<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
KMART CORPORATION
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
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(4) Date filed:
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<PAGE> 2
KMART CORPORATION
- --------------------------------------------------------------------------------
April 10, 1998
Dear Stockholder:
It is my pleasure to invite you to join the Board of Directors and
management of Kmart Corporation at the Music Hall located at 350 Madison Avenue,
Detroit, Michigan for the Annual Meeting of Stockholders on Tuesday, May 19,
1998 at 10:00 a.m.
The Notice of Meeting, Proxy Statement and Proxy Card accompanying this
letter describe in detail the matters to be acted upon at the meeting.
Stockholder parking will be made available at no charge at parking
structures in the vicinity of the Music Hall. Directions to the Annual Meeting,
as well as your admission ticket to the Meeting and parking voucher, are on the
back cover of this Proxy Statement. Stockholders will need to present the
parking voucher to obtain parking at no charge and the admission ticket to
obtain admission to the Annual Meeting. If you plan to attend the Meeting,
please check the appropriate box on the Proxy Card.
It is important that your shares be represented at the Meeting regardless
of the number that you may hold. Whether or not you plan to attend the Meeting,
please sign, date and return your Proxy Card in the enclosed envelope as soon as
possible. This will not prevent you from voting your shares in person at the
Meeting before voting closes, if you wish to do so. Stockholders of record also
have the option of voting by telephone or Internet, as described on the Proxy
Card.
We hope that you will be able to attend the Meeting and look forward to
seeing you on May 19.
Sincerely,
FLOYD HALL
Floyd Hall
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 3
KMART CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 19, 1998
TO THE STOCKHOLDERS OF
KMART CORPORATION
The 1998 Annual Meeting of Stockholders of Kmart Corporation will be held
at the Music Hall, 350 Madison Avenue, Detroit, Michigan on Tuesday, May 19,
1998, beginning at 10 a.m. local time, for the following purposes:
1. To elect four Class III directors for a term expiring in 2001 as
set forth in the accompanying Proxy Statement.
2. To ratify the appointment of Price Waterhouse LLP as independent
accountants of the Company for the 1998 fiscal year.
3. To act upon two stockholder proposals, if presented at the meeting,
as set forth in the accompanying Proxy Statement, concerning a report on
vendor workplace conditions and the elimination of the provisions
classifying the Board of Directors.
4. To transact such other business as may properly come before the
Meeting or any adjournment of the Meeting.
Stockholders of record of Kmart Common Stock at the close of business on
March 20, 1998 are entitled to notice of and to vote at the Meeting or any
adjournment of the Meeting.
By order of the Board of Directors
NANCIE LADUKE
Nancie W. LaDuke
Vice President and Secretary
Troy, Michigan
April 10, 1998
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
About the Meeting........................................... 1
What is the purpose of the Annual Meeting?................ 1
Who is entitled to vote?.................................. 1
What constitutes a quorum?................................ 1
How do I vote?............................................ 1
Can I vote by telephone or electronically?................ 1
Can I change my vote after I submit my proxy?............. 2
Will my vote be kept confidential?........................ 2
How do I vote my 401(k) shares?........................... 2
What are the Board's recommendations?..................... 2
What vote is required to approve each item?............... 2
Stock Ownership............................................. 3
Who are the largest owners of the Company's Common
Stock?................................................. 3
How much Common Stock do the Company's directors and
executive officers own?................................ 4
Proposal 1 -- Election of Directors......................... 5
Directors standing for election........................... 5
Directors continuing in office............................ 6
How are directors compensated?............................ 7
How often did the Board meet during fiscal 1997?.......... 7
What are the Committees of the Board?..................... 7
Board Committee Membership................................ 8
What are the functions of the Board Committees?........... 8
Executive Compensation.................................... 9
Compensation and Incentives Committee Report on
Executive Compensation................................ 9
What is the Company's philosophy of executive
compensation?....................................... 9
Base Salary.......................................... 9
Annual Incentive Bonus............................... 10
Stock Purchases, Stock Options and Restricted
Shares.............................................. 10
How was the Company's CEO compensated in fiscal
1997?............................................... 11
Executive Compensation Summary Table................... 12
Option Grants in Fiscal Year 1997...................... 13
Option Exercises and Values for Fiscal Year 1997....... 14
Pension Plan Table..................................... 14
Employment and Severance Arrangements.................. 15
Performance Graph...................................... 16
Proposal 2 -- Ratification of Appointment of Independent
Accountants............................................... 16
Proposals 3 - 4 -- Stockholder Proposals.................... 17
Corporate Governance........................................ 20
Guidelines on Significant Corporate Governance Issues..... 20
Selection and Composition of the Board.................... 20
Board Leadership.......................................... 21
Board Relationship to Senior Management................... 22
Meeting Procedures........................................ 22
Committee Matters......................................... 23
Leadership Development.................................... 23
Other Business/Future Stockholder Proposals................. 24
</TABLE>
<PAGE> 5
KMART CORPORATION
3100 WEST BIG BEAVER ROAD
TROY, MICHIGAN 48084
PROXY STATEMENT
------------------------------
April 10, 1998
This Proxy Statement contains information related to the Annual Meeting of
Stockholders of Kmart Corporation, a Michigan corporation, to be held on
Tuesday, May 19, 1998, beginning at 10:00 a.m. local time, at the Music Hall,
350 Madison Avenue, Detroit, Michigan, and at any adjournment of the Meeting.
The Proxy Statement and accompanying Proxy Card are first being mailed to
stockholders on or about the above date.
ABOUT THE MEETING
WHAT IS THE PURPOSE OF THE ANNUAL MEETING?
At the Company's Annual Meeting, stockholders will act upon the matters
outlined in the accompanying Notice of Annual Meeting, including the election of
directors, the ratification of the Company's independent accountants and
consideration of two proposals submitted by stockholders. In addition, the
Company's management will report on the performance of the Company during fiscal
1997 and respond to questions from stockholders.
WHO IS ENTITLED TO VOTE?
Only stockholders of record of the Company's Common Stock, par value $1.00,
at the close of business on the record date, March 20, 1998, are entitled to
receive notice of the Annual Meeting and to vote the shares of Common Stock that
they held on that date at the Meeting or any adjournment of the Meeting. Each
outstanding share entitles its holder to cast one vote on each matter to be
voted upon.
WHAT CONSTITUTES A QUORUM?
The presence at the Meeting, in person or by proxy, of the holders of a
majority of the shares of Common Stock outstanding on the record date will
constitute a quorum, permitting the Meeting to conduct its business. As of the
record date, 489,678,249 shares of Common Stock of the Company were outstanding.
Proxies received but marked abstentions and broker non-votes will be included in
the calculation of the number of shares considered to be present at the Meeting
but will be disregarded in tabulating the vote on the election of directors and
the other proposals.
HOW DO I VOTE?
If you are a registered stockholder (that is, if you hold your stock in
your own name), and you complete and properly sign the accompanying Proxy Card
and return it to the Company's stock transfer agent, The First National Bank of
Boston, it will be voted as you direct. If you attend the Meeting, you may
deliver your completed Proxy Card in person.
If your shares are held in "street name" and you complete and properly sign
the Proxy Card provided to you by your broker or other nominee, the broker or
other nominee is required to vote your shares as you direct pursuant to a duly
executed Proxy Card.
CAN I VOTE BY TELEPHONE OR ELECTRONICALLY?
If you are a registered stockholder (that is, if you hold your stock in
your own name), you may vote by telephone, or electronically through the
Internet, by following the instructions printed on your Proxy Card.
1
<PAGE> 6
If your shares are held in "street name," you will need to contact your
broker or other nominee to determine whether you will be able to vote by
telephone or electronically.
CAN I CHANGE MY VOTE AFTER I SUBMIT MY PROXY?
Yes. Even after you have submitted your proxy, you may change your vote at
any time prior to the close of voting at the Meeting by filing with the
Secretary of the Company either a notice of revocation or a duly executed proxy
bearing a later date.
WILL MY VOTE BE KEPT CONFIDENTIAL?
The Company has adopted a policy providing for confidential voting.
Stockholder votes will be tabulated by The First National Bank of Boston and,
subject to certain limited exceptions including a contested proxy solicitation,
how a particular stockholder votes will not be disclosed to the Company prior to
the final tabulation of the vote.
HOW DO I VOTE MY 401(K) SHARES?
If you participate in the Kmart Corporation Retirement Savings Plan, you
may vote shares of Common Stock of the Company equivalent to the value of the
interest credited to your account by instructing Boston Safe Deposit and Trust
Company, the record holder of shares of Common Stock in the Plan, pursuant to
the Proxy/Voting Instruction Card being mailed with this Proxy Statement to Plan
participants. Boston Safe Deposit and Trust Company will vote your shares in
accordance with your duly executed instructions timely received. If you do not
send instructions, the share equivalents credited to your account will be voted
by the trustee in the same proportion that it votes share equivalents for which
it did receive timely instructions.
WHAT ARE THE BOARD'S RECOMMENDATIONS?
Unless you give other instructions on your Proxy Card, the persons named as
proxy holders on the Proxy Card will vote in accordance with the recommendations
of the Board of Directors. The Board's recommendation is set forth together with
the description of each item in this Proxy Statement. In summary, the Board
recommends a vote:
- for election of the nominated slate of directors (see page 5)
- for ratification of the appointment of Price Waterhouse LLP as the
Company's independent accountants (see page 16)
- against approval of each of the stockholder proposals (see pages
16-20)
With respect to any other matter that properly comes before the Meeting,
the proxy holders will vote in accordance with their judgment on such matter.
WHAT VOTE IS REQUIRED TO APPROVE EACH ITEM?
- ELECTION OF DIRECTORS. The affirmative vote of a plurality of the
votes cast at the Meeting is required for the election of directors. A
properly executed proxy marked "Withhold Authority" with respect to the
election of one or more directors will not be voted with respect to the
director or directors indicated, but will be counted for purposes of
determining whether there is a quorum.
- ELIMINATION OF PROVISIONS CLASSIFYING BOARD. The affirmative vote of
the holders of 58% of the outstanding shares entitled to vote is required
to approve the proposed amendment of the Company's Articles of
Incorporation to eliminate the classified board. A properly executed proxy
marked "Abstain" with respect to the proposal will have the same effect as
a vote against the proposal.
- OTHER PROPOSALS. For each other proposal, the affirmative vote of a
majority of the votes cast by stockholders represented in person or by
proxy and entitled to vote on the proposal is required for approval. A
properly executed proxy marked "Abstain" with respect to any such proposal
will not be voted and will not be counted in determining the shares
necessary for approval.
