SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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[_] Soliciting Material Pursuant to (S) 240.14a-12
KMART CORPORATION
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(Name of Registrant as Specified In Its Charter)
N/A
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Kmart Corporation
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Notice of 2001 Annual Meeting
of Stockholders
and Proxy Statement
April 4, 2001
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 15, 2001 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 Annual Meeting
regardless of the number that you may hold. Whether or not you plan to attend
the Meeting, please vote your shares either by returning the attached Proxy
Card or voting by telephone or Internet as soon as possible. (See pages 1-2 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 15.
Sincerely,
/S/ Charles C. Conaway
Charles C. Conaway
Chairman of the Board
and Chief Executive Officer
Kmart Corporation
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 15, 2001
TO THE STOCKHOLDERS OF
KMART CORPORATION
The 2001 Annual Meeting of Stockholders of Kmart Corporation will be held at
the Detroit Opera House, 1526 Broadway, Detroit, Michigan on Tuesday, May 15,
2001, beginning at 10 a.m. E.T., for the following purposes:
1. To elect one Class I director for a term expiring in 2002, one Class
II director for a term expiring in 2003 and four Class III directors for
terms expiring in 2004 as set forth in the accompanying Proxy Statement.
2. To ratify the appointment of PricewaterhouseCoopers LLP as
independent accountants of the Company for the 2001 fiscal year.
3. To act upon a stockholder proposal, if presented at the Meeting, as
set forth in the accompanying Proxy Statement, requesting that the Company
endorse the Coalition for Environmentally Responsible Economies (CERES)
Principles.
4. To act upon a stockholder proposal, if presented at the Meeting, as
set forth in the accompanying Proxy Statement, concerning vendor standards.
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 16, 2001 are entitled to notice of and to vote at the Meeting or any
adjournment of the Meeting.
By order of the Board of Directors
/S/ James E. Defebaugh IV
James E. Defebaugh IV
Vice President and Secretary
Troy, Michigan
April 4, 2001
TABLE OF CONTENTS
Page
----
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 Internet?............................... 1
Can I elect to receive future proxy and other materials via
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 Kmart Stock Direct 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 many shares of Common Stock do the Company's directors and
executive officers own?........................................... 5
Proposal 1 -- Election of Directors................................. 6
Director standing for election for a term expiring in 2002......... 6
Director standing for election for a term expiring in 2003......... 6
Directors standing for election for terms expiring in 2004......... 6
Directors Continuing in Office..................................... 7
How are directors compensated?..................................... 8
How often did the Board meet during fiscal 2000?................... 8
What are the standing Committees of the Board?..................... 8
Board Committee Membership......................................... 9
What are the functions of the standing Board Committees?........... 9
Audit Committee Report.............................................. 10
Audit Fees.......................................................... 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
2000?............................................................ 11
Base Salary...................................................... 11
Annual Incentive Bonus........................................... 12
Stock Options and Other Equity Awards ........................... 12
How was the Company's CEO compensated in fiscal 2000?............. 13
Executive Compensation Summary Table............................... 14
Option Grants in Fiscal Year 2000.................................. 15
Option Exercises and Values for Fiscal Year 2000................... 16
Pension Plans...................................................... 16
Employment and Severance Arrangements.............................. 16
Stock Performance Graph............................................. 18
Comparison of Cumulative Total Return/January 1996 to January
2001.............................................................. 18
Proposal 2 -- Ratification of Appointment of Independent
Accountants........................................................ 18
Proposal 3 -- Stockholder Proposal.................................. 19
Proposal 4 -- Stockholder Proposal.................................. 20
Corporate Governance................................................ 22
Guidelines on Significant Corporate Governance Issues.............. 22
Selection and Composition of the Board............................ 23
Board Leadership.................................................. 23
Board Relationship to Senior Management........................... 25
Meeting Procedures................................................ 25
Committee Matters................................................. 25
Leadership Development............................................ 26
Other Business/Future Stockholder Proposals......................... 27
Charter of the Audit Committee of the Board of Directors of Kmart
Corporation........................................................ Appendix A
Admission Ticket/Parking Voucher.................................... Back Cover
Kmart Corporation
3100 West Big Beaver Road
Troy, Michigan 48084
PROXY STATEMENT
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This Proxy Statement contains information relating to the Annual Meeting of
Stockholders of Kmart Corporation, a Michigan corporation, to be held on
Tuesday, May 15, 2001, beginning at 10:00 a.m. E.T., 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 4, 2001.
ABOUT THE MEETING
What is the purpose of the Annual Meeting?
At the Company's Annual Meeting, stockholders will act upon the matters
outlined in the accompanying Notice of Annual Meeting, including the election
of directors, the ratification of the Company's independent accountants and
consideration of two stockholder proposals. In addition, the Company's
management will report on the performance of the Company during fiscal 2000 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 16, 2001, 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, 487,226,130 shares of Common Stock of the Company were
outstanding. Proxies received but marked as 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) or a participant in the Kmart Stock Direct Plan or in a Kmart
employee stock plan, and you either complete and properly sign the accompanying
Proxy Card and return it to the Company's stock transfer agent, Fleet National
Bank, 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 either 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.
Can I vote by telephone or Internet?
If you are a registered stockholder (that is, if you hold your stock in your
own name) or a participant in the Kmart Stock Direct Plan or in a Kmart
employee stock plan, you will save the Company expense by voting your shares
over the telephone or Internet as follows:
By telephone:
If you have a touch-tone phone, call 1-877-PRX-VOTE (1-877-779-
8683) toll free or call collect at 1-201-536-8073. You will be
asked to enter the 14-digit Control Number located on your
Proxy Card. Then follow the instructions.
1
By Internet:
If you have an e-mail account and Internet access, point your
browser to http://www.eproxyvote.com/km. You will be asked to
enter the 14-digit Control Number found either on your Proxy Card
or electronic proxy notification. 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 Internet.
This Proxy Statement and the 2000 Annual Report are also available via
Internet at: http://www.kmart.com/corp under Investor Relations.
Can I elect to receive future proxy and other materials via Internet?
You may elect to receive future proxy and other materials via Internet if
you have an e-mail account and Internet access. This will reduce the Company's
printing and postage expense. Simply access http://www.econsent.com/km and then
follow the instructions. You will be asked to enter your Account Number, which
appears on your Kmart Stock Direct statements and on your Proxy Card. 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 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 EquiServe Limited Partnership 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 Kmart Stock Direct Plan or in a Kmart
employee stock plan?
Effective February 1, 2000, Kmart Stock Direct, the Company's direct stock
purchase plan, replaced the Kmart Stock Purchase and Dividend Reinvestment
Plan.
If a stockholder is a participant in Kmart Stock Direct (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 either electronically or telephonically), 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 either electronically or
telephonically), the Plan shares will be 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.
2
What are the Board's recommendations?
