baker

Director

     

Steven A. Burd

Director

         

Wayne Embry

Director

     

James D. Ericson

Director

/S/    JOHN F. HERMA

 

       

John F. Herma

Director

     

Frank Sica

Director

/S/    JUDY SPRIESER

 

     

/S/    PETER M. SOMMERHAUSER

 

Judy Sprieser

Director

     

Peter M. Sommerhauser

Director

/S/    R. ELTON WHITE

 

     

/S/    WESLEY S. MCDONALD

 

R. Elton White

Director

     

Wesley S. McDonald

Executive Vice President, Chief Financial Officer

(Principal Financial and Accounting Officer)

 

Dated: March 18, 2005

 

 


EXHIBIT INDEX

 

 

Exhibit
Number


  

Description


3.1    Articles of Incorporation of the Company, as amended, incorporated herein by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999.
3.2    Bylaws of the Company, incorporated herein by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2000.
4.1    Five-Year Credit Agreement dated as of July 10, 2002 among the Company, the lenders party thereto, Bank One, NA, as Syndication Agent, U.S. Bank, National Association, Wachovia Bank, National Association and Fleet National Bank, as Co-Documentation Agents, and The Bank of New York as Issuing Bank, Swing Line Lender and Administrative Agent, incorporated herein by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 3, 2002.
4.2    Indenture dated as of December 1, 1995 between the Company and The Bank of New York as trustee, incorporated herein by reference to Exhibit 4.3 of the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 1996.
4.3    First Supplemental Indenture dated as of June 1, 1999 between the Company and The Bank of New York, incorporated herein by reference to Exhibit 4.2 of the Company’s Registration Statement on Form S-4 (Reg. No. 333-83031).
4.4    Second Supplemental Indenture dated as of March 8, 2001 between the Company and The Bank of New York, as trustee, incorporated herein by reference to Exhibit 4.5 of the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2001.
4.5    Third Supplemental Indenture dated January 15, 2002 between the Company and The Bank of New York, as trustee, incorporated herein by reference to Exhibit 4.6 of the Company’s registration statement on Form S-3 (Reg. No. 333-83788), filed on March 6, 2002.
4.6    Certain other long-term debt is described in Note 5 of the Notes to Consolidated Financial Statements. The Company agrees to furnish to the Commission, upon request, copies of any instruments defining the rights of holders of any such long-term debt described in Note 5 and not filed herewith.
10.1    364-Day Credit Agreement dated as of July 10, 2002 among the Company, the lenders party thereto, Bank One, NA, as Syndication Agent, U.S. Bank, National Association, Wachovia Bank, National Association and Fleet National Bank, as Co-Documentation Agents and The Bank of New York, as Administrative Agent, incorporated herein by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 3, 2002.
10.2    Extension No. 1, Waiver No. 1 and Amendment No. 1, dated as of June 30, 2003, under the 364-Day Credit Agreement, dated as of July 10, 2002, among the Company, the lenders party thereto, Bank One, NA, as Syndication Agent, U.S. Bank, National Association, Wachovia Bank, National Association and Fleet National Bank, as Co-Documentation Agents, and The Bank of New York, as the Administrative Agent, incorporated herein by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 2, 2003.
10.3    Extension No. 2 and Amendment No. 2, dated as of June 22, 2004, under the 364-Day Credit Agreement, dated as of July 10, 2002, among the Company, the lenders party thereto, Bank One, NA, as Syndication Agent, U.S. Bank, National Association, Wachovia Bank, National Association and Fleet National Bank, as Co-Documentation Agents, and The Bank of New York, as the Administrative Agent, incorporated herein by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 30, 2004.


10.4    Amended and Restated Executive Deferred Compensation Plan, incorporated herein by reference to Exhibit 10.1 of the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2003.*
10.5    Kohl’s Corporation 2005 Deferred Compensation Plan, incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated December 10, 2004.*
10.6    Summary of Executive Medical Plan.*
10.7    Summary of Executive Life and Accidental Death and Dismemberment Plans.*
10.8    Summary of Executive Bonus Plan, incorporated herein by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K dated February 23, 2005.*
10.9    1992 Long Term Compensation Plan, incorporated herein by reference to Exhibit 10.13 of the Company’s registration statement on Form S-1 (File No. 33-46883).*
10.10    1994 Long-Term Compensation Plan, incorporated herein by reference to Exhibit 10.15 of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 4, 1996.*
10.11    2003 Long-Term Compensation Plan, incorporated herein by reference to Exhibit 10.10 of the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2003.*
10.12    Form of Executive Stock Option Award, incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated February 23, 2005.*
10.13    1997 Stock Option Plan for Outside Directors, incorporated herein by reference to Exhibit 4.4 of the Company’s registration statement on Form S-8 (File No. 333-26409), filed on May 2, 1997.*
10.14    Form of Outside Director Stock Option Award.*
10.15    Employment Agreement between the Company and William S. Kellogg dated April 30, 1992, incorporated herein by reference to Exhibit 10.6 of the Company’s registration statement on Form S-1 (File No. 33- 46883).*
10.16    Employment Agreement between the Company and Jay H. Baker dated April 30, 1992, incorporated herein by reference to Exhibit 10.7 of the Company’s registration statement on Form S-1 (File No. 33-46883).*
10.17    Employment Agreement between the Company and John F. Herma dated April 30, 1992, incorporated herein by reference to Exhibit 10.8 of the Company’s registration statement on Form S-1 (File No. 33- 46883).*
10.18    Employment Agreement between the Company and R. Lawrence Montgomery, incorporated herein by reference to Exhibit 10.4 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 1998.*
10.19    Employment Agreement between the Company and Kevin Mansell, incorporated herein by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 1, 1999.*
10.20    Amended and Restated Agreements dated December 10, 1998 between the Company and Mr. Montgomery, incorporated herein by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K for the Fiscal year ended January 30, 1999.*


10.21    Amended and Restated Agreements dated December 10, 1998 between the Company and Mr. Mansell, incorporated herein by reference to Exhibit 10.13 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 1999.*
10.22    First Amendment to Employment Agreement between the Company and Mr. Montgomery, dated November 15, 2000, incorporated herein by reference to Exhibit 10.13 of the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2001.*
10.23    Employment Agreement between the Company and Arlene Meier dated November 15, 2000, incorporated herein by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2001.*
10.24    Amendment to Employment Agreement between the Company and Mr. Kellogg, dated January 31, 2004, incorporated herein by reference to Exhibit 10.21 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004.*
10.25    Amendment to Employment Agreement between the Company and Mr. Baker, dated January 31, 2004, incorporated herein by reference to Exhibit 10.22 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004.*
10.26    Amendment to Employment Agreement between the Company and Mr. Herma, dated January 31, 2004, incorporated herein by reference to Exhibit 10.23 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004.*
10.27    Second Amendment to Employment Agreement between the Company and Mr. Montgomery, dated January 31, 2004, incorporated herein by reference to Exhibit 10.24 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004.*
10.28    Amendment to Employment Agreement between the Company and Mr. Mansell, dated January 31, 2004, incorporated herein by reference to Exhibit 10.25 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004.*
10.29    Amendment to Employment Agreement between the Company and Ms. Meier, dated January 31, 2004, incorporated herein by reference to Exhibit 10.26 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004. *
10.30    Form of Executive Employment Agreement.*
10.31    Form of Restricted Stock Agreement.*
10.32    Summary of Outside Director Compensation.*
21.1    Subsidiaries of the Registrant.
23.1    Consent of Ernst & Young LLP.
31.1    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


99.1    Cautionary Statements Regarding Forward-Looking Information and Risk Factors.

 

*   A management contract or compensatory plan or arrangement.
Schedule of Benefits For Standard Plan

EXHIBIT 10.6

 

SCHEDULE OF BENEFITS

FOR STANDARD PLAN

 

Benefit Plan 207

 

Major Medical Benefits (Associates and Dependents)

    

Individual Lifetime Maximum

  

$750,000

Maximum Hospital Daily Benefit

  

Semi Private

Charge of semi-private room of which hospital has greatest number will be paid toward private room.

    

Number of Days per Confinement

  

Unlimited

 

     Utilizing Participating
Provider


   Utilizing Non-Participating
Provider


Deductible Amount Per Calendar Year

         

Single

   $0    $0

2 Member Family

   $0    $0

3 or more Member Family

   $0    $0

Percent of Company Participation after Deductible

   100%    100%

Out-of-Pocket Maximum Per Calendar Year (Includes Deductible)

         

Single

   $0    $0

Family

   $0    $0

Hospitalization

         

Number of Inpatient Days

   Unlimited
100%
   Unlimited
100%

X-Ray, Lab and Miscellaneous Hospital Services in a:

         

•       Hospital (Inpatient and Outpatient)

         

•       Skilled Nursing Facility

         

•       Outpatient Surgery Facility

         

Pre-Certification Required for All Inpatient Hospital Confinements

   Required No Penalty for
Non Certification
   Required No Penalty for
Non Certification

Surgery Services (Including Inpatient and Outpatient)

   100%    100%


Second Surgical Opinion (Elective Non-Emergency Surgeries)

   100%    100%

Physician Visits

         

Hospital

   100% (No limit)    100% (No limit)

Office

   100%    100%

Radiation Therapy

   100%    100%

Maternity (Includes coverage for dependent daughters)

   100%    100%

Emergency Care

   100%    100%

Mental Health and Alcoholism/Substance Abuse

         

Inpatient/Transitional Treatment

   100%    100%

Outpatient

   100%    100%

Short Term Rehabilitation Therapy

         

