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KMART CORPORATION
- --------------------------------------------------------------------------------
NOTICE OF 1999 ANNUAL MEETING
OF STOCKHOLDERS
AND PROXY STATEMENT
April 12, 1999
Dear Kmart Stockholder:
It is my pleasure to invite you to join the Board of Directors and
management of Kmart Corporation at the Detroit Opera House located at 1526
Broadway, Detroit, Michigan for the Annual Meeting of Stockholders on Tuesday,
May 18, 1999 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 Detroit Opera House. 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.
For those stockholders of record with an e-mail account and access to the
Internet, we encourage you to access http://www.eproxyvote.com/km to vote your
shares via the Internet, and to access http://www.econsent.com/km to elect to
receive future annual reports, proxy and other materials via the Internet. For
stockholders who own their shares through a broker or other institution, check
with your broker to see if you will be able to vote and receive future materials
via the Internet. This electronic means of communication is quick and convenient
and can result in substantial savings to your Company in terms of printing and
distribution costs.
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 vote your shares by returning the attached Proxy Card or voting by
telephone or over the Internet as soon as possible. (See page 2 of this Proxy
Statement or the attached Proxy Card for instructions on voting by telephone or
Internet.) This will not prevent you from voting your shares in person at the
Meeting before voting closes, if you wish to do so.
We hope that you will be able to attend the Meeting and look forward to
seeing you on May 18.
Sincerely,
FLOYD HALL
Floyd Hall
Chairman of the Board, President
and Chief Executive Officer
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KMART CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 18, 1999
TO THE STOCKHOLDERS OF
KMART CORPORATION
The 1999 Annual Meeting of Stockholders of Kmart Corporation will be held
at the Detroit Opera House, 1526 Broadway, Detroit, Michigan on Tuesday, May 18,
1999, beginning at 10 a.m. local time, for the following purposes:
1. To elect five Class I directors for a term expiring in 2002 as set
forth in the accompanying Proxy Statement.
2. To re-affirm the performance goals under the Annual Incentive Bonus
Plan.
3. To ratify the appointment of PricewaterhouseCoopers LLP as
independent accountants of the Company for the 1999 fiscal year.
4. To act upon two stockholder proposals, if presented at the meeting,
as set forth in the accompanying Proxy Statement, concerning the policy on
stock option pricing and the elimination of the classified Board of
Directors.
5. 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 19, 1999 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 12, 1999
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<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 the Internet?.................. 2
Can I elect to receive future proxy and other materials
over the Internet?..................................... 2
Can I change my vote after I submit my proxy?............. 2
Will my vote be kept confidential?........................ 2
How do I vote my shares held in the Stock Purchase and
Dividend Reinvestment Plan or in a Kmart employee stock
plan?.................................................. 2
What are the Board's recommendations?..................... 3
What vote is required to approve each item?............... 3
Stock Ownership............................................. 4
Who are the largest owners of the Company's Common
Stock?................................................. 4
How much Common Stock do the Company's directors and
executive officers own?................................ 5
Section 16(a) Filings/Legal Proceedings/Management
Transactions........................................... 6
Proposal 1 -- Election of Directors......................... 6
Directors standing for election for terms expiring in
2002................................................... 6
Directors continuing in office............................ 7
How are directors compensated?............................ 9
How often did the Board meet during fiscal 1998?.......... 9
What are the standing Committees of the Board?............ 9
Board Committee Membership................................ 10
What are the functions of the standing Board
Committees?............................................ 10
Executive Compensation...................................... 11
Compensation and Incentives Committee Report on Executive
Compensation........................................... 11
What is the Company's philosophy of executive
compensation?.......................................... 11
How were the Company's executive officers compensated in
fiscal 1998?........................................... 12
Base Salary............................................... 12
Annual Incentive Bonus.................................... 12
Stock Purchases, Stock Options and Restricted Shares...... 12
How was the Company's CEO compensated in fiscal 1998?..... 13
Executive Compensation Summary Table...................... 14
Option Grants in Fiscal Year 1998......................... 15
Option Exercises and Values for Fiscal Year 1998.......... 16
Pension Plans............................................. 16
Employment and Severance Arrangements..................... 16
Stock Performance Graphs.................................... 18
Comparison of Cumulative Total Return/January 1994 to
January 1999........................................... 18
Comparison of Cumulative Total Return/1, 3 and 5 Year
Periods Ending January 31, 1999........................ 18
Proposal 2 -- Reaffirmation of Performance Goals under
Annual Incentive Bonus Plan............................... 19
Proposal 3 -- Ratification of Appointment of Independent
Accountants............................................... 19
Proposals 4 and 5 -- Stockholder Proposals.................. 20
Corporate Governance........................................ 23
Guidelines on Significant Corporate Governance Issues..... 23
Selection and Composition of the Board.................... 23
Board Leadership.......................................... 24
Board Relationship to Senior Management................... 25
Meeting Procedures........................................ 26
Committee Matters......................................... 26
Leadership Development.................................... 27
Other Business/Future Stockholder Proposals................. 27
Admission Ticket/Parking Voucher............................ Back Cover
</TABLE>
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KMART CORPORATION
3100 WEST BIG BEAVER ROAD
TROY, MICHIGAN 48084
PROXY STATEMENT
------------------------------
This Proxy Statement contains information related to the Annual Meeting of
Stockholders of Kmart Corporation, a Michigan corporation, to be held on
Tuesday, May 18, 1999, beginning at 10:00 a.m. local time, at the Detroit Opera
House, 1526 Broadway, 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 April 12, 1999.
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 re-affirmation of the performance goals under the Annual
Incentive Bonus Plan, 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
1998 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 19, 1999, 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 of Common Stock 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, 494,087,094 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
for purposes of a quorum 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, BankBoston, N.A., or vote
via telephone or Internet as set forth in this Proxy Statement and on the Proxy
Card, 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, or vote via
telephone or internet as permitted by your broker or nominee, the broker or
nominee is required to vote your shares as you direct.
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CAN I VOTE BY TELEPHONE OR THE INTERNET?
If you are a registered stockholder (that is, if you hold your stock in
your own name), you may vote by telephone or the Internet as follows:
By telephone: If you have a touch-tone phone, call 1-877-PRX-VOTE
(1-877-779-8683) toll free. You will be asked to enter the
14-digit Control Number located on your Proxy Card. Then
follow the instructions.
By Internet: If you have an email account and Internet access, point your
browser to http://www.eproxyvote.com/km . You will be asked
to enter the 14-digit Control Number on your Proxy Card.
Then follow the instructions.
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 the Internet.
