Ex-Kmart CEO testifies in federal civil trial
ANN ARBOR, Mich. -- The former head of Kmart Corp., defending himself against the government's claims he covered up the retailer's woeful finances, testified Wednesday that he kept directors fully informed in the months leading to bankruptcy in 2002.
More than seven years later, Charles Conaway is on trial in a civil lawsuit by the Securities and Exchange Commission, which says he misled Kmart's board and investors by not disclosing delays in payments to suppliers and an ill-timed purchase of $850 million in inventory.
Conaway said he informed the board about the buy in September 2001, not two months later, and also sent a letter to each director, telling them Kmart's problems were worse than he perceived.
"Our balance sheet is taxed. ... Transforming this business will take longer" than expected, Conaway said in a letter that was introduced as evidence.
Known as a turnaround specialist, Conaway was Kmart's chairman and chief executive from May 2000 to March 2002 as the company struggled to compete against Target and Wal-Mart.
He spent much of his testimony describing what he inherited: A 2,100-store retailer in crisis with quality that was "horrific" and 18,000 trailers around the country stuffed with unsold inventory, including Halloween merchandise that was five years old.
Referring to Wal-Mart and Target, Conaway said, "We just got killed by those guys."
"I was brought in to save Kmart. There was no ifs, ands or buts about that," he told jurors.
Conaway said he didn't believe Kmart would run out of money, despite the mistake of buying too much inventory in late summer 2001. He said the company's plan to delay payments to vendors to save cash was not a secret.
"You've got thousands of vendors getting stretched," Conaway said.
He also revealed ill feelings for unnamed members of Kmart's board. Conaway said he wrote a letter to each director, reinforcing his concerns about the company, because "it was literally like they didn't care."
"I'm not only frustrated, I'm mad," he said, recalling his mindset in 2001.
When he joined Kmart, Conaway said the former chief executive warned him that some directors slept during meetings. He said he was advised to end meetings before noon.
Kmart's former chief financial officer, John McDonald Jr., recently agreed to pay a $120,000 penalty to settle the SEC's lawsuit against him.
Kmart emerged from bankruptcy and now is part of Sears Holdings Corp., based in Hoffman Estates, Ill. It has 1,360 stores and more than 133,000 workers.