Physical

   100%    100%

Occupational

   100%    100%

Speech

   100%    100%

Chiropractic Services

   100%    100%

Preventative Care (Includes x-rays and lab tests in connection with exam)

   100%    100%

Well Baby Care, including immunizations, the first 6 visits will not apply to the maximum (Birth to 6 years of age)

   100%    100%

Routine Physical Exam (over age 6)

   100%    100%

Pap Smears

   100%    100%

Mammograms

   100%    100%

Tuberculosis Testing (to age 19)

   100%    100%

X-ray and Lab Tests

   100%    100%

Allergy Care

   100%    100%


Ambulance

   100%    100%

Durable Medical Equipment

   100%    100%

Oral Surgery

   100%    100%

Vision Care Eye Exams (for illness or injury only)

   100%    100%

Lenses

   100%    100%

Frames

   100%    100%

Contact Lenses

   100%    100%

Hearing Exams

   100%    100%

Health Education & Counseling

   Not Covered    Not Covered

Hospice Care

         

Impatient

   100%    100%

Outpatient

   100%    100%

Bereavement Counseling

   Not Covered    Not Covered

Skilled Nursing Home

   100%    100%

Home Health Care

   100%    100%

Family Planing Elective Sterilization

   100%    100%

Prescription Drugs

         

Copay Waived with Drug Card

   $0 Generic/Brand    No Benefit
Summary of Benefits Insured by Mutual of Omaha

EXHIBIT 10.7

 

KOHL'S DEPARTMENT STORES

September 1, 2003

Summary of Benefits Insured by Mutual of Omaha

 

Class 1, CEO, President, COO

 

Basic Life & Accidental Death & Dismemberment   Business Travel Accident

(Provided by Kohl's)


 

(Provided by Kohl's)


What is my Life Insurance benefit?   3x your Salary ($3,000,000 max)  

If I die while traveling on Business for Kohl's,

what is my Benefit?

  $250,000
What is my Accidental Death Benefit?   3x your Salary ($2,000,000 max)   If I'm hurt while Traveling on Business, are there any other benefits?  

Yes, benefits of $62,500, $125,000 or

$250,000 may be paid for specific

losses

What is my Accidental Dismemberment Benefit?  

1/4 to 1x your Salary

(depending upon the loss)

 

What if I have an Emergency while Traveling

on Business?

 

The coverage includes a

Worldwide Assistance

Program

Who Pays for It?   Kohl’s        
Will My Benefit Continue if I get Disabled?   Yes        
Is there a Living Benefit if I develop a Terminal Condition?   Yes        
Can I keep my Life Insurance When I Retire?   No        
Can I Convert Coverage to an Individual Policy when I Terminate employment?   Yes        
             
Supplemental Life   Voluntary Accidental Death & Dismemberment

(Optional)


 

(Optional)


How much extra Life Ins can I buy?   1x your Salary   How much extra AD&D can I buy?    
Is there a maximum?   Yes, Basic + Supplemental cannot exceed $3,000,000   Associate   Increments of $10,000 to a maximum of $500,000
What is the Monthly Cost?  

Age Bracket


 

Life Rate/$1000


      % of your coverage
    0-29   $0.04   Spouse only   60%
    30-34   $0.05   Child(ren) only   25% for each child
    35-39   $0.06   Spouse and Child(ren)   50% spouse
    40-44   $0.10       20% for each child
    45-49   $0.13        
    50-54   $0.25   Are only Accidental Deaths covered?   No, there are benefits for certain
   

55-59

60-64

65+

 

$0.41

$0.54

$0.84

      dismemberments and paralysis
       

 

What is the Monthly Cost?

 

 

Associate: $.22 per $10,000 Dependents: $.40 per $10,000

            Will My Benefit Continue if I get Disabled?   Yes, until you are no longer eligible for this benefit
Will My Benefit Continue if I get Disabled?   Yes   Can I keep my Life Insurance When I Retire?   No
Is there a Living Benefit if I develop a Terminal Condition?   Yes   Can I Convert Coverage to an Individual Policy when I Terminate employment?   No
Can I Convert Coverage to an Individual Policy when I Terminate employment?   Yes        


Dependents' Life   Long Term Disability

(Optional)


 

(Provided by Kohl’s)


How much Life Ins. can I buy for my Dependents?  

Option I


 

Option II


 

How long must I be Disabled before

Benefits begin?

  180 days
Spouse   $5,000   $10,000        

Child(ren) over 6 months to age 19 or 25 if a

full-time student

  $2,000   $5,000   What is my Benefit?  

60% of your basic monthly

earnings to a maximum

monthly benefit of $10,000

Child(ren) 14 days to 6 months   $100   $100      
How much does it Cost?   $1.25 per month   $2.50 per month        
Can I cover a dependent who is confined in a health care facility or who is unable to perform normal activities?   You can enroll them but coverage will not become effective until the dependent is no longer confined and is able to perform normal activities   How Long will Benefits continue?   Until you are no longer disabled or you reach normal retirement age
   

 

Are there special Limits for disabilities due

to Mental Disorders or Substance Abuse?

 

 

Yes, benefits for these disabilities are

generally limited to 24 months

   

 

Will my Benefit be offset by other Sources

of Income?

 

 

Yes

   

 

Is there a Partial Disability Benefit?

  Yes
   

 

Are Pre-Existing Conditions covered?

 

 

You will not receive any benefits for a disability which begins in the first 12 months of your being insured if the disability is due to a pre-existing condition

           

 

Can I Convert Coverage to an Individual Policy when I Terminate employment?

 

 

No

 

Certain exclusions exist for each benefit.

Amounts of Basic Life Insurance in excess of $50,000 are taxed by the IRS as imputed income.

Amounts in excess of $1,000,000 ($400,000 if age 60 or over) are not guaranteed. Satisfactory evidence of good health will be required.

You will become eligible for these benefits beginning with your first day of active work. If you waive benefits and later decide to enroll for them, you must submit satisfactory evidence of good health. You will be eligible to enroll in or change your benefits during open enrollment of each year. Benefit changes made during open enrollment are effective on April 1 of each year.

 

This summary is for illustrative purposes only and is not intended to be a complete description of your benefits.

The benefits described in this summary are not guaranteed.

The above benefits may differ slightly from those benefits previously insured by Reliance Standard.

Please refer to the Summary Plan Descriptions (available from Corporate Human Resources—Benefit Department) for more detail.


KOHL'S DEPARTMENT STORES

September 1, 2003

Summary of Benefits Insured by Mutual of Omaha

 

Class 2, CFO, Executive & Senior Vice President

 

Basic Life & Accidental Death & Dismemberment   Business Travel Accident

(Provided by Kohl's)


 

(Provided by Kohl's)


What is my Life Insurance benefit?   2x your Salary ($3,000,000 max)  

If I die while traveling on Business for Kohl's,

what is my Benefit?

  $250,000
What is my Accidental Death Benefit?   2x your Salary ($2,000,000 max)   If I'm hurt while Traveling on Business, are there any other benefits?  

Yes, benefits of $62,500, $125,000 or

$250,000 may be paid for specific

losses

What is my Accidental Dismemberment Benefit?  

1/4 to 1x your Salary

(depending upon the loss)

 

What if I have an Emergency while Traveling

on Business?

 

The coverage includes a

Worldwide Assistance

Program

Who Pays for It?   Kohl’s        
Will My Benefit Continue if I get Disabled?   Yes        
Is there a Living Benefit if I develop a Terminal Condition?   Yes        
Can I keep my Life Insurance When I Retire?   No        
Can I Convert Coverage to an Individual Policy when I Terminate employment?   Yes        
             
Supplemental Life   Voluntary Accidental Death & Dismemberment

(Optional)


 

(Optional)


How much extra Life Ins can I buy?   1x your Salary   How much extra AD&D can I buy?    
Is there a maximum?   Yes, Basic + Supplemental cannot exceed $3,000,000   Associate   Increments of $10,000 to a maximum of $500,000
What is the Monthly Cost?  

Age Bracket


 

Life Rate/$1000


      % of your coverage
    0-29   $0.04   Spouse only   60%
    30-34   $0.05   Child(ren) only   25% for each child
    35-39   $0.06   Spouse and Child(ren)   50% spouse
    40-44   $0.10       20% for each child
    45-49   $0.13        
    50-54   $0.25   Are only Accidental Deaths covered?   No, there are benefits for certain
   

55-59

60-64

65+

 

$0.41

$0.54

$0.84

      dismemberments and paralysis
       

 

What is the Monthly Cost?

 

 

Associate: $.22 per $10,000 Dependents: $.40 per $10,000

            Will My Benefit Continue if I get Disabled?   Yes, until you are no longer eligible for this benefit
Will My Benefit Continue if I get Disabled?   Yes   Can I keep my Life Insurance When I Retire?   No
Is there a Living Benefit if I develop a Terminal Condition?   Yes   Can I Convert Coverage to an Individual Policy when I Terminate employment?   No
Can I Convert Coverage to an Individual Policy when I Terminate employment?   Yes        


Dependents' Life   Long Term Disability

(Optional)


 

(Provided by Kohl’s)


How much Life Ins. can I buy for my Dependents?  

Option I


 

Option II


 

How long must I be Disabled before

Benefits begin?

  180 days
Spouse   $5,000   $10,000        

Child(ren) over 6 months to age 19 or 25 if a

full-time student

  $2,000   $5,000   What is my Benefit?  