2
<PAGE> 7
If you hold your shares in "street name" through a broker or other nominee,
your broker or nominee may not be permitted to exercise voting discretion with
respect to some of the matters to be acted upon. Thus, if you do not give your
broker or nominee specific instructions, your shares may not be voted on those
matters, will not be counted in determining the number of shares necessary for
approval and, with respect to the proposal relating to the elimination of the
classified board, will have the same effect as a vote against the proposal.
STOCK OWNERSHIP
WHO ARE THE LARGEST OWNERS OF THE COMPANY'S COMMON STOCK?
The following table sets forth certain information concerning persons
which, to the knowledge of the Company, own more than 5% of the outstanding
Common Stock.
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS SHARES COMMON STOCK
---------------- ------ ------------
<S> <C> <C>
Barrow, Hanley, MeWhinney & Strauss, Inc.................... 51,042,438 10.5%
One McKinney Plaza
3232 McKinney Avenue, 15th Floor
Dallas, Texas 75204-2429(1)
Dodge & Cox................................................. 26,286,260 5.4%
One Sansome Street, 35th Floor
San Francisco, California 94104(2)
Putnam Investments, Inc..................................... 32,975,976 6.0%
One Post Office Square
Boston, Massachusetts 02109(3)
Vanguard/Windsor Funds, Inc. -- Windsor II.................. 35,140,700 7.22%
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600(4)
</TABLE>
- -------------------------
(1) Information obtained from Schedule 13G as of December 31, 1997 filed with
the Securities and Exchange Commission ("SEC") by Barrow, Hanley, MeWhinney
& Strauss, Inc. ("BHMS"). BHMS is a registered investment advisor which has
the shared power to dispose or to direct the disposition of all of the above
shares and has the shared power to vote or to direct the voting of 298,895
of the shares.
(2) Information obtained from Schedule 13G as of December 31, 1997 filed with
the SEC by Dodge & Cox. Dodge & Cox is a registered investment advisor which
has the sole power to dispose or to direct the disposition of all of the
above shares, has the sole power to vote or to direct the voting of
23,504,960 of the shares and has the shared power to vote or to direct the
voting of 398,100 of the shares.
(3) Information obtained from Schedule 13G as of December 31, 1997 filed with
the SEC by Putnam Investments, Inc., Marsh & McLennan Companies, Inc.,
Putnam Investment Management, Inc. and The Putnam Advisory Company, Inc.
Putnam Investments, Inc., a subsidiary of Marsh & McLennan Companies, Inc.,
wholly owns two registered investment advisors, Putnam Investment
Management, Inc., which is the investment advisor to the Putnam family of
mutual funds, and The Putnam Advisory Company, Inc., which is the investment
advisor to Putnam's institutional clients. Putnam Investments, Inc. has the
shared power to dispose or to direct the disposition of 32,975,976 of the
above shares. Putnam Investment Management, Inc. has the shared power to
dispose or to direct the disposition of 32,602,214 of the shares. The Putnam
Advisory Company, Inc. has the shared power to dispose or to direct the
disposition of 373,762 of the shares and the shared power to vote or to
direct the voting of 298,895 of the shares.
(4) Information obtained from Schedule 13G as of December 31, 1997 filed with
the SEC by Vanguard/Windsor Funds, Inc. -- Windsor II, which is a registered
investment company with the sole power to dispose or to direct the
disposition and to vote or to direct the voting of the above shares.
3
<PAGE> 8
HOW MUCH COMMON STOCK DO THE COMPANY'S DIRECTORS AND EXECUTIVE OFFICERS OWN?
The following table shows the Common Stock ownership of the Company's
directors, the named executive officers and all of the directors and executive
officers of the Company as a group, in each case as of March 1, 1998.
<TABLE>
<CAPTION>
NAME SHARES
---- ------
<S> <C>
James B. Adamson(1)......................................... 11,112
Lilyan H. Affinito(1)....................................... 28,031
Stephen F. Bollenbach(1).................................... 19,673
Joseph A. Califano, Jr.(1)(2)............................... 14,945
Richard G. Cline(1)(5)...................................... 24,838
Willie D. Davis(5).......................................... 9,063
Enrique C. Falla(1)(2)...................................... 19,990
Joseph P. Flannery(1)(2).................................... 17,963
Andrew A. Giancamilli(2)(3)................................. 237,087
Floyd Hall(3)............................................... 2,051,238
Donald W. Keeble(3)......................................... 373,824
Robert D. Kennedy(1)(2)..................................... 21,414
J. Richard Munro(1)......................................... 14,050
Anthony N. Palizzi(3)....................................... 373,742
Marvin P. Rich(3)(4)........................................ 498,317
Robin B. Smith(1)(5)........................................ 7,854
William P. Weber(1)......................................... 19,912
James O. Welch(1)(5)(6)..................................... 209,767
Directors and executive officers as a group (53
persons)(1)-(6)............................................. 6,922,827
</TABLE>
As of March 1, 1998, none of the directors and executive officers owned l% or
more of the outstanding shares of Common Stock. The shares owned by the
directors and executive officers as a group represented approximately 1.4% of
the outstanding shares of Common Stock as of March 1, 1998.
- -------------------------
(1) Includes restricted Common Stock units accrued under the Directors Stock
Plan as follows: Mr. Adamson -- 4,042 units; Ms. Affinito -- 5,377 units;
Mr. Bollenbach -- 3,822 units; Mr. Califano -- 4,481 units; Mr.
Cline -- 5,246 units; Mr. Falla -- 4,481 units; Mr. Flannery -- 764 units;
Mr. Kennedy -- 4,042 units; Mr. Munro -- 5,377 units; Ms. Smith -- 2,428
units; Mr. Weber -- 4,042 units; and Mr. Welch -- 4,481 units.
(2) Includes shares of Common Stock that can be acquired by conversion of Kmart
Financing I Trust Convertible Preferred Stock as follows: Mr.
Califano -- 1,333 shares; Mr. Falla -- 6,666 shares; Mr. Flannery -- 6,666
shares; Mr. Giancamilli -- 333 shares; Mr. Kennedy -- 3,333 shares; and all
directors and executive officers as a group -- 24,081 shares.
(3) Includes shares of Common Stock that can be acquired by exercise of stock
options within 60 days of March 1, 1998 as follows: Mr.
Giancamilli -- 105,737 shares; Mr. Hall -- 933,333 shares; Mr. Keeble --
297,399 shares; Mr. Palizzi -- 305,266 shares; and Mr. Rich -- 383,333
shares.
(4) Mr. Rich resigned from the Company as of April 3, 1998.
(5) Mr. Cline may be deemed to share voting and investment power as to 64,900
shares of Common Stock, owned by one or more of the Benchmark Funds of which
he is a trustee. Mr. Davis may be deemed to share voting and investment
power as to 3,200,000 shares of Common Stock, owned by one or more of the
Strong Funds of which he is a director. Ms. Smith may be deemed to share
voting and investment power as to 51,900,000 shares of Common Stock, owned
by one or more of the Prudential Investments mutual funds of which she is a
director. Mr. Welch may be deemed to share voting and investment power as to
41,231,876 shares of Common Stock, owned by one or more of the Vanguard
Group of Investment Companies of which he is a director. If such additional
shares were included, executive officers and directors as a group would be
considered to beneficially own 96,396,776 shares of Common Stock, or
4
<PAGE> 9
19.13% of the Common Stock outstanding, including .00014% for Mr. Cline,
0.0065% for Mr. Davis 10.63% for Ms. Smith and 8.49% for Mr. Welch. Mr.
Cline, Mr. Davis, Ms. Smith and Mr. Welch each disclaim beneficial ownership
of such shares.
(6) Includes 166,397 shares of Common Stock held by trusts of which Mr. Welch
and/or his wife is a co-trustee and 1,870 shares owned by his wife.
Based upon a review of filings with the Securities and Exchange Commission
and written representations that no other reports were required, the Company
believes that all of the Company's directors and executive officers complied
during fiscal 1997 with the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934.
PROPOSAL 1 -- ELECTION OF DIRECTORS
The Company's Articles of Incorporation and By-laws provide that the number
of directors, as determined from time to time by the Board, shall be not less
than seven nor more than twenty-one. The Board has fixed the number of directors
at 13, as of May 19, 1998. The Articles and By-laws further provide that
directors shall be divided into three classes (Class I, Class II and Class III)
serving staggered three-year terms, with each class to be as nearly equal in
number as possible.
Enrique C. Falla, who has served as a director of the Company since 1992,
will retire from the Board of Directors as of the date of the 1998 Annual
Meeting.
DIRECTORS STANDING FOR ELECTION
In accordance with the recommendation of its Nominating Committee, the
Board has nominated Lilyan H. Affinito, Richard G. Cline, Willie D. Davis and
Joseph P. Flannery for election as Class III directors for a term expiring at
the 2001 Annual Meeting and until their successors are elected and qualified.
All of the nominees are presently directors of the Company whose terms expire at
the 1998 Annual Meeting.
CLASS III DIRECTORS. The directors standing for election are:
LILYAN H. AFFINITO, 66
Former Vice Chairman of the Board of Maxxam Group Inc. (forest products
operations, real estate management and development and aluminum production).
Director of Caterpillar, Inc., Chrysler Corporation and Jostens Inc. Has served
as a director of Kmart Corporation since 1990.
RICHARD G. CLINE, 63
Chairman, Hussmann International, Inc. (refrigerated merchandising equipment and
refrigeration systems). Also Chairman, Hawthorne Investors, Inc. Previously
served as Chairman and Chief Executive Officer and as Chairman, President and
Chief Executive Officer of NICOR, Inc. (natural gas distribution and
containerized shipping). Director of Hussmann International, Inc., Ryerson Tull,
Inc. and Whitman Corporation. Trustee of Benchmark Funds. Has served as a
director of Kmart Corporation since 1995.
WILLIE D. DAVIS, 63
President of All Pro Broadcasting, Inc. (radio stations). Director of Alliance
Bank, The Dow Chemical Company, Johnson Controls, Inc., MGM Grand, Inc., Rally's
Hamburgers, Inc., Sara Lee Corporation, Strong Funds and WICOR, Inc. Has served
as a director of Kmart Corporation since 1986.
