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Kmart Files for Chapter 11 Bankruptcy

TROY, Mich. - Kmart Corporation announced today that the company and 37 of its U.S. subsidiaries have filed voluntary petitions for reorganization under chapter 11 of the U.S. Bankruptcy Code. In its filings in the U.S. Bankruptcy Court for the Northern District of Illinois, in Chicago, the company said it will reorganize on a fast- track basis and has targeted emergence from chapter 11 in 2003.

Kmart's bankruptcy declaration is the largest in the retail business since Federated Department Stores Inc. filed for Chapter 11 in 1990 and emerged two years later, The Associated Press reports.

Kmart also announced that it has secured a $2 billion senior secured debtor-in-possession (DIP) financing facility from Credit Suisse First Boston, Fleet Retail Finance, Inc., General Electric Capital Corporation and JPMorgan Chase Bank.

The company said its decision to seek judicial reorganization was based on a combination of factors, including a rapid decline in its liquidity resulting from Kmart's below-plan sales and earnings performance in the fourth quarter, the evaporation of the surety bond market, and an erosion of supplier confidence. On Monday Fleming Cos., Kmart's primary food and consumables supplier, cut off most shipments, saying Kmart failed to make its regular weekly payment.

Other factors include intense competition in the discount retailing industry, unsuccessful sales and marketing initiatives, the continuing recession, and recent capital market volatility.

Charles C. Conaway, CEO of Kmart, said: "We are committed and determined to complete our reorganization as quickly and as smoothly as possible, while taking full advantage of this chance to make a fresh start and reposition Kmart for the future ? I am confident that, with our tremendous resources and dedicated supplier and associate communities, Kmart will emerge from this process as a stronger, more dynamic, more profitable enterprise with a well-defined position in the discount retail sector."

All 2,114 Kmart stores are open and serving customers. The company announced that it will evaluate the performance of every store and terms of every lease in the portfolio by the end of the first quarter of 2002 with the objective of closing unprofitable or underperforming stores this year to increase cash flow and return on invested capital. In addition, Kmart is seeking Bankruptcy Court approval to immediately terminate the leases of approximately 350 stores that were closed previously by Kmart or are currently being leased by other tenants at rents below Kmart's obligation, thereby resulting in an immediate annual savings of approximately $250 million. The company looks to save an additional $350 million through reengineering the organization, staff reductions, office consolidations, and other actions.

U.S. Bancorp Piper Jaffray analyst George Dahlman says Kmart's actions will have very little near-term impact on the food industry. "With Kmart having about 1% market share of the total retail food market, the opportunities for the redistribution of this market share among existing retailers remains unlikely as Kmart would continue to do business as usual at the retail level. We believe the most likely outcome would be Kmart closing approximately 25% of its store base, which would result in very little idled Fleming capacity and provide no discernable impact on food retailers and/or wholesalers."
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