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UPDATE:The Blue Light Flickers

22 Jan, 2002 By: Holly J. Wagner


Video suppliers seem to be holding a $150 million-plus bag as Kmart poises to reorganize under Chapter 11 bankruptcy protections.

Court documents indicate four studios are among the discounter's largest creditors. They are Fox, owed $34 million; Disney, owed $56 million; Warner Bros., $21 million; and Universal, $31 million. Also on the hook are Handleman Co., which manages video inventory for online subsidiary bluelight.com, owed $63.7 million; Nintendo, $44.9 million and video game publisher Electronic Arts for $18.2 million.

An executive at one of the six major studios, who asked not to be identified, said suppliers have stopped sending video product to Kmart. Another said his company has shipped all ordered titles, with only one title streeting now subject to a possible delay.

"But they are working very quickly to make sure there, was not a break," he said. "We've been shipping to them and now we are trying to work through what this new financing means with the bankruptcy. My guess is we will be able to continue to ship to them because they have this new financing and we will either be paid cash up front or on some other terms."

Buckling under the weight of poor holiday sales and pressure from other discounters, Kmart Corp. said earlier today it had secured $2 billion in financing to attempt the reorganization.

Key points of the reorganization plan include full payout to creditors and closure of 350 underperforming stores. Both are critical to the success of the reorganization; the first because Kmart needs to shore up supplier confidence and maintain shipments and the second because the bankruptcy protections will let the company end some leases before they would have otherwise.

Craig Kornblau, president of Universal Studios Home Video, isn't too concerned about Kmart's bankruptcy filing. "They're not going away," he said. "They're downsizing a bit and will probably get rid of smaller stores, but I think they will come back a stronger, more powerful retailer because they won't be burdened by underperforming stores. As long as this new financing allows them to buy product, I dont think there will be much of an impact on our business, if any."

"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," said Kmart CEO Charles C. Conaway. "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."

Fleming Foods and Scott's garden products company cut off shipments to the discounter yesterday because Kmart could not pay its bills. The $2 billion idebtor-in-possession (DIP)

financing from Credit Suisse First Boston, Fleet Retail Finance, General Electric Capital Corp. and JPMorgan Chase Bank will let the company continue operations while it attempts a plan that would bring it out of bankruptcy in 2003, a schedule analysts are calling very aggressive.

During the reorganization, the banks will act in various capacities including as collateral monitors, documentation agents and syndication agents under the plan, which remains subject to approval from the the U.S. Bankruptcy Court for the Northern District of Illinois.

The company expects to be able to access $1.15 billion upon court approval of an interim financing order; the full facility is subject to final court approval later.

Today all 2,114 Kmart stores are open and serving customers. Kmart credit cards, checks, gift certificates and store credits will be honored 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.

Probably in light of the Enron bankruptcy and its aftermath, the company made a point of announcing its pension plan and savings plans are maintained independently and are protected under federal law and it will continue to administer the plans as usual. Other retiree benefits are also expected to continue without disruption.

Kmart also named Ronald B. Hutchison EVP 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, will advise Kmart on reorganization matters and work with the senior management team to rebuild and reposition the company.

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