JOSEPH P. FLANNERY, 66
Chairman of the Board, President and Chief Executive Officer of Uniroyal
Holding, Inc. (investment management company). Director of APS Holding Corp.,
Arvin Industries, Inc., Ingersoll Rand Company, Newmont Gold Company, Newmont
Mining Corporation and The Scotts Company. Has served as a director of Kmart
Corporation since 1985.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ELECTION OF MS. AFFINITO AND
MESSRS. CLINE, DAVIS AND FLANNERY AS CLASS III DIRECTORS.
5
<PAGE> 10
DIRECTORS CONTINUING IN OFFICE
CLASS I DIRECTORS. The following Class I directors were elected at the Company's
1996 Annual Meeting for terms expiring at the Annual Meeting in 1999:
JAMES B. ADAMSON, 50
Chairman and Chief Executive Officer, Advantica Restaurant Group (formerly
Flagstar Corporation) (food services and restaurant franchises). Previously
served as Chief Executive Officer, as Chief Operating Officer and as Retail
President of Burger King Corporation. Director of Oxford Health Plans. Has
served as a director of Kmart Corporation since 1996.
STEPHEN F. BOLLENBACH, 55
President and Chief Executive Officer of Hilton Hotels Corporation. Previously
served as Senior Executive Vice President and Chief Financial Officer of The
Walt Disney Company, as President and Chief Executive Officer of Host Marriott
Corporation, and as Chief Financial Officer of Marriott Corporation. Director of
America West Airlines, Inc., Hilton Hotels Corporation, Ladbroke Group PLC and
Time Warner Inc. Has served as a director of Kmart Corporation since 1996.
FLOYD HALL, 59
Chairman of the Board, President and Chief Executive Officer. Previously served
as Chairman and Chief Executive Officer of Alva Reproductions Inc. (museum
reproductions), Glass Masters Inc. (stained glass products) and The Museum Co.
(retail stores) and as Chairman of Lynx Technologies Inc. (telecommunications).
Prior to that, served as Chairman and Chief Executive Officer of The Grand Union
Company, of Target Stores and of B. Dalton Booksellers Inc. Director of Jundt
Funds. Has served as a director of Kmart Corporation since 1995.
ROBERT D. KENNEDY, 65
Former Chairman and Chief Executive Officer of Union Carbide Corporation
(chemicals and plastics manufacturer). Director of Birmingham Steel Corporation,
General Signal Corporation, Lionore Mining International Ltd., Sun Oil Co.,
Union Carbide Corporation, Union Camp Corporation and UCAR International Inc.
Has served as a director of Kmart Corporation since 1996.
WILLIAM P. WEBER, 57
Vice Chairman of Texas Instruments Incorporated (diversified electronics
manufacturer). Previously served as Executive Vice President and as Components
Sector President of Texas Instruments Incorporated. Director of Texas
Instruments Incorporated. Has served as a director of Kmart Corporation since
1996.
CLASS II DIRECTORS. The following Class II directors were elected at the
Company's 1997 Annual Meeting for terms expiring at the Annual Meeting in 2000.
JOSEPH A. CALIFANO, JR., 66
Chairman and President, The National Center on Addiction and Substance Abuse at
Columbia University, attorney, author and Adjunct Professor of Public Health
(health policy and management), College of Physicians and Surgeons of Columbia
University and Columbia University School of Public Health. Director of
Authentic Fitness Corp., Automatic Data Processing, Inc., Chrysler Corporation,
Health Plan Services, Inc., The Travelers Inc. and Warnaco, Inc. Has served as a
director of Kmart Corporation since 1990.
J. RICHARD MUNRO, 67
Chairman of the Board of Genentech, Inc. (bio-technology). Previously served as
Chairman of the Executive Committee and as Co-Chairman of the Board and Co-Chief
Executive Officer of Time Warner Inc. (entertainment and communications) and as
Chairman of the Board and Chief Executive Officer of Time Inc. (communications).
Director of Genentech, Inc., Kellogg Company and Mobil Corporation. Has served
as a director of Kmart Corporation since 1990.
6
<PAGE> 11
ROBIN B. SMITH, 58
Chairman and Chief Executive Officer of Publishers Clearing House (distribution
of publications). Previously served as President and Chief Executive Officer of
Publishers Clearing House. Director of BellSouth Corp., Prudential Investments
mutual funds, Springs Industries, Inc. and Texaco, Inc. Has served as a director
of Kmart Corporation since 1996.
JAMES O. WELCH, JR., 66
Former Vice Chairman of RJR Nabisco, Inc. and Chairman of Nabisco Brands, Inc.
Director of TECO Energy, Inc. and Vanguard Group of Investment Companies. Has
served as a director of Kmart Corporation since 1995.
HOW ARE DIRECTORS COMPENSATED?
Directors who are not employees of the Company or its subsidiaries receive
an annual retainer of $50,000, with no additional amount payable for attending
meetings. Fifty percent (and at the election of the director, up to 100%) of the
annual retainer is paid in Common Stock in lieu of cash pursuant to the
Directors Stock Plan. In addition, under the Directors Stock Plan, restricted
stock units, which are distributed as shares of Common Stock upon termination of
Board service, are accrued for a period of time equal to the director's Board
service, but no more than ten years, in an amount equal to 50% of the annual
retainer, plus, for Committee chairpersons, an amount equal to 10% of the annual
retainer.
Under the Company's Deferred Compensation Plan for Non-Employee Directors
and the Directors Stock Plan, a director may elect to defer all or any portion
of his or her compensation for services as a director which is payable in cash
or Common Stock. Under these Plans, deferred cash amounts earn interest at a
rate equivalent to the ten-year U.S. Treasury Note rate plus 5%, and deferred
shares of Common Stock are credited with an amount equal to any dividends
payable on such shares, which are converted on a quarterly basis to additional
shares.
Effective January 1, 1996, benefits under the Company's Directors
Retirement Plan were terminated with respect to new directors and the accrual of
future benefits for existing directors was terminated. Non-employee directors
who served on the Board prior to December 31, 1995 and who serve at least five
years are entitled to benefits under the Plan. Upon retirement from the Board or
age 62, whichever is later, such directors will receive an annual benefit equal
to the annual retainer at the time of retirement for a period equal to the
director's accrued years under the Plan, not to exceed ten years. Ms. Affinito
and Messrs. Califano, Davis, Falla, Flannery and Munro have vested benefits
under the Directors Retirement Plan.
Directors who are employees of the Company or its subsidiaries do not
receive the above compensation or benefits.
HOW OFTEN DID THE BOARD MEET DURING FISCAL 1997?
The Board of Directors met 8 times during fiscal 1997. Each director
attended at least 83% of the Board and Committee meetings held while he or she
served as a director or member of the Committee.
WHAT ARE THE COMMITTEES OF THE BOARD?
The Board of Directors has Audit, Executive, Compensation and Incentives,
Finance and Nominating Committees. Except for the Executive Committee, the
Committees are comprised solely of non-employee directors.
7
<PAGE> 12
BOARD COMMITTEE MEMBERSHIP
<TABLE>
<CAPTION>
COMPENSATION AND
AUDIT INCENTIVES EXECUTIVE FINANCE NOMINATING
NAME COMMITTEE COMMITTEE COMMITTEE COMMITTEE COMMITTEE
---- --------- ---------------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
James B. Adamson.................... x
Lilyan H. Affinito.................. * x x
Stephen F. Bollenbach............... x
Joseph A. Califano, Jr.............. x
Richard G. Cline.................... * x x
Willie D. Davis..................... x
Joseph P. Flannery.................. x * x
Enrique C. Falla.................... x
Floyd Hall.......................... *
Robert D. Kennedy................... x
J. Richard Munro.................... x x *
Robin B. Smith...................... x
William P. Weber.................... x
James O. Welch, Jr.................. x
</TABLE>
- -------------------------
x Member
* Chairperson
WHAT ARE THE FUNCTIONS OF THE BOARD COMMITTEES?
Audit Committee. Recommends to the Board the selection of independent
accountants; approves the nature and scope of services performed by the
independent accountants and reviews the range of fees for such services; confers
with the independent accountants and reviews results of their audits; reviews
the Company's internal audit, accounting and financial controls; and provides
assistance to the Board with respect to corporate and reporting practices of the
Company. In fiscal 1997, the Audit Committee met 5 times.
Compensation and Incentives Committee. Determines the nature and amount of
compensation of the executive officers of the Company and its subsidiaries; and
administers the Company's Annual Incentive Bonus Plan and executive and director
stock plans. The Committee is assisted as needed by an independent consultant
which reports directly to the Committee. In fiscal 1997, the Compensation and
Incentives Committee met 5 times.
Executive Committee. Exercises the power and authority of the Board as may
be necessary during the intervals between meetings of the Board, subject to such
limitations as are provided by law or by resolution of the Board. In fiscal
1997, the Executive Committee met 2 times.
Finance Committee. Reviews and oversees corporate operating and financial
policies, procedures and plans; makes recommendations to the Board on dividend
policy, corporate financing, the issuance and sale of Company securities and the
investments of funds; and reviews and oversees the Employee Pension Plan and
Pension Fund and the Retirement Savings Plan/Profit Sharing Program and Funds.
In fiscal 1997, the Finance Committee met 4 times.
Nominating Committee. Recommends to the Board nominees for election as
directors. In performing this function, the Committee considers nominees
recommended by stockholders. Such recommendations should be submitted in writing
to the Secretary of the Company and should include a description of the proposed
nominee's qualifications, other relevant biographical data and the written
consent of the proposed nominee to serve, if elected. In addition, the By-laws
of the Company establish certain procedures concerning stockholder nominations
for elections of directors. The By-laws generally require that notice of such
nominations be delivered to the Secretary of the Company within the following
specified time limits prior to the stockholders meeting at which the directors
are to be elected: 90 days in advance of an annual meeting; and the tenth day
following the date on which notice of a special meeting is first given to
stockholders. Each
8
<PAGE> 13
notice of nomination is required to contain the name and address of the
stockholder who intends to make the nomination; the name, age, business address
and written consent of each nominee; and such other information as would be
required to be disclosed with respect to the nominee in a proxy solicitation. In
fiscal 1997, the Nominating Committee met 4 times.
EXECUTIVE COMPENSATION
COMPENSATION AND INCENTIVES COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's executive compensation program is administered by the
Compensation and Incentives Committee of the Board of Directors. The Committee
is comprised of four independent, non-employee directors.
WHAT IS THE COMPANY'S PHILOSOPHY OF EXECUTIVE COMPENSATION?