Unless you give other instructions either via your Proxy Card or your
electronic vote, the persons named as proxy holders on the Proxy Card will vote
in accordance with the recommendations of the Board of Directors. The Board's
recommendation is set forth together with the description of each item in this
Proxy Statement. In summary, the Board recommends a vote:
. for election of the nominated slate of directors (see pages 6-7)
. for ratification of the appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants (see page 18)
. against approval of the stockholder proposals (see pages 19-22).
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.
. Ratification of Independent Accountants, Adoption of CERES Principles and
Vendor Standards Proposals. The affirmative vote of a majority of the
votes cast by stockholders represented in person or by proxy and entitled
to vote on these proposals is required for approval. A properly executed
Proxy marked "Abstain" with respect to any of these proposals 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 and will not be counted in determining the number of shares necessary
for approval.
3
STOCK OWNERSHIP
Who are the largest owners of the Company's Common Stock?
The following table sets forth certain information as of December 31, 2000
(except for Robert P. Bermingham and Kenneth J. Abdalla, whose ownership
information is as of January 12, 2001) concerning persons which, to the
knowledge of the Company, own more than 5% of the outstanding Common Stock.
Percent of
Name and Address Shares Common Stock
---------------- ---------- -------------
Barrow, Hanley, Mewhinney & Strauss, Inc.............. 55,687,438 11.28%
One McKinney Plaza
3232 McKinney Avenue, 15th Floor
Dallas, Texas 75204-2429(1)
Vanguard/Windsor Funds, Inc.--Windsor II Fund......... 39,811,200 8.29%
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600(2)
Dodge & Cox........................................... 44,245,760 9.2%
One Sansome Street, 35th Floor
San Francisco, California 94104(3)
Robert P. Bermingham.................................. 16,694,700 3.5%
The Yucaipa Companies LLC
9130 W. Sunset Boulevard
Los Angeles, California 90069(4)
Kenneth J. Abdalla.................................... 12,256,000 2.5%
11718 Barrington Court #625
Los Angeles, California 90049(4)
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(1) Information obtained from Schedule 13G as of December 31, 2000 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 10,208,238
of the above shares and the shared power to vote or to direct the voting of
45,479,200 of the shares.
(2) Information obtained from Schedule 13G as of December 31, 2000 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, 2000 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
41,287,210 of the shares and has the shared power to vote or to direct the
voting of 373,000 of the shares.
(4) Information obtained from Schedule 13D as of January 12, 2001 jointly filed
with the SEC by U.S. Transportation, LLC, The Yucaipa Companies LLC and
Ronald W. Burkle (the "Burkle-Affiliated Entities") and American Companies,
LLC, Westgate Enterprises III, LLC and Kenneth J. Abdalla (the "Abdalla-
Affiliated Entities"). The Burkle-Affiliated Entities and the Abdalla-
Affiliated Entities may be deemed a group as defined under Rule 13d-5(b) of
the Securities Exchange Act of 1934, however, the Burkle-Affiliated
Entities and the Abdalla-Affiliated Entities do not affirm the existence of
a group and each of them disclaims beneficial ownership of securities
beneficially owned by the other. Each of the Burkle-Affiliated Entities has
the shared power to dispose or to direct the disposition and to vote or to
direct the voting of 16,694,700 shares. Each of the Abdalla-Affiliated
Entities has the shared power to dispose or to direct the disposition of
2,500,000 of the shares and the shared power to vote or to direct the
voting of 12,256,000 shares.
4
How many shares of 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, 2001.
Percent of
Name Shares Common Stock
- ---- ---------- ------------
James B. Adamson(1)(2).................................. 46,704 *
Lilyan H. Affinito(1)(2)................................ 54,806 *
Michael Bozic(2)(4)..................................... 739,558 *
Joseph A. Califano, Jr.(1)(2)(3)........................ 35,604 *
Richard G. Cline(1)(2)(4)............................... 59,742 *
Charles C. Conaway...................................... 956,034 *
Willie D. Davis(2)...................................... 23,578 *
Joseph P. Flannery(1)(2)................................ 30,048 *
Andrew A. Giancamilli(2)(3)............................. 1,435,005 *
Floyd Hall(2)........................................... 9,631,872 2.0%
Cecil B. Kearse(2)...................................... 322,247 *
Robert D. Kennedy(1)(2)(3).............................. 44,288 *
J. Richard Munro(1)(2).................................. 39,260 *
Mark S. Schwartz........................................ 108,125 *
Robin B. Smith(1)(2)(4)................................. 30,728 *
Thomas T. Stallkamp(1)(2)............................... 16,101 *
Richard J. Statuto(4)................................... 1,500 *
James O. Welch, Jr.(1)(2)(4)(5)......................... 230,760 *
Martin E. Welch III(2)(3)............................... 447,779 *
Directors and executive officers as a group
(38 persons)(1)-(5).................................... 15,360,879 3.2%
- --------
* 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 -- 12,401 units; Ms. Affinito -- 11,946 units;
Mr. Califano -- 10,625 units; Mr. Cline -- 13,317 units; Mr. Flannery --
1,515 units; Mr. Kennedy -- 12,401 units; Mr. Munro -- 13,123 units; Ms.
Smith -- 10,787 units; Mr. Stallkamp -- 4,567 units; and Mr. J. Welch --
11,801 units.
(2) Includes shares of Common Stock that can be acquired by exercise of stock
options within 60 days of March 1, 2001 as follows: Mr. Adamson -- 7,200
shares; Ms. Affinito -- 7,200 shares; Mr. Bozic -- 553,100 shares; Mr.
Califano -- 7,200 shares; Mr. Cline -- 12,200 shares; Mr. Davis -- 7,200
shares; Mr. Flannery -- 12,200 shares; Mr. Giancamilli -- 842,404 shares;
Mr. Hall -- 7,983,385 shares; Mr. Kearse -- 262,694 shares; Mr. Kennedy --
7,200 shares; Mr. Munro -- 7,200 shares; Ms. Smith -- 7,200 shares; Mr.
Stallkamp -- 2,200 shares; Mr. J. Welch -- 7,200 shares; Mr. M. Welch --
310,101 shares; and all directors and executive officers as a group --
10,709,392 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;
Mr. M. Welch -- 3,986 shares; and all directors and executive officers as a
group -- 9,318 shares.
(4) Mr. Bozic may be deemed to share voting and investment power as to
3,743,042 shares of Common Stock and 27,300 shares of Kmart Financing I
Convertible Preferred Shares owned by Morgan Stanley Dean Witter Funds of
which he is a director. Mr. Cline may be deemed to share voting and
investment power as to 19,900 shares of Common Stock owned by one or more
of the Northern Funds of which he is a trustee and as to 44,400 shares of
Common Stock owned by one or more of the Northern Institutional Funds of
which he is a trustee. Ms. Smith may be deemed to share voting and
investment power as to 126,557
5
shares of Common Stock owned by one or more of the Prudential Investments
mutual funds of which she is a trustee. Mr. Statuto may be deemed to share
voting and investment power as to 57,200 shares of Common Stock owned by
CHRISTUS Health of which he is Vice Chairman. Mr. J. Welch may be deemed to
share voting and investment power as to 54,329,663 shares of Common Stock
and 20,000,000 shares of Kmart Financing I Convertible Preferred Shares
owned by one or more of the Vanguard Group of Investment Companies of which
he is a director. If such additional shares were included, executive
officers and directors as a group would be considered to beneficially own
73,681,641 shares of Common Stock, or 15.1% of the Common Stock outstanding
as of March 1, 2001, including 0.92% for Mr. Bozic, 0.025% for Mr. Cline,
0.032% for Ms. Smith, 0.012% for Mr. Statuto and 11.2% for Mr. J. Welch. Ms.
