Kmart Emerges From Chapter 11 Having Achieved Key Objectives

Company Concludes Fast-Track Reorganization With $2 Billion in Exit Financing, Strong Balance Sheet and Financial Performance Ahead of Projections

Kmart Corporation today announced that it has emerged from the Chapter 11 reorganization process. The Company, and 37 of its domestic subsidiaries and affiliates, officially concluded its fast- track reorganization today after completing all required actions and satisfying all remaining conditions to its First Amended Plan of Reorganization, as modified, which was confirmed by the U.S. Bankruptcy Court for the Northern District of Illinois by order dated April 23, 2003.

In conjunction with its emergence from Chapter 11, Kmart today also closed on its new $2 billion exit financing facility provided by a syndicate led by GE Corporate Financial Services, Fleet Retail Finance Inc. and Bank of America, N.A. This credit facility, which is secured by inventory, replaces the Company's $2 billion debtor-in-possession (DIP) facility and is available to Kmart to help meet its ongoing working capital needs, including borrowings for seasonal purchases of inventory.

Julian C. Day, Kmart President and Chief Executive Officer, said, "This is a momentous day for Kmart. Although the last 15 1/2 months have been difficult and required sacrifice by all involved, the Company successfully used the Chapter 11 reorganization process for the purposes for which it was designed. Kmart emerges from Chapter 11 having accomplished all our major objectives for this process. We have strengthened our balance sheet and significantly reduced liabilities by $6 billion. We have secured $2 billion in exit financing, which will provide continued assurance to our vendors and landlords about our strong liquidity position. We have closed stores and renegotiated onerous lease agreements. Additionally, we have developed a more disciplined, efficient organization and lowered our overall operating costs."

Day continued, "Kmart emerges from Chapter 11 as a new and vital enterprise focused on delivering value to customers and stakeholders alike. Our focus going forward will be on continuing to revitalize our business by driving profitable sales, identifying opportunities to further improve efficiency and reduce costs, and enhancing asset productivity. Our associates are facing the future with new energy and enthusiasm -- and a renewed commitment to providing our customers compelling promotional values, great private brands and excellent service."

In accordance with the Plan of Reorganization, which became effective today, the Company completed an internal corporate restructuring in which Kmart became an indirect subsidiary of a newly formed corporation, Kmart Holding Corporation. The Company's publicly traded shares will be shares of common stock of Kmart Holding Corporation.

Effective upon today's emergence, the members of the new Board of Directors of Kmart Holding Corporation, in addition to CEO Julian C. Day, are: E. David Coolidge III, William C. Crowley, William Foss, Edward S. Lampert, Steven T. Mnuchin, Anne Reese, Brandon Stranzl and Thomas J. Tisch.

Also as part of the emergence, Al Koch and Ted Stenger, principals of AlixPartners who served as the Company's Chief Financial Officer and Treasurer, respectively, have left the Company. James F. Gooch has been named Vice President and Treasurer. The Company is in the final stages of an executive search for its post-emergence chief financial officer and expects to name a successor in the near future.

Kmart's Plan Investors -- ESL Investments, Inc. and Third Avenue Value Fund -- received approximately 33 million shares of Kmart Holding Corporation's new Common Stock and a 9 percent convertible note with a principal amount of $60 million for their investment of approximately $387 million in the Company (including approximately $187 million they received in satisfaction of pre-petition claims they held). The holders of Kmart's pre- petition bank debt, other than ESL, received approximately $243 million in cash.

The Company also issued approximately 25 million shares of the new Kmart Holding Corporation Common Stock for distribution to holders of the pre- petition notes (Class 4 claims under the Plan). Approximately 32 million shares of the new Common Stock will be distributed to trade vendor/lease rejection claimholders (Class 5 claims under the Plan), commencing no later than June 30, 2003. Under the Plan, the number of shares of Common Stock to be issued in respect of Class 5 claims is fixed and will not be affected by the total value of the claims that may ultimately be allowed as a result of the claims reconciliation process.

Consistent with the Plan, Kmart's prior common stock and trust preferred securities were cancelled as of May 6, 2003. The new shares of Kmart Holding Corporation common stock being issued to certain Kmart creditors in accordance with the Plan and to the Plan Investors initially will be publicly traded on the over-the-counter (OTC) market, until such time as the Company is able to satisfy the listing criteria for NASDAQ or a national securities exchange requiring a minimum number of record holders. Kmart does not expect to be able to satisfy these requirements until additional stock is distributed to trade creditors, service providers and landlords with lease rejection claims. The first distribution to such creditors is expected to occur no later than June 30, 2003.

Financial Update

At emergence, the Company's liquidity position is estimated to be $2.7 billion, including net borrowings available (after letters of credit) under the new $2 billion exit financing facility and cash of approximately $1.1 billion. After completing all remaining (estimated at $350 million) payments related to consummation of the Plan, including payments for cure claims related to leases and executory contracts, reclamation claims, retention bonuses for certain employees and financing facility commitment fees, the Company expects that its cash will approximate $750 million. Accordingly, the Company does not expect to borrow funds under the new exit financing facility until the planned seasonal inventory build occurs in the fall.