The Company's 1997 Compensation Program for executives consisted of the
following key elements:
- Base salary
- Performance-based annual incentive bonus
- Executive restricted stock purchases at an effective 20% discount
- Grants of stock options and restricted shares
The primary goal of the program is to assure that the compensation provided
to the Company's executives is tied to the Company's business strategies and
objectives, thereby aligning the financial interests of senior executives with
those of stockholders. Other objectives of the Committee's compensation strategy
are to attract and retain the best possible executive talent, to motivate those
executives to obtain optimum performance for the Company, to link executive and
stockholder interests through equity based plans and to provide compensation
that recognizes individual contributions as well as overall business results.
On a regular and recurring basis, the Committee conducts a review of the
Company's executive compensation program, assisted as needed by an independent
compensation consultant, in order that the Committee may assure that the
Company's compensation program is properly integrated with both the Company's
annual and longer term objectives and is competitive with compensation programs
of other companies with which the Company must directly compete for executive
talent.
The Committee's policy with respect to each of the components of the
Company's executive compensation program is discussed below. Through these
programs, a significant portion of the Company's executive compensation is
linked to performance and the alignment of executive interests with those of
stockholders.
The Committee has also adopted a policy that, while maintaining an
appropriately competitive compensation program, it will endeavor to take the
necessary steps so that all compensation paid to executive officers will be tax
deductible to the Company under Section 162(m) of the Internal Revenue Code
("IRC").
Base Salary
Base salaries for the Company's executive officers are based on a structure
of graduated salary levels that are established by reference to several
commercially available executive compensation surveys in which the Company and
other major U.S. retailers participate. The range for each position consists of
minimum, mid-point and maximum salary levels. Generally, the salary goals for
executive officers are targeted at the average salaries for comparable positions
within the companies participating in the surveys (unless an employment
agreement provides otherwise or as necessary to meet specific competitive
offers). Any annual salary adjustment, within each applicable position/salary
grade, is determined based on the performance of the individual (including the
achievement of his or her annual objectives). The retail companies included in
the surveys represent a narrower group than the companies included in the
Standard & Poor's Retail Stores Composite Index, contained in the Company's
stock performance graph. The Committee believes that the
9
<PAGE> 14
means by which comparative salary levels are determined is appropriate since
they enable the Company's executive salary structure to reflect the practice of
other retailers that are comparable to the Company in size and complexity. The
Committee intends periodically to assess the continued suitability of this
approach and to modify it if appropriate.
Annual Incentive Bonus
Executive officers have an opportunity to earn annual bonuses based on
performance against corporate and business unit goals approved by the Committee.
In addition, the Committee may approve adjustments to the bonus formula as
necessary from time to time to insure against unmerited windfalls or penalties
due to accounting changes or other non-operating factors.
The Company's goal for 1997, and the funding of 1997 incentive bonuses of
executive officers, was based solely on the achievement of consolidated
after-tax 1997 financial results (exclusive of certain one-time charges).
Participants were assigned threshold, target and maximum bonus levels, with
funding depending on the level of achievement of the annual goal -- zero if
achievement was below the threshold level of 80% of goal, and increasing
incrementally from 25% of the targeted bonus at 80% achievement of goal, to 100%
of the targeted bonus at 100% achievement of goal, to a maximum of 225% of the
targeted bonus at achievement of 150% of goal or greater.
The 1997 targeted bonus opportunity for each executive officer was based on
a percentage of their annual base salary -- with the largest targeted bonus
opportunity being granted to the CEO and the targeted bonus opportunity granted
to other executive officers decreasing incrementally based on their
position/salary grade. Generally, the on-plan incentive bonus for executive
officers was targeted at the average bonus for comparable positions within the
companies participating in the above described executive compensation surveys
(unless an employment agreement provided otherwise or as necessary to meet
specific competitive offers).
Bonus payouts from available funding were based on the achievement of
individual financial and personal performance objectives approved and
subsequently evaluated by the senior officer to whom the executive officer
reported, as well as by the CEO (and, in the case of the CEO, by the Board of
Directors).
Stock Purchases, Stock Options and Restricted Shares
The Company's long-term incentive compensation for executive officers and
other key executives consisted of purchases of restricted shares under the
Management Stock Purchase Plan, stock options granted under the 1992 Stock
Option and 1997 Long-Term Equity Compensation Plans and restricted shares
granted under the Performance Restricted Stock and 1997 Long-Term Equity
Compensation Plans.
The Committee has long believed that aligning management's interests with
those of stockholders is an important element of the Company's executive
compensation program and that encouraging increased levels of ownership in the
Company's Common Stock is a key ingredient in achieving this goal. The
Management Stock Purchase Plan, which was approved by stockholders, provides for
the use of any annual incentive bonus earned by the executive officers and other
executive participants under the Annual Incentive Bonus Plan to be used to
purchase shares of Common Stock at an effective 20% discount, such shares to be
restricted from sale or transfer for a period of three years. A participant may
choose to use less than 100% of his or her annual bonus to purchase such
restricted shares, but in no event less than 20%.
The Company's Stock Option Plans also enable executive officers and other
key executives to develop and maintain a substantial stock ownership position in
the Company's Common Stock, and create a direct link between executive
compensation and stockholder return. Under the Stock Option Plans, which were
approved by stockholders, options for Common Stock were granted in 1997 to over
3,000 executives.
Generally, the 1997 stock option grants for executive officers, other than
the CEO, were developed using industry accepted stock option valuation and
pricing models. Grants ranged from 50% to 110% of the applicable salary range
midpoint depending on position and salary grade, and were targeted at the
average
10
<PAGE> 15
grant levels for comparable positions at the companies participating in the
above described executive compensation surveys (unless an employment agreement
provided otherwise, or a specific competitive offer was met, or the Committee
determined otherwise based on its own assessment of the situation).
Stock options were granted with an exercise price equal to the market price
of the Common Stock on the date of grant, will expire after ten years and will
vest over a three year period at the rate of one-third of the shares per year.
Under the Performance Restricted Stock and 1997 Long-Term Equity
Compensation Plans, the Committee granted awards of Common Stock with a three
year restricted period to eight key executive officers, including the named
executive officers. These grants were made by the Committee based on its
assessment that these individuals had made material contributions to the Company
and that the grants would enhance the Company's ability to retain their
services.
HOW WAS THE COMPANY'S CEO COMPENSATED IN FISCAL 1997?
Mr. Hall's 1997 cash compensation included a base salary of $1,200,000
which was equivalent to the median salary of the other CEOs of companies
participating in the above described executive compensation surveys. Mr. Hall's
bonus payout for 1997 was $1,815,600 as a result of the Company's attaining its
1997 financial goal and Mr. Hall's exceptional achievement with respect to his
individual financial and personal performance objectives. In March of 1997, the
Committee also granted Mr. Hall stock options to purchase 1,000,000 shares of
Common Stock and awarded him 225,000 shares of restricted Common Stock. These
awards were made by the Committee based on its assessment that Mr. Hall had
made, and continues to make, significant contributions to the Company. All of
Mr. Hall's 1997 compensation was tax deductible by the Company under IRC Section
162(m) or was deferred until such time as it will be tax deductible to the
Company.
Compensation and Incentives Committee
R. G. Cline, Chair
W. D. Davis
J. R. Munro
J. O. Welch, Jr.
The Compensation and Incentives Committee Report and the performance graph
included elsewhere in this Proxy Statement shall not be deemed filed or
incorporated by reference into any other filings by the Company under the
Securities Act of 1933 or the Securities Exchange of 1934, except to the extent
that the Company specifically incorporates this information by reference.
11
<PAGE> 16
EXECUTIVE COMPENSATION SUMMARY TABLE
The following table sets forth information concerning total compensation
paid to the Chief Executive Officer and the four other most highly compensated
executive officers of the Company who served in such capacities as of January
28, 1998 (the "named executive officers") for services rendered to the Company
during each of the last three fiscal years. In addition, information is included
concerning the former President and Chief Operating Officer, U.S. Kmart Stores,
who retired from the Company as of December 31, 1997.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------------------
ANNUAL COMPENSATION NO. OF STOCK RESTRICTED
NAME AND ---------------------------------- OPTIONS STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) GRANTED(#) AWARDS($)(2) COMPENSATION(3)
------------------ ---- --------- ----------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
F. Hall......................... 1997(4) $1,200,000 $1,815,600 1,000,000 $2,729,250 $ 375,693(5)
Chairman of the Board 1996(4) 1,000,000 1,749,500 900,000 1,488,200 144,542
President and Chief 1995 660,300 1,000,000 3,450,000 6,375,000 -0-
Executive Officer
A. A. Giancamilli............... 1997 485,835 442,700 320,000 1,269,000 24,291
President and General 1996 315,000 261,300 90,000 -0- 2,350
Merchandise Manager 1995 201,440 30,455 39,071 -0- 175
U. S. Kmart Stores
M. P. Rich(6)................... 1997 600,000 462,000 150,000 1,031,050 46,320
Executive Vice President 1996 550,000 638,300 200,000 -0- 25,475
Strategic Planning, Finance 1995 500,000 103,280 130,000 -0- 1,250
and Administration
D. W. Keeble.................... 1997 432,000 378,000 70,000 606,500 32,750
Executive Vice President 1996 400,000 461,200 100,000 -0- 35,350
Store Operations 1995 350,000 74,620 100,000 -0- 10,500
A. N. Palizzi................... 1997 413,400 258,400 60,000 545,850 32,140
Executive Vice President 1996 390,000 419,100 100,000 -0- 50,459
General Counsel 1995 325,000 74,620 40,000 -0- 28,878
W. Flick........................ 1997 733,333 478,400 -0- 2,729,250 28,334
Former President and 1996 687,500 340,300 750,000 -0- 1,156,500
Chief Operating Officer 1995 50,000 -0- 400,000 -0- 1,000,000
U.S. Kmart Stores
</TABLE>
- -------------------------
(1) A portion of each named executive officer's 1997 cash bonus was used to
purchase restricted shares of Common Stock at an effective 20% discount
pursuant to the Company's Management Stock Purchase Plan, as follows: Mr.
Hall -- $907,800 of bonus was used; the value of the stock was $1,134,750.
Mr. Giancamilli -- $88,540 of bonus was used; the value of the stock was
$110,675. Mr. Rich -- $92,400 of bonus was used; the value of the stock was
$115,500. Mr. Keeble -- $75,600 of bonus was used; the value of the stock
was $94,500. Mr. Palizzi -- $51,680 of bonus was used; the value of the
stock was $64,600. (Values are based on the market price of the stock as of
the date of issue.)