This proxy statement and the 1998 annual report are also available over the
Internet at: http://www.kmart.com/d about/financials/index.htm .
CAN I ELECT TO RECEIVE FUTURE PROXY AND OTHER MATERIALS OVER THE INTERNET?
You may elect to receive future proxy and other materials over the Internet
if you have an e-mail account and access to the Internet. Simply access
http://www.econsent.com/km and then follow the instructions. Your consent will
remain in effect unless it is withdrawn by contacting the Stock Transfer Agent
at: 1-800-336-6981; P.O. Box 8038, Boston, MA 02266-8038 or
http://www.equiserve.com.
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 a notice of revocation or by submitting a duly executed
proxy bearing a later date or by voting by telephone or over the Internet on 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 BankBoston, N.A. 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 SHARES HELD IN THE STOCK PURCHASE AND DIVIDEND REINVESTMENT
PLAN OR IN A KMART EMPLOYEE STOCK PLAN?
If a stockholder is a participant in the Kmart Stock Purchase and Dividend
Reinvestment Plan (the Stock Purchase Plan), the proxy card will represent the
number of full shares of Common Stock in the participant's Stock Purchase Plan
account on the record date (as well as shares registered in the participant's
name or held in a Kmart employee stock plan). If the proxy card is not signed
and returned (or the shares are not voted electronically), the Stock Purchase
Plan shares and the registered shares will not be voted.
If a stockholder is a participant in the Kmart Retirement Savings Plan or
Deferred Compensation and Restoration Plan (the Plan(s)), the proxy card will
represent the number of full shares of Common Stock in the employee's Plan
account(s) on the record date (as well as shares registered in the participant's
name or held in the Stock Purchase Plan). The proxy card will serve as voting
instructions to the trustees of the Plans. If the proxy card is not signed and
returned (or the shares are not voted electronically), the Plan shares will be
2
<PAGE> 6
voted by each Plan trustee in the same proportion that it votes Plan shares for
which it did receive timely voting instructions from other Plan participants.
WHAT ARE THE BOARD'S RECOMMENDATIONS?
Unless you give other instructions on your Proxy Card or via your
electronic vote, the persons named as proxy holders on the Proxy 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 6)
- for re-affirmation of the performance goals under the Annual
Incentive Bonus Plan (page 19)
- for ratification of the appointment of PricewaterhouseCoopers LLP as
the Company's independent accountants (see page 19)
- against approval of each of the stockholder proposals (see pages
20-23)
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(s) 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.
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.
3
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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
COMMON STOCK AS OF
NAME AND ADDRESS SHARES DECEMBER 31, 1998
---------------- ------ ------------------
<S> <C> <C>
Barrow, Hanley, MeWhinney & Strauss, Inc.................... 56,008,178 11.39%
One McKinney Plaza
3232 McKinney Avenue, 15th Floor
Dallas, Texas 75204-2429(1)
Vanguard/Windsor Funds, Inc. -- Windsor II Fund............. 38,159,100 7.76%
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600(2)
Putnam Investments, Inc..................................... 33,505,698 6.80%
One Post Office Square
Boston, Massachusetts 02109(3)
Dodge & Cox................................................. 28,946,460 5.89%
One Sansome Street, 35th Floor
San Francisco, California 94104(4)
</TABLE>
- -------------------------
(1) Information obtained from Schedule 13G as of December 31, 1998 filed with
the Securities and Exchange Commission ("SEC") by Barrow, Hanley, MeWhinney
& Strauss, Inc. ("BHMS"). BHMS is a registered investment advisor which has
the sole power to dispose or to direct the disposition of all of the above
shares and has the sole power to vote or to direct the voting of 11,526,238
of the above shares and the shared power to vote or to direct the voting of
44,481,940 of the shares.
(2) Information obtained from Schedule 13G as of December 31, 1998 filed with
the SEC by Vanguard/Windsor Funds, Inc. -- Windsor II Fund, 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) Information obtained from Schedule 13G as of December 31, 1998 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 33,505,698 of the
above shares and the shared power to vote or to direct the voting of 860,590
of the shares. Putnam Investment Management, Inc. has the shared power to
dispose or to direct the disposition of 32,536,155 of the shares. The Putnam
Advisory Company, Inc. has the shared power to dispose or to direct the
disposition of 969,543 of the shares and the shared power to vote or to
direct the voting of 860,590 of the shares.
(4) Information obtained from Schedule 13G as of December 31, 1998 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
26,056,810 of the shares and has the shared power to vote or to direct the
voting of 375,100 of the shares.
4
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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, 1999.
<TABLE>
<CAPTION>
PERCENT OF
NAME SHARES COMMON STOCK
---- ------ ------------
<S> <C> <C>
James B. Adamson(1)(2)...................................... 19,992 *
Lilyan H. Affinito(1)(2).................................... 36,610 *
Lawrence L. Anderson(2)..................................... 123,068 *
Stephen F. Bollenbach(1)(2)................................. 29,553 *
Joseph A. Califano, Jr.(1)(2)(3)............................ 23,198 *
Richard G. Cline(1)(2)(4)................................... 40,369 *
Warren F. Cooper(2)......................................... 277,115 *
Willie D. Davis(2)(4)....................................... 15,689 *
Joseph P. Flannery(1)(2).................................... 23,574 *
Andrew A. Giancamilli(2)(3)................................. 484,965 *
Floyd Hall(2)............................................... 6,424,590 1.30%
Donald W. Keeble(2)......................................... 519,514 --
Robert D. Kennedy(1)(2)(3).................................. 29,667 *
J. Richard Munro(1)(2)...................................... 25,578 *
Robin B. Smith(1)(2)(4)..................................... 16,107 *
William P. Weber(1)(2)...................................... 29,992 *
James O. Welch(1)(2)(4)(5).................................. 227,048 *
Directors and executive officers as a group (59
persons)(1)-(5)............................................. 11,476,020 2.32%
</TABLE>
* Except as noted, each director and executive officer owned less than 1% of
the outstanding shares of Common Stock.
- -------------------------
(1) Includes restricted Common Stock units accrued under the Directors Stock
Plan as follows: Mr. Adamson -- 5,669 units; Ms. Affinito -- 7,330 units;
Mr. Bollenbach -- 5,449 units; Mr. Califano -- 6,108 units; Mr.
Cline -- 7,524 units; Mr. Flannery -- 1,415 units; Mr. Kennedy -- 5,669
units; Mr. Munro -- 7,330 units; Ms. Smith -- 4,055 units; Mr.
Weber -- 5,669 units; and Mr. Welch -- 6,108 units.