In the Plan, the Company projected EBITDA(1) (earnings before interest, taxes, depreciation and amortization) of $75 million for the full 2003 fiscal year. Subsequent to the preparation of this projection, Kmart announced that it had terminated its supply agreement with Fleming Companies, Inc., and that it had undertaken various reductions in Selling, General and Administrative (SG&A) expenses. In addition, at the confirmation hearings held by the Court in April 2003, representatives of the Company testified that for the first two months of fiscal 2003, the Company's EBITDA(1) was $184 million ahead of the projection in the Plan, principally due to the success of the inventory clearance sales at the 316 closing stores. Accordingly, based on the Company's improved financial performance prior to emergence, the Company expects to implement an annual incentive compensation program for eligible employees that will target EBITDA(1) performance at approximately $375 million for the 2003 fiscal year.

Monthly Operating Results

In its monthly operating report for the four-week period ended March 26, 2003, filed with the Bankruptcy Court and on Form 8-K with the Securities and Exchange Commission today, Kmart reported a net loss of $483 million on sales of $1.896 billion. The net loss includes a non-cash charge of $385 million for the settlement of a contract rejection claim filed by Fleming, which will be treated as a general unsecured claim in accordance with the terms of the Plan.

Same-store sales for the five-week period ended April 2, 2003 declined 7.4% compared to the same period in 2002. The comparable five-week period in 2002 included sales for the Easter holiday, while the same period in 2003 did not. Due in part to this holiday shift, Kmart's same-store sales for April 2003 increased 1.1% from the same period a year ago. Inventory clearance sales at the 316 closing stores, which were completed by April 13, 2003, are not included in the same-store sales comparisons.

The information in the monthly operating report for March does not reflect the application of "fresh start" accounting, which the Company expects to be reflected in its report on Form 10-Q for the quarterly period ended April 30, 2003. This report is due to be filed with the SEC by June 16, 2003. After giving effect to "fresh start" accounting, Kmart's book equity value, or net worth, is expected to exceed $1.5 billion.

Going forward, Kmart is no longer required to file detailed monthly operating reports with the Bankruptcy Court, and will instead file summary quarterly reports. In addition, the Company does not plan to issue earnings guidance or other information regarding its actual or projected financial results, other than that reported in its SEC filings.

Kmart Corporation is a mass merchandising company that serves America through its Kmart and Kmart SuperCenter retail outlets.

Cautionary Statement Regarding Forward-Looking Information and Other Matters

Statements made by Kmart which address activities, events or developments that we expect or anticipate may occur in the future, including certain of the information contained in the Plan of Reorganization and Disclosure Statement, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the Company's current views with respect to current and future events and financial performance. Such forward- looking statements are and will be, as the case may be, subject to many risks and uncertainties, including, but not limited to, Kmart's having filed for bankruptcy and factors relating to Kmart's operations and the business environment in which Kmart operates, which may cause the actual results of Kmart to be materially different from any future results expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include Kmart's ability to operate pursuant to its exit financing facility; the ability of the Company to obtain and maintain normal terms with its vendors; the ability of Kmart to attract and retain customers; and those set forth in Kmart's Annual Report on Form 10-K for the fiscal year ended January 29, 2003, or in other filings made, from time to time, by Kmart with the Securities and Exchange Commission (the "Company Filings"). The forward-looking statements speak only as of the date when made and Kmart does not undertake to update such statements.

Footnote (1): EBITDA is a non-GAAP financial measure, internally defined and used by Kmart's management in assessing the Company's financial performance. Set forth below is Kmart's Projected Consolidated Statement of Operations for the 2003 fiscal year ended January 28, 2004, as previously disclosed in its First Amended Plan of Reorganization, as modified, and confirmed by the U.S. Bankruptcy Court for the Northern District of Illinois by order dated April 23, 2003. A reconciliation of the Projected Consolidated Statement of Operations to EBITDA is also listed below.

  Kmart Corporation
  Projected Consolidated Statements of Operations
  (Dollars in millions)

                                                               Fiscal Year

  Net sales                                                       $25,427
  Cost of sales, buying and occupancy                              20,389
  Gross margin                                                      5,038
  Selling, general and administrative expenses                      5,121
     Earnings before reorganization cost,
      fresh start valuation charges, interest,
       income taxes and extraordinary items                           (83)
  Interest expense, net                                               134
     Earnings before reorganization cost,
      fresh start valuation charges,
       income taxes and extraordinary items                          (217)
  Reorganization items, net                                           464
  Non-comparable items                                                 25
  Fresh start valuation charges                                     5,347
     (Loss) earnings before income taxes
       and extraordinary item                                      (6,053)
  Income taxes                                                          2
     (Loss) earnings before extraordinary item                     (6,055)
  Extraordinary gain on discharge of
   debt, net of income taxes                                        5,347
  Extraordinary gain - negative goodwill                              120
     Net (loss) earnings from continuing operations                  (588)
  Discontinued Operations                                              -
     Net (loss) earnings                                            $(588)

  Reconciliation to EBITDA
     Earnings before reorganization cost,
      fresh start valuation charges, interest,
       income taxes and extraordinary items                           (83)
  Depreciation and amortization                                       158

  EBITDA                                                              $75

SOURCE: Kmart Corporation

CONTACT: Lori McTavish, Senior Vice President, Communications,
+1-248-463-5350, or Jack Ferry, Director, Corporate Communications,
+1-248-463-2705, both of Kmart Corporation

Web site:

© Transform SR Brands, LLC