(2) These amounts represent the value of the following grants of restricted
shares of Common Stock issued under the Company's Long-Term Equity
Compensation Plan or the Performance Restricted Stock Plan, as applicable
(based on the market price of the stock as of the date of issue): Mr. Hall
-- 225,000 shares; Mr. Giancamilli -- 100,000 shares; Mr. Rich -- 85,000
shares (which were forfeited since they were not vested as of April 3, 1998,
the date of Mr. Rich's resignation); Mr. Keeble -- 50,000 shares; Mr.
Palizzi -- 45,000 shares; and Mr. Flick -- 225,000 shares (which were
forfeited since they were not vested as of December 31, 1997, the date of
Mr. Flick's retirement).
(3) The dollar amounts under "All Other Compensation" for Messrs. Hall,
Giancamilli, Rich, Keeble, Palizzi and Flick include employer contributions
under the Company's Supplemental Retirement Savings Plan and for 1995 and
1996 for Messrs. Keeble and Palizzi under the Company's Supplemental Pension
Plan. The Supplemental Plans provide benefits to the extent that the
Employee Retirement Income Security Act (ERISA) limits the amount of
employer contributions to which a participant would otherwise be entitled
under the Plans absent such limitation.
(4) $1,363,788 of Mr. Hall's 1997 cash compensation and $993,493 of his 1996
cash compensation was deferred in order for the Company to avoid tax
non-deductibility under IRC Section 162(m). These mandatory deferrals accrue
interest equal to the 10-year U.S. Treasury Note rate plus 5%.
(5) Benefits received by Mr. Hall include reimbursement of $165,292 in housing
costs and living expense allowance (including $46,339 in taxes paid in
connection therewith).
(6) Mr. Rich resigned from the Company as of April 3, 1998.
12
<PAGE> 17
OPTION GRANTS IN FISCAL YEAR 1997
The following table shows all grants of options to each of the named
executive officers in fiscal 1997.
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS
NUMBER OF GRANTED TO
OPTIONS EMPLOYEES HYPOTHETICAL
GRANTED IN FISCAL EXERCISE PRICE EXPIRATION VALUE AT GRANT
NAME (#)(1) 1997 ($/SH)(2) DATE ($)(3)
---- --------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
F. Hall............................ 1,000,000 13.82% $12.125 3/19/07 $5,351,440
A. A. Giancamilli.................. 60,000(4) 4.42 12.125 3/19/07 321,086
35,000 12.34 6/29/07 189,130
225,000 12.69 12/3/07 1,261,215
M. P. Rich(5)...................... 150,000 2.07 12.125 3/19/07 802,716
D. W. Keeble....................... 70,000 0.097 12.125 3/19/07 374,601
A. N. Palizzi...................... 60,000 0.083 12.125 3/19/07 321,086
W. Flick........................... -0- -0- -- -- --
</TABLE>
- -------------------------
(1) Options shown above will become exercisable in three equal annual
installments commencing one year from date of grant.
(2) All options were granted at a price equal to 100% of the market value of the
Common Stock on the date of grant (March 17, 1997 for Messrs. Hall, Rich,
Keeble and Palizzi and March 17, 1997, June 27, 1997 and December 1, 1997
for Mr. Giancamilli). The exercise price may be paid in cash, already owned
shares or a combination of both.
(3) This column represents the estimated present value of the options granted
during fiscal 1997 on the date of grant using the Black-Scholes option
pricing model based upon the following assumptions: an estimated time until
exercise of 5 years; a 5-year stock price volatility rate of .388952,
.391145 and .400439 for grants made on March 17, 1997, June 27, 1997 and
December 1, 1997, respectively; a risk-free interest rate of 6.54%, 6.33%
and 5.83% for grants made on March 17, 1997, June 27, 1997 and December 1,
1997, respectively; a dividend yield of 0.00%; and no adjustment for
non-transferability or forfeiture. The actual value, if any, that an
executive officer may realize will depend on the excess of the market price
over the exercise price on the date the option is exercised so that there is
no assurance that the value realized by an executive will be at or near the
value estimated by the Black Scholes model, which is based on arbitrary
assumptions as to the variables of stock price volatility, future dividend
yield and interest rate.
(4) Mr. Giancamilli was granted options for 60,000 shares on March 17, 1997 in
connection with the 1997 broad-based grant of stock options to key
executives of the Company, for 35,000 shares on June 27, 1997 when he was
promoted to Senior Vice President and General Merchandise Manager,
Consumables/ Commodities/Soft Home and 225,000 shares on December 1, 1997
when he was promoted to President and General Merchandise Manager, U. S.
Kmart.
(5) Mr. Rich resigned from the Company as of April 3, 1998.
13
<PAGE> 18
OPTION EXERCISES AND VALUES FOR FISCAL YEAR 1997
The table below sets forth the following information with respect to
options exercised by each of the named executive officers in fiscal 1997 and the
status of their options at January 28, 1998:
- the number of shares of Common Stock acquired upon exercise of
options during fiscal 1997;
- the aggregate dollar value realized upon the exercise of such
options;
- the total number of exercisable and non-exercisable stock options
held at January 28, 1998; and
- the aggregate dollar value of in-the-money exercisable and
non-exercisable options at January 28, 1998.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SHARES VALUE NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON REALIZED UPON OPTIONS AT 1/28/98 AT 1/28/98
NAME EXERCISE (#) EXERCISE ($) EXERCISABLE/NONEXERCISABLE(#) EXERCISABLE/NONEXERCISABLE($)
---- ------------ ------------- ----------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
F. Hall.............. -0- -0- 300,000 5,050,000 $129,000 $258,000
A. A. Giancamilli.... -0- -0- 49,534 399,537 121,120 178,761
M. P. Rich(1)........ -0- -0- 136,666 413,334 216,665 433,336
D. W. Keeble......... -0- -0- 137,733 236,667 108,333 216,668
A. N. Palizzi........ -0- -0- 175,933 166,667 108,333 216,668
W. Flick............. 83,333 $560,831 166,666 83,333 176,666 270,832
</TABLE>
- -------------------------
(1) Mr. Rich resigned from the Company as of April 3, 1998.
PENSION PLAN TABLE(1)
The following table illustrates the estimated annual benefits payable under
the combined Employee Pension Plan and Supplemental Pension Benefit Plan
described below under the final average compensation formula (prior to the
applicable Social Security reduction) for employees at various levels of
compensation and years of service after age 21 and assumes that the Plans will
continue in their present form until the employee's retirement and that the
employee will continue in the employ of the Company or a participating
subsidiary until age 65.
<TABLE>
<CAPTION>
YEARS OF SERVICE(3)
----------------------------------------------------------------------------
REMUNERATION(2) 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
--------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$125,000.................. $ 28,125 $ 37,500 $ 46,875 $ 56,250 $ 65,625
150,000.................. 33,750 45,000 56,250 67,500 78,750
200,000.................. 45,000 60,000 75,000 90,000 105,000
250,000.................. 56,250 75,000 93,750 112,500 131,250
300,000.................. 67,500 90,000 112,500 135,000 157,500
350,000.................. 75,750 105,000 131,250 157,500 183,750
400,000.................. 90,000 120,000 150,000 180,000 210,000
450,000.................. 101,250 135,000 168,750 202,500 236,250
500,000.................. 112,500 150,000 187,500 225,000 262,500
600,000.................. 135,000 180,000 225,000 270,000 315,000
700,000.................. 157,500 210,000 262,500 315,000 367,500
800,000.................. 180,000 240,000 300,000 360,000 420,000
900,000.................. 202,500 270,000 337,500 405,000 472,500
</TABLE>
- -------------------------
(1) The accrual of benefits under the Company's tax-qualified Employee Pension
Plan was frozen as of January 31, 1996. Therefore, service after January 31,
1996 is not recognized for benefit calculation purposes, but is recognized
for vesting purposes. The Plan will provide benefits computed under (i) a
career average formula at 1.25% of the employee's compensation for each year
of credited service prior to
14
<PAGE> 19
January 31, 1996, or (ii) a final average compensation formula at 1.50% of
the average of the employee's best five compensation years multiplied by
years of service after age 21 and prior to January 31, 1996 up to 35 years
minus 2% of the employee's Social Security benefit for each year of service
up to 30 years, whichever formula provides the greater benefit. Since the
formula described in (ii) provides the greater benefit to any eligible named
executive officer, the Pension Plan Table illustrates the estimated annual
benefits payable under that formula (prior to the applicable Social Security
reduction).
The Company has also adopted a Supplemental Pension Benefit Plan which
provides benefits to the extent that ERISA limits the pension to which an
employee would otherwise be entitled under the Employee Pension Plan absent
such limitation; provided, however, that the maximum annual benefit payable
under the Plans on a combined basis is $653,171, as adjusted by any increase
in the urban consumer price index after January 1, 1998 to the date of
retirement.
The amounts shown are based on the pension being paid only during the
lifetime of the retired employee and would be reduced on an actuarially
equivalent basis in the event of a survivor benefit or optional form of
payment. Of the named executive officers, only Messrs. Keeble and Palizzi
are eligible to receive benefits under the Plan. Mr. Keeble has 27 years of
service under the Plan after age 21, and Mr. Palizzi has 26 years of service
under the Plan after age 21.
(2) "Remuneration" is the average compensation of an employee during the 5
highest years preceding January 31, 1996. Compensation covered by the Plans
for executive officers is the sum of their annual salary and bonus.
(3) The pension amounts shown in the table are subject to reduction by 2% of the
employee's Social Security benefit for each year of service prior to January
31, 1996 up to a maximum of 30 years. The maximum reduction at age 65 is
currently $9,596.
The Company also has adopted a Supplemental Executive Retirement Plan for
the purpose of providing supplemental retirement income to executive officers of
the Company who retire prior to age 65 or who are hired by the Company later in
their careers, whom the Board of Directors approves as eligible to receive
benefits under the Plan. Benefits are determined by the Board of Directors based
on the position, responsibilities and rate of compensation of the employee,
benefits payable or which would have been payable under other plans, and such
other factors as the Board may deem relevant.