60% of your basic monthly

earnings to a maximum

monthly benefit of $10,000

Child(ren) 14 days to 6 months   $100   $100      
How much does it Cost?   $1.25 per month   $2.50 per month        
Can I cover a dependent who is confined in a health care facility or who is unable to perform normal activities?   You can enroll them but coverage will not become effective until the dependent is no longer confined and is able to perform normal activities   How Long will Benefits continue?   Until you are no longer disabled or you reach normal retirement age
   

 

Are there special Limits for disabilities due

to Mental Disorders or Substance Abuse?

 

 

Yes, benefits for these disabilities are

generally limited to 24 months

   

 

Will my Benefit be offset by other Sources

of Income?

 

 

Yes

   

 

Is there a Partial Disability Benefit?

  Yes
   

 

Are Pre-Existing Conditions covered?

 

 

You will not receive any benefits for a disability which begins in the first 12 months of your being insured if the disability is due to a pre-existing condition

           

 

Can I Convert Coverage to an Individual Policy when I Terminate employment?

 

 

No

 

Certain exclusions exist for each benefit.

Amounts of Basic Life Insurance in excess of $50,000 are taxed by the IRS as imputed income.

Amounts in excess of $1,000,000 ($400,000 if age 60 or over) are not guaranteed. Satisfactory evidence of good health will be required.

You will become eligible for these benefits beginning with your first day of active work. If you waive benefits and later decide to enroll for them, you must submit satisfactory evidence of good health. You will be eligible to enroll in or change your benefits during open enrollment of each year. Benefit changes made during open enrollment are effective on April 1 of each year.

 

This summary is for illustrative purposes only and is not intended to be a complete description of your benefits.

The benefits described in this summary are not guaranteed.

The above benefits may differ slightly from those benefits previously insured by Reliance Standard.

Please refer to the Summary Plan Descriptions (available from Corporate Human Resources—Benefit Department) for more detail.

Outside Director Stock Option Agreement

EXHIBIT 10.14

 

KOHL’S CORPORATION

OUTSIDE DIRECTOR STOCK OPTION AGREEMENT

 

NAME


 

GRANT DATE


 

NUMBER

OF SHARES


  

OPTION PRICE

PER SHARE


  

SOCIAL

SECURITY

NUMBER


   

EXPIRATION DATE


             

 

The Board of Directors of Kohl’s Corporation (the “Board”) has approved granting to the director named above (“Director”) a nonstatutory option (“Option”) to purchase shares of Kohl’s Corporation (“Kohl’s”) common stock pursuant to the 1997 Stock Option Plan for Outside Directors (“Plan”) on the terms and subject to the conditions described below. The Board and the Director agree as follows:

 

1. Number of Shares Optioned; Option Price.

 

Kohl’s grants to Director the right and option to purchase, in the aggregate, the number of shares of Kohl’s $0.01 par value common stock (“Common Shares”) shown above at the option price per share shown above. Except as provided by this Agreement, the Option granted shall be irrevocable. The Common Shares which Director is entitled to purchase will be either Kohl’s authorized but unissued common stock or Kohl’s treasury shares. The granting of the Option shall impose no obligation on Director to exercise such Option.

 

2. Time Limitations on Exercise of Option.

 

Except as provided in the Plan or in this Agreement, and unless the Board establishes otherwise, Director is entitled to purchase, in whole or in part, not more than percentage portion of the total number of Common Shares shown above according to the percentages and on or after the anniversary dates specified below, but before a date or event of termination as described in this Agreement as follows:

 

Anniversary Date

After Option Grant


 

Number of

Options Exercisable


 

 

Except as provided in the Plan or in this Agreement, this Option may not be exercised after the expiration of ten (10) years from the date it is granted (the “Expiration Date”). This Option may not be exercised for fractional Common Shares.

 

3. Termination.

 

If Director ceases to be a Director of Kohl’s for any reason, Director shall have until the Expiration Date to exercise this Option to the same extent to which Director would otherwise be entitled to exercise this Option on or prior to the date of such termination as provided in Paragraph 2. To the extent Director is not entitled to exercise this Option prior to the date of Director’s termination, such outstanding and unexercised Option shall immediately lapse and Director shall have no further rights with respect to it.

 

4. Rights In the Event of Director’s Death.

 

In the event of Director’s death while actively participating on the Kohl’s Board, the number of Common Shares for which the Option may be exercised shall be the total number of Common Shares granted to Director pursuant to this Option Agreement which remain outstanding and unexercised as of the date of Director’s death. In the event of Director’s death following Director’s resignation from Kohl’s Board, the number of Common Shares for which the Option may be exercised shall be limited to that number of Common Shares the Director would otherwise be entitled to exercise this Option on the date of Director’s resignation from Kohl’s Board, as provided in paragraph 2.

 

5. Method of Exercising Option.

 

Director may exercise the Option on or after the appropriate anniversary date (and before a date or event of termination) in whole or in part, from time to time by providing to Kohl’s (i) a written notice identifying this Option and stating the number of Common Shares which Director desires to purchase; and (ii) payment of the option price per share for the Common Shares then being acquired by full payment for the Common Shares being purchased. This Option will be considered exercised with respect to the number of Common Shares Director desires to purchase on the date that Kohl’s receives Director’s notice of exercise and payment. Director shall not acquire any rights or privileges as a shareholder of Kohl’s for any Common Shares issuable upon the exercise of this Option until such Common Shares have been duly issued by Kohl’s.


6. Prohibition Against Transfer, Pledge, and Attachment.

 

This Option, and the rights and privileges conferred by it, is personal to Director and may not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) during Director’s lifetime and shall be exercisable only by Director. Director may transfer this Option, and the rights and privileges conferred by it, upon Director’s death, either by will or under the laws of descent and distribution, or by beneficiary designation made in such form and subject to such limitations as may from time to time be acceptable to the Board and delivered to and accepted by the Board. All distributees shall be subject to all of the terms and conditions of this Agreement to the same extent as if Director were still alive. This Option, and the rights and privileges conferred by it, may not be subjected to execution, attachment or similar process.

 

7. Notices.

 

Any notice to be given to Kohl’s under the terms of this Agreement shall be addressed to the attention of Kohl’s Chairman, N56 W17000 Ridgewood Drive, Menomonee Falls, Wisconsin 53051, and any notice to be given to Director shall be addressed to him at his address as he may designate in writing.

 

8. Provisions of the Plan Control.

 

This Option is subject to, and qualified in its entirety by reference to, the terms and conditions of the Plan under which it is granted and the provisions of the Plan shall be incorporated into and be a part of this Option Agreement. The Plan empowers the Board to make interpretations, rules and regulations under it. Determination by the Board with respect to the Plan shall be binding upon Director.

 

9. Taxes.

 

Kohl’s may require payment of or withhold any tax which it believes is required to be the obligation of Director as a result of the grant or exercise of this Option, and Kohl’s may defer making delivery of Common Shares or cash payable hereunder until arrangements satisfactory to Kohl’s have been made for such tax obligations.

 

Kohl’s has caused this Agreement to be executed and Director has executed the same as evidence of Director’s acceptance hereof and upon the terms and conditions herein set forth as of the grant date shown above.

 

KOHL’S CORPORATION
By:  

/s/ R. Lawrence Montgomery


    R. Lawrence Montgomery, Chairman
Director:  

 


Employment Agreement

EXHIBIT 10.30

 

EMPLOYMENT AGREEMENT

 

THIS EMPLOYMENT AGREEMENT (“Agreement”) is executed as of this      day of                 , 20    , by and between Kohl’s Department Stores, Inc. (“Company”) and «Name» (“Employee”).

 

RECITALS

 

The Company desires to employ Employee, and Employee desires to be employed by the Company, on the terms and conditions set forth herein.

 

The parties believe it is in their best interests to make provision for certain aspects of their relationship during and after the period in which Employee is employed by the Company.

 

NOW, THEREFORE, in consideration of the premises and the mutual agreements and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Company and Employee (“Parties”), the Parties agree as follows:

 

ARTICLE I

EMPLOYMENT

 

1.1 Term of Employment. The Company employs Employee, and Employee accepts employment by the Company, for the              (    ) year period commencing on                 , 20     and ending on                 , 20     (“Initial Term”), subject to earlier termination as hereinafter set forth in Article IV, below. This Agreement shall be automatically extended for successive              (    ) year periods (collectively, “Renewal Terms”; individually, “Renewal Term”) unless, at least              (    ) months prior to the expiration of the Initial Term or the then current Renewal Term, either party provides the other with a written notice of intention not to renew, in which case this Agreement shall terminate as of the end of the Initial Term or said Renewal Term, as applicable. If this Agreement is extended, the terms of this Agreement during such Renewal Term shall be the same as the terms in effect immediately prior to such extension (including the early termination provisions set forth in Article IV, below), subject to any such changes or modifications as mutually may be agreed between the Parties as evidenced in a written instrument signed by both the Company and Employee. If Employee’s employment is terminated for any reason specified in Section 4.1, below, after either party has provided a notice of non-renewal under this Section 1.1, such termination will be treated as a termination under the applicable provision of Section 4.1 and not as a termination due to non-renewal under this Section 1.1.

 

1.2 Position and Duties. Employee shall be employed in the position of «Title», and shall be subject to the authority of, and shall report to, the Company’s Chief Executive Officer (“CEO”) and/or Board of Directors (“Board”). Employee’s duties and responsibilities shall include all those customarily attendant to the position of «Title» and such other duties and responsibilities as may be assigned from time to time by the Company’s CEO and/or Board. Employee shall devote


Employee’s entire business time, attention and energies exclusively to the business interests of the Company while employed by the Company except as otherwise specifically approved in writing by the Company’s CEO and/or Board. During the Initial Term and any Renewal Term, Employee may not participate on the board of directors or any similar governing body of any for-profit entity other than the Company, unless first approved in writing by the Company’s Board.