(2) Includes shares of Common Stock that can be acquired by exercise of stock
options within 60 days of March 1, 1999 as follows: Mr. Adamson -- 5,000
shares; Ms. Affinito -- 5,000 shares; Mr. Anderson -- 90,001 shares; Mr.
Bollenbach -- 5,000 shares; Mr. Califano -- 5,000 shares; Mr.
Cline -- 10,000 shares; Mr. Cooper -- 171,667 shares; Mr. Davis -- 5,000
shares; Mr. Flannery -- 10,000 shares; Mr. Giancamilli -- 292,405 shares;
Mr. Hall -- 5,121,129 shares; Mr. Keeble -- 374,734 shares; Mr.
Kennedy -- 5,000 shares; Mr. Munro -- 5,000 shares; Ms. Smith -- 5,000
shares; Mr. Weber -- 5,000 shares; and Mr. Welch -- 5,000 shares.
(3) 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. Giancamilli -- 333 shares; Mr.
Kennedy -- 3,333 shares; and all directors and executive officers as a
group -- 11,152 shares.
(4) Mr. Cline may be deemed to share voting and investment power as to 66,700
shares of Common Stock owned by one or more of the Northern Institutional
Funds of which he is a trustee. Mr. Davis may be deemed to share voting and
investment power as to 2,505,000 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 6,468,457 shares of Common Stock
owned by one or more of the Prudential Investments mutual funds of which she
is a trustee. Mr. Welch may be deemed to share voting and investment power
as to 46,311,167 shares of Common Stock owned by one or more of the Vanguard
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<PAGE> 9
Group of Investment Companies of which he is a director. An executive
officer of the Company may be deemed to share voting and investment power as
to 1,733,339 shares of Common Stock owned by one or more of the MSDW Funds
of which he is a trustee. If such additional shares were included, executive
officers and directors as a group would be considered to beneficially own
57,084,663 shares of Common Stock, or 11.56% of the Common Stock outstanding
as of March 1, 1999, including 0.0135% for Mr. Cline, 0.5073% for Mr. Davis,
1.31% for Ms. Smith, 9.3799% for Mr. Welch and 0.351% for the executive
officer. Ms. Smith, Messrs. Cline, Davis and Welch and the executive officer
each disclaim beneficial ownership of such shares.
(5) Includes 169,317 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.
SECTION 16(A) FILINGS/LEGAL PROCEEDINGS/TRANSACTIONS WITH MANAGEMENT
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 1998 with the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934 except a report was inadvertently not timely
filed by Mr. Adamson in connection with a sale of Common Stock by his broker.
Upon discovery, the oversight was corrected.
Mr. Bozic, who joined the Company as Vice Chairman on December 1, 1998, was
formerly Chairman of the Board, President and Chief Executive Officer of Levitz
Furniture Inc., which filed a voluntary petition under Chapter 11 of the Federal
Bankruptcy Code on September 5, 1997. Mr. Bozic resigned as an officer of Levitz
on November 20, 1998; he remains a member of its Board of Directors.
In 1996, the Company made an interest-free loan to Mr. Hall of $200,000 in
connection with his acquisition of a Michigan residence. The loan is secured by
a promissory note from Mr. Hall and is to be repaid to the Company, in the event
of a sale of the residence, from the sale proceeds. The loan was outstanding
throughout 1998.
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 18, 1999. 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.
DIRECTORS STANDING FOR ELECTION FOR TERMS EXPIRING IN 2002
In accordance with the recommendation of its Nominating Committee, the
Board has nominated James B. Adamson, Stephen F. Bollenbach, Floyd Hall, Robert
D. Kennedy and William P. Weber for election as Class I directors for a term
expiring at the 2002 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 1999 Annual Meeting.
CLASS I DIRECTORS. The following Class I directors are standing for election.
JAMES B. ADAMSON, 51
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. Has served as a director of Kmart
Corporation since 1996.
6
<PAGE> 10
STEPHEN F. BOLLENBACH, 56
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
Hilton Hotels Corporation, Ladbroke Group PLC, Park Place Entertainment Corp.,
Spring Group PLC and Time Warner Inc. Has served as a director of Kmart
Corporation since 1996.
FLOYD HALL, 60
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, 66
Chairman and Chief Executive Officer, UCAR International Inc. (graphite and
carbonelectrodes manufacturer). Previously served as Chairman and Chief
Executive Officer of Union Carbide Corporation (chemicals and plastics
manufacturer). Director of 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, 58
Former 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 Micron
Technology, Inc. and Unigraphic Solutions Inc. Has served as a director of Kmart
Corporation since 1996.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ELECTION OF MESSRS. ADAMSON,
BOLLENBACH, HALL, KENNEDY AND WEBER AS CLASS I DIRECTORS.
DIRECTORS CONTINUING IN OFFICE
CLASS II DIRECTORS. The following Class II directors were elected at the
Company's 1997 Annual Meeting for terms expiring at the 2000 Annual Meeting.
JOSEPH A. CALIFANO, JR., 67
Chairman and President, The National Center on Addiction and Substance Abuse at
Columbia University, attorney, author and Adjunct Professor of Public Health,
College of Physicians and Surgeons of Columbia University and Columbia
University School of Public Health (health policy and management). Director of
Authentic Fitness Corp., Automatic Data Processing, Inc., Health Plan Services,
Inc. and Warnaco, Inc. Has served as a director of Kmart Corporation since 1990.
7
<PAGE> 11
J. RICHARD MUNRO, 68
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, Mobil Corporation and Sensormatic
Electronic Corp. Has served as a director of Kmart Corporation since 1990.
ROBIN B. SMITH, 59
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., Springs Industries, Inc.
and Texaco, Inc. Trustee of Prudential Investments mutual funds. Has served as a
director of Kmart Corporation since 1996.
JAMES O. WELCH, JR., 67
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.
CLASS III DIRECTORS. The following Class III directors were elected at the
Company's 1998 Annual Meeting for terms expiring at the 2001 Annual Meeting.
LILYAN H. AFFINITO, 67
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., Jostens Inc. and Keyspan Energy. Has served as a
director of Kmart Corporation since 1990.
RICHARD G. CLINE, 64
Chairman, Hussmann International, Inc. (refrigerated merchandising equipment and
refrigeration systems). Also Chairman, Hawthorne Investors, Inc. (management
advisory services and private investments). 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 Northern Institutional Funds. Has served as a director of Kmart
Corporation since 1995.
WILLIE D. DAVIS, 64
President of All Pro Broadcasting, Inc. (radio stations). Director of Alliance
Bank, Bassett Furniture Industries, Incorporated, 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, 67
Chairman of the Board, President and Chief Executive Officer of Uniroyal
Holding, Inc. (investment management company). Director of Arvin Industries,
Inc., Ingersoll Rand Company, Newmont Mining Corporation and The Scotts Company.
