Accounting & Tax

Convertible Note Spurs Kmart Restatement

The company is restating the accounting for a $60 million convertible note that was issued when it emerged from bankruptcy.
Stephen TaubFebruary 15, 2005

Kmart Holding Corp., which is preparing to merge with Sears, Roebuck & Co., has restated its results for the year ended January 28, 2004, as well as for last year’s quarterly filings.

Unlike a slew of other retailers and restaurant chains, however, the revisions are not related to how the company accounts for leases. Kmart is restating the accounting for a $60 million convertible note that was issued when the company emerged from bankruptcy nearly two years ago and that is no longer outstanding.

The changes made by the restatements are non-cash charges and do not impact cash flows from operations, the company added.

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The restatements resulted in a non-cash charge to interest expense of $22 million for the 39 weeks ended January 28, which trim earnings by a penny to $2.51 per share. They also resulted in a $9 million charge for fiscal year 2004, but this charge will not impact diluted earnings per share for the year.

Kmart announced that the restatement is the result of discussions with the Securities and Exchange Commission. The restatements are related to a change in the date on which the value of the $60 million convertible note is allocated between the value of its conversion feature and the value of the debt instrument.

The restatements use the date Kmart emerged from bankruptcy — May 6, 2003 — while the original filings used the date investors agreed to purchase the note — January 24, 2003. As a result, the initial carrying amount of the debt on the restated financials is lower than originally reported, Kmart elaborated, and the company is incurring an increased non-cash interest charge reflecting the amortization of the resulting higher debt discount.

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