 

ARTICLE II

COMPENSATION AND OTHER BENEFITS

 

2.1 Base Salary. The Company shall pay Employee an annual base salary as described in Exhibit A (a copy of which is attached hereto and incorporated herein), payable in accordance with the normal payroll practices and schedule of the Company (“Base Salary”). The Base Salary shall be subject to adjustment from time to time as determined by the Board.

 

2.2 Benefit Plans and Fringe Benefits. During the Initial Term or any Renewal Term, Employee will be eligible to participate in the plans, programs and policies, including without limitation group medical insurance, fringe benefits, paid vacation, expense reimbursement and incentive pay plans, which the Company makes available to senior executives of the Company in accordance with the eligibility requirements, terms and conditions of such plans, programs and policies in effect from time to time. Employee acknowledges and agrees that the Company may amend, modify or terminate any of such plans, programs and policies at any time at its discretion.

 

2.3 Equity Plans or Programs. During the Initial Term or any Renewal Term, Employee may be eligible to participate in stock option, phantom stock, restricted stock or other similar equity-incentive plans or programs which the Company may establish from time to time. The terms of any such plans or programs, and Employee’s eligibility to participate in them, shall be established by the Board at its sole discretion. Employee acknowledges and agrees that the Company may amend, modify or terminate any of such plans or programs at any time at its discretion.

 

ARTICLE III

RESTRICTED STOCK

 

Upon execution of this Agreement and the Restricted Stock Agreement of even date herewith between Employee and the Company (a copy of which is attached hereto as Exhibit B and incorporated herein), Employee will be granted restricted stock of the Company pursuant to the terms of such Restricted Stock Agreement. Employee understands and acknowledges that his/her rights and obligations regarding the restricted stock granted to him/her under this Agreement are governed by the Restricted Stock Agreement executed herewith.

 

2


ARTICLE IV

TERMINATION

 

4.1 Right to Terminate; Automatic Termination.

 

(a) Termination Without Cause. Subject to Section 4.2, below, the Company may terminate Employee’s employment and all of the Company’s obligations under this Agreement at any time and for any reason.

 

(b) Termination For Cause. Subject to Section 4.2, below, the Company may terminate Employee’s employment and all of the Company’s obligations under this Agreement at any time for Cause (defined below) by giving notice to Employee stating the basis for such termination, effective immediately upon giving such notice or at such other time thereafter as the Company may designate. “Cause” shall mean any of the following: (i) Employee’s willful failure to substantially perform Employee’s duties after a written demand for substantial performance is delivered to Employee that specifically identifies the manner in which the Company believes that Employee has not substantially performed his/her duties, and Employee has failed to demonstrate substantial efforts to resume substantial performance of Employee’s duties on a continuous basis within thirty (30) calendar days after receiving such demand; provided, however, that failure to meet sales or financial performance objectives, by itself, will not constitute “Cause”; (ii) Employee’s willful violation of a material provision of “Kohl’s Ethical Standards and Responsibilities” which is materially injurious to the Company, monetarily or otherwise; (iii) any dishonest or fraudulent conduct which results, or is intended to result, in gain to Employee or Employee’s personal enrichment at the expense of the Company; (iv) any material breach of this Agreement by Employee after a written notice of such breach is delivered to Employee that specifically identifies the manner in which the Company believes that Employee has breached this Agreement, and Employee has failed to cure such breach within thirty (30) calendar days after receiving such demand; provided, however, that no cure period shall be required for breaches of Articles V, VI or VIII, below, of this Agreement; or (v) conviction of Employee, after all applicable rights of appeal have been exhausted or waived, of any crime that materially discredits the Company or is materially detrimental to the Company’s reputation or goodwill. The term “willful” as used in this Article IV means any act or omission committed in bad faith or without a reasonable belief that the act or omission was in the best interest of the Company.

 

(c) Termination for Good Reason. Subject to Section 4.2, below, Employee may terminate Employee’s employment and all of the Company’s obligations under this Agreement at any time for Good Reason (defined below) by giving notice to the Company stating the basis for such termination, effective immediately upon giving such notice. “Good Reason” shall mean any of the following: (i) a significant reduction in the Employee’s status, title, position, responsibilities or Base Salary; (ii) any material breach by the Company of this Agreement; (iii) any purported termination of the Employee’s employment for Cause which does not comply with the terms of this Agreement; or (iv) a mandatory relocation of Employee’s employment with the Company from the area, except for travel reasonably required in the performance of Employee’s duties and responsibilities; provided, however, that no termination shall be for Good Reason until the Employee has provided the Company with written notice of the conduct alleged to have caused Good Reason and at least thirty (30) calendar days have elapsed and the Company has failed to demonstrate substantial efforts to cure any such alleged conduct after the Company’s receipt of such written notice from Employee.

 

3


(d) Termination by Death or Disability. Subject to Section 4.2, below, Employee’s employment and the Company’s obligations under this Agreement shall terminate automatically, effective immediately and without any notice being necessary, upon Employee’s death or a determination of Disability of Employee. For purposes of this Agreement, “Disability” means the inability of Employee, due to a physical or mental impairment, to perform the essential functions of Employee’s job with the Company, with or without a reasonable accommodation and such inability has or is reasonably anticipated to continue for a period in excess of one hundred eighty (180) calendar days. A determination of Disability shall be made by the Company, which may, at its sole discretion, consult with a physician or physicians satisfactory to the Company, and Employee shall cooperate with any efforts to make such determination. Any such determination shall be conclusive and binding on the parties. Any determination of Disability under this Section 4.1(d) is not intended to alter any benefits any party may be entitled to receive under any disability insurance policy carried by either the Company or Employee with respect to Employee, which benefits shall be governed solely by the terms of any such insurance policy.

 

(e) Termination by Resignation. Subject to Section 4.2, below, Employee’s employment and the Company’s obligations under this Agreement shall terminate automatically, effective immediately upon Employee’s provision of written notice to the Company of Employee’s resignation from employment with the Company or at such other time as may be mutually agreed between the Parties following the provision of such notice.

 

4.2 Rights Upon Termination.

 

(a) Termination By Company for Cause, By Employee Other Than For Good Reason or By Employee’s Non-Renewal. If Employee’s employment is terminated by the Company pursuant to Section 4.1(b), above, by Employee pursuant to Section 4.1(e), above, or due to non-renewal by Employee pursuant to Section 1.1, above, Employee shall have no further rights against the Company hereunder, except for the right to receive (i) any unpaid Base Salary with respect to the period prior to the effective date of termination together with payment of any vacation that Employee has accrued but not used through the date of termination (collectively “Final Pay”); (ii) reimbursement of expenses to which Employee is entitled under Section 2.2, above (“Final Expenses”); and (iii) Employee’s unpaid bonus, if any, attributable to any complete fiscal year of the Company ended before the date of termination. Any such bonus payment shall be made at the same time as any such bonus is paid to other similarly situated executives of the Company. Furthermore, under this Section 4.2(a), vesting of any Company stock options granted to Employee ceases on the date of termination, and any unvested stock options lapse and are forfeited immediately upon termination. If Employee’s employment is terminated by Employee pursuant to Section 4.1(e), above, Employee shall also be eligible to receive a Severance Payment (defined below), the payment of which is contingent upon Employee’s execution of a written release agreement (in a form satisfactory to the Company) containing, among other things, a general release of claims against the Company. For purposes of this Section 4.2(a), “Severance Payment” means payment of          percent (        ) of Employee’s Base Salary, payable for              (    )                  following the effective date of termination pursuant to the normal payroll practices and schedule of the Company. The amount of such Severance Payment shall be reduced by any compensation received by Employee during the remainder of the Initial Term or the then current Renewal Term, as applicable, and Employee agrees to reimburse the Company for the amount of such reduction.

 

4


Employee acknowledges and agrees that he/she has an obligation to use his/her reasonable efforts to secure other employment and that his/her failure to do so, as determined at the sole discretion of the Board, is a breach of this Agreement subject to Section 9.6, below.

 

(b) Termination By Company’s Non-Renewal or Due to Employee’s Death. If Employee’s employment is terminated due to non-renewal by the Company pursuant to Section 1.1, above, or due to Employee’s death pursuant to Section 4.1(d), above, Employee shall have no further rights against the Company hereunder, except for the right to receive (i) Final Pay; (ii) Final Expenses; and (iii) Employee’s unpaid bonus, if any, attributable to any complete fiscal year of the Company ended before the date of termination plus a share of any bonus attributable to the fiscal year of the Company during which the date of termination occurs (pro-rated, as determined by the Company, for the portion of the fiscal year prior to the date of termination). Any such bonus payments shall be made at the same time as any such bonuses are paid to other similarly situated executives of the Company. Furthermore, under this Section 4.2(b), vesting of any Company stock options granted to Employee prior to the date of termination shall continue as scheduled until March 31 of the calendar year in which the term of this Agreement expires, after which such vesting ceases, and any unvested stock options lapse and are forfeited; provided, however, that if Employee’s termination is due to Employee’s death, all Company stock options granted to Employee immediately vest upon the date of Employee’s death.