Has served as a director of Kmart Corporation since 1985.
8
<PAGE> 12
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.
In January 1999, all nonemployee directors were granted options to purchase
5,000 shares of Common Stock, and Messrs. Cline and Flannery were granted
options for an additional 5,000 shares of Common Stock in consideration of their
service as co-chairmen of a special Board Committee, under the 1997 Long-Term
Equity Compensation Plan. The options vested immediately, have a term of ten
years and two days and have an exercise price of $14.78 per share, the fair
market value of the stock on the date of grant. In addition, Messrs. Cline and
Flannery each received cash compensation of $20,000 for their services as
co-chairmen of the special Board Committee.
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,
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 frozen Plan, not to exceed ten years. Ms. Affinito and Messrs. Califano,
Davis, Flannery and Munro have vested benefits under the frozen 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 1998?
The Board of Directors met nine times during fiscal 1998. Each director
attended at least 88% of the Board and Committee meetings held while he or she
served as a director or member of the Committee.
WHAT ARE THE STANDING COMMITTEES OF THE BOARD?
The Board of Directors has the following standing Committees: Audit,
Executive, Compensation and Incentives, Finance and Nominating. Except for the
Executive Committee, the Committees are comprised solely of non-employee
directors.
9
<PAGE> 13
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
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 STANDING 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 and key
accounting and/or reporting matters, including Year 2000 matters; 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 1998, the Audit Committee met five 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, Deferred Compensation and
Restoration Plan, Non-Employee Directors Deferred Compensation Plan and
executive and non-employee director stock plans. The Committee is assisted as
needed by an independent compensation consultant which reports directly to the
Committee. In fiscal 1998, the Compensation and Incentives Committee met six
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
1998, the Executive Committee met one time.
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 1998, the Finance Committee met four 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
10
<PAGE> 14
stockholder nominations for election 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 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 1998, the Nominating Committee met four 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 1998 Compensation Program for executives consisted of the
following key elements:
- Base salary
- Performance-based annual incentive bonus
- 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 Company'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").
11
<PAGE> 15
HOW WERE THE COMPANY'S EXECUTIVE OFFICERS COMPENSATED IN FISCAL 1998?
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 were targeted at the median salary for comparable positions
within the companies participating in the surveys (unless an employment
agreement provided 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 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
graphs. The Committee believes that the means by which comparative salary levels
are determined is appropriate since they enable the Company's executive salary
structure to reflect the practices 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
In 1998, executive officers had an opportunity to earn annual incentive
bonuses based on performance against Company and business unit goals approved by
the Committee (adjusted for certain one time charges), as well as individual
goals approved and subsequently evaluated by the senior officer to whom the
executive officer reported (and in the case of the CEO, by the Board of
Directors).
Participants in the bonus program were assigned threshold, target and
maximum bonus levels, with funding depending on the level of achievement of the
applicable goals. With respect to the goals based on Company and business unit
results, funding of these bonus components ranged from 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 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 funding of the bonus component based
on individual goals ranged from zero to 225% of targeted bonus depending on the
evaluation of the executive officer's achievement of such goals.
The 1998 targeted bonus opportunity for each executive officer was based on
a percentage of 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 median 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).
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, grants of stock options under the 1992 Stock
Option and 1997 Long-Term Equity Compensation Plans and grants of restricted
shares under the Performance Restricted Stock and 1997 Long-Term Equity
Compensation Plans. All of these plans were approved by stockholders.
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
12
<PAGE> 16
of ownership in the Company's Common Stock is a key ingredient in achieving this
goal. The Management Stock Purchase Plan provides for the use of any annual
incentive bonus earned by executive officers and other executive participants
under the Annual Incentive Bonus Plan, which was approved by stockholders, to be
used to purchase shares of Common Stock at an effective 20% discount, with 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 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, options for
Common Stock were granted in 1998 to more than 2,900 executives.
Generally, the 1998 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 125% of the applicable salary range
midpoint depending on position and salary grade, and were targeted at the median
grant levels for comparable positions at the companies participating in the
above described executive compensation surveys (unless an employment agreement
provided otherwise, 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 seven 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 1998?
Mr. Hall's 1998 cash compensation included a base salary of $1,300,000
which approximated the median salary of the other CEOs of companies
participating in the above described executive compensation surveys. Mr. Hall's
bonus payout for 1998 was $1,379,000 as a result of the Company's attaining its
1998 financial goals and Mr. Hall's exceptional achievement with respect to his
individual financial and personal performance objectives. In March 1998, the
Committee also granted Mr. Hall stock options to purchase 313,385 shares of
Common Stock and awarded him 100,000 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. In
addition, in September 1998, the Board of Directors granted Mr. Hall additional
stock options to purchase 1,000,000 shares of Common Stock in connection with
the extension of the term of Mr. Hall's employment agreement with the Company to
April 2001. All of Mr. Hall's 1998 compensation was tax deductible by the
Company under Code 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, Chairperson
W. D. Davis
J. R. Munro
J. O. Welch, Jr.
The Compensation and Incentives Committee Report and the performance graphs
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 Act of 1934 except to the
extent that the Company specifically incorporates this information by reference.
13
<PAGE> 17
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
27, 1999 (the "named executive officers") for services rendered to the Company
during each of the last three fiscal years.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION -------------------------------------------
--------------------------------------------------- NO. OF STOCK RESTRICTED
NAME AND OTHER ANNUAL OPTIONS STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) GRANTED(3) AWARDS(4) COMPENSATION(5)
------------------ ---- ------ -------- --------------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
F. Hall.............. 1998 $1,300,000 $1,379,000 $259,127 1,313,385 $1,628,000 $417,373
Chairman of the 1997 1,200,000 1,815,600 262,544 1,000,000 2,729,250 235,240
Board, President 1996 1,000,000 1,749,500 123,529 900,000 1,488,200 21,043
and Chief Executive
Officer
A. A. Giancamilli.... 1998 650,000 523,400 -- 150,000 814,000 41,466
President and 1997 485,835 442,700 -- 320,000 1,269,000 23,422
General Merchandise 1996 315,000 261,300 -- 90,000 -0- 7,924
Manager, U. S.