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
The Company has entered into employment or severance agreements with the
named executive officers. Mr. Hall's agreement, which has a term ending June 3,
2000, provides for an annual salary of at least $1 million and an annual on-plan
incentive bonus opportunity of at least $1 million based on the attainment of
performance goals. If his employment is terminated by the Company other than for
cause or disability or if he terminates for good reason, he will be entitled to
receive monthly severance payments equal to his monthly base salary at the time
of termination, plus 1/12th the annual on-plan bonus for the year in which
termination occurred (the "severance payments"). The severance payments will be
made during a severance period equal to the term remaining of his employment
agreement at the time of termination, but in no event for less than 12 months
nor more than 36 months. In addition, if his employment is terminated without
cause and within 2 years of a change in control of the Company, he would be
entitled to receive a lump sum payment equal to the severance payments. The
agreements entered into with the other named executive officers contain
substantially similar severance provisions and provide that, if employment is
terminated by the Company, other than for cause or disability, or if the
executive officer terminates employment for good reason, he will be entitled to
receive severance payments in monthly installments during a 2 year severance
period following termination equal to his monthly base salary at the time of
termination, plus 1/12th the annual on-plan bonus targeted for the year in which
termination occurred, which payments will be reduced by the amount of
compensation received from other employment. The executive officer has an
obligation to seek such other employment. In the event of termination for cause
or disability, the executive officer would not receive any severance payments
under the agreement.
15
<PAGE> 20
The Company estimates that if the employment of Messrs. Hall, Giancamilli,
Rich, Keeble and Palizzi were terminated in 1998, and severance payments were
due them under their severance agreements, the total payments due for the entire
severance period (assuming no reduction for other employment) would be
approximately $8,220,000. Mr. Rich resigned from the Company as of April 3,
1998, and no payments were due under his severance agreement.
PERFORMANCE GRAPH
Set forth below is a graph comparing the total returns (assuming dividend
reinvestment) of the Company's Common Stock, the Standard & Poor's ("S&P") 500
Composite Index and the S&P Retail Stores Composite Index for the 5-year period
commencing January 31, 1993.
COMPARISON OF CUMULATIVE TOTAL RETURN/JANUARY 1993 TO JANUARY 1998
TOTAL STOCKHOLDER RETURN
<TABLE>
<CAPTION>
MEASUREMENT PERIOD KMART RETAIL S&P 500
(FISCAL YEAR COVERED) CORP COMPOSITE INDEX
<S> <C> <C> <C>
JAN-93 100 100 100
JAN-94 87.55 94.28 111.02
JAN-95 64.05 88.83 112.90
JAN-96 29.10 96.47 157.55
JAN-97 37.64 113.10 195.37
JAN-98 37.86 167.87 247.01
</TABLE>
Assumes $100 invested on January 31, 1993
in the Company's Common Stock,
S&P 500 Composite Index and S&P
Retail Stores Composite Index and that any dividends are reinvested.
S Company's Common Stock
K S&P 500 Composite Index
M S&P Retail Stores Composite Index
PROPOSAL 2 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
Subject to stockholder ratification, the firm of Price Waterhouse LLP has
been appointed by the Board of Directors as independent accountants to audit the
Company's books and records for fiscal 1998, upon recommendation of the Audit
Committee. Representatives of Price Waterhouse LLP will be present at the Annual
Meeting, will have the opportunity to make a statement if they desire to do so
and will be available to respond to appropriate questions from stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 2.
16
<PAGE> 21
PROPOSAL 3 -- STOCKHOLDER PROPOSAL
Aaron Merle Epstein, who is the owner of 1,250 shares of Common Stock of
the Company, has notified the Company of his intention to present the following
resolution at the Annual Meeting of Stockholders, which proposal is opposed by
the Board of Directors.
"RESOLVED: The shareholders of Kmart, Inc. (sic) request the Board of
Directors to prepare a report at a reasonable expense describing the Company's
actions to ensure that it does not and will not do business with foreign
suppliers who manufacture items for sale in the United States using forced
labor, convict labor, or illegal child labor, or who fail to satisfy all
applicable laws and standards protecting their employees' wages, benefits,
working conditions, freedom of association, and other rights.
This report should include:
1. Summary of current monitoring practices enforcing the company's
policies for its manufacturers and suppliers.
2. Establishment of independent monitoring programs in conjunction
with local respected religious and human rights groups.
3. Establishment of incentives to encourage suppliers to raise
standards, rather than terminate contracts.
4. Public disclosure of contract supplier reviews on a regular basis."
STOCKHOLDER'S SUPPORTING STATEMENT
"As U.S. companies import more goods, concern is growing about working
conditions in many nations that fall far below basic standards of fair and
humane treatment. Several years ago, a controversy arose after reports that
goods made by convicts in Chinese prisons were being imported into the United
States for sale to consumers. The Tariff Act of 1930 makes it illegal to import
any goods made by forced labor, including convict labor. China's use of prison
labor and its record on human rights generally are issues in the debate about
whether China should enjoy "most favored nation" trading status with the United
States.
Public concern has also been voiced in the wake of reports that retail
items were manufactured using illegal child labor, unsafe or unhealthy working
conditions, and similar conditions. In April 1997 the White House Apparel
Industry partnership, which was appointed by President Clinton to make
recommendations in this area, presented a report to the President setting out a
Workplace Code of Conduct and Principles of Monitoring for the apparel and
footwear industry. The standards in that report, if implemented comprehensively
and diligently, are intended to eliminate poor working conditions for workers in
the U.S. and abroad.
I am submitting this proposal because Kmart imports many goods into the
United States, and thus we as shareholders have a strong interest in learning
what steps Kmart is taking to monitor and control the conditions under which the
goods it sells are produced. Reports that overseas suppliers are exploiting
workers may damage a company's reputation and generate a consumer backlash.
In our view too, it makes good business sense to enforce strict sourcing
standards. For example, there are subterfuges that suppliers can use to import
goods made by forced labor into the United States. Also, when the federal
government enforces applicable laws, it may hold companies liable for actions of
their suppliers.
Strict standards and an active enforcement policy are thus vital for a
company such as Kmart. I therefore ask the Board to prepare a report giving
investors data about Kmart efforts to assure that it is not doing business with
overseas suppliers that exploit workers.
I URGE YOU TO VOTE FOR THIS RESOLUTION"
BOARD OF DIRECTORS STATEMENT OPPOSING STOCKHOLDER PROPOSAL
THE BOARD OF DIRECTORS OPPOSES ADOPTION OF PROPOSAL 3.
17
<PAGE> 22
Kmart shares Mr. Epstein's concern for the rights of workers around the
globe and is committed to working only with suppliers who share our standards of
conduct in the workplace. Kmart has consistently demonstrated leadership in the
retail industry to ensure that progressive policies and procedures are in place.
The Company's Workplace Code of Conduct: Human Rights Standards for Kmart
Suppliers requires all suppliers to:
- Provide a clean, safe and healthy work environment in all of their
manufacturing facilities, including those to which they subcontract work;
- Engage in fair and ethical employment practices, including
compliance with all local child labor laws, wage and hour provisions,
anti-discrimination laws, and to refrain from use of any forced labor,
coercion or corporal punishment;
- Allow Kmart to have full access to all facilities and records for
regular compliance inspections.
Under the terms of its supplier orders and the Kmart Code of Conduct, Kmart
can immediately terminate its relationship and cancel orders with any supplier
that fails to provide access for the purposes of inspection and monitoring of
their facilities. If a supplier is found in violation of the Code of Conduct,
Kmart will require the supplier to:
- Work with the Department of Labor and/or other local governing
bodies to immediately correct problems;
- Pay all associated fines and penalties, including any and all back
wages;
- Put a corrective course of action in place to ensure there are no
future violations;
- Pass follow-up inspections by Kmart inspections and/or independent
monitors; or
- Face possible termination of its relationship as a supplier of Kmart
if full compliance is not achieved.
Since June 1, 1997 Kmart's independent monitors have conducted more than
600 supplier facility inspections for Kmart. Steps have been taken to correct
any unacceptable supplier practices discovered during the course of these
inspections, as recommended by the U.S. Department of Labor and/or other local
governing bodies.
While the Board agrees that there may be a role for local organizations in
special circumstances, there is neither an existing network of organizations to
carry out monitoring nor a consensus on monitoring standards or methods. Under
these circumstances, the Board believes it would be difficult, inefficient and
uneconomic to attempt to implement the proposed global approach utilizing
religious and human rights groups.
In terms of public disclosure of supplier reviews, much of this information
is proprietary and no retailer would want to disclose confidential details
regarding its supplier base and their operations. For this reason, Kmart
believes that such public disclosure is better left to public agencies like the
Department of Labor, which does in fact issue quarterly reports of statistics on
contractors and manufacturers subject to Department of Labor enforcement. This
report is part of the Department of Labor's multi-pronged strategy of
enforcement, recognition and education.
Kmart has been aggressive in its public disclosure of its supplier
workplace standards and compliance procedures. Along with representatives from
the U.S. Department of Labor, Business for Social Responsibility, the Council
for Economic Priorities, manufacturers, unions, retail trade organizations and
human rights groups, Kmart participates in forums worldwide designed to
strengthen workplace standards and compliance. Kmart also is one of the lead
sponsors of an exhibit at the Smithsonian Institute designed to educate the
public about the steps which must be taken to ensure ongoing compliance with all
labor laws and responsible manufacturing of the goods sold in U.S. retail
stores.
With such a complete and active commitment to the principles of our
Workplace Code of Conduct and an extensive, independent monitoring program in
place, Kmart's management and Board of Directors believe that the Company's
current program is best suited to ensure compliance and leadership on this
important issue. That is why the Board of Directors recommends a vote against
Proposal 3.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 3.
18
<PAGE> 23
PROPOSAL 4 -- STOCKHOLDER PROPOSAL
The International Brotherhood of Teamsters, which is the owner of 290
shares of the Common Stock of the Company, and the New York City Police
Department Pension Fund, which is the owner of 321,000 shares of Common Stock of
the Company, have notified the Company of their intention to present the
following resolution at the Annual Meeting of Stockholders, which proposal is
opposed by the Board.
"RESOLVED, that pursuant to Section 450.1611 of the Business Corporation
Act of the State of Michigan, the shareholders amend the Articles of
Incorporation of Kmart, Inc. (sic) to eliminate the classification of directors
of the Company. Article VII is amended as follows:
Strike all but the first sentence of the first paragraph, and
substitute:
There shall only be one class of directors. All directors shall be
elected annually, at the annual meeting of stockholders, beginning
with the 1999 annual meeting of stockholders, except that any
director elected to a longer term prior to enactment of this
provision shall be permitted to serve out his term (unless removed
earlier for cause).
