Kmart Corporation filed its plan to come out of bankruptcy in Chicago late Friday, and did so without the final approval of its creditors. The company stated that it’s optimistic that its statutory committees will formally endorse the Plan of Reorganization (POR) at or prior to a hearing on the adequacy of its Disclosure Statement, which has been scheduled for February 25, 2003, in the Bankruptcy Court.

As previously reported, the discount retailer expects to emerge from Chapter 11 by April 30, 2003.

ESL Investments of Connecticut and Third Avenue Value Fund of New York are expected to invest as much as $352 million to rescue Kmart, according to the plan.

Kmart has also received a commitment for up to $2 billion in exit financing from GE Commercial Finance, Fleet Retail Finance Inc. and Bank of America, N.A. This credit facility, which will be secured by inventory, would replace the company’s current $2 billion DIP facility on the effective date of the POR.

Edward Lampert, the 40 year-old principal of ESL, has been a behind-the-scenes player in the Kmart bankruptcy for some time. The group is expected to provide approximately $280 million in cash.

Lampert and his partners have already invested about $380 million in Kmart. ESL has agreed to contribute the cash distribution it would have received under the POR as a holder of the pre-petition bank debt in order to purchase additional shares of the company’s new common stock. ESL will also purchase up to $60 million of convertible secured notes, depending on reorganized Kmart’s liquidity needs.

Pre-petition lenders, who are owed approximately $1.08 billion, will receive cash in an amount equal to 40% of the principal amount of their claims in lieu of shares of new common stock of the reorganized Kmart.

Trade vendors meeting appropriate qualifications would have the benefit for up to two years of a first lien on substantially all owned real estate that is developed and unencumbered.

In its filing, Kmart said it would cancel its current stock and re-issue 500 million shares of common stock at a penny each and 20 million shares of preferred stock to be issued at the board of directors discretion.

Current shareholders stake in Kmart will be wiped out.

Under Kmart’s plan, a new board of directors will be named and will include Kmart’s new CEO, Julian Day, four directors chosen by ESL and Third Avenue, two chosen by the unsecured creditors committee and two by the financial institutions committee.

Kmart said a creditors liquidation trust would be created to sue some former executives.

Kmart’s current board has also been investigating, and on Friday said it had found “credible and persuasive evidence” that 10 executives, including former President Mark Schwartz, had violated their stewardship responsibilities to the company and were fired for cause.

The retailer will be going after those executives to try to get back millions of dollars in loans and other compensation granted them just before Kmart slipped into bankruptcy a year ago.

Kmart is still probing former chairman and CEO Chuck Conaway’s role in the downfall, but said the investigation indicates Kmart would have legal claims against him.

Day said the company also had established enhanced controls and other measures so that there could be “an unquestioned confidence” in the new management team going forward.

The new Kmart will be about one-third smaller than before it declared the largest retail bankruptcy in history. Kmart had 2,114 stores and about 240,000 employees when it filed for Chapter 11 in January 2002. It has already closed 283 stores and let 22,000 workers go. It is now planning to shut another 362 stores and a distribution center in Texas, cutting 37,000 jobs. Kmart expects to have about 168,000 employees, 1,500 stores and 17 distribution centers when it is out of bankruptcy.

Kmart indicated that Day, a former Sears and Safeway executive, will get a $1 million salary. In addition, Day gets a $1 million bonus upon the company’s emergence from Chapter 11. His employment agreement runs through Jan. 31, 2006. Day also is eligible for potential cash incentives tied to performance.

Day replaces James Adamson, who resigned immediately but will stay on the board through the last legs of the reorganization. Adamson will pocket a cash severance payment of $3 million, which is double his base salary, as well as any pay he hasnt received yet for his contribution toward reorganization.

Once the company emerges from Chapter 11, Adamson is eligible for an additional cash payment of $600,000, the filing said.

Both Adamson and the company agreed to a “mutual release” from claims against each other.

>>> The plan fails to lay out what Kmart expects to represent to the market. Without a clear, compelling rationale for a consumer to shop in its stores, the retailer may be destined to be a perennial also-ran behind WMT and TGT, putting it back in this same place in the not-too-distant future…

>>> One has to wonder if the quick emergence is tied to the bonuses paid to executives, regardless if it makes economic – or retail – sense…