Kmart Stores
L. L. Anderson....... 1998 470,000 265,000 288,130 70,000 488,400 18,828
Executive Vice 1997 214,686 200,000 88,013 200,000 -0- 831
President and 1996 -0- -0- -0- -0- -0- -0-
President, Super
Kmart
D. W. Keeble......... 1998 460,000 315,000 -- 80,000 895,400 38,852
Executive Vice 1997 432,000 378,000 -- 70,000 606,500 32,002
President, Store 1996 400,000 461,200 -- 100,000 -0- 33,961
Operations
W. F. Cooper......... 1998 405,000 300,000 -- 75,000 732,600 34,657
Executive Vice 1997 380,000 266,500 -- 70,000 545,850 23,072
President, Human 1996 316,667 419,100 131,944 100,000 -0- 490
Resources and
Administration
</TABLE>
- -------------------------
(1) A portion of each named executive officer's 1998 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 -- $689,500 of bonus was used; the value of the stock was $861,875. Mr.
Giancamilli -- $104,680 of bonus was used; the value of the stock was
$130,850. Mr. Anderson -- $53,000 of bonus was used; the value of the stock
was $66,250. Mr. Keeble -- $63,000 of bonus was used; the value of the stock
was $78,750. Mr. Cooper -- $60,000 of bonus was used; the value of the stock
was $75,000. (Values are based on the market price of the stock as of the
date of issue.)
(2) The dollar amounts under "Other Annual Compensation" include: Reimbursement
of housing and living costs. Mr. Hall: 1998 -- $159,988 (including $48,683
in taxes in connection therewith); 1997 -- $153,763 (including $46,339 in
taxes in connection therewith); 1996 -- $110,725 (including $32,649 in taxes
in connection therewith). Non-business use of Company plane. Mr. Hall:
1998 -- $80,087 (including $13,557 in taxes in connection therewith);
1997 -- $97,251 (including $23,604 in taxes in connection therewith).
Reimbursement of moving and temporary living expenses. Mr. Anderson:
1998 -- $285,898 (including $122,537 in taxes in connection therewith);
1997 -- $88,013 (including $40,486 in taxes in connection therewith); Mr.
Cooper: 1996 -- $131,944 (including $37,660 in taxes in connection
therewith). Except as noted, the cost to the Company for perquisites and
other personal benefits did not exceed the lesser of $50,000 or 10% of the
total payments reported in the Salary and Bonus columns and, therefore, is
not included.
(3) These stock options were granted under the 1992 Stock Option Plan and the
1997 Long-Term Equity Compensation Plan.
14
<PAGE> 18
(4) 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
-- 100,000 shares; Mr. Giancamilli -- 50,000 shares; Mr. Anderson -- 30,000
shares; Mr. Keeble -- 55,000 shares; and Mr. Cooper -- 45,000 shares. As of
January 27, 1999, the number and value of all restricted stock issued to the
named executive officers were as follows: Mr. Hall -- 1,285,677/$20,570,832;
Mr. Giancamilli -- 187,808/$3,004,728; Mr. Anderson -- 33,067/$529,072; Mr.
Keeble -- 120,800/$1,932,800; and Mr. Cooper -- 102,436/$1,638,976.
(5) The dollar amounts under "All Other Compensation" include: Life insurance
premiums. Mr. Hall: 1998 -- $10,495; 1997 -- $10,286; 1996 -- $9,410; Mr.
Giancamilli: 1998 -- $911; 1997 -- $553; 1996 -- $442; Mr. Anderson:
1998 -- $1,565; 1997 -- $831; Mr. Keeble: 1998 -- $1,471; 1997 -- $857;
1996 -- $601; Mr. Cooper: 1998 -- $1,732; 1997 -- $886; 1996 -- $490.
Employer contributions under Company's Supplemental Retirement Savings Plan
and/or Deferred Compensation and Restoration Plan. Mr. Hall:
1998 -- $138,374; 1997 -- $103,300; 1996 -- $1,842; Mr. Giancamilli:
1998 -- $40,555; 1997 -- $22,869; 1996 -- $2,982; Mr. Anderson:
1998 -- $17,263; Mr. Keeble: 1998 -- $37,381; 1997 -- $31,145;
1996 -- $16,700; Mr. Cooper: 1998 -- $32,925; 1997 -- $22,186. Employer
contributions under Company's Supplemental Pension Plan. Mr. Keeble:
1996 -- $16,660. Interest on compensation mandatorily deferred so that it
would be tax deductible to the Company under Code Section 162(m). Mr. Hall:
1998 -- $268,504 (including $130,682 in above market interest);
1997 -- $121,654 (including $56,802 in above market interest);
1996 -- $9,791.
OPTION GRANTS IN FISCAL YEAR 1998
The following table shows all grants of options to each of the named
executive officers in fiscal 1998.
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS
GRANTED
TO
NUMBER OF EMPLOYEES HYPOTHETICAL
OPTIONS IN FISCAL EXERCISE PRICE EXPIRATION VALUE AT GRANT
NAME GRANTED 1998 (1) DATE (2)
---- --------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
F. Hall.......................... 313,385(3)(4) 18.43% $16.28 3/18/08 $2,295,254
1,000,000(4)(5) 13.19 9/21/08 5,921,021
A. A. Giancamilli................ 150,000(3) 2.11 16.28 3/18/08 1,098,611
L. L. Anderson................... 70,000(3) 0.98 16.28 3/18/08 512,685
D. W. Keeble..................... 80,000(3) 1.12 16.28 3/18/08 585,926
W. F. Cooper..................... 75,000(3) 1.05 16.28 3/18/08 549,305
</TABLE>
- -------------------------
(1) All options were granted at a price equal to 100% of the market value of the
Common Stock on the date of grant (March 16, 1998 and September 21, 1998 for
Mr. Hall and March 16, 1998 for Messrs. Giancamilli, Anderson, Keeble and
Cooper). The exercise price may be paid in cash, already owned shares or a
combination of both.
(2) This column represents the estimated present value of the options granted
during fiscal 1998 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 .418823 and
.440884 for grants made on March 16, 1998 and September 21, 1998,
respectively; a risk-free interest rate of 5.51% and 4.51% for grants made
on March 16, 1998 and September 21, 1998, 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.
(3) Options will become exercisable in three equal annual installments
commencing one year from date of grant.
(4) Mr. Hall was granted options under the 1997 Long-Term Equity Compensation
Plan for 313,385 shares on March 16, 1998 in connection with the 1998
broad-based grant of stock options to key executives of the Company and was
granted options under the 1997 Plan and the 1982 Stock Option Plan for
15
<PAGE> 19
1,000,000 shares on September 21, 1998 in connection with the extension of
the term of his employment agreement with the Company to April 2001.
(5) Options will become exercisable on April 1, 2001, subject to the terms of
the employment agreement between Mr. Hall and the Company.