Strike the third paragraph in its entirety.
Strike from the fifth paragraph the following, final phrase, "and such
directors so elected shall not be divided into classes pursuant to this
article."
STOCKHOLDERS' SUPPORTING STATEMENT
Kmart's board is divided into three classes of directors serving staggered
three-year terms. This means that an individual director faces elections only
once every three years, and shareholders only vote on roughly one-third of the
board each year.
Generally, shareholders have grown increasingly opposed to classified
board. In 1995, 60.5% of votes cast by Kmart's shareholders were cast for repeal
of the classified board. Kmart did not take any action. In 1996, a majority of
shareholders voting on the question again voted to repeal the classified board.
The company engaged in expensive litigation, which they eventually lost,
disputing the vote tally. They still chose to ignore shareholders wishes and did
not declassify the board of directors. For that reason, we believe that
shareholders must now demand, rather than urge, the repeal of the classified
board.
Although some companies continue to defend staggered boards as a guarantee
of continuity, we think a better way to insure continuity is through director
re-elections. When directors are performing well they routinely are reelected
with majorities over 95%.
A responsive, proactive and accountable board has never been more important
for Kmart shareholders:
Kmart has been included in this year's "Focus List" of underachieving
companies issued by the Council of Institutional Investors, its third appearance
since 1993.
In Fortune's Most Admired Companies survey, Kmart was the least admired
among all companies in the category of quality of products and services.
By adopting annual elections, Kmart can demonstrate its commitment to
fuller accountability to shareholders, accountability that honors shareholder
prerogatives.
We urge you to vote YES for this proposal."
BOARD OF DIRECTORS STATEMENT OPPOSING STOCKHOLDER PROPOSAL
THE BOARD OF DIRECTORS OPPOSES ADOPTION OF PROPOSAL 4.
When classification of the Board of Directors was adopted at the 1986
Annual Meeting, the holders of 58% of the outstanding shares of the Company
favored amending the Company's Articles of Incorporation to provide for a
staggered board of directors where approximately one third of the directors are
elected annually.
19
<PAGE> 24
The Board of Directors, as well as a majority of stockholders, have
evidenced their belief that a classified board is in the best interests of the
Company and its stockholders because classification ensures continuity in the
composition of the board, assures that a majority of the directors have prior
experience and in-depth knowledge of the Company and prevents sudden and
disruptive changes in corporate policies by precluding election of an entirely
new group of directors in a single year. In addition, a classified board affords
the Company valuable protection against an unsolicited takeover unfavorable to
stockholders by giving incumbent directors the time and leverage necessary to
negotiate a more favorable and fair result or to consider appropriate alternate
strategies, in order to more effectively represent the interests of all
stockholders of the Company.
In addition, the Company's Shareholder Rights Plan (a so-called "poison
pill" plan) was redeemed following the 1995 Annual Meeting, and the Company, to
the extent allowable, has elected out of the protections offered by Michigan
anti-takeover statutes. Without a classified board, the Company will be limited
in its ability to negotiate and explore alternatives so as to maximize
stockholder value in the event of an unsolicited takeover. In considering this
proposal, stockholders should be mindful of the Board's belief that, when faced
with any unsolicited takeover proposal, stockholders of a company with a
classified board should be in a stronger position to negotiate a price premium
than stockholders of a company without a classified board. The reality of this
concern is underscored by the fact that a significant number of unsolicited
takeover attempts in the past several years have been accompanied by the
pressure tactic of a proxy contest to remove and replace directors.
The Board of Directors, which consists almost exclusively of independent,
outside directors, is firmly committed to improving performance and enhancing
stockholder value and does not believe that a staggered board in any way
diminishes this commitment or the Board's accountability to stockholders.
In considering the proposal's assertion that a majority of shareholders
voting approved of declassifying the board in earlier elections, it is important
to note that the 1996 stockholder proposal was approved by less than 29% of the
outstanding shares of the Company and that the 1995 stockholder proposal
received less than 41% of the outstanding shares of the Company. Both votes were
significantly less than the 58% of outstanding shares required by the Company's
Articles of Incorporation to eliminate the classified board.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 4.
CORPORATE GOVERNANCE
GUIDELINES ON SIGNIFICANT CORPORATE GOVERNANCE ISSUES
These guidelines are being published in this Proxy Statement to inform
stockholders of the Board's current thinking with respect to selected corporate
governance issues considered to be of significance to stockholders. The
guidelines are only guidelines and not rigid rules. The Board will continue to
assess the appropriateness and efficacy of the guidelines and it is likely that
changes to the guidelines will occur from time to time.
SELECTION AND COMPOSITION OF THE BOARD
1. BOARD MEMBERSHIP CRITERIA
The Nominating Committee periodically reviews (at least annually) the
mix of skills, experience levels and backgrounds of present and potential
Board members in light of anticipated needs.
2. SELECTION AND ORIENTATION
The Nominating Committee reviews qualifications of potential
candidates and recommends director nominees to the full Board. The
Nominating Committee may receive suggestions for candidates from individual
Board members, including the CEO, as well as from stockholders of the
Company. The Nominating Committee has adopted a policy regarding factors to
be considered in selecting director nominees which include: the nominee's
intelligence, judgment, foresight, personal character, experience
20
<PAGE> 25
and achievements; the overall composition of the Board; having a majority
of independent directors on the Board; and representation of a diversity of
backgrounds and expertise which are most needed and beneficial to the Board
and the Company.
3. EXTENDING THE INVITATION TO A POTENTIAL DIRECTOR TO JOIN THE BOARD
The invitation to join the Board should be extended by the Board
itself or by the Chairman of the Nominating Committee.
BOARD LEADERSHIP
4. SELECTION OF CHAIRMAN AND CEO
The Board should be free to make this choice any way that seems best
for the Company at a given point in time. Therefore, the Board does not
have a policy, one way or the other, on whether or not the role of the
Chief Executive and Chairman should be separate and, if it is to be
separate, whether the Chairman should be selected from the non-employee
directors or be an employee.
5. LEAD DIRECTOR CONCEPT
The Company has no "lead outside director." If a meeting of outside
directors concerns a Committee matter, the Committee chairperson would
normally chair the meeting. Any member of the Board may act to convene the
Board as necessary or desirable in the event the CEO is incapacitated.
6. SIZE OF BOARD
As of the date of the 1998 Annual Meeting, there will be 13 Kmart
Board members. Management, the Board and the Nominating Committee have
indicated that a size of 13-15 members is about right.
7. MIX OF INSIDE AND OUTSIDE DIRECTORS
On matters of corporate governance, the practice is to involve the
full Board. The CEO is currently the only member of management on the
Board; as of the date of the 1998 Annual Meeting, there will be 12 outside
directors. There is no By-Law on the number of outside directors on the
Board; however, the By-Laws limit membership on the Audit Committee,
Compensation and Incentives Committee and Nominating Committee to outside
directors only (Article IV, Sections 2, 3 and 4).
8. BOARD DEFINITION OF WHAT CONSTITUTES INDEPENDENCE FOR OUTSIDE DIRECTORS
The Nominating Committee has adopted the following definition of
"independent director" for purpose of evaluating director nominees: a
director who is outside of management and free from any relationship that,
in the opinion of the Board of Directors, would interfere with the exercise
of independent judgment as a Board member including, without limitation,
any relationship that involves payments to a director from the Company
other than compensation for services as a director.
9. DIRECTORS WHO CHANGE THEIR PRESENT JOB RESPONSIBILITIES
The Board has adopted a policy that any director who has a significant
change in occupation, retires from his or her principal employment or is
unavailable for active participation due to health, change of residence or
similar reason (except for short duration) shall submit an offer of
resignation from the Board. Action on such conditional offer of resignation
is by Board resolution, upon recommendation of the Nominating Committee.
10. TERM LIMITS
The Board has adopted a policy that (1) no outside director shall be
nominated for re-election after having served four 3-year terms
(disregarding partial terms), (2) no director shall be nominated for re-
election at an annual stockholders meeting coinciding with or next
following his or her 70th birthday and (3) inside directors (other than the
CEO) shall retire on the date of their retirement or termination of
employment.
21
<PAGE> 26
11. RETIREMENT AGE
Outside directors must retire upon expiration of their term of office
following their 70th birthday.
12. BOARD COMPENSATION REVIEW
The Company's Executive Vice President of Human Resources monitors
director compensation in relation to other large U.S. companies on an
ongoing basis and advises the Compensation and Incentives Committee if
changes are appropriate. Changes in Board compensation are approved by the
Board, upon recommendation of the Compensation and Incentives Committee.
13. EXECUTIVE SESSIONS OF OUTSIDE DIRECTORS
Outside directors meet separately, or with the CEO, from time to time,
as determined by the outside directors and/or CEO. This includes an
evaluation of CEO performance at least annually.
14. ASSESSING THE BOARD'S PERFORMANCE
The Board will regularly survey its members to assess the Board's
contribution as a whole and specifically review areas in which the Board
and/or management believes a better contribution could be made. The purpose
is to increase the effectiveness of the Board, not to target individual
Board members.
15. BOARD INTERACTION WITH INSTITUTIONAL INVESTORS, THE PRESS, CUSTOMERS,
ETC.
The Board believes that management generally should speak for Kmart
Corporation. While individual Board members may, from time to time, meet or
otherwise communicate with various constituencies that are involved with
Kmart, it is expected that Board members would do this with the knowledge
of management and, in most instances, at the request of management.
BOARD RELATIONSHIP TO SENIOR MANAGEMENT
16. REGULAR ATTENDANCE OF NON-DIRECTORS AT BOARD MEETINGS
The General Counsel and the Secretary are the only non-directors
present at each Board meeting for its duration. The officers who compose
the Management Executive Committee attend all meetings for operational,
financial and related presentations. Other presenters attend on an
invitation basis for their presentation(s).
17. BOARD ACCESS TO SENIOR MANAGEMENT
Board members have complete access to Kmart management. It is assumed
that Board members will use judgment to be sure that this contact is not
distracting to the Company and that such contact, if in writing, be copied
to the CEO. Furthermore, the Board encourages management to, from time to
time, bring managers into Board Meetings who: (a) can provide additional
insight into the items being discussed because of personal involvement in
these areas, and/or (b) represent managers with future potential that
senior management believes should be given exposure to the Board.
MEETING PROCEDURES
18. SELECTION OF AGENDA ITEMS FOR BOARD MEETINGS
The Chairman of the Board/CEO, in consultation with the other Board
members and members of management, establishes the agenda for each Board
meeting. Each Board member is free to suggest the inclusion of item(s) on
the agenda.
