In re: KMART CORPORATION, et al., Chapter 11, Reorganized Debtors.

Case No. 02-B02474 (Jointly Administered).United States Bankruptcy Court, N.D. Illinois, Eastern Division.
November 5, 2004

Robert C. Edmundson Senior Deputy Attorney General Office of Attorney General Pittsburgh, PA.

Andrew N. Goldman Eric R. Markus Wilmer Cutler Pickering Hale and Dorr LLP, New York, NY, Attorneys for Kmart Corporation, et al.

STIPULATION AND AGREED ORDER REGARDING CLAIMS OF THE COMMONWEALTH OF PENNSYLVANIA AND ASSOCIATED OBJECTIONS
SUSAN SONDERBY, Chief Judge, Bankruptcy

The Commonwealth of Pennsylvania (“Pennsylvania”) and Kmart Corporation and certain of its subsidiaries and affiliates, former debtors and debtors in possession in the above-captioned cases (collectively, “Kmart”) hereby stipulate and agree as follows:

1. Pennsylvania Department of Revenue has filed a number of tax claims in the above-captioned case (each as more specifically identified in Exhibit A to the Settlement Agreement) (the “Claims”).

2. Kmart has objected to each of the Claims through one or more omnibus objections to claims in the above-captioned case (the “Objections”).

3. Upon consideration of the Claims and the Objections (collectively, the “Pleadings”), Pennsylvania and Kmart stipulate and agree that the Pleadings are hereby resolved with prejudice pursuant to the Settlement Agreement attached hereto (the “Settlement Agreement”) and hereby made a part of this Stipulation and Agreed Order.

4. Nothing in this Stipulation and Agreed Order shall be deemed an admission of fact on the part of Kmart or Pennsylvania.

5. This Court shall retain jurisdiction to hear any matters or disputes arising from or relating to the Pleadings and this Stipulation and Agreed Order, including, without limitation, the Settlement Agreement.

Page 2

SETTLEMENT AGREEMENT
This Settlement Agreement is entered into on this 17 day of October, 2004, by and among Kmart Corporation, a Michigan corporation and certain of its subsidiaries and affiliates, former debtors and debtors in possession (collectively, “Kmart”) in the Bankruptcy Case (defined below) and the Commonwealth of Pennsylvania, Pennsylvania Department of Revenue (“Revenue”).

WHEREAS, on January 22, 2002 (the “Petition Date”), Kmart filed a voluntary petition in the United States Bankruptcy Court for the Northern District of Illinois (Eastern Division) (the “Bankruptcy Court”) for reorganization relief under Chapter 11 of Title 11 of the United States Code, 11 U.S.C. Sections 101,et seq., as amended (Case No. 02-B02474, the “BankruptcyCase”). Since that time Kmart has remained in possession of its property and has continued to operate its business pursuant to Sections 1107 and 1108 of the Bankruptcy Code.

WHEREAS, Revenue has certain pre-Petition Date claims against Kmart, as indicated on Exhibit A to this Settlement Agreement (all claims collectively, and for ease of reference, the “Claims”).

WHEREAS, Kmart disputes the amount and/or validity of the Claims and Pennsylvania’s entitlement to payment of the Claims as evidenced by Kmart’s objections to such Claims filed with the Bankruptcy Court.

WHEREAS, Kmart and Pennsylvania desire to liquidate and resolve the amount of the Claims so as to conclude all Federal and Pennsylvania state litigation between the parties, their agents and affiliates regarding same.

NOW, THEREFORE, in consideration of the mutual agreements set forth herein, the parties hereto agree as follows:

1. The Claims listed on Exhibit A attached hereto shall be deemed allowed claims in the Bankruptcy Case in the amounts set forth on such Exhibit. However, payment in respect of such Claims will be limited to the amount set forth in Paragraph 2.A and shall be made in accordance with this Settlement Agreement.

2. Kmart and Pennsylvania agree that the Claims set forth onExhibit A shall be finally settled and resolved as follows:

A. Kmart shall tender payment of Two Million Dollars ($2,000,000) (the “Cash Payment”) to Pennsylvania within eleven (11) days of the date this Settlement Agreement is approved by the Bankruptcy Court; and

B. Kmart shall, within thirty (30) days of the approval of this Settlement Agreement by the Bankruptcy Court, file the necessary documents to withdraw with prejudice all petitions, requests, or actions seeking a refund or re-determination of any tax liability incurred or tax payment made on or before the Petition Date, including, but not limited to, the Pennsylvania Finance and Revenue Petitions identified as follows:

Page 3

765 F.R. 2003 676 F.R. 2003 41 F.R. 2002 514 F.R. 2002 504 F.R. 2001
Kmart shall also, within thirty (30) days of the approval of this Settlement Agreement, discontinue with prejudice the tax appeal currently pending before the Pennsylvania Commonwealth Court concerning the September 1, 1993 through December 31, 1996 sales tax audit; and
C. Kmart agrees that Revenue may apply pre-petition tax credits existing on the below identified accounts to the assessed pre-petition tax claims without further direction or authority from Kmart.

EIN 38-3469157 Kmart of Pennsylvania L.P.

