Kmart Seeks OK For Revised Plan

By Lara Mossa
The Oakland Press
February 25, 2003 

Kmart Corp. will ask the U.S. Bankruptcy Court today to approve a revised version of its new business plan, a move that would begin the process to emerge from Chapter 11 bankruptcy. The discount chain plans to exit Chapter 11 by the end of April. 

As new Chief Executive Officer and President Julian Day assembles his new management team and completes a second round of store closings, the future of the Troy headquarters is still unclear.

Experts estimate that Kmart will shrink its corporate staff by at least one-third, which is the same reduction the business made to its store base. If that is the case, Kmart would cut an additional 300 staff members in Troy, bringing the total to 1,300 cuts, leaving 2,600 at headquarters.

"To be a lean business, if your revenue goes down 30 percent, you really need to work on reducing your overhead by 30 percent," said Van Conway of Conway, Mackenzie and Dunleavy, a management and consulting firm and business turnaround company in Birmingham. "For Kmart, it's imperative they reduce corporate overhead."

Kmart had 2,114 stores at the time of the bankruptcy filing in January, 2002, and will have about 1,500 by the end of April. The company had 3,900 corporate employees in Troy at the beginning of last year and now has 2,900 staff members at the headquarters. 

Some have speculated that Kmart will lay off as many as 1,000 corporate employees with the second wave of store closings. But Patrick O'Keefe, president and CEO of O'Keefe & Associates, a financial consulting firm in Bloomfield Hills, suspects it will be less.

"Typically, the corporate strategy is to make the first cut the deepest cut," he said. "I would suspect this cut will not be as great. You cut as much fat out of the organization as you can on the first blow."

Kmart spokesman Jack Ferry said Kmart is assessing the most recent store closings and expects a reduction in headquarters staff, but said there is no target date or number at this time. 

If the court approves the plan (Disclosure Statement), Kmart will solicit votes from its unsecured creditors and financial institutions committees. The deadline for votes will be April 4 and a confirmation hearing is slated for April 14-15. Once the plan is confirmed, Kmart expects to exit bankruptcy by April 30.

Under the plan, Kmart will pay secured creditors in full. Pre-petition lenders with $1.08 billion in claims will receive 40 percent of their claims in cash. Kmart's common stock will be eliminated and new stock will be distributed to holders of pre-petition notes and debentures, trade creditors, service providers and landlords with lease rejection claims. Kmart will authorize up to $500 million shares of new common stock.

Personal injury and litigation claims will receive a deferred cash payment for a percentage of their claim. Trade vendors will receive up to two years of a lien on property. 

ESL Investments and Third Avenue Trust will contribute $140 million in cash to the plan and exchange $153.4 million in pre-petition claims for shares of stock in the reorganized company. In addition, the investors will contribute about $60 million for convertible notes and select four board members. Kmart's existing board of directors will be dismissed and replaced by the time the retail chain emerges from bankruptcy.

Although the U.S. Bankruptcy Court in Chicago has received several objections to the plan, including letters from irate shareholders, the court likely will ignore comments about claims.

In addition, Kmart officials are expected to reveal more about the company's internal investigation. Kmart revealed in January that 10 former executives were fired lawfully for "breach of contract" and being "grossly derelict" in their duties. And the company has enough evidence against former CEO Charles Conaway to support legal claims against him. A creditors' trust will be established to pursue lawsuits against former executives and Kmart's shareholders will divvy 2.5 percent of the awards.