 

(c) Termination Due to Disability. If Employee’s employment is terminated due to Employee’s Disability pursuant to Section 4.1(d), above, Employee shall have no further rights against the Company hereunder, except for the right to receive (i) Final Pay; (ii) a Severance Payment (defined below), the payment of which is contingent upon Employee’s execution of a written release agreement (in a form satisfactory to the Company) containing, among other things, a general release of claims against the Company; (iii) Final Expenses; and (iv) Employee’s unpaid bonus, if any, attributable to any complete fiscal year of the Company ended before the date of termination plus a share of any bonus attributable to the fiscal year of the Company during which the date of termination occurs (pro-rated, as determined by the Company, for the portion of the fiscal year prior to the date of termination). Any such bonus payments shall be made at the same time as any such bonuses are paid to other similarly situated executives of the Company. For purposes of this Section 4.2(c), “Severance Payment” means              (_) months of Base Salary, payable in equal installments during the              (_) month period following Employee’s exhaustion of any short-term disability benefits provided by the Company, in accordance with the normal payroll practices and schedule of the Company. The amount of such Severance Payment shall be reduced by any compensation (including any payments received by Employee under any disability plans, programs or policies offered by the Company) received by Employee during the six (6) month period following the date of termination, and Employee agrees to reimburse the Company for the amount of any such reduction. Employee acknowledges and agrees that, upon the cessation, if any, of such Disability, he/she has an obligation to use his/her reasonable efforts to secure other employment and that his/her failure to do so, as determined at the sole discretion of the Board, is a breach of this Agreement subject to Section 9.6, below. Furthermore, under this Section 4.2(c), vesting of any Company stock options granted to Employee ceases on the date of termination, and any unvested stock options lapse and are forfeited immediately upon termination.

 

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(d) Termination By Company Without Cause or By Employee for Good Reason.

 

i. No Change of Control. If Employee’s employment is terminated by the Company pursuant to Section 4.1(a), above, or by the Employee pursuant to Section 4.1(c), above, and such termination does not occur within one (1) year after the occurrence of a Change of Control (defined below), Employee shall have no further rights against the Company hereunder, except for the right to receive (A) Final Pay; (B) a Severance Payment (defined below), the payment of which is contingent upon Employee’s execution of a written release agreement (in a form satisfactory to the Company) containing, among other things, a general release of claims against the Company; (C) Final Expenses; (D) Employee’s unpaid bonus, if any, attributable to any complete fiscal year of the Company ended before the date of termination plus a share of any bonus attributable to the fiscal year of the Company during which the date of termination occurs (pro-rated, as determined by the Company, for the portion of the fiscal year prior to the date of termination); provided, however, that such bonus payments shall be made at the same time as any such bonuses are paid to other similarly situated executives of the Company; (E) outplacement services from an outplacement service company of the Company’s choosing at a cost not to exceed Twenty Thousand and no/100 Dollars ($20,000.00), payable directly to such outplacement service company (“Outplacement Services”); and (F) Health Insurance Continuation (defined below). For purposes of this Section 4.2(d)(i), “Severance Payment” means payment of Employee’s Base Salary for                                          pursuant to the normal payroll practices and schedule of the Company. The amount of such Severance Payment shall be reduced by any compensation received by Employee during the remainder of the Initial Term or the then current Renewal Term, as applicable, and Employee agrees to reimburse the Company for the amount of any such deduction. Furthermore, under this Section 4.2(d)(i), vesting of any Company stock options granted to Employee prior to the date of termination shall continue as scheduled until March 31 of the calendar year in which the term of this Agreement expires, after which such vesting ceases, and any unvested stock options lapse and are forfeited.

 

ii. Change of Control. If Employee’s employment is terminated by the Company pursuant to Section 4.1(a), above, or by the Employee pursuant to Section 4.1(c), above, and such termination occurs within one (1) year after the occurrence of a Change of Control (defined below), Employee shall have no further rights against the Company hereunder, except for the right to receive, (A) Final Pay; (B) a Severance Payment (defined below), the payment of which is contingent upon Employee’s execution of a written release agreement (in a form satisfactory to the Company) containing, among other things, a general release of claims against the Company, (C) Final Expenses; (D) Employee’s unpaid bonus, if any, attributable to any complete fiscal year of the Company ended before the date of termination plus a share of any bonus attributable to the fiscal year of the Company during which the date of termination occurs (pro-rated, as determined by the Company, for the portion

 

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of the fiscal year prior to the date of termination); provided, however, that such bonus payments shall be made at the same time as any such bonuses are paid to other similarly situated executives of the Company; and (E) Outplacement Services. For purposes of this Section 4.2(d)(ii), “Severance Payment” means an amount equal to the sum of (x) Employee’s Base Salary for the period of time equal to the longer of the remainder of the then current term of this Agreement or                                          (“Severance Period”) plus (y) an amount equal to the average (calculated at the sole discretion of the Company) of the three (3) most recent annual incentive compensation plan payments, if any, paid to Employee prior to the effective date of termination multiplied times the number of incentive plan payments Employee would have received during the remainder of the then current term of this Agreement. Furthermore, under this Section 4.2(d)(ii), vesting of any Company stock options granted to Employee prior to termination shall occur immediately upon the date of termination.

 

iii. Definition – Change of Control. “Change of Control” means the occurrence of (1) the acquisition (other than from the Company) by any person, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)), other than the Company, a subsidiary of the Company or any employee benefit plan or plans sponsored by the Company or any subsidiary of the Company, directly or indirectly, of beneficial ownership (within the meaning of Exchange Act Rule 13d-3) of thirty-three percent (33%) or more of the then outstanding shares of common stock of the Company or voting securities representing thirty-three percent (33%) or more of the combined voting power of the Company’s then outstanding voting securities ordinarily entitled to vote in the election of directors unless the Incumbent Board (defined below), before such acquisition or within thirty (30) days thereafter, deems such acquisition not to be a Change of Control; or (2) individuals who, as of the date of this Agreement, constitute the Board (as of such date, “Incumbent Board”) ceasing for any reason to constitute at least a majority of such Board; provided, however, that any person becoming a director subsequent to the date of this Agreement whose election, or nomination for election by the shareholders of the Company, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be for purposes of this Agreement, considered as though such person were a member of the Incumbent Board but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest which was (or, if threatened, would have been) subject to Exchange Act Rule 14a-12(c); or (3) the consummation of any merger, consolidation or share exchange of the Company with any other corporation, other than a merger, consolidation or share exchange which results in more than sixty percent (60%) of the outstanding shares of the common stock, and voting securities representing more than sixty percent (60%) of the combined voting power of then outstanding voting securities entitled to vote generally in the election of directors, of the surviving, consolidated or resulting corporation being then beneficially owned, directly or indirectly, by the persons who were the Company’s shareholders immediately prior to such transaction in substantially the same proportions as their

 

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ownership, immediately prior to such transaction, of the Company’s then outstanding Common Stock or then outstanding voting securities, as the case may be; or (4) the consummation of any liquidation or dissolution of the Company or a sale or other disposition of all or substantially all of the assets of the Company.

 

Following the occurrence of an event which is not a Change of Control whereby there is a successor company to the Company, or, if there is no such successor, whereby the Company is not the surviving corporation in a merger or consolidation, the surviving corporation or successor holding company (as the case may be), for purposes of this Agreement, shall thereafter be referred to as the Company.

 

iv. Definition – Health Insurance Continuation. For purposes of Section 4.2(d)(i), above, the term “Health Insurance Continuation” means that, if Employee, following termination from employment under Section 4.2(d)(i), above, timely elects to participate in the Company’s group health insurance plans pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), the Company will pay the normal monthly employer’s cost of coverage under the Company’s group health insurance plans toward such COBRA coverage until the earlier of (i) the end of the term of this Agreement or (ii) the end of the 18-month period for which Employee is eligible for COBRA. If the end of the term of this Agreement is later than the end of the 18-month period for which Employee is eligible for COBRA, the Company will, until the end of the term of this Agreement in which such termination occurred, pay the normal monthly employer’s cost of coverage under the Company’s group health insurance plans to, at its sole discretion, allow Employee to continue to participate in such plans (if allowed by law and the Company’s policies, plans and programs) or allow Employee to purchase reasonably comparable individual health insurance coverage through the end of the term of this Agreement. Employee acknowledges and agrees that Employee is responsible for paying the balance of any costs not paid for by the Company under this Section 4.2(d)(iv) which are associated with Employee’s participation in the Company’s health insurance plans or individual health insurance and that Employee’s failure to pay such costs may result in the termination of Employee’s participation in such plans or insurance. Employee acknowledges and agrees that the Company may deduct from any Severance Payment Employee receives pursuant to Section 4.2(d)(i), above, amounts that Employee is responsible to pay for Health Insurance Continuation under this Section 4.2(d)(iv). The Health Insurance Continuation provided under this 4.2(d)(iv) will cease on the date on which Employee becomes eligible for health insurance coverage under another employer’s group health insurance plan, and, within five (5) calendar days of Employee becoming eligible for health insurance coverage under another employer’s group health insurance plan, Employee agrees to inform the Company of such fact in writing.

 

4.3 Return of Records. Upon termination of employment, for whatever reason, or upon request by the Company at any time, Employee shall immediately return to the Company

 

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all documents, records, and materials belonging and/or relating to the Company, and all copies of all such materials. Upon termination of employment, for whatever reason, or upon request by the Company at any time, Employee further agrees to destroy such records maintained by Employee on Employee’s own computer equipment.

 

ARTICLE V

CONFIDENTIALITY

 

5.1 Acknowledgments. Employee acknowledges and agrees that, as an integral part of its business, the Company has expended a great deal of time, money and effort to develop and maintain confidential, proprietary and trade secret information to compete against similar businesses and that this information, if misused or disclosed, would be harmful to the Company’s business and competitive position in the marketplace. Employee further acknowledges and agrees that in Employee’s position with the Company, the Company provides Employee with access to its confidential, proprietary and trade secret information, strategies and other confidential business information that would be of considerable value to competitive businesses. As a result, Employee acknowledges and agrees that the restrictions contained in this Article V are reasonable, appropriate and necessary for the protection of the Company’s confidential, proprietary and trade secret information.