Smith and Messrs. Bozic, Cline, Davis, Statuto and J. Welch each disclaim
beneficial ownership of such shares.
(5) Includes 165,940 shares of Common Stock held by trusts of which Mr. J.
Welch and/or his wife is a co-trustee.
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 10, as of May 15, 2001. 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.
Director standing for election for a term expiring in 2002
The Board of Directors has appointed Mr. Conaway as a Class I director. Mr.
Conaway was appointed to fill the vacancy created by the resignation of Floyd
Hall in 2000. In accordance with the recommendation of its Committee on
Directors and Corporate Governance and in accordance with the Articles and By-
Laws, the Board has nominated Mr. Conaway for election as a Class I director
for a term expiring at the 2002 Annual Meeting and until his successor is
elected and qualified.
Class I Director. The following Class I Director is standing for election:
CHARLES C. CONAWAY, 40
Chairman of the Board and Chief Executive Officer. Previously served as
President, as Chief Operating Officer, as Executive Vice President and Chief
Financial Officer of CVS Corporation and as Executive Vice President and Chief
Financial Officer of Melville Corporation. Has served as a director of Kmart
Corporation since 2000.
Director standing for election for a term expiring in 2003
The Board of Directors has, effective April 17, 2001, appointed Richard J.
Statuto as a Class II director. Mr. Statuto was appointed on March 20, 2001 in
anticipation of vacancies created by the retirement of Joseph A. Califano, Jr.,
J. Richard Munro and James O. Welch, Jr. as of the 2001 Annual Meeting. In
accordance with the recommendation of its Committee on Directors and Corporate
Governance and in accordance with the Articles and By-Laws, the Board has
nominated Mr. Statuto for election as a Class II director for a term expiring
at the 2003 Annual Meeting and until his successor is elected and qualified.
Class II Director. The following Class II Director is standing for election:
RICHARD J. STATUTO, 43
President and Chief Executive Officer of St. Joseph Health Systems (provider of
hospital, physician, homecare, wellness and insurance services). Previously
served as Chief Operating Officer and Vice President of Marketing and Planning
of St. Joseph Health Systems. Also Vice Chairman of CHRISTUS Health. Has served
as a director of Kmart Corporation since 2001.
Directors standing for election for terms expiring in 2004
In accordance with the recommendation of its Committee on Directors and
Corporate Governance, the Board has nominated Ms. Affinito and Messrs. Cline,
Davis and Flannery for election as Class III directors for terms expiring at
the 2004 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 2001 Annual Meeting.
6
Class III Directors. The following Class III directors are standing for
election:
LILYAN H. AFFINITO, 69
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. and KeySpan Corporation. Has served as a director
of Kmart Corporation since 1990.
RICHARD G. CLINE, 66
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) and as Chairman, Hussmann
International, Inc. (refrigerated merchandising equipment and refrigeration).
Director of Ryerson Tull, Inc. and Whitman Corporation. Trustee of Northern
Funds and Northern Institutional Funds. Has served as a director of Kmart
Corporation since 1995.
WILLIE D. DAVIS, 66
President of All Pro Broadcasting, Inc. (radio stations). Director of Alliance
Bank, Bassett Furniture Industries, Incorporated, Checkers, Inc., The Dow
Chemical Company, Johnson Controls, Inc., MGM Mirage, Inc., MGM, Inc., Sara Lee
Corporation, Strong Funds and Wisconsin Energy Corporation. Has served as a
director of Kmart Corporation since 1986.
JOSEPH P. FLANNERY, 69
Chairman of the Board, President and Chief Executive Officer of Uniroyal
Holding, Inc. (investment management company). Director of ArvinMeritor, Inc.,
Ingersoll Rand Company, Newmont Mining Corporation and The Scotts Company. Has
served as a director of Kmart Corporation since 1985.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ELECTION OF MR. CONAWAY AS A
CLASS I DIRECTOR, MR. STATUTO AS A CLASS II DIRECTOR AND MS. AFFINITO AND
MESSRS. CLINE, DAVIS AND FLANNERY AS CLASS III DIRECTORS.
Directors Continuing in Office
Class I Directors. The following Class I directors' terms expire at the 2002
annual meeting. Messrs. Adamson and Kennedy were elected at the Company's 1999
Annual Meeting
JAMES B. ADAMSON, 53
Chairman, Advantica Restaurant Group (formerly Flagstar Corporation) (food
services and restaurant franchises). Previously served as Chief Executive
Officer and President, Denny's, Inc. and 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.
ROBERT D. KENNEDY, 68
Former Chairman and Chief Executive Officer of Union Carbide Corporation
(chemicals and plastics manufacturer). Director of Chase Industries, Inc.,
International Paper, Inc. and Sunoco, Inc. Has served as a director of Kmart
Corporation since 1996.
Class II Directors. The following Class II directors' terms expire at the 2003
Annual Meeting. Ms. Smith and Mr. Stallkamp were elected at the Company's 2000
Annual Meeting.
7
ROBIN B. SMITH, 61
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.
THOMAS T. STALLKAMP, 54
Vice Chairman and Chief Executive Officer, MSX International (provider of
technology based business systems and services). Previously served as Vice
Chairman and as President of DaimlerChrysler Corporation and as President of
Chrysler Corporation. Director of Baxter International, Inc. Has served as a
director of Kmart Corporation since 1999.
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 addition, on January 27, 2000, each of the Company's non-employee
directors received an option grant pursuant to the Directors Stock Plan which
entitles them to purchase 6,600 shares of Common Stock. This option vests in
three equal installments on each of the first three anniversaries of the date
of grant and has a per share exercise price of $8.84.
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. Davis and
Flannery 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 2000?
The Board of Directors met 12 times during fiscal 2000. Except for Mr.
Stallkamp, who attended 71% of the Board and Committee meetings, each director
attended at least 83% of the Board and Committee meetings held while he or she
served as a director or member of a 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 Committee on Directors and
Corporate Governance. Except for the Executive Committee, the Committees are
comprised solely of non-employee directors.