OPTION EXERCISES AND VALUES FOR FISCAL YEAR 1998
The table below sets forth the following information with respect to
options exercised by each of the named executive officers in fiscal 1998 and the
status of their options at January 27, 1999:
- the number of shares of Common Stock acquired upon exercise of
options during fiscal 1998;
- the aggregate dollar value realized upon the exercise of such
options;
- the total number of exercisable and non-exercisable stock options
held at January 27, 1999; and
- the aggregate dollar value of in-the-money exercisable and
non-exercisable options at January 27, 1999.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SHARES VALUE NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON REALIZED UPON OPTIONS AT 1/27/99 AT 1/27/99
NAME EXERCISE EXERCISE EXERCISABLE/NONEXERCISABLE EXERCISABLE/NONEXERCISABLE
---- ----------- ------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
F. Hall.............. -0- -0- 4,383,334 2,280,051 $15,726,169 $7,004,331
A. A. Giancamilli.... -0- -0- 205,738 393,333 1,097,975 941,666
L. L. Anderson....... -0- -0- 66,667 203,333 302,002 603,998
D. W. Keeble......... 3,000 $4,020 291,401 159,999 998,422 453,828
W. F. Cooper......... -0- -0- 90,001 154,999 611,089 441,161
</TABLE>
PENSION PLANS
The accrual of benefits under the Company's tax-qualified Employee Pension
Plan and Supplemental Pension Benefit Plan was frozen as of January 31, 1996.
Therefore, service after January 31, 1996 is not recognized for benefit
accumulation purposes, but is recognized for vesting purposes. The Company's
Supplemental Pension Benefit Plan 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. Of the named executive officers,
only Mr. Keeble is eligible to receive benefits under the Company's frozen
Employee Pension and Supplemental Pension Benefit Plans. Mr. Keeble has 28 years
of service under the Plans after age 21. His estimated accrued benefit under the
combined Plans and under the "final average compensation formula" is $9,154 per
month at age 65. This amount is based on the pension being paid during his
lifetime and would be reduced on an actuarially equivalent basis in the event of
a survivor benefit or optional form of payment. The "final average compensation
formula" is 1.50% of the average of the officer's best five compensation years
prior to January 31, 1996 multiplied by years of service after age 21 and prior
to January 31, 1996 up to 35 years minus 2% of the applicable Social Security
benefit for each year of service up to 30 years.
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 April 1,
2001, 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 of the annual on-plan bonus for the year in which
termination occurred (the "severance payments"). The severance payments will be
made during a severance
16
<PAGE> 20
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. If
his employment is terminated without cause and within two 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 two year severance period following termination equal to
his monthly base salary at the time of termination, plus 1/12th of 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. In the event of termination for cause or disability, the executive
officer would not receive any severance payments under the agreement.
The Company estimates that if the employment of Messrs. Hall, Giancamilli,
Anderson, Keeble and Cooper were terminated in 1999, 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 $8,454,600.
17
<PAGE> 21
STOCK PERFORMANCE GRAPHS
COMPARISON OF CUMULATIVE TOTAL RETURN/JANUARY 1994 TO JANUARY 1999
TOTAL STOCKHOLDER RETURN
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, 1994.
<TABLE>
<CAPTION>
PERFORMANCE GRAPH
K MART CORP S&P 500 INDEX RETAIL COMPOSITE
----------- ------------- ----------------
<S> <C> <C> <C>
Jan-94 100.00 100.00 100.00
Jan-95 73.00 102.00 94.00
Jan-96 33.00 142.00 102.00
Jan-97 63.00 176.00 120.00
Jan-98 62.00 222.00 178.00
Jan-99 99.00 295.00 292.00
</TABLE>
Assumes $100 invested on January 31, 1994
in the Company's Common Stock,
S&P 500 Composite Index and S&P
Retail Stores Composite Index and that any dividends are reinvested.
Company's Common Stock
S&P 500 Composite Index
S&P Retail Stores Composite Index
COMPARISON OF CUMULATIVE TOTAL RETURN/1, 3 AND 5 YEAR PERIODS
ENDING JANUARY 31, 1999
TOTAL STOCKHOLDER RETURN
Set forth below is a table comparing the total returns (assuming dividend
reinvestment) of the Company's Common Stock, the S&P 500 Composite Index and the
S&P Retail Stores Composite Index for the one year, three year and five year
periods ending January 31, 1999. Beginning with sweeping changes in senior
management in mid-1995, the Company has undertaken a major strategic
re-direction based on initiatives commencing in the 1995-1996 time period and
continuing to the present and affecting store operations, merchandising and the
Company's financial structure. The following table is included, in addition to
the five year performance stock graph, in order to illustrate the stock
performance during the three year period commencing January 31, 1996 and during
the last year, as compared to the above five year period.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
1 YEAR 3 YEAR 5 YEAR
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Company's Common Stock 60% 199% 0%
-------------------------------------------------------------------------------------------------------------
S&P 500 Composite Index 32% 112% 196%
-------------------------------------------------------------------------------------------------------------
S&P Retail Stores Composite Index 64% 190% 189%
-------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 22
PROPOSAL 2 -- REAFFIRMATION OF PERFORMANCE GOALS UNDER
ANNUAL INCENTIVE BONUS PLAN
Under Section 162(m) of the Internal Revenue Code, the Company cannot
deduct certain compensation in excess of $1 million paid to the named executive
officers. However, certain performance-based compensation is not subject to this
limitation if the material terms of such compensation, including the maximum
amounts payable to any individual and the performance goals to be used, are
approved by stockholders. The Code requires that stockholders re-affirm the
performance goals and the maximum amount payable under the plan every five
years.
In 1994, the Board of Directors adopted, and the stockholders approved, the
Annual Incentive Bonus Plan (the Bonus Plan) which satisfied the above
requirements for deductibility of compensation paid under the Plan. The Bonus
Plan provides that the performance goals must be expressed in terms of: (i) the
Company's return on equity, assets, capital or investment; (ii) pre-tax or
after-tax profit levels of the Company, the Subsidiaries, subdivisions thereof
or any combination of the foregoing; (iii) expense reduction levels; (iv)
implementation of critical projects or processes; and/or (v) changes in market
price of the Common Stock. The Compensation and Incentives Committee of the
Board of Directors must establish the applicable performance goals within the
time period required for the compensation to qualify as performance-based under
Code Section 162(m). The Bonus Plan also provides that the bonus paid to the CEO
for any Bonus Plan year may not exceed three times the salary midpoint for the
salary grade of the CEO, as determined by the Compensation and Incentives
Committee prior to the beginning of such Bonus Plan year based on competitive
data, including a survey of competitive companies; and the bonus paid to any of
the other named executive officers for a Bonus Plan year may not exceed two
times the salary midpoint (as of the beginning of such Plan year) for such
officer's salary grade, as determined by the Committee prior to the beginning of
such Plan year.