 

5.2. Confidentiality Obligations. During the term of Employee’s employment under this Agreement, Employee will not directly or indirectly use or disclose any Confidential Information or Trade Secrets (defined below) except in the interest and for the benefit of the Company. After the termination, for whatever reason, of Employee’s employment with the Company, Employee will not directly or indirectly use or disclose any Trade Secrets unless such information ceases to be deemed a Trade Secret by means of one of the exceptions set forth in Section 5.3(c), below. For a period of two (2) years following termination, for whatever reason, of Employee’s employment with the Company, Employee will not directly or indirectly use or disclose any Confidential Information, unless such information ceases to be deemed Confidential Information by means of one of the exceptions set forth in Section 5.3(c), below.

 

5.3 Definitions.

 

(a) Trade Secret. The term “Trade Secret” shall have that meaning set forth under applicable law. This term is deemed by the Company to specifically include all Company-created computer source code and any confidential information received from a third party with whom the Company has a binding agreement restricting disclosure of such confidential information.

 

(b) Confidential Information. The term “Confidential Information” shall mean all non-Trade Secret or proprietary information of the Company which has value to the Company and which is not known to the public or the Company’s competitors, generally, including, but not limited to, new products, customer lists, pricing policies and strategies, employment records and policies, operational methods, marketing plans and strategies, advertising plans and strategies, product development techniques and plans, business acquisition and divestiture plans, resources, sources of supply, suppliers and supplier contractual

 

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relationships and terms, technical processes, designs, inventions, research programs and results, source code, short-term and long-range planning, projections, information systems, sales objectives and performance, profits and profit margins, and seasonal plans, goals and objectives.

 

(c) Exclusions. Notwithstanding the foregoing, the terms “Trade Secret” and “Confidential Information” shall not include, and the obligations set forth in this Article V shall not apply to, any information which: (i) can be demonstrated by Employee to have been known by Employee prior to Employee’s employment by the Company; (ii) is or becomes generally available to the public through no act or omission of Employee; (iii) is obtained by Employee in good faith from a third party who discloses such information to Employee on a non-confidential basis without violating any obligation of confidentiality or secrecy relating to the information disclosed; or (iv) is independently developed by Employee outside the scope of Employee’s employment without use of Confidential Information or Trade Secrets.

 

ARTICLE VI

RESTRICTED SERVICES OBLIGATION

 

6.1 Acknowledgments. Employee acknowledges and agrees that the Company is one of the leading retail companies in the United States, with department stores throughout the United States, and that the Company compensates executives like Employee to, among other things, develop and maintain valuable goodwill and relationships on the Company’s behalf (including relationships with customers, suppliers and vendors) and to maintain business information for the Company’s exclusive ownership and use. As a result, Employee acknowledges and agrees that the restrictions contained in this Article VI are reasonable, appropriate and necessary for the protection of the Company’s goodwill, customer, supplier and vendor relationships and confidential information and trade secrets. Employee further acknowledges and agrees that the restrictions contained in this Article VI will not pose an undue hardship on Employee or Employee’s ability to find gainful employment.

 

6.2 Restricted Services Obligation. For the                          period following termination, for whatever reason, of Employee’s employment with the Company, Employee will not, directly or indirectly, provide Restricted Services (defined below) for or on behalf of any Competitive Business (defined below). During such                          period, Employee also will not, directly or indirectly, provide any Competitive Business with any advice or counsel in the nature of the Restricted Services.

 

6.3 Definitions. For purposes of this Article VI, the following are defined terms:

 

(a) Restricted Services. “Restricted Services” shall mean services of any kind or character comparable to those Employee provided to the Company during the eighteen (18) month period immediately preceding Employee’s last date of employment with the Company.

 

(b) Competitive Business. “Competitive Business” shall mean                         .

 

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(c) Goods. “Goods” means merchandise categories that comprise at least ten percent (10%) of the Company’s annual revenues during the twelve (12) months prior to Employee’s last date of employment with the Company.

 

ARTICLE VII

BUSINESS IDEAS; NON-DISPARAGEMENT

 

7.1 Assignment of Business Ideas. Employee shall immediately disclose to the Company a list of all inventions, patents, applications for patent, copyrights, and applications for copyright in which Employee currently holds an interest. The Company will own, and Employee hereby assigns to the Company, all rights in all Business Ideas. All Business Ideas which are or form the basis for copyrightable works shall be considered “works for hire” as that term is defined by United States Copyright Law. Any works that are not found to be “works for hire” are hereby assigned to the Company. While employed by the Company and for one (1) year thereafter, Employee will promptly disclose all Business Ideas to the Company and execute all documents which the Company may reasonably require to perfect its patent, copyright and other rights to such Business Ideas throughout the world. After Employee’s employment with the Company terminates, for whatever reason, Employee will cooperate with the Company to assist the Company in perfecting its rights to any Business Ideas including executing all documents which the Company may reasonably require.

 

7.2 Business Ideas. The term “Business Ideas” as used in this Agreement means all ideas, inventions, data, software, developments and copyrightable works, whether or not patentable or registrable, which Employee originates, discovers or develops, either alone or jointly with others while Employee is employed by the Company and for one (1) year thereafter and which are (a) related to any business known by Employee to be engaged in or contemplated by the Company, (b) originated, discovered or developed during Employee’s working hours, or (c) originated, discovered or developed in whole or in part using materials, labor, facilities, Confidential Information, Trade Secrets, or equipment furnished by the Company.

 

7.3 Non-Disparagement. Employee agrees not to engage at any time in any form of conduct or make any statements or representations, or direct any other person or entity to engage in any conduct or make any statements or representations, that disparage, criticize or otherwise impair the reputation of the Company, its affiliates, parents and subsidiaries and their respective past and present officers, directors, stockholders, partners, members, agents and employees. Nothing contained in this Section 7.3 shall preclude Employee from providing truthful testimony or statements pursuant to subpoena or other legal process or in response to inquiries from any government agency or entity.

 

ARTICLE VIII

EMPLOYEE NON-SOLICITATION

 

During the term of Employee’s employment with the Company and for                          thereafter, Employee shall not directly or indirectly encourage any Company employee to terminate his/her employment with the Company.

 

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ARTICLE IX

GENERAL PROVISIONS

 

9.1 Notices. Any and all notices, consents, documents or communications provided for in this Agreement shall be given in writing and shall be personally delivered, mailed by registered or certified mail (return receipt requested) or sent by courier, confirmed by receipt, and addressed as follows (or to such other address as the addressed party may have substituted by notice pursuant to this Section 9.1):

 

(a) If to the Company:

 

Kohl’s Department Stores, Inc.

N56 W17000 Ridgewood Drive

Menomonee Falls, WI 53051

Attn: Richard Schepp, General Counsel

 

(b) If to Employee:

_____________________________

_____________________________

_____________________________

 

Such notice, consent, document or communication shall be deemed given upon personal delivery or receipt at the address of the party stated above or at any other address specified by such party to the other party in writing, except that if delivery is refused or cannot be made for any reason, then such notice shall be deemed given on the third day after it is sent.

 

9.2 Employee Disclosures and Acknowledgments.

 

(a) Prior Obligations. Following is a list of prior obligations (written and oral), such as confidentiality agreements or covenants restricting future employment or consulting, that Employee has entered into which may restrict Employee’s ability to perform Employee’s duties as an Employee for the Company:                                        ______________________________________________________________________________________________________________________

______________________________________________________________________________________________________________________.

 

(b) Confidential Information of Others. Employee certifies that Employee has not, and will not, disclose or use during Employee’s time as an employee of the Company, any confidential information which Employee acquired as a result of any previous employment or under a contractual obligation of confidentiality or secrecy before Employee became an employee of the Company.

 

(c) Scope of Restrictions. By entering into this Agreement, Employee acknowledges the nature of the Company’s business and the nature and scope of the restrictions set forth in Articles V, VI and VIII, above, including specifically Wisconsin’s Uniform Trade Secrets Act, presently § 134.90, Wis. Stats. Employee acknowledges and represents that the scope of such restrictions are appropriate, necessary and reasonable for the protection of the

 

12


Company’s business, goodwill, and property rights. Employee further acknowledges that the restrictions imposed will not prevent Employee from earning a living in the event of, and after, termination, for whatever reason, of Employee’s employment with the Company. Nothing herein shall be deemed to prevent Employee, after termination of Employee’s employment with the Company, from using general skills and knowledge gained while employed by the Company.

 

(d) Prospective Employers. Employee agrees, during the term of any restriction contained in Articles V, VI and VIII, above, to disclose such provisions to any future or prospective employer. Employee further agrees that the Company may send a copy of this Agreement to, or otherwise make the provisions hereof known to, any such employer.

 

9.3 Effect of Termination. Notwithstanding any termination of this Agreement, the Employee, in consideration of his employment hereunder, shall remain bound by the provisions of this Agreement which specifically relate to periods, activities or obligations upon or subsequent to the termination of the Employee’s employment.

 

9.4 Confidentiality of Agreement. Employee agrees that, with the exception of disclosures pursuant to Section 9.2(d), above, Employee will not disclose, directly or indirectly, the terms of this Agreement to any third party; provided, however, that following Employee’s obtaining a promise of confidentiality for the benefit of the Company from Employee’s tax preparer, accountant, attorney and spouse, Employee may disclose the terms of this Agreement to such of these individuals who have made such a promise of confidentiality. This provision shall not prevent Employee from disclosing such matters in testifying in any hearing, trial or other legal proceeding where Employee is required to do so.