8
BOARD COMMITTEE MEMBERSHIP
Committee
on
Compensation Directors
and and
Audit Incentives Executive Finance Corporate
Name Committee Committee Committee Committee Governance
- ---- --------- ------------ --------- --------- ----------
James B. Adamson.......... * x
Lilyan H. Affinito........ x x x
Joseph A. Califano........ x
Richard G. Cline.......... x x x
Charles C. Conaway........ *
Willie D. Davis........... x x
Joseph P. Flannery........ x x x
Robert D. Kennedy......... *
J. Richard Munro.......... x x x x
Robin B. Smith............ x *
Thomas T. Stallkamp....... *
Richard J. Statuto(1)..... x x
James O. Welch, Jr........ x
- --------
x Member
* Chairperson
(1) Board and Board Committee membership effective as of April 17, 2001.
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; 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. The duties
and responsibilities of the Committee are more fully described in the Audit
Committee Charter, which is attached as Appendix A to this Proxy Statement. In
fiscal 2000, the Audit Committee met 5 times.
Compensation and Incentives Committee. Determines the nature and amount of
compensation of the executive officers of the Company and its subsidiaries; and
administers the Company's Annual Incentive Bonus Plan, Management 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 2000, the Compensation and Incentives
Committee met 16 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. The
Executive Committee did not meet in fiscal 2000.
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 2000, the Finance Committee met 5 times.
Committee on Directors and Corporate Governance. 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
9
procedures concerning 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 2000,
the Committee on Directors and Corporate Governance met 5 times.
AUDIT COMMITTEE REPORT
The Audit Committee is comprised of four outside directors, all of whom are
independent under the rules of the New York Stock Exchange. In fiscal 2000, the
Board of Directors approved and adopted a written charter, which sets forth the
Audit Committee's duties and responsibilities and reflects new SEC regulations
and New York Stock Exchange rules. A copy of the charter is attached as
Appendix A to this Proxy Statement.
The Audit Committee has reviewed and discussed the Company's audited
financial statements for the fiscal year ended January 31, 2001 with management
and with the Company's independent auditors, PricewaterhouseCoopers LLP. The
Audit Committee has discussed with PricewaterhouseCoopers LLP the matters
required to be discussed by Statement on Auditing Standards No. 61 relating to
the conduct of the audit. The Audit Committee has received the written
disclosures and the letter from PricewaterhouseCoopers LLP required by
Independence Standards Board Standard No. 1, Independence Discussions with
Audit Committees, and has discussed with PricewaterhouseCoopers LLP their
independence. The Audit Committee has considered the compatibility of the
provision of non-audit services with maintaining the auditor's independence.
Based on the Audit Committee's review of the audited financial statements
and the review and discussions described in the foregoing paragraph, the Audit
Committee recommended to the Board of Directors that the audited financial
statements for the fiscal year ended January 31, 2001 be included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2001
for filing with the SEC.
Audit Committee
J. B. Adamson, Chairperson
L. H. Affinito
J. R. Munro
R. B. Smith
The Audit Committee Report 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.
AUDIT FEES
The aggregate fees billed or expected to be billed to the Company for the
fiscal year ended January 31, 2001 by the Company's principal accounting firm,
PricewaterhouseCoopers LLP, are as follows:
Audit Fees................................................... $ 1,125,000
Financial Information Systems Design and Implementation
Fees........................................................ 8,355,000
All Other Fees............................................... 3,318,000
-----------
Total.................................................... $12,798,000
===========
10
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 2000 Compensation Program for executives consisted of the
following key elements:
. Base salary
. Performance-based annual incentive bonus
. Grants of stock options and restricted stock
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 intends to maximize the performance-based components of
compensation paid to executive officers. However, the Committee believes that
the Company must attract, retain and reward the executive talent necessary to
maximize the return to stockholders and that the loss of a tax deduction under
federal tax law may be a necessary and desirable trade-off in certain
circumstances.
How were the Company's executive officers compensated in fiscal 2000?
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
graph. 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.
11
Annual Incentive Bonus
In 2000, executive officers had an opportunity to earn annual incentive
bonuses based on performance against Company and business unit goals approved
by the Committee. Generally, the bonus levels for executive officers were
targeted at the median bonus levels for competitive positions within the
companies participating in the surveys (unless an employment agreement provided
otherwise or as necessary to meet specific competitive offers). Bonuses awarded
to executive officers with respect to fiscal year 2000 reflect the Committee's,
or in the case of Mr. Conaway, the Board of Director's, decision to award such
bonuses based primarily upon individual achievement, rather than the
achievement of performance goals under the Company's annual bonus plans.
Stock Options and Other Equity Awards
The Company's long-term incentive compensation for executive officers and
other key executives consisted of grants of stock options and restricted stock
under the 1997 Long-Term Equity Compensation Plan. This plan was approved by
stockholders.
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 1997 Long-Term Equity
Compensation Plan, options for Common Stock were granted in 2000 to more than
3,100 executives.
Generally, the 2000 stock option grants for executive officers, other than
the CEO, were developed using industry accepted stock option valuation and
pricing models. Grants generally ranged from 50% to 235% of the applicable
salary range midpoint depending on position and salary grade, and were targeted
at the 75th percentile of 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
generally vest over a two or three year period.
During fiscal year 2000, the Company also entered into special retention and
incentive agreements with certain of its executive officers, including Messrs.
Schwartz and Kearse, pursuant to the Company's Executive Leadership Team
Program (the "ELT Program"). Each of the executive officers who participated in
the ELT Program received a retention payment which generally must be returned
to the Company in the event that the executive's employment with the Company is
terminated prior to January 31, 2004. In addition, the participating executives
received a grant of restricted stock. The restricted stock grant generally
vests on January 31, 2005. In addition, upon the achievement of specified
performance goals, the executives may earn additional restricted stock grants.
In exchange for the cash award and restricted stock grants, the executives
entered into a confidentiality, cooperation, non-disparagement, non-competition
and non-solicitation agreement with the Company.
During fiscal 2000, the Company also granted restricted stock to certain
executive officers, primarily to officers at the level of senior vice president
or above. These grants typically vest completely in three to five years
following the date of the grant, based upon the recipient's continued service
with the Company.
The Committee has long believed that aligning management's interests with
those of stockholders is an important element of the Company's executive
compensation program and that encouraging increased levels of ownership in the
Company's Common Stock is a key ingredient in achieving this goal. The
Management Stock Purchase Plan 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.
12
How was the Company's CEO compensated in fiscal 2000?
Mr. Conaway's fiscal year 2000 cash compensation included his base salary
(paid at the annual rate of $1,400,000) and an annual cash bonus opportunity of
125% of his annual base salary. Mr. Conaway's salary approximated the median
salary of chief executive officers in the above-described executive
compensation surveys. Mr. Conaway also received stock option grants, restricted
stock grants and stock grants pursuant to his employment agreement, which is
described on pages 16-17 hereof. Mr. Conaway's bonus award with respect to the
Company's 2000 fiscal year was $1,750,000 and was awarded in accordance with
the provisions of Mr. Conaway's employment agreement.