Subject to stockholder approval of this proposal, 1999 goals approved under
the Bonus Plan are based on after-tax profit levels of the Company and
subdivisions thereof, as well as expense reduction levels and implementation of
critical projects.
Consistent with the requirements of Code Section 162(m), Proposal 2 seeks
stockholder re-affirmation of the existing performance goals, as well as the
provision regarding the maximum amounts payable, contained in the Bonus Plan,
which were originally approved by stockholders in 1994.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 2.
PROPOSAL 3 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
Subject to stockholder ratification, the firm of PricewaterhouseCoopers LLP
has been appointed by the Board of Directors as independent accountants to audit
the Company's books and records for fiscal 1999, upon recommendation of the
Audit Committee. Representatives of PricewaterhouseCoopers 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 3.
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<PAGE> 23
PROPOSAL 4 -- STOCKHOLDER PROPOSAL
The Massachusetts Laborers' Pension Fund, which states that it is the
beneficial owner of 2,800 shares of Common Stock, has notified the Company that
it intends to present a resolution for action by the stockholders at the Annual
Meeting. The text of the resolution and the supporting statement submitted by
the proponent are as follows:
"RESOLVED, that shareholders of Kmart Corporation (the "Company") urge the
Board of Directors to adopt a policy that no future or existing stock options
for senior executives shall be granted or amended, as the case may be, unless
the exercise price for such options is equal to or higher than the lowest
exercise price for any stock option granted during the year immediately
preceding the grant or amendment, as the case may be."
STOCKHOLDERS SUPPORTING STATEMENT
"We believe that stock options should be used to reward superior
performance and to align the interests of senior executives with those of
shareholders. Re-pricing is the practice of lowering the exercise price for
"underwater" stock options (stock options whose exercise price is above the
market price of the company stock) or allowing such options to be exchanged for
options with lower exercise prices.
Over the last five years, the Company's stock performance has substantially
lagged behind the S&P Retail Stores Index and S&P 500 Index. As a result of the
significant decline in the Company's stock price, the Board at Kmart may feel
pressure to re-price stock options granted to senior executives. Moreover,
according to Institutional Shareholder Services (ISS), the Company adopted a
Long-Term Equity Compensation Plan in March, 1997 which does not prohibit stock
option re-pricing. The practice of stock option re-pricing rewards poor
performance and divides the interests of senior executives from those of
shareholders, who cannot "re-price" their stock.
In recent years, many large institutional investors have opposed the
practice of re-pricing. The State of Wisconsin Investment Board (SWIB) has filed
nearly two dozen resolutions seeking to curb options re-pricing and has
successfully convinced 16 companies to adopt a policy requiring shareholder
approval of any future re-pricing. Institutional Shareholder Services, the
nation's leading proxy voting firm, advises institutional investors to oppose
re-pricing, calling it "the pre-eminent concern on the compensation front for
shareholders." The Council of Institutional Investors has condemned re-pricing
unless submitted to shareholders for approval.
Compensation experts including Towers Perrin, WestWard Pay Strategies and
Graef Crystal have also criticized re-pricing. Moreover, Crain's Business
Journal recently warned in an editorial that re-pricing "will make a joke out of
the shareholder rights movement. Stock options can't be doled out only when
times are good -- and replaced when they're bad. CEOs, like other shareholders,
must live with the rewards -- and risks -- of stock ownership."
As reasonable shareholders, we understand that certain situations may
justify re-pricing. In those situations, however, shareholders, not the board of
directors, should serve as the final arbiters.
We urge you to support this proposal.
KMART RESPONSE
THE BOARD OF DIRECTORS OPPOSES ADOPTION OF PROPOSAL 4.
The Board believes that the interests of Kmart and its stockholders are
best served by Kmart's existing stock option plans. These plans, which were
approved by Kmart stockholders, provide that options cannot be granted at less
than fair market value prices, that is, the average selling price of Kmart
Common Stock on the
20
<PAGE> 24
date of grant. Kmart has never repriced options for its senior executive
officers and has no intention of doing so. While the Company did allow an
exchange of options held by middle management employees in 1996, including the
Company's store managers, the exchange was based on a Black-Scholes option
pricing model that resulted in a significant reduction in the number of options
outstanding. As such, the exchange did not create any economic advantage for
those who participated. This was a one-time event in the Company's 83-year
history associated with a significant change in Company strategy and direction.
Members of the Company's Management Executive Committee were specifically
excluded from the 1996 exchange.
While the proponents' discussion focuses on repricing of existing options,
the proposal prohibits the Company from granting, as well as amending, an option
unless the exercise price is equal to or higher than the lowest exercise price
for any option granted during the immediately preceding year. Options are
designed to align the interests of senior executives and other key employees
with the interests of stockholders. The ability to grant options at current
market price is a key component in attracting and retaining executives. The
proposal could significantly reduce Kmart's ability to use this form of
compensation to attract new executives to the Company.
As Kmart stockholders are well aware, the Company has been in a turnaround
situation during the past several years, and those turnaround efforts continue
through the present. Any competitive company has a need to hire talented
executives for key positions. Under this proposal, Kmart could be deprived of
the ability to attract such executives through the granting of market-priced
stock options. This could put Kmart at a competitive disadvantage with the other
companies with which the Company must compete for executive talent.
Also, while the Company's executives are highly motivated to improve
earnings performance, which should in turn improve stockholder value, it is
ultimately the stock market that determines share price. Under this proposal, a
decline in market valuation affecting either the market at large or the broad
retailing sectors in which Kmart competes could leave the Company unable to
provide incentives to its current or new executives through the grant of
market-priced stock options, again creating a competitive disadvantage with the
Company's competitors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 4.
PROPOSAL 5 -- STOCKHOLDER PROPOSAL
The International Brotherhood of Teamsters, which states that it owns 290
shares of Common Stock, and the New York City Police Department Pension Fund,
which states that it owns 321,000 shares of Common Stock, have notified the
Company of their intention to present the following resolution for action at the
Annual Meeting of Stockholders. The text of the resolution and the supporting
statement submitted by the proponents are as follows:
"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 2000 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).
21
<PAGE> 25
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."
KMART RESPONSE
THE BOARD OF DIRECTORS OPPOSES ADOPTION OF PROPOSAL 5.
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.
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.