2000-02 $ 283.39 2001-02 $ 5,812.78 2001-03 $29,197.98

EIN 38-0729500 Kmart Corporation

1999-01 $ 5,048.26 1999-03 $202,577.04 2000-04 $ 514.63 2001-02 $ 1,639.32 2001-04 $ 2.81

3. Pennsylvania agrees, upon receipt of the Cash Payment by certified funds to the Commonwealth of Pennsylvania, and Kmart’s compliance with the requirements set forth in Paragraph 2.B and 2.C, that (i) all Claims set forth on Exhibit A shall be deemed satisfied and expunged with prejudice; and (ii) Pennsylvania releases and discharges Kmart from any and all liability for any taxable period, or portion thereof, ending on or before the Petition Date. Pennsylvania and Kmart agree that payment of the Cash Payment, together with Kmart’s withdrawal of its various refund petitions and or appeals and its relinquishment of the various credits as identified above, constitutes full and final payment for and satisfaction of all tax liabilities of Kmart with respect to Pennsylvania through the Petition Date.

4. Kmart agrees that it shall not seek any refund or re-determination of liability from Pennsylvania for tax periods before the Petition Date. Pennsylvania agrees that it shall not assess or attempt to assess for any taxes incurred or due, in whole or in part, prior to the Petition Date.

5. It is expressly understood that this Settlement Agreement will have no effect on any loss carryovers or credits which are expressly reserved on Kmart’s behalf as hereinafter described as follows:

Page 4

A. Kmart’s net operating losses computed for the Commonwealth of Pennsylvania are expressly preserved and will be treated in the ordinary course of business in accordance with the laws of the Commonwealth of Pennsylvania.

B. Cash credit carryovers reported for Kmart Corporation and Kmart of Pennsylvania, L.P. covering fiscal year ended 01/29/03 are expressly preserved as carry-forwards for FYE 01/28/04.

C. Employment tax credits reported for Kmart Corporation, Kmart of Pennsylvania, LP and Kmart Stores of TNCP, Inc. are expressly preserved as credits and shall remain as carry-forwards through their 10-year expiration term (unless earlier utilized).

6. Kmart and Pennsylvania agree that any tax liability incurred by Kmart subsequent to the Petition Date, and any disputes between the parties with respect to such tax liabilities, will be treated in the ordinary course of business in accordance with the laws of the Commonwealth of Pennsylvania. Given this understanding, the Commonwealth agrees that the post bankruptcy claims as identified on Exhibit B are withdrawn without prejudice.

7. This Settlement Agreement shall be binding upon Kmart and Pennsylvania only after it has been approved by the Bankruptcy Court. Kmart agrees to present this Settlement Agreement for Bankruptcy Court approval within fifteen (15) days after its execution by Pennsylvania. In the event this Settlement Agreement is not approved, it shall be null and void and its provisions shall not be binding on either party.

It is specifically understood and agreed that this Settlement Agreement does not constitute, and shall not be construed as, any admission of liability or fault whatsoever by either party.

Each party represents that they understand and fully agree to each and every provision hereof.

[Signature Page follows]

Page 5

IN WITNESS WHEREOF, each party has executed this Settlement Agreement as of the day and year first written above.

[EDITORS’ NOTE: SIGNATURES IS ELECTRONICALLY NON-TRANSFERRABLE.]

EXHIBIT A

CLOSING AGREEMENT

KMART CORPORATION
COMMONWEALTH OF PENNSYLVANIA
CLAIMS TO BE EXPUNGED[*]

Claim # Claim Date Claim Amt. Department Omnibus Objection Comment:

564 3/15/2002 $ 134,120.23 Pennsylvania Department of Revenue 14th (reduced) Continued
565 3/15/2002 — Pennsylvania Department of Revenue 14th (amended restated) Ordered
1126 4/5/2002 33,745.00 Pennsylvania Department of Revenue 14th (reduced) Continued
24446 6/24/2002 3,739,604.90 Pennsylvania Department of Revenue 14th (reduced) Continued
24447 6/24/2002 — Pennsylvania Department of Revenue 11th (amended restated) Ordered
30435 7/22/2002 — Pennsylvania Department of Revenue 11th (amended restated) Ordered
30820 4/22/2002 191,056.00 Pennsylvania Department of Revenue 19th (proposed settlement) Continued
30821 4/22/2002 — Pennsylvania Department of Revenue 1st (duplicate) Ordered
34599 7/29/2002 4,368,982.43 Pennsylvania Department of Revenue 19th (amended restated) Continued
37370 779.20 Pennsylvania Department of Revenue 19th (overstated) Continued
48297 4/21/2003 4,369,346.76 Pennsylvania Department of Revenue 11th (reduced) Continued
48298 4/21/2003 5,155,567.64 Pennsylvania Department of Revenue 11th (reduced) Continued
56870 10/1/2003 4,637,491.94 Pennsylvania Department of Revenue 19th (proposed settlement) Continued
56871 10/1/2003 4,242,836.16 Pennsylvania Department of Revenue 19th (duplicate) Continued

EXHIBIT B
CLOSING AGREEMENT
KMART CORPORATION
COMMONWEALTH OF PENNSYLVANIA
ADMINISTRATIVE CLAIMS

Claim # Claim Date Claim Amt. Department Omnibus Objection Comment

49070 5/27/2003 42,181.24 Pennsylvania Department of Revenue 19th (satisfied) Continued
49071 5/27/2003 237,163.73 Pennsylvania Department of Revenue 19th (tax disallowance) Continued
49072 5/27/2003 4,015.00 Pennsylvania Department of Revenue 19th (tax disallowance) Continued
49073 5/27/2003 347,259.98 Pennsylvania Department of Revenue 19th (tax disallowance) Continued
49089 5/27/2003 40,084.19 Pennsylvania Department of Revenue 19th (tax disallowance) Continued

[*] Certain of the claims listed as ordered have already been expunged but are listed here for convenience and to confirm their status as between the parties.

Page 1