Compensation and Incentives
Committee
R. D. Kennedy, Chairperson
R. G. Cline
W. D. Davis
J. O. Welch, Jr.
The Compensation and Incentives Committee Report and the performance graph
included elsewhere in this Proxy Statement shall not be deemed filed or
incorporated by reference into any other filings by the Company under the
Securities Act of 1933 or the Securities Exchange Act of 1934 except to the
extent that the Company specifically incorporates this information by
reference.
13
Executive Compensation Summary Table
The following tables set forth information concerning total compensation
paid to the two individuals who served as the Company's Chief Executive Officer
during fiscal 2000 and the four other most highly compensated executive
officers of the Company who served in such capacities as of January 31, 2001
(the "named executive officers") for services rendered to the Company during
each of the last three fiscal years, if applicable. Pursuant to the Securities
and Exchange Commission rules, the tables also set forth information concerning
the compensation of a former executive officer of the Company who is also
deemed by SEC rules to be a named executive officer for the following
disclosure.
Long-Term
Annual Compensation Compensation
------------------------------------------ ---------------------
Securities Restricted
Name and Principal Other Annual Underlying Stock All Other
Position Year Salary(1) Bonus(2) Compensation(3) Options(4) Awards(5) Compensation(6)
------------------ ---- ---------- ---------- --------------- ---------- ---------- ---------------
C. Conaway.............. 2000 $ 943,056 $8,087,890 $446,913 4,000,000 $4,692,950 --
Chairman of the Board
and Chief Executive
Officer
A. Giancamilli.......... 2000 756,250 -- 24,797 630,000 2,999,850 $ 66,047
Former President and 1999 687,500 500,000 -- 200,000 -- 54,942
Chief Operating Officer 1998 650,000 523,400 -- 150,000 814,000 41,466
M. Schwartz(7).......... 2000 243,182 1,783,196 272,358 225,000 518,250 1,026,679
President and Chief
Operating Officer
C. Kearse............... 2000 422,250 125,000 -- 219,900 229,140 1,063,244
Executive Vice 1999 360,000 262,210 -- 80,000 56,958 25,651
President, 1998 335,000 227,800 -- 60,000 25,118 15,944
Merchandising
M. Welch III ........... 2000 430,425 100,000 -- 159,900 598,500 39,200
Executive Vice 1999 412,700 206,449 -- 70,200 56,993 32,407
President and Chief 1998 400,700 228,000 -- 60,000 151,248 26,894
Financial Officer
F. Hall................. 2000 518,909 486,500 234,807 820,000 1,422,750 2,489,649
Former Chairman of the 1999 1,375,000 1,305,800 270,539 500,000 861,875 625,291
Board, President and 1998 1,300,000 1,379,000 259,127 1,313,385 1,638,000 417,373
Chief Executive Officer
M. Bozic................ 2000 500,000 -- -- 253,100 813,000 221,071
Former Vice Chairman 1999 637,500 385,000 91,015 100,000 -- 12,120
1998 130,000 60,000 60,715 200,000 1,131,750 --
- --------
(1) At the election of the officers, up to 100% of salary may be deferred
pursuant to the Company's Management Deferred Compensation and Restoration
Plan.
(2) Mr. Conaway's 2000 bonus consists of a $2,500,000 signing bonus, a
guaranteed annual bonus of $1,750,000 and $3,837,890 in cash and stock
sign-on bonuses, all of which are pursuant to his employment agreement. Mr.
Schwartz's bonus is pursuant to an agreement entered into in connection
with his employment with the Company. Mr. Hall's bonus was paid pursuant to
an agreement entered into in connection with his retirement from the
Company.
(3) The dollar amounts under "Other Annual Compensation" include: Reimbursement
of Housing and Temporary Living Costs -- Mr. Conaway -- $414,076 (2000);
Mr. Schwartz -- $232,459 (2000); Mr. Hall -- $159,521 (2000), $185,242
(1999), $159,988 (1998); Mr. Bozic -- $89,863 (1999), $60,715 (1998); Non-
Business Use of Company Plane -- Mr. Conaway -- $24,337 (2000); Mr.
Giancamilli -- $24,047 (2000), $19,271 (1999), $7,238 (1998); Mr. Schwartz
-- $39,899 (2000); Mr. Hall -- $75,286 (2000), $68,528 (1999), $80,087
(1998); Mr. Bozic -- $1,152 (1999).
14
(4) The stock options (other than the grant to Mr. Conaway) were granted under
the 1997 Long-Term Equity Compensation Plan.
(5) As of January 31, 2001, the number and value of all restricted stock held
by the named executive officers were as follows: Mr. Conaway --
615,000/$5,381,250; Mr. Giancamilli -- 493,122/$4,314,818; Mr. Schwartz --
75,000/$656,250; Mr. Kearse -- 45,552/$398,580; and Mr. M. Welch --
105,759/$925,391.
(6) The dollar amounts for fiscal year 2000 set forth under "All Other
Compensation" include: Value of Life Insurance Premiums -- Mr. Giancamilli
-- $2,422; Mr. Kearse -- $1,529; Mr. M. Welch -- $1,671; Mr. Hall --
$11,532; Mr. Bozic -- $3,617; Company Contributions to Retirement Savings
Plan and/or Management Deferred Compensation and Restoration Plan -- Mr.
Giancamilli -- $63,625; Mr. Kearse -- $35,036; Mr. M. Welch -- $37,529; Mr.
Hall -- $385,354; Mr. Bozic -- $48,704; Retention Bonus -- Mr. Schwartz --
$1,026,679; Mr. Kearse -- $1,026,679; Consulting Fees -- Mr. Hall --
$1,885,000; Interest on Mandatorily Deferred Compensation -- Mr. Hall --
$116,402; Above Market Interest on Mandatorily Deferred Compensation -- Mr.
Hall -- $91,361.
(7) Assumed his current position effective as of March 14, 2001. Prior thereto
he was Executive Vice President, Store Operations.
Option Grants in Fiscal Year 2000
% of Total
Number of Options Options to
Granted in Fiscal Employees in Exercise Expiration Hypothetical
Name 2000 Fiscal 2000 Price(1) Date(2) Value(3)
- ---- ----------------- ------------ -------- ---------- ------------
C. Conaway.............. 4,000,000 18.02% $7.63 5/31/2010 $15,185,680
A. Giancamilli.......... 330,000 1.49 8.84 1/28/2010 1,454,835
A. Giancamilli.......... 300,000 1.35 6.84 7/26/2010 1,009,895
M. Schwartz............. 225,000 1.01 6.91 9/07/2010 764,996
C. Kearse............... 109,000 0.49 8.84 1/28/2010 480,536
C. Kearse............... 110,000 0.50 6.84 7/26/2010 370,295
M. Welch III............ 109,900 0.50 8.84 1/28/2010 484,504
M. Welch III............ 50,000 0.23 7.06 8/20/2010 174,475
F. Hall................. 820,000 3.69 8.84 1/28/2010 3,615,045
M. Bozic................ 253,100 1.14 8.84 1/28/2010 1,115,814
- --------
(1) All options were granted at a price equal to 100% of the market value of
the Common Stock on the applicable date of grant. The exercise price may be
paid in cash, already owned shares or a combination of both.
