Kmart Corp. files plan of reorganization

Alexandra R. Moses

Monday, Jan. 27, 2003 | 9:34 a.m.

DETROIT -- Kmart Corp. filed its reorganization plan in federal bankruptcy court on Friday, saying that a large portion of the cash to fund its turnaround will come primarily from two investors.

Its five-year business plan calls for a return to profitability in fiscal 2004 and focuses on Kmart becoming "the store of the neighborhood." The reorganization plan is subject to bankruptcy court approval.

ESL Investments Inc., a hedge fund owned by Connecticut millionaire Edward Lampert, and New York-based Third Avenue Trust, will invest at least $293.4 million in exchange for stock of the reorganized retailer, according to the company's plan of reorganization filed Friday in Chicago.

The company filed for Chapter 11 a year ago following disappointing holiday sales and a stock dive. The Troy, Mich.-based retailer, which has struggled to compete with Wal-Mart's low prices and Target's hipper merchandise, has said it wants to exit bankruptcy protection by April 30.

Kmart's reorganization calls for the retailer to cancel its current stock and reissue 500 million shares of common stock at a penny each; 20 million shares of preferred stock can be issued at the board of directors' discretion. Creditors will get shares of stock as partial repayment of Kmart's debt. They are owed $1.08 billion. Current stockholders would get nothing under the plan.

The reorganization plan also includes guidelines for the selection of a new board. Kmart's nine-member board has presided over much of the retailer's financial troubles in the past several years and has come under intense criticism.

When the company leaves bankruptcy, nine new board members will be selected by the company's creditors. Four of the directors will be chosen by ESL and Third Avenue.

ESL oversees $5 billion in holdings. Lampert, 40, has been listed by Forbes magazine as the second-richest person in Connecticut, worth more than $800 million. He was abducted from a parking garage in Greenwich, Conn., on Jan. 10 and released unharmed two days later. All four suspected kidnappers have been arrested.

A bankruptcy court hearing is scheduled for Feb. 25. If the judge approves the plan, Kmart will seek creditor acceptance of it.

Kmart has already taken several steps toward its restructuring, including closing stores, cutting jobs and naming a new chief executive officer, Julian Day.

Kmart shuttered 283 stores last year and plans to close 326 more, resulting in a combined loss of more than 59,000 employees, once the second round is complete. It announced the most recent spate of closings last week.

Some analysts have said the key for Kmart's survival is to stop trying to compete as a mega-store in a market that's already been cornered.

"I think Kmart will survive in a much smaller and specific marketplace," said Ivan Kallick, a bankruptcy lawyer at Manatt, Phelps & Phillips in Los Angeles. "They will not have the broad reach that they have had for many years because of the competitive issues that are out there now."