KMART'S REORGANIZATION PLAN: A PATTERN OF MASS DESTRUCTION.
The disclosures paint a picture of a retailer desperate to maintain its market position as well as control over its vendors. It also shows how deep corporate abuses ran preceding the retailer's Chapter 11 filing.
Here's a rundown of some of the key points detailed in Kmart's plan of reorganization and its disclosure statement:
An emerging Kmart would be structured by a $293.4 million investment (in exchange for new stock) by ESL Investments Inc., a hedge fund owned by millionaire Edward Lampert, and Third Avenue Trust, which is based in New York.
If Kmart's plan is not confirmed, the retailer said in court papers that other plans could be proposed. "Such plans might involve either a reorganization and continuation of [Kmart]'s business, or an orderly liquidation of their assets, or a combination of both," Kmart said in the disclosure statement.
Regarding Kmart's internal review of the former stewardship of the company, the investigation is ongoing. Charles Conaway, former chairman and chief executive officer, was questioned by Kmart lawyers two weeks ago. According to court documents, Anthony B. D'Onofrio, executive vice president for systems capability and chief supply chain officer, and Mark Moreland, divisional vice president of treasury and assistant treasurer, were still waiting to be questioned. Meanwhile, Kmart's board of directors, including James Adamson, could also be called for questioning.
A key issue of the internal review is $28 million in retention loans made to 25 of Kmart's top executives, most of whom the retailer "severed employment relationships" with.
In a rare disclosure of retail vendor practices, the disclosure statement revealed that "a significant portion of the items" Kmart sells is delivered on consignment. Some of the categories consigned included floor care products, health care items, electric blankets and seasonal products. The retailer seemed to be eager to keep the practice up while it went through bankruptcy.
In court papers, Kmart also identified several sticky areas where the retailer could face legal claims stemming from its internal investigations as well as ongoing investigations by the Securities and Exchange Commission and the Federal Bureau of Investigation. Here are a few of the potential legal claims Kmart could face:
The $24 million of retention loans was not disclosed to the compensation committee of the board of directors, the retailer said in court papers. "In addition, management created purported committee documents that varied materially from the loan program documents submitted to the committee for approval."
The court filing also showed that "in an effort to avert a potential liquidity crisis," former managers launched "Project Slow It Down," which deferred or reduced vendor payments.
It was also disclosed that "former senior managers imposed gross margin and vendor allowance target numbers" on buyers while also being warned "repeatedly that the numbers imposed from the top were unattainable." Kmart said in the court papers that certain employees were "demoted or transferred when they resisted a manager's demand to incorporate numbers they believed to be unrealistic into the company forecasts and financial reports." The retailer did not disclose the names of any of these managers or buyers.
Regarding vendor payments and allowances, it was disclosed that in 2001, "the Kmart merchant community was under extraordinary pressure" from management to record allowances that "were in excess of the plan for the year," and that $92 million in allowances for the first three quarters of 2001 were deemed "questionable."
And aside from abusing the retailer's "generous corporate aircraft policy," certain former managers "authorized the expenditure of $12 million to purchase corporate aircraft." The money was not included in Kmart's capital budget.