(2) Options have ten year terms and will become exercisable in three equal
annual installments commencing one year from date of grant, other than the
options granted to Messrs. Giancamilli and Kearse with an exercise price of
$6.84, which will become fully exercisable commencing two years from date
of grant.
(3) This column represents the estimated present value of the options granted
during fiscal 2000 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 .466015 for
options granted on January 27, 2000, .4678805 for options granted on May
30, 2000 and July 25, 2000, and .4728046 for options granted on August 19,
2000 and September 6, 2000; risk-free interest rates of 6.67%, 6.52%,
6.16%, 6.09% and 5.94% for options granted on January 27, 2000, May 30,
2000, July 25, 2000, August 19, 2000 and September 6, 2000, 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 the assumptions described above.
15
Option Exercises and Values for Fiscal Year 2000
The table below shows the value at January 31, 2001 of options held by each
of the named executive officers. None of the named executives officers
exercised stock options during fiscal year 2000:
Value of Unexercised
Number of Unexercised In-the-Money Options
Options at 1/31/01 at 1/31/01
Name Exercisable/Nonexercisable Exercisable/Nonexercisable(1)
- ---- -------------------------- -----------------------------
C. Conaway............ 0/4,000,000 $ 0/4,880,000
A. Giancamilli........ 725,738/1,118,333 83,727/573,000
M. Schwartz........... 0/225,000 0/414,000
C. Kearse............. 216,694/290,098 44,862/210,100
M. Welch III.......... 250,034/277,566 90,500/84,500
F. Hall............... 7,983,385/0 73,800/0
M. Bozic.............. 553,100/0 22,779/0
- --------
(1) Option value based on a per share value of $8.75.
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. Kearse is eligible to receive benefits under the Company's frozen
Employee Pension and Supplemental Pension Benefit Plans. Mr. Kearse has 26
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
$2,063.32 per month at age 65. This amount is based on the pension being paid
during his lifetime and would be reduced on an actuarial 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.
The Company has also adopted a Supplemental Executive Retirement Plan for
the purpose of providing income to executive officers of the Company who retire
prior to age 65 or who are hired by the Company later in their careers, whom
the Board of Directors approves as eligible to receive benefits under the Plan.
Benefits are determined by the Board based on the position, responsibilities
and rate of compensation of the employee, benefits payable or which would have
been payable under other plans and such other factors as the Board may deem
relevant.
Employment and Severance Arrangements
The Company has entered into an employment agreement with Mr. Conaway. Mr.
Conaway's agreement, which has a term ending on May 30, 2005 (subject to
automatic annual one-year extensions, commencing on May 20, 2004), provides for
an annual salary of at least $1.4 million and an annual on-plan incentive bonus
opportunity of at least 125% of his then-current annual salary based on the
attainment of performance goals. In addition, Mr. Conaway's 2000 annual bonus
was guaranteed at the level of $1,750,000. Mr. Conaway was granted an option to
acquire 1,500,000 shares of the Company's Common Stock, as well as an option to
acquire 250,000 shares of the common stock of BlueLight.com, Inc., in each case
with a per share exercise price equal to the fair market value of such shares
on the date of grant. Mr. Conaway is also eligible for additional option grants
during the term of his employment with a target value equal to 400% of his base
salary, such grants to be made based upon the achievement of performance goals
established by the Committee. Mr. Conaway was also granted 200,000 unrestricted
shares of the Company's Common Stock as a sign-on bonus. In order to compensate
Mr. Conaway for compensation opportunities with his former employer he had to
forego in order to
16
accept employment with the Company, he will be paid an aggregate of $10,000,000
in cash and $5,000,000 in shares (both payable in installments over the first
five years of his employment with the Company), and has been awarded a stock
grant of 303,000 unrestricted shares of Company Common Stock, an option to
acquire 2,500,000 shares of Company Common Stock (vesting over four years), and
615,000 restricted shares of Company Common Stock.
If Mr. Conaway's employment is terminated by the Company during the term of
the agreement 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 period of 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. Payments to Mr. Conaway will be
"grossed-up" to compensate for the imposition of any golden parachute excise
taxes thereon.
A standard severance agreement has been entered into with the other named
current executive officers which provide that, if the executive's 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 the executive's monthly base salary at
the time of termination, plus, in some cases, 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.
Each of Messrs. Schwartz, Kearse and M. Welch are also eligible for benefits
under the Company's Amended and Restated Special Severance Plan. The Special
Severance Plan generally provides for the payment of benefits to the executive
in the event that his employment with the Company is terminated by the Company
within two years following the occurrence of a "change in control" (as defined
in the Special Severance Plan). In the event of such a termination of
employment, the executive will be entitled to a payment equal to three times
his annual base salary and annual target bonus and a payment sufficient to
allow the executive to purchase life and health insurance coverage for 24
months at a level substantially similar to that provided by the Company. The
executive will also be eligible to receive an additional payment in respect of
pension benefits which he otherwise would have been eligible to earn. The
executive will be entitled to an additional payment such that, following the
receipt of such additional payment, the executive will retain the amount of
such payments which he would have received had no taxes been imposed. In order
to be eligible for the benefits provided under the Special Severance Plan, the
executive must waive any severance rights which he may have under any separate
severance arrangement with the Company.
In June 2000, Mr. Hall retired as an officer and director of the Company. In
connection with his retirement, Mr. Hall entered into an agreement with the
Company, which provided, among other things, that upon his retirement, the
restrictions on 275,000 shares of restricted stock and restricted stock units
would lapse and 2,257,795 stock options would vest and all outstanding options
would remain outstanding through their applicable terms. In addition, in
connection with Mr. Hall's retirement, he was paid (i) $486,500, (which
represents a pro rata portion of his on-plan target bonus for the year of his
retirement) and (ii) $5,717,367 (which represents principal and interest on
certain deferred compensation previously earned by Mr. Hall during his
employment with the Company). Mr. Hall also entered into a consulting agreement
with the Company which has a term running through June 4, 2001 and provides
that the Company pay Mr. Hall a monthly consulting fee of $235,625 in exchange
for his services thereunder.
In October 2000, Mr. Bozic retired from his employment with the Company. In
connection with his retirement, Mr. Bozic entered into an agreement with the
Company, which provided, among other things, that upon his retirement, the
restrictions on his restricted stock would lapse and his stock options would
vest and remain outstanding through their applicable term. In addition,
pursuant to his employment agreement, Mr. Bozic became entitled to severance
payments equal to his monthly base salary and a 1/12th portion of his annual
bonus for 24 months following his retirement.
17
Stock Performance Graph
COMPARISON OF CUMULATIVE TOTAL RETURN/JANUARY 1996 TO JANUARY 2001
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, 1996.