 

9.5 Cooperation. Employee agrees to take all reasonable steps during and after Employee’s employment with the Company to make himself/herself available to and to cooperate with the Company, at its request, in connection with any legal proceedings or other matters in which it is or may become involved. Following Employee’s employment with the Company, the Company agrees to pay reasonable compensation to Employee and to pay all reasonable expenses incurred by Employee in connection with Employee’s obligations under this Section 9.5.

 

9.6 Effect of Breach. In the event that Employee breaches any provision of this Agreement, Employee agrees that the Company may suspend all additional payments to Employee under this Agreement (including any Severance Payment), recover from Employee any damages suffered as a result of such breach and recover from Employee any reasonable attorneys’ fees or costs it incurs as a result of such breach. In addition, Employee agrees that the Company may seek injunctive or other equitable relief, without the necessity of posting bond, as a result of a breach by Employee of any provision of this Agreement.

 

9.7 Entire Agreement. This Agreement contains the entire understanding and the full and complete agreement of the Parties and supersedes and replaces any prior understandings and agreements among the Parties, with respect to the subject matter hereof.

 

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9.8 Headings. The headings of sections and paragraphs of this Agreement are for convenience of reference only and shall not control or affect the meaning or construction of any of its provisions.

 

9.9 Consideration. Execution of this Agreement is a condition of Employee’s employment with the Company and Employee’s employment by the Company, and the benefits provided to Employee under this Agreement, constitute the consideration for Employee’s undertakings hereunder.

 

9.10 Amendment. This Agreement may be altered, amended or modified only in a writing, signed by both of the Parties hereto.

 

9.11 Assignability. This Agreement and the rights and duties set forth herein may not be assigned by Employee, but may be assigned by the Company, in whole or in part. This Agreement shall be binding on and inure to the benefit of each party and such party’s respective heirs, legal representatives, successors and assigns.

 

9.12 Severability. If any court of competent jurisdiction determines that any provision of this Agreement is invalid or unenforceable, then such invalidity or unenforceability shall have no effect on the other provisions hereof, which shall remain valid, binding and enforceable and in full force and effect, and such invalid or unenforceable provision shall be construed in a manner so as to give the maximum valid and enforceable effect to the intent of the Parties expressed therein.

 

9.13 Waiver of Breach. The waiver by either party of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by either party.

 

9.14 Governing Law; Construction. This Agreement shall be governed by the internal laws of the State of Wisconsin, without regard to any rules of construction concerning the draftsman hereof.

 

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year written above.

 

KOHL’S DEPARTMENT STORES, INC.:

 


By:

 

 


                                                                              ,                                                  
        [Title]
EMPLOYEE:    

 


«Name»

       

«Title»

       

 

15


EXHIBIT A

 

BASE COMPENSATION

 

16


EXHIBIT B

 

RESTRICTED STOCK AGREEMENT

 

17

Restricted Stock Agreement

EXHIBIT 10.31

 

RESTRICTED STOCK AGREEMENT

 

This Agreement is made and entered into as of the          day of                 , 20     by and between KOHL’S CORPORATION, a Wisconsin corporation (the “Company”), and «Name» (the “Executive”). All terms used herein and not otherwise defined shall have the same meaning as set forth in the Company’s 2003 Long-Term Compensation Plan (the “Plan”).

 

RECITALS:

 

The Compensation Committee of the Board of Directors of the Company (the “Committee”) desires to encourage Executive to enter into an employment agreement with the Company of even date herewith (the “Employment Agreement”), to provide Executive with a stronger incentive to strive for the continued success and growth of the Company, and to further align his/her interests with those of the Company’s shareholders.

 

The Committee has determined to award to the Executive) shares of the common stock of the Company (“Common Stock”), subject to the restrictions contained herein, pursuant to the Plan.

 

NOW, THEREFORE, in consideration of the benefits that the Company expects to be derived in connection with the services to be hereafter rendered to it or its subsidiaries by the Executive, the Company and the Executive hereby agree as follows:

 

ARTICLE I

 

Restricted Shares

 

1.1 Award of Restricted Shares. The Company hereby awards to the Executive                          (            ) shares of Common Stock (the “Restricted Shares”), subject to the restrictions contained herein and the provisions of the Plan.

 

1.2 Vesting of the Restricted Shares. Provided that the Executive is still in the employ of the Company, the Restricted Shares shall vest in accordance with the following schedule:

 

 

 

 

 

Notwithstanding the foregoing, the vesting of the Restricted Shares shall be treated as follows after termination of Executive’s employment with the Company:

 

(a) Termination By Company for Cause, By Executive Other Than for Good Reason or Due to Disability. If Executive’s employment is terminated by the Company pursuant to Section 4.1(b) of the Employment Agreement, by Executive pursuant to Section 4.1(e) of the Employment Agreement or due to Disability (defined in the Employment Agreement) pursuant to Section 4.1(d) of the Employment Agreement, the vesting of the Restricted Shares shall, on the date of such termination, cease and any unvested Restricted Shares shall be forfeited by Executive and revert to the Company.


(b) Termination Due to Executive’s Death. If Executive’s employment is terminated due to Executive’s death pursuant to Section 4.1(d) of the Employment Agreement, the Restricted Shares shall, upon such termination, vest immediately.

 

(c) Termination By Company Without Cause or By Executive for Good Reason. If Executive’s employment is terminated by the Company pursuant to Section 4.1(a) of the Employment Agreement or by the Executive pursuant to Section 4.1(c) of the Employment Agreement, the Restricted Shares shall, following such termination, continue to vest as scheduled through the end of the Initial Term or the then current Renewal Term, as applicable, of the Employment Agreement. Following the end of such term of the Employment Agreement, any unvested Restricted Shares shall be forfeited by Executive and revert to the Company.

 

(d) Termination By Non-Renewal. If Executive’s employment is terminated due to non-renewal by Executive or the Company pursuant to Section 1.1 of the Employment Agreement, the vesting of the Restricted Shares shall, on the date of such termination, cease and any unvested Restricted Shares shall be forfeited by Executive and revert to the Company; provided, however, that should Executive’s employment terminate pursuant to any of the subsections of Section 4.1 of the Employment Agreement following the provision of a notice of non-renewal under Section 1.1 of the Employment Agreement but before the end of the Initial Term or the then current Renewal Term (defined in the Employment Agreement), as applicable, the consequences, specified in the applicable subsection of this Section 1.2 (but not those specified in this Section 1.2(d)) associated with such earlier termination shall control the vesting, if any, of the Restricted Shares following such earlier termination.

 

(e) Change of Control. Pursuant to the Plan, any outstanding Restricted Shares shall become vested in the event of a Change of Control, as defined in the Plan.

 

Any Restricted Shares which do not vest shall be forfeited by Executive and revert to the Company. The period during which the Restricted Shares are unvested is referred to herein as the Restricted Period.

 

1.3 Shareholder Status. Prior to the vesting of the Restricted Shares, Executive shall have the right to vote the Restricted Shares, the right to receive and retain all regular cash dividends paid or distributed in respect of the Restricted Shares, and except as expressly provided otherwise herein, all other rights as a holder of outstanding shares of Common Stock. Notwithstanding the foregoing, the Executive shall not have the right to vote or to receive dividends with respect to the Restricted Shares with respect to record dates occurring after any of

 

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the Restricted Shares revert to the Company pursuant to Section 1.2 hereof. Until the Restricted Shares vest pursuant to Section 1.2 hereof, the Company shall retain custody of the stock certificates representing the Restricted Shares. As soon as practicable after the lapse of the restrictions, the Company shall issue or release or cause to be issued or released certificate(s) representing the shares, less any shares used to satisfy the obligation to withhold income and/or employment taxes in connection with the vesting of any Restricted Shares.

 

1.4 Prohibition Against Transfer. During the Restricted Period, the Restricted Shares may not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) by the Executive, or be subject to execution, attachment or similar process. Any transfer in violation of this Section 1.4 shall be void and of no further effect.

 

ARTICLE II

 

Miscellaneous

 

2.1 Provisions of the Plan Control. This Agreement shall be governed by the provisions of the Plan, the terms and conditions of which are incorporated herein by reference. The Plan empowers the Committee to make interpretations, rules and regulations thereunder, and, in general, provides that determinations of such Committee with respect to the Plan shall be binding upon the Executive. A copy of the Plan will be delivered to the Executive upon reasonable request.

 

2.2 Taxes. The Company may require payment of or withhold any income or employment tax which it believes is payable as a result of the grant or vesting of the Restricted Shares or any payments thereon or in connection therewith, and the Company may defer making delivery with respect to the shares until arrangements satisfactory to the Company have been made with regard to any such withholding obligation. In accordance with the Plan, the Company may withhold shares of Common Stock to satisfy such withholding obligations.

 

2.3 No Employment Rights. The award of the Restricted Shares pursuant to this Agreement shall not give the Executive any right to remain employed by the Company or any affiliate thereof.

 

2.4 Notices. Any notice to be given to the Company under the terms of this Agreement shall be given in writing to the Company in care of its General Counsel at Kohl’s Department Stores, Inc., N56 W17000 Ridgewood Drive, Menomonee Falls, Wisconsin, 53051. Any notice to be given to the Executive may be addressed to him/her at the address as it appears on the payroll records of the Company or any subsidiary thereof. Any such notice shall be deemed to have been duly given if and when actually received by the party to whom it is addressed, as evidenced by a written receipt to that effect.

