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Kmart Reports Funds Were ‘Mismanaged'

31 Jan, 2003 By: Joan Villa

Kmart submitted its reorganization plan as expected and won approval to close 316 stores, but the retailer unexpectedly admitted “credible and persuasive evidence” that 10 former executives may have mismanaged millions of dollars in company funds.

Kmart set up a Creditors' Litigation Trust that will allow creditors to pursue legal action that may arise from investigations into the fired managers, who are suspected of accounting irregularities and improperly receiving multimillion-dollar loans without the knowledge of the board, the company said.

In the next six weeks, Kmart will sell off an estimated $1.5 billion in inventory from the shuttered locations -- 10 fewer than previously reported because of last-minute lease renegotiations -- which will leave the chain with 1,513 stores in 572 markets.

To retain customers, the chain will give out coupon books worth $150 each and print offers on the back of the closing stores' cash register tapes for $12 off every $100 the customer spends at a nearby store. The offers are part of an ad campaign dubbed “Savings are here to stay,” launching this week.

Unsecured creditors, who are owed a total $2.72 billion and include several video departments of major studios, will receive stock in the newly reorganized company worth some 15 percent of their pre-petition claims, according to the filing in U.S. Bankruptcy Court for the Northern District of Illinois. Four studios were originally listed among the chain's top 50 creditors: Buena Vista Home Entertainment, owed $56 million; 20th Century Fox Home Entertainment, $34 million; Universal Music & Video, $30.7 million; and Warner Home Video, $21 million.

During the reorganization process, music distributor Handleman was deemed a “critical vendor” when the company filed for bankruptcy in January 2002 and got $49 million of its $64 million pre-petition claim, the filing stated. Under a special consignment motion, Kmart also paid an unspecified percentage of claims from suppliers who consigned jewelry, videos, CDs, DVDs and other products. For example, Universal Music & Video received a payment of $25 million and agreed to waive the remainder of its pre-petition claim.

President and CEO Julian Day said plans include a focus on “being ‘the store of the neighborhood' and further testing of the ‘store of the future' prototype.”

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