Date
Period
January January January January January January
Company/Index 1996 1997 1998 1999 2000 2001
- ------------- ------- ------- ------- ------- ------- -------
Kmart Corporation........ 100 189 187 199 141 149
S&P 500 Index............ 100 124 154 101 119 115
Retail Composite......... 100 122 183 249 314 338
Assumes $100 invested on January 31, .Kmart Corporation
1996 in the Company's Common Stock, sS&P 500 Composite Index
S&P 500 Composite Index and S&P .S&P Retail Stores Composite Index
Retail Stores Composite Index and
that any dividends are reinvested.
PROPOSAL 2 -- 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 2001, 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 2.
18
PROPOSAL 3 -- STOCKHOLDER PROPOSAL
Mercy Health Services and Trinity Health, 29000 Eleven Mile Road, Farmington
Hills, Michigan 48336, which states that they own 4,600 shares of Common Stock
and the Servants of Jesus, 9965 Marilyn Road, Reese, Michigan 48757, which
states that it owns 5,000 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:
"WHEREAS:
Leaders of industry in the United States now acknowledge their obligation to
pursue superior environmental performance and to disclose information about
that performance to their investors and other stakeholders.
The integrity, utility, and comparability of environmental disclosure depend
on using a common format, credible metrics, and a set of generally accepted
standards. This will enable investors to assess environmental progress within
and across industries.
The Coalition for Environmentally Responsible Economies (CERES)--a ten-year
partnership between large investors, environmental groups, and corporations--
has established what we believe is the most thorough and well-respected
environmental disclosure form in the United States. CERES has also taken the
lead internationally, convening major organizations together with the United
Nations Environment Programme in the Global Reporting Initiative (GRI). The GRI
Guidelines for standardizing environmental disclosure worldwide were pilot
tested by 20 companies last year.
Companies which endorse the CERES Principles engage with stakeholders in
transparent environmental management and agree to a single set of consistent
standard for environmental reporting. That standard is set by the endorsing
companies together with CERES.
The CERES Principles and CERES Report have been adopted by leading firms in
various industries: American Airlines, Arizona Public Service, Bank America,
BankBoston, Baxter International, Bethlehem Steel, Coca-Cola, Ford, General
Motors, Interface, ITT Industries, Northeast Utilities, Pennsylvania Power and
Light, Polaroid, and Sun Company.
We believe endorsing the CERES Principles commits a company to the prudent
oversight of its financial and physical resources through: 1) protection of the
biosphere; 2) sustainable use of natural resources; 3) waste reduction; 4)
energy conservation; 5) risk reduction; 6) safe products/services; 7)
environmental restoration; 8) informing the public; 9) management commitment;
10) audits and reports. (The full text of the CERES Principles and accompanying
CERES Report form are obtainable from CERES, 11 Arlington Street, Boston
Massachusetts 02116, (617) 247-0700/www.ceres.org).
RESOLVED:
Shareholders request that the company endorse the CERES Principles as a
reasonable and beneficial component of their corporate commitment to be
publicly accountable for environmental performance.
Stockholders' Supporting Statement
Recent studies show that the integration of environmental commitment into
business operations provides competitive advantage and improves long-term
financial performance for companies. In addition, the depth of a firm's
environmental commitment and the quality with which it manages its
environmental performance are indicators of prudent foresight exercised by
management.
19
Given investors' needs for credible information about a firm's environmental
performance, and given the number of companies that have already endorsed the
CERES Principles and adopted its report format, it is a reasonable, widely
accepted step for a company to endorse those Principles if it wishes to
demonstrate its seriousness about superior environmental performance.
Furthermore, we believe that endorsing the CERES Principles will lead to
improved stakeholder relations and data tracking systems and enable Kmart to
effectively manage particular environmental issues, such as in mercury in
thermometers, contract labor health and safety, and facility siting.
Your vote FOR this resolution serves the best interests of our Company and
its shareholders."
Kmart Response
The Board of Directors Opposes Adoption of Proposal 3.
The Company is committed to the fundamental objectives and philosophy of the
CERES Principles and is dedicated to operating its business in an
environmentally responsible manner. The Company has instituted company-wide
recycling and energy conservation programs and continually explores ways to
implement specific initiatives which result in positive environmental effects.
Currently, the Company is reviewing with its suppliers the possibility of using
chlorine-free paper products.
The Company has carefully reviewed the CERES principles, but has concluded
that it should not formally endorse them. The CERES Principles are, in our
judgment, not appropriate for a retail business such as the Company.
Furthermore, the CERES Principles, we believe, are vague and offer little
meaningful guidance as to appropriate environmental policies and procedures.
The Board of Directors does not believe that it is appropriate to endorse
principles that do not improve the Company's ability to conduct its business in
an environmentally responsible manner.
Endorsing the CERES Principles will impose unnecessary costs on the Company
by requiring the Company to prepare an annual report in accordance with the
CERES Principles and pay an annual fee to CERES. The Company will continue to
conduct business in an environmentally responsible manner and believes that
this is best accomplished without endorsing the CERES Principles. Endorsement
of the CERES Principles would increase the costs of the Company's environmental
initiatives without meaningfully enhancing its environmental policies and
procedures.
For these reasons the Board of Directors believes that endorsement of the
CERES Principles would not be in the best interests of the Company and its
stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 3.
PROPOSAL 4 -- STOCKHOLDER PROPOSAL
Aaron M. Epstein, 13455 Ventura Boulevard, #209, Sherman Oaks, California
91423-6122, who states that he owns 1,250 shares of Common Stock, Holy Cross,
Southern Province, 2111 Brackenridge Street, Austin, Texas 78704-4322, which
states that they own 500 shares of Common Stock, the New York City Teachers'
Retirement System, Comptroller of the City of New York, 1 Centre Street, New
York, New York 10007-2341, which states that they own 516,600 shares of Common
Stock, and the Connecticut Retirement Plans and Trust Fund, State of
Connecticut, Office of Treasurer, 55 Elm Street, Hartford, Connecticut 06106-
1773, which states that they own 92,500 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:
20
"Whereas: Consumers and shareholders continue to be seriously concerned
about whether abusive working conditions and absence of a living wage exist in
facilities where the products they buy are produced or assembled.
Three-quarters of the US consumers surveyed would avoid shopping at a
retailer that they knew sold garments made in sweatshops. An overwhelming 86%
of those surveyed would pay a 5% mark-up to ensure decent working conditions.
("The Consumer and Sweatshops," Marymount University Survey, November, 1999).
Students have persuaded their universities to adopt codes requiring that
clothing sold in university stores is made under humane conditions. (Business
Week, 5/3/99).
Nearly half the global workforce involved in producing textiles, garments
and shoes are women and wage inequalities are their universal lot.
(International Labor Organization, 10/16/00).
Our company purchased goods produced in countries like China where human
rights abuses and unfair labor practices have been well documented. (U.S. State
Department's "China Country Report on Human Rights Practices--1999").