19. BOARD MATERIALS DISTRIBUTED IN ADVANCE
It is the sense of the Board that information and data that is
important to the Board's understanding of the business be distributed in
writing to the Board before the Board meets. Management will make every
attempt to see that this material is as brief as possible while still
providing the desired information.
22
<PAGE> 27
20. BOARD PRESENTATIONS
As a general rule, presentations on specific subjects should be sent
to the Board members in advance so that Board meeting time may be conserved
and discussion time focused on questions that the Board has about the
material. On those occasions in which the subject matter is too sensitive
to put on paper, the presentation will be discussed at the meeting.
COMMITTEE MATTERS
21. NUMBER OF COMMITTEES
There are currently five Board committees: Audit, Compensation and
Incentives, Executive, Finance and Nominating. The Board may form, merge or
dissolve a Committee as the Board determines, depending on circumstances.
22. COMMITTEE ASSIGNMENT AND ROTATION
The Board has adopted a policy of 3 year tenure for Committee
chairpersons unless it is determined in a particular instance that a longer
tenure is in the best interests of the Board. Committee assignments are
evaluated and rotated as appropriate at 5 year intervals or sooner if there
is a change in Board membership. Under the Company's By-Laws, membership on
the Audit, Compensation and Incentives and Nominating Committees is limited
to outside directors only. All Committee changes are approved by the Board,
upon recommendation of the Nominating Committee.
23. FREQUENCY AND LENGTH OF COMMITTEE MEETINGS
Committee meetings are normally held on the day preceding, or the
morning of, each regularly scheduled Board meeting. Committee meetings are
scheduled a year in advance. Changes to the schedule are made as needed by
the Committee chairperson in consultation with appropriate members of
management.
24. COMMITTEE AGENDA
The chairperson of the Committee in consultation with the appropriate
members of management will develop the Committee's agenda. A preliminary
annual schedule of Committee agenda subjects is issued each year. The final
agenda is set by the Committee chairperson in consultation with appropriate
members of management prior to each meeting.
LEADERSHIP DEVELOPMENT
25. FORMAL EVALUATION OF THE CHIEF EXECUTIVE OFFICER
The Compensation and Incentives Committee has adopted a policy of
reviewing the CEO's annual compensation and performance evaluation with all
outside directors. The outside directors then meet with the CEO to discuss
the evaluation. The evaluation is based on criteria such as performance of
the business, accomplishment of long-term strategic objectives, development
of management, etc. The evaluation will be used by the Compensation and
Incentives Committee in the course of its deliberations when considering
the compensation of the Chief Executive Officer.
23
<PAGE> 28
26. SUCCESSION PLANNING
The CEO meets annually with the outside directors to report on
succession planning.
27. MANAGEMENT DEVELOPMENT
The CEO meets annually with the outside directors to report on
management development.
OTHER BUSINESS/FUTURE STOCKHOLDER PROPOSALS
The Board of Directors knows of no other matters to be voted upon at the
Meeting. If any other matters properly come before the Meeting, it is the
intention of the persons named in the enclosed Proxy Card to vote such proxy in
accordance with their judgment on such matters, including any proposal which was
omitted in accordance with federal securities laws.
No person is authorized to give any information or to make any
representation other than that contained in this Proxy Statement, and if given
or made, such information may not be relied upon as having been authorized.
The entire cost of soliciting proxies will be borne by the Company. Proxies
may be solicited by mail, telecopy, telegraph, telex or internet and by
directors, officers and regular employees of the Company. The Company has
retained D.F. King to assist in the distribution of proxy solicitation materials
at a cost of approximately $11,000 plus out of pocket expenses. The Company will
also reimburse brokerage houses and other custodians, nominees and fiduciaries
for their reasonable out-of-pocket expenses for forwarding soliciting materials
to the beneficial owners.
Pursuant to the General Rules under the Securities Exchange Act of 1934,
proposals of stockholders intended to be presented to the 1999 Annual Meeting of
Stockholders must be received by the Secretary of the Company on or before
December 16, 1998 to be considered for inclusion in the proxy materials for that
Meeting. In addition, the By-laws of the Company contain requirements relating
to the timing and content of the notice which stockholders must provide to the
Secretary of the Company for any matter or any director nomination to be
properly presented at a stockholders meeting.
A copy of the Company's 1997 Annual Report on Form 10-K will be furnished
without charge to any stockholder upon written request. All written requests
should be directed to: Kmart Corporation, Financial Reporting Department, 3100
West Big Beaver Road, Troy, Michigan 48084-3163.
24
<PAGE> 29
MUSIC HALL [KMART LOGO]
350 MADISON AVENUE
DETROIT, MI 48226 STOCKHOLDER
10:00 A.M., TUESDAY, MAY 19, 1998 PARKING
VOUCHER
Stockholder parking will be made available at no charge
at the following parking structures upon submission of
this parking voucher. (See map above.)
- - Detroit Athletic Club Garage
241 Madison Avenue
- - Opera House Garage
1426 Broadway
- - Grand Circus Park Underground Garage
Woodward at Adams
CUT AND DETACH HERE
- --------------------------------------------------------------------------------
DIRECTIONS TO ANNUAL MEETING
ADMISSION TICKET
TO
[MAP] KMART CORPORATION
1998 ANNUAL MEETING
OF STOCKHOLDERS
MAY 19, 1998
3440-PS-98
<PAGE> 30
[KMART LOGO]
C/O Boston EquiServe
P.O. Box 9398
Boston, MA 02205-9398
VOTE BY TELEPHONE OR INTERNET
QUICK - EASY - IMMEDIATE
Kmart Corporation encourages you to take advantage of two new cost-effective
and convenient ways to vote your shares. You may now vote your proxy 24 hours
a day, 7 days a week, using either a touch-tone telephone or through the
Internet. Your telephone or Internet vote authorizes the named proxies to vote
your shares in the same manner as if you marked, signed, and returned your
proxy card.
VOTE BY PHONE: CALL TOLL-FREE ON A TOUCH-TONE TELEPHONE 1-888-807-7699
You will be asked to enter the 13-digit CONTROL NUMBER
located above your name and address in the lower left of
this form. Then simply follow the instructions.
OR
VOTE BY INTERNET: POINT YOUR BROWSER TO THE WEB ADDRESS: HTTP://WWW.
EQUISERVE.COM/PROXY/
You will be asked to enter the 13-digit CONTROL NUMBER
located above your name and address in the lower left
of this form. Then simply follow the instructions. You
may also indicate if you would be interested in receiving
future proxy materials via the Internet.
OR
VOTE BY MAIL: Simply mark, sign and date your proxy card and return it
in the enclosed postage-paid envelope. IF YOU ARE VOTING
BY TELEPHONE OR THE INTERNET, PLEASE DO NOT MAIL YOUR PROXY
CARD.
THANK YOU FOR VOTING
DETACH PROXY CARD HERE
/X/ PLEASE MARK VOTES AS IN THIS EXAMPLE.
WHERE NO VOTING INSTRUCTIONS ARE GIVEN, THE SHARES REPRESENTED BY THIS PROXY
WILL BE VOTED FOR PROPOSAL 1 AND 2 AND VOTED AGAINST PROPOSALS 3 AND 4.
<TABLE>
<CAPTION>
<S><C>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1 AND 2
1. Election of Directors WITHOLD Proposal 2:
Lilyan H. Affinito FOR FROM ALL Ratification of FOR AGAINST ABSTAIN
Richard G. Cline / / / / Independent Accountants / / / / / /
Willie D. Davis
Joseph P. Flannery
_______________________________________________________
If you do not wish your shares to be voted "FOR" a
particular nominee, write the nominee(s) name above.
Your shares will be voted for the remaining nominee(s)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
AGAINST PROPOSALS 3 AND 4
Proposal 3:
Report on FOR AGAINST ABSTAIN
Vendor Monitoring / / / / / /
Proposal 4:
Elimination of
Classified Board / / / / / /
For Change of
Address Mark Here / / If You Plan To Attend Meeting / /
And Note at Left. Mark Here.
RECEIPT IS HEREBY ACKNOWLEDGED OF THE KMART NOTICE OF MEETING AND PROXY
STATEMENT.
IMPORTANT: Please sign exactly as your name or names appear
on this Proxy. Where shares are held jointly, both holders should
sign. When signing as attorney, executor, administrator, trustee or
guardian, please give your full title as such. If the holder is a
corporation, execute in full corporate name by authorized officer.
Signature _____________________________________________ Date _________________________ Signature _______________ Date ___________
</TABLE>
<PAGE> 31
[KMART LOGO]
DIRECTIONS TO KMART CORPORATION ANNUAL MEETING OF STOCKHOLDERS
Music Hall
350 Madison Avenue
Detroit, Michigan 48226
10:00 A.M., Tuesday, May 19, 1998
Stockholder parking will be made available at no charge at the following
parking structures upon submission of the parking voucher on the back of the
proxy statement. (See map at right.)
- - Detroit Athletic Club Garage
241 Madison Avenue
- - Opera House Garage
1426 Broadway
- - Grand Circus Park Underground Garage
Woodward at Adams
[MAP]
THE ANNUAL MEETING ADMISSION TICKET AND PARKING VOUCHER
ARE ON THE BACK OF THE PROXY STATEMENT
KMART CORPORATION
PROXY/VOTING INSTRUCTIONS FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 19, 1998
- --------------------------------------------------------------------------------
The signer(s) hereby appoint(s) Floyd Hall, Nancie W. LaDuke and Anthony
N. Palizzi, or any one of them, with power of substitution in each, proxies to
vote all Kmart Corporation common stock of the signer(s) at the Annual Meeting
of Stockholders to be held at the Music Hall, 350 Madison Avenue, Detroit,
Michigan 48226, on Tuesday, May 19, 1998 at 10:00 a.m. (local time), and at all
adjournments thereof, on the matters indicated on the reverse side hereof and
in their discretion on any other business that may properly come before such
Meeting. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
Kmart Retirement Savings Plan participants may vote their proportionate
share of Kmart Corporation common stock in the Plan by signing and returning
this card. If the card is signed without voting instructions, shares will be
voted by the Plan trustee as indicated on the reverse side. If this card is not
returned or is returned unsigned, shares will be voted by the Plan trustee in
the same proportion as the shares for which voting instructions are received
from other Plan participants.
[SEE REVERSE SIDE]
