Bankruptcy Can Be Expensive

The cost of rebounding from bankruptcy protection will be high for Kmart. The retailer said it will pay its new chairman and turnaround specialist $4.5 million, plus a $4 million bonus, if it emerges from Chapter 11 next year.

According to the company's bankruptcy filing, Kmart paid James Adamson $2.5 million to take the position, replacing previous chairman Chuck Conaway (who remains ceo). Adamson will receive $1million annually through 2003, and the bonus if Kmart comes out of Chapter 11 by July 31, 2003.

If Kmart fails to shed its bankruptcy status by that deadline, Adamson's bonus will fall to $2 million — that based on the emergence occurring by April 30, 2004. Adamson, 53, was credited with helping pull Advantica Restaurant Group, Inc. (Denny's, CoCo's, Carrow's) — then known as Flagstar — out of bankruptcy during his tenure as chairman, president and ceo. (He also helped repair Denny's reputation after a series of racial discrimination lawsuits in the 1990s.) He has been a member of the Kmart board since 1996.

Kmart also paid — with bankruptcy court approval — $76 million of the money it owed Fleming Cos. (Dallas). And so the merchandise distributor has resumed shipping (mostly grocery) products to Kmart stores.

Fleming has an additional net claim of about $30 million, representing primarily merchandise shipped after January 18 and non-merchandise receivables (such as unreimbursed transportation costs, unreturned pallets and vendor rebates). Fleming said it will submit a claim against these receivables.

Fleming, the primary food and consumer products supplier to the now-bankrupt Troy, Mich.-based retailer, was named a critical vendor by the U.S. Bankruptcy Court for the Northern District of Illinois, where the nation's third-largest discounter filed for Chapter 11 bankruptcy protection on Tuesday.

Fleming executive vp Bill Marquard said his company will extend trade credit to Kmart on its weekly payment cycle.

PepsiCo (Purchase, N.Y.) also said it has resumed shipments — of Frito-Lay products — to Kmart. Those shipments were halted on Tuesday, the day of the bankruptcy filing.

At a bankruptcy hearing in Chicago on Tuesday, Kmart ceo Chuck Conaway said holding back payments from Fleming “would be devastating” to Kmart and make it harder to reverse the company's fortunes. Bankruptcy Court judge Susan Pierson Sonderby evidently agreed, ruling that the payments were “necessary to keep the business as a going concern.”

At the time of its bankruptcy filing, Kmart announced it had received roughly $2 billion of senior debtor-in-possession financing facility from an amalgam of banks so it could maintain operations during the period of its reorganization.