 

2.5 Governing Law. This Agreement and all questions arising hereunder or in connection herewith shall be determined in accordance with the laws of the State of Wisconsin without giving effect to its conflicts of law provisions.

 

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IN WITNESS WHEREOF, the parties have caused this Agreement to be effective as of the date first written above.

 

KOHL’S CORPORATION
By:  

 


Title:  

 


 


«Name»    
«Title»    

 

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Outside Director Compensation

EXHIBIT 10.32

 

Outside Director Compensation

 

Directors who are not employees of the Registrant or its subsidiaries receive an annual retainer fee of $15,000. Committee chairpersons receive an additional $5,000 retainer fee. Non-employee directors also receive $1,000 for each full Board of Directors and committee meeting attended in person ($500 if the director participates via teleconference). Stock options are granted to non-employee directors from time to time. These grants are typically made at the time the director joins the Board or is re-elected by the shareholders to serve a three year term. Ten-year options to purchase 3,000 shares of the Company’s common stock were granted to each of the directors that were re-elected to the Board in fiscal 2004. Directors are also reimbursed for travel and other expenses related to attendance at Board of Directors and committee meetings or educational seminars approved in advance by the Governance and Nominating Committee.

Subsidiaries

Exhibit 21.1

 

Subsidiaries

 

Name


   State of Incorporation or Formation

Kohl’s Department Stores, Inc.

   Delaware

Kohl’s Investment Corporation

   Delaware

Kohl’s Illinois, Inc.*

   Nevada

Kohl’s Pennsylvania, Inc.*

   Pennsylvania

Kohl’s New York DC, Inc.

   Nevada

Kohl’s Texas, L.L.C.*

   Delaware

Kohl’s Texas Limited Partner, L.L.C.*

   Delaware

Kohl’s Texas, L.P.

   Texas

Kohl’s Indiana, Inc. *

   Delaware

Kohl’s Indiana, L.P.

   Delaware

Kohl’s Michigan, L.P.

   Delaware

*These subsidiaries are wholly owned subsidiaries of Kohl’s Department Stores, Inc.

 

 

Consent of Independent Registered Public Accounting Firm

Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the incorporation by reference in the Registration Statement (Form S-8 #33-49886) pertaining to the 1992 Long Term Compensation Plan, in the Registration Statement (Form S-8 #333-26409) pertaining to the 1994 Long Term Compensation Plan and 1997 Stock Option Plan for Outside Directors, in the Registration Statement (Form S-8 #33-84558) pertaining to Kohl’s Corporation Employee Savings Plan, and in the Registration Statement (Form S-8 #333-105264) pertaining to the 2003 Long Term Compensation Plan, and in the related prospectuses, of our reports dated March 4, 2005, with respect to the consolidated financial statements and schedule of Kohl’s Corporation, Kohl’s Corporation management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Kohl’s Corporation, included in this Annual Report (Form 10-K) for the year ended January 29, 2005.

 

/s/    Ernst & Young LLP

 

Milwaukee, WI

March 16, 2005

Section 302 Certification

EXHIBIT 31.1

 

Certification of the Chief Executive Officer Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

 

1. I, R. Lawrence Montgomery, certify that I have reviewed this Annual Report on Form 10-K of Kohl’s Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: March 18, 2005

 

/s/ R. Lawrence Montgomery


R. Lawrence Montgomery

Chairman, Chief Executive Officer

 

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Section 302 Certification

EXHIBIT 31.2

 

Certification of the Chief Financial Officer Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

 

1. I, Wesley S. McDonald, certify that I have reviewed this Annual Report on Form 10-K of Kohl’s Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: March 18, 2005

 

/s/ Wesley S. McDonald


Wesley S. McDonald

Chief Financial Officer

 

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Section 906 Certification

EXHIBIT 32.1

 

Certification by the Chief Executive Officer Pursuant to 18 U. S. C. Section 1350, as Adopted

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

I, R. Lawrence Montgomery, Chairman and Chief Executive Officer of Kohl’s Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to my knowledge, on the date of this Certification:

 

1. This Annual Report on Form 10-K of the Company for the annual period ended January 29, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

 

2. That the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: March 18, 2005

 

/s/ R. Lawrence Montgomery


R. Lawrence Montgomery

Chairman, Chief Executive Officer

Section 906 Certification

EXHIBIT 32.2

 

Certification of the Chief Financial Officer Pursuant to 18 U. S. C. Section 1350, as Adopted

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

I, Wesley S. McDonald, Chief Financial Officer of Kohl’s Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to my knowledge, on the date of this Certification:

 

1. This Annual Report on Form 10-K of the Company for the annual period ended January 29, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

 

2. That the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: March 18, 2005

 

/s/ Wesley S. McDonald


Wesley S. McDonald

Chief Financial Officer

Cautionary Statements

EXHIBIT 99.1

 

CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING INFORMATION and RISK FACTORS.

 

The Company and its representatives may, from time to time, make written or verbal forward-looking statements. Those statements relate to developments, results, conditions or other events the Company expects or anticipates will occur in the future. The Company intends words such as “believes,” “anticipates,” “ plans,” “expects” and similar expressions to identify forward-looking statements. Without limiting the foregoing, those statements may relate to future revenues, earnings, store openings, market conditions, new strategies and the competitive environment. Forward-looking statements are based on management’s then current views and assumptions and, as a result, are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Any such forward-looking statements are qualified by the following important risk factors that could cause actual results to differ materially from those predicted by the forward-looking statements.

 

An investment in the Company’s common stock or other securities carries certain risks. Investors should carefully consider the risks described below and other risks which may be disclosed from time to time in the Company’s filings with the SEC before investing in the Company’s securities.

 

General Economic Conditions

 

General economic factors that are beyond the Company’s control impact the Company’s forecasts and actual performance. These factors include interest rates; recession; inflation; deflation; consumer credit availability; consumer debt levels; tax rates and policy; unemployment trends; the threat or possibility of war, terrorism or other global or national unrest; political or financial instability; and other matters that influence consumer confidence and spending. Increasing volatility in financial markets may cause these factors to change with a greater degree of frequency and magnitude. Changes in the economic climate could adversely affect the Company’s performance.

 

Competitive Pressures

 

The retail business is highly competitive. The Company competes for customers, associates, locations, merchandise, services and other important aspects of its business with many other local, regional and national retailers. Those competitors, some of which have a greater market presence than the Company, include traditional store-based retailers, Internet and catalog businesses and other forms of retail commerce. Unanticipated changes in the pricing and other practices of those competitors may adversely affect the Company’s performance.

 

Consumer Demand

 

The Company’s business is dependent on the Company’s ability to anticipate fluctuations in consumer demand for a wide variety of merchandise. Failure to accurately predict constantly changing consumer tastes, preferences, spending patterns and other lifestyle decisions could create inventory imbalances and adversely affect the Company’s performance and long term relationships with its customers.

 

Weather conditions

 

Because a significant portion of the Company’s business is apparel and subject to weather conditions in its markets, its operating results may be unexpectedly and adversely affected. Frequent or unusually heavy snow, ice or rain storms or extended periods of unseasonable temperatures in its markets could adversely affect the Company’s performance.

 

Seasonality

 

The Company’s business is subject to seasonal influences, with a major portion of sales and income historically realized during the second half of the fiscal year, which includes the back-to-school and holiday seasons. This seasonality causes the Company’s operating results to vary considerably from quarter to quarter and could materially adversely affect the market price of its securities.

 

Merchandise Sourcing

 

The merchandise sold by the Company is sourced from a wide variety of domestic and international vendors. All of the Company’s vendors must comply with applicable laws and the Company’s required standards of conduct. The

 

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Company’s ability to find qualified vendors and access products in a timely and efficient manner is a significant challenge which is typically even more difficult with respect to goods sourced outside the United States. Political or financial instability, trade restrictions, tariffs, currency exchange rates, transport capacity and costs and other factors relating to foreign trade, and the ability to access suitable merchandise on acceptable terms are beyond the Company’s control and could adversely impact the Company’s performance.

 

Labor Conditions

 

The Company’s performance is dependent on attracting and retaining a large and growing number of quality associates. Many of those associates are in entry level or part time positions with historically high rates of turnover. The Company’s ability to meet the Company’s labor needs while controlling the Company’s costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation and changing demographics. Changes that adversely impact the Company’s ability to attract and retain quality associates could adversely affect the Company’s performance.

 

New Store Growth

 

The Company’s plans to continue to increase the number of its stores will depend in part upon the availability of existing retail stores or store sites on acceptable terms. Increases in real estate, construction and development costs could limit the Company’s growth opportunities. There can be no assurance that such stores or sites will be available to the Company for purchase or lease, or that they will be available on terms acceptable to the Company. If the Company is unable to grow its retail business, the Company’s financial performance could be adversely affected.

 

New Markets

 

The Company’s growth strategy is dependent upon the Company’s ability to successfully execute the Company’s retailing concept in new markets and geographic regions. If the Company is unable to successfully execute its retail concept in these new markets and regions, or if consumers are not receptive to the Company’s concept in these markets or regions, the Company’s financial performance could be adversely affected.

 

Regulatory and Litigation Developments

 

Various aspects of the Company’s operations are subject to federal, state or local laws, rules and regulations, any of which may change from time to time. Additionally, the Company is regularly involved in various litigation matters that arise in the ordinary course of its business. Litigation or regulatory developments could adversely affect the Company’s business operations and financial performance.

 

Other Factors

 

The foregoing list of risk factors is not exclusive. Other factors and unanticipated events could adversely affect the Company. The Company does not undertake to revise any forward-looking statement to reflect events or circumstances that occur after the date the statement is made.

 

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