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    Kmart and Fleming Terminate Supply Arrangement

    TROY, Mich., and DALLAS - Kmart Corporation and Fleming Companies Inc. announced on Monday that they had terminated their supply relationship by means of a rejection of the parties' 2001 contract through Kmart's Chapter 11 reorganization.

    TROY, Mich., and DALLAS - Kmart Corporation and Fleming Companies Inc. announced on Monday that they had terminated their supply relationship by means of a rejection of the parties' 2001 contract through Kmart's Chapter 11 reorganization.

    The two-year-old distribution deal had at one time envisaged about $4.5 billion in annual business over a 10-year period, but after Kmart's Chapter 11 reorganization -? which includes numerous store closings -- officials noted, "Kmart is not the same company that it was when we first started the contract."

    Fleming first indicated its intention to sever ties with Kmart Jan. 23, when the distributor reported a fourth-quarter loss. Kmart accounted for about 20 percent of Fleming's sales in the third quarter.

    Kmart and Fleming said they are continuing their ongoing discussions regarding transition arrangements and resolution of outstanding claims under the agreement.

    Kmart president and CEO Julian Day said, "At this critical juncture in our chapter 11 cases, as we move forward with the plan confirmation process and, soon thereafter, emergence from chapter 11 altogether, we have determined that given the change in our store base, among other things, the Fleming supply arrangement no longer meets our needs and the rejection of the contract at this time is appropriate."

    Fleming Chairman and CEO Mark Hansen said, "Despite our mutual efforts to negotiate modifications to the supply agreement, it was clear to both parties that termination was the right solution. The basis on which the parties entered into the agreement have substantially changed, warranting an end to the relationship."

    In an interview with Reuters Monday, Fleming CFO Mark Shapiro told Reuters the termination of the Kmart contract was "the appropriate conclusion" and would not impact the company's future growth plans.

    "Kmart is not the same company that it was when we first started the contract, given the fact that Kmart is closing its supercenters," said Shapiro. "The cost of modifying the contract would have been too high."

    "Our company [Fleming] has diversified away from Kmart," Shapiro added. He was referring to Fleming's recent push to grow business by focusing on supplying convenience stores and other big retailers like discounter Target Corp and grocer Albertsons Inc.

    He added that if Kmart had remained a customer, the discounter would have accounted for less than 15 percent of Fleming's overall sales.

    Kmart said that the termination of the Fleming relationship was supported by the Plan Investors under the company's proposed Plan of Reorganization and that the action was permitted under both the Company's DIP financing and exit financing facilities as approved by the Bankruptcy Court on Jan. 28, 2003. The supply agreement would have otherwise expired in February 2011 and could not have been clearly terminated by Kmart without cause until the first quarter of 2007.

    Fleming said it intends to release its revised business implications after the parties finalize a transition arrangement.

    Fleming serves nearly 50,000 retail locations, including supermarkets, convenience stores, supercenters, discount stores, concessions, limited assortment, drug, specialty, casinos, gift shops, military commissaries and exchanges and more. Fleming serves more than 600 North American stores of global supermarketer IGA.

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