22
<PAGE> 26
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 1998 stockholder proposal was approved by less than 31% of the
outstanding shares of the Company, the 1996 stockholder proposal was approved by
less than 29% of the outstanding shares of the Company and the 1995 stockholder
proposal was approved by less than 41% of the outstanding shares of the Company.
All 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 5.
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 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.
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<PAGE> 27
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 1999 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 1999 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, Finance 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 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.
24
<PAGE> 28
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.
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. The Committee is also assisted as needed by an
independent compensation consultant. 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 regularly surveys its members to assess the Board's
contribution as a whole and to 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 the
Company. 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.
25
<PAGE> 29
MEETING PROCEDURES
18. SELECTION OF AGENDA ITEMS FOR BOARD MEETINGS
The 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.
20. BOARD PRESENTATIONS
As a general rule, presentations on specific subjects should be sent
to 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 standing 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 three year tenure policy for Committee
chairpersons unless it is determined in a particular instance that a longer
tenure is in the best interests of the Board or the Company. Committee
assignments are evaluated and rotated as appropriate at five 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, Finance 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.
26
<PAGE> 30
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 is used by the Compensation and
Incentives Committee in the course of its deliberations when considering
the compensation of the CEO.
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, including any
proposal which was omitted in accordance with federal securities laws, 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.
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 $9,000 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 at the 2000 Annual Meeting of
Stockholders pursuant to SEC Rule 14a-8 must be received by the Secretary of the
Company on or before December 13, 1999 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.
Specifically, proposals of stockholders intended to be presented at the 2000
Annual Meeting (other than stockholder proposals set forth in the Company's
proxy statement) must be received by the Secretary of the Company on or before
February 16, 2000 unless the meeting is not held within eight days of May 16,
2000. In the latter case, if less than 100 days notice or public disclosure of
the Annual Meeting date is given, the proposal must be received by the Secretary
not later than the tenth day following the date notice or public disclosure of
the Meeting date is given to stockholders.
A copy of the Company's 1998 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, Investor Relations, 3100 West Big
Beaver Road, Troy, Michigan 48084-3163.
27
<PAGE> 31
TICKET/PARKING
3440-PS-99
<PAGE> 32
[KMART LOGO]
DIRECTIONS TO KMART CORPORATION ANNUAL MEETING OF STOCKHOLDERS
Detroit Opera House
1526 Broadway
Detroit, Michigan 48226
10:00 A.M., Tuesday, May 18, 1999
- -------------------------------------------
Stockholder parking will be made available [MAP]
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.) *= Parking Enter meeting via the
Madison Avenue entrance
to Detroit Opera House.
- Detroit Opera House Garage
1526 Broadway
- Grand Circus Park Underground Garage
Woodward at Adams
- -------------------------------------------
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 18, 1999
- --------------------------------------------------------------------------------
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 Detroit Opera House, 1526 Broadway, Detroit,
Michigan 48226, on Tuesday, May 18, 1999 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. IF THIS CARD IS SIGNED AND RETURNED WITHOUT VOTING INSTRUCTIONS, THE
SHARES REPRESENTED BY THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2, AND 3 AND
VOTED AGAINST PROPOSALS 4 AND 5.
Participants in the Kmart Retirement Savings and Deferred Compensation
and Restoration Plans may vote their proportionate share of Kmart Corporation
common stock in each Plan by signing and returning this card. IF THIS CARD IS
SIGNED AND RETURNED WITHOUT VOTING INSTRUCTIONS, THE SHARES REPRESENTED BY THIS
PROXY WILL BE VOTED BY EACH PLAN TRUSTEE AS INDICATED IN THE PRECEDING
PARAGRAPH. IF THIS CARD IS NOT RETURNED OR IS RETURNED UNSIGNED, SHARES WILL BE
VOTED BY EACH PLAN TRUSTEE IN THE SAME PROPORTION AS THE SHARES FOR WHICH VOTING
INSTRUCTIONS ARE RECEIVED FROM OTHER PARTICIPANTS IN EACH OF THE PLANS.
------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. | SEE |
|REVERSE SIDE|
------------
THANK YOU FOR VOTING.
<PAGE> 33
[KMART LOGO]
c/o EquiServe
P.O. Box 9398
Boston, MA 02205-9398
VOTE BY TELEPHONE OR INTERNET
QUICK - EASY - COST-EFFECTIVE - AVAILABLE 24 HOURS A DAY - 7 DAYS/WEEK UNTIL 3
P.M. E.S.T., MAY 17, 1999
You may now vote your proxy 24 hours a day, 7 days a week, using either a
touch-tone telephone or 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 1-877-PRX-VOTE
(1-877-779-8683) OR CALL COLLECT ON A TOUCH-TONE TELEPHONE
1-201-536-8073.
You will be asked to enter the 14-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.eproxyvote.com/km
You will be asked to enter the 14-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 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.
RECEIVE FUTURE MATERIALS VIA THE INTERNET
You may elect to receive future proxy and other materials over the Internet if
you have an e-mail account and access to the Internet. To take advantage of this
offer, please access http://www.econsent.com/km and then simply follow the
instructions. Your consent will remain in effect unless it is withdrawn by
calling, writing or e-mailing the Transfer Agent, EquiServe, at 1-800-336-6981;
P.O. Box 8038, Boston, MA 02266-8038; or www.equiserve.com.
DETACH
IF YOU ARE VOTING BY TELEPHONE OR THE INTERNET, PLEASE DO NOT MAIL HERE
YOUR PROXY CARD.
- --------------------------------------------------------------------------------
<TABLE>
<S><C>
/X/ (PLEASE MARK)
VOTES AS IN
THIS EXAMPLE.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE VOTE FOR PROPOSALS 1, 2, AND 3. THE BOARD OF DIRECTORS RECOMMENDS A
AGAINST PROPOSALS 4 AND 5.
- ------------------------------------------------------------------------------------------------------------------------------------
WITHHOLD
FOR FROM ALL FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
1. Election of Directors Proposal 2:
(01) James B. Adamson / / / / Reaffirmation of / / / / / / Proposal 4: / / / / / /
(02) Stephen F. Bollenbach Performance Goals Stock Option
(03) Floyd Hall under Annual Incentive Pricing Policy
(04) Robert D. Kennedy Bonus Plan
(05) William P. Weber Proposal 5:
Proposal 3: / / / / / / Elimination of
Ratification of Classified Board
Independent Accountants
- ------------------------------------------
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).
- ------------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------
| |
For Change Of
Address Mark Here If You Plan To Attend
And Note At Left. / / Meeting, 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
---------------------------------- --------- ------------------------------------------- ------------
PLEASE SIGN THIS PROXY AS NAME(S) APPEAR ABOVE.
</TABLE>
