Kmart Files Chapter 11.

Kmart Corporation announced that in order to aggressively address the financial and operational challenges that have hampered its performance, 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 indicated that it will reorganize on a fast-track basis and has targeted emergence from chapter 11 in 2003.

Kmart also announced that, to fund its turnaround and continuing operations, 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, which will act in various capacities including as collateral monitors, documentation agents and syndication agents. The DIP facility, which remains subject to Bankruptcy Court approval, will be used to supplement the Company’s existing cash flow during the reorganization process. JPMorgan Securities Inc. and Fleet Securities, Inc. arranged the financing. The Company expects to be able to access $1.15 billion of the DIP facility upon court approval of an interim financing order; the full facility is subject to final court approval at a later date.

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. 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, Chief Executive Officer 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. We deeply regret any adverse effect today’s action will have on our associates, vendors and business partners. I also regret the impact of our filing on all Kmart shareholders, including many of our associates. But after considering a wide range of alternatives, it became clear that this course of action was the only way to truly resolve the Company’s most challenging problems. 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’s credit cards, checks, gift certificates and store credits will be honored as always and its return policies have not been affected by the filing. Kmart associates are being paid in the usual manner and their medical, dental, life insurance, disability, and other benefits are expected to continue without disruption.

The Company’s pension plan and savings plans are maintained independently of the Company and are protected under federal law. The Company will continue to administer the plans as usual. Other retiree benefits are also expected to continue without disruption. The Company also said that approximately 3.5% of its total 401(k) savings plan assets consist of Kmart shares purchased by its employees and approximately 10.5% of the assets consist of shares provided by the Company to match employee investments. Total Kmart share holdings in its 401(k) savings plan represent about 6% of Kmart’s total outstanding common shares.

Conaway said: “When I joined Kmart 18 months ago, I found a company with many strengths, including dedicated associates, great store locations, a proud 100-year history, and some of the best known and loved brands in retailing – including the great Kmart name itself. We remain determined to build on this foundation and continue Kmart’s transformation.”

Kmart also announced that Ronald B. Hutchison has been named Executive Vice President and Chief Restructuring Officer, a new position, effective immediately. He and James B. Adamson, who was elected non-executive Chairman of Kmart’s Board of Directors on January 17, 2002, will be actively engaged in advising Kmart on reorganization matters and working with the senior management team to rebuild and reposition the Company.

Kmart Chairman James B. Adamson said, “We are gratified by the support of our lenders in arranging our $2 billion of debtor-in-possession (DIP) financing, an important vote of confidence in the Company, our people, and our potential. We are also pleased that the banks have agreed to allow our vendors an opportunity to receive a second lien on the Company’s collateral for their post-petition accounts payable, provided that the vendors resume normal trade terms and full merchandise shipments within the first 60 days of the reorganization case. With that support, and with the protection of chapter 11, we are confident the Company will move forward in a better position to restructure for the future. Fortunately, Kmart has a number of strengths upon which we can build, including a substantial core group of profitable stores in highly desirable locations.”

Conaway outlined the strategic, operational and financial initiatives that the Company intends to continue or implement during the reorganization process, including:

Investing in key merchandising and marketing initiatives to enhance Kmart’s strategic positioning as the authority for what Moms value by offering exclusive brands that will differentiate Kmart from its competitors;

Optimizing the supply chain to maximize efficiencies and service capabilities;

Investing in critical technology, standardized information technology platforms, merchandising opportunities and supply chain enhancements;

Evaluating the performance of every store and terms of every lease in the Kmart 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;

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; and

Pursuing opportunities to reduce annual expenses by an additional $350 million through reengineering the organization, staff reductions, office consolidations, and other actions.

Kmart said that it filed more than 30 first day motions in the bankruptcy court in Chicago to support its approximately 240,000 associates and 4,000 vendors, together with its customers and other stakeholders. The court filings include requests to obtain interim financing authority and maintain existing cash management programs; to retain legal, financial, real estate and other professionals to support the Company’s reorganization cases; and for other relief.

During the restructuring process, vendors, suppliers and other business partners will be paid under normal terms for goods and services provided during the reorganization. In its filing documents, Kmart and its U.S. subsidiaries listed total assets of $17 billion of assets at book value and total liabilities of $11.3 billion as of the fiscal quarter ended October 31, 2001. Kmart’s foreign subsidiaries are not covered by the filing and are operating as normal.