Reports that suppliers are exploiting workers may damage our company's
reputation and generate a consumer backlash. Our company should demonstrate
enforcement of its standards by developing independent monitoring programs with
local, respected and independent religious, human rights and labor groups. To
be credible, the process of monitoring and verification must be transparent,
with the contents of compliance reports made public.
To improve the quality of life of workers who make its products, our company
should implement ongoing wage adjustments, ensuring that workers have a
sustainable living wage.
And rather than terminating contracts Kmart should establish incentives to
encourage its suppliers and vendors to raise labor standards.
Resolved: Request the Board of Directors to:
1. Amend the Kmart Buying Policy and standard purchase contracts to reflect
full adoption of the principles defined by the International Labor
Organization (ILO). ("Declaration on Fundamental Principles and Rights
at Work and its Follow-up").
2. Establish an independent monitoring process that assesses adherence to
these conventions and,
3. Report annually on adherence to the amended Policy through an
independent and transparent process, the first such report to be
completed by January 2002.
Stockholders' Supporting Statement
1. All workers have the right to form and join trade unions and to bargain
collectively. (ILO Conventions 87 and 98).
2. Workers representatives shall not be the subject of discrimination and
shall have access to all workplaces necessary to enable them to carry
out their representation functions. (ILO Convention 135).
3. There shall be no discrimination or intimidation in employment. Equality
of opportunity and treatment shall be provided regardless of race,
color, sex, religion, political opinion, age, nationality, social origin
or other distinguishing characteristics. (ILO Convention 100 and 111).
4. Employment shall be freely chosen. There shall be no use of force,
including bonded or prison labor. (ILO Convention 29 and 105).
5. There shall be no use of child labor (ILO Convention 138)."
21
Kmart Response
The Board of Directors Opposes Adoption of Proposal 4.
The Company believes that it has a responsibility to purchase from suppliers
who provide acceptable workplace conditions and wages. The Company has zero
tolerance for any supplier's use of forced, convict or illegal child labor, as
well as for the failure by suppliers to implement key wage, benefit and health
and safety practices in accordance with local law. The Company has initiated
two programs to ensure that its suppliers conform with these principles.
The Company has adopted and distributed to its suppliers a Vendor Workplace
Code of Conduct. The Vendor Workplace Code of Conduct was developed in
cooperation with the United States Department of Labor and incorporates the
following principles:
. Suppliers and their subcontractors must comply with laws and regulations
regarding:
-- Child labor
-- Wages and hours
-- Anti-discrimination
. All suppliers' and their subcontractors' employees must be:
-- Voluntary
-- Non-prison labor
-- Treated with respect
Kmart requires its suppliers to agree in writing to comply with the Vendor
Workplace Code of Conduct, and the terms of the Code are incorporated by
reference in the Company's standard form purchase orders.
In addition, since 1997 the Company has initiated a third party monitoring
program with Cal Safety Compliance Corporation. Cal Safety has been involved in
workplace compliance monitoring for over eight years and serves over 350
companies worldwide. The Company's compliance program is designed to: (i)
inspect the production facilities used to produce goods purchased by Kmart;
(ii) educate suppliers and their subcontractors regarding applicable laws and
the provisions of the Vendor Workplace Code of Conduct; (iii) enforce the
suppliers' and their subcontractors' compliance with applicable employee
protection and other laws and/or the Code; (iv) reinspect and re-educate
factories with violations; and (v) assess and collect back wages found due in
domestic production factories. Over 3,900 on-site inspections of various
workplaces throughout the world were carried out by Cal Safety and the
Company's internal quality assurance and compliance staff during 2000.
The Company's Vendor Workplace Code of Conduct and its enforcement through
Cal Safety and the Company's own internal staff provide a very effective means
of ensuring that workers producing the products sold by the Company work in
fair and healthy environments and are treated ethically. The Board of Directors
believes the Company's policies and practices comport with the goals expressed
by the International Labor Organization principles and that the additional time
and money spent complying with the International Labor Organization principles
would be duplicative and not in the best interest of the Company and its
stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 4.
CORPORATE GOVERNANCE
Guidelines on Significant Corporate Governance Issues
These guidelines are being published in this Proxy Statement to inform
stockholders of the Board's current thinking with respect to selected corporate
governance issues considered to be of significance to stockholders. The
guidelines are only guidelines and not rigid rules. The Board will continue to
assess the appropriateness and efficacy of the guidelines and it is likely that
changes to the guidelines will occur from time to time.
22
Selection and Composition of the Board
1. Board Membership Criteria
The Committee on Directors and Corporate Governance 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 Committee on Directors and Corporate Governance reviews qualifications
of potential candidates and recommends director nominees to the full Board. The
Committee on Directors and Corporate Governance may receive suggestions for
candidates from individual Board members, including the CEO, as well as from
stockholders of the Company. The Committee on Directors and Corporate
Governance 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.
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 Committee on Directors and Corporate Governance.
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 2001 Annual Meeting, there will be 10 Kmart Board
members. Management, the Board and the Committee on Directors and Corporate
Governance have indicated that a size of 10-13 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 2001 Annual Meeting, there will be 9 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 Committee on Directors and Corporate
Governance to outside directors only (Article IV, Sections 2, 3, 4 and 5).
23
8. Board Definition of What Constitutes Independence for Outside Directors
The Committee on Directors and Corporate Governance has adopted the
following definition of "independent director" for purposes 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. Audit Committee
members are appointed in accordance with the independence standards set forth
in the New York Stock Exchange rules.
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 Committee on Directors and Corporate Governance.
10. Term Limits
The Board has adopted a policy that, unless it is determined in a particular
instance that a longer tenure is in the best interests of the Board or the
Company: (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.
In 1999, because five directors would be scheduled to retire in 2001 under
applicable tenure policies, the Board has determined that it is in the best
interests of the Board and the Company to waive these policies with respect to
Messrs. Davis and Flannery for at least one year.
11. Retirement Age
Outside directors generally retire at the Annual Meeting 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 in the Company's
director compensation program are appropriate. The Committee is also assisted
as needed by an independent compensation consultant. Changes in director
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.
24
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/or the Secretary are the only non-directors present
at each Board meeting for its duration. The officers who compose the Senior
Management Executive Committee attend all meetings for operational, financial
and related presentations. Other officers attend on an invitation basis for
presentations or other purposes.
17. Board Access to Senior Management
Board members have complete access to Kmart management. It is assumed that
Board members will use judgment to be sure that this contact is not distracting
to the Company and that such contact, if in writing, be copied to the CEO.
Furthermore, the Board encourages management to, from time to time, bring
managers into Board Meetings who: (a) can provide additional insight into the
items being discussed because of personal involvement in these areas, and/or
(b) represent managers with future potential that senior management believes
should be given exposure to the Board.
Meeting Procedures
18. Selection of Agenda Items for Board Meetings
The CEO, in consultation with other Board members or members of management,
establishes the agenda for each Board meeting. Each Board member is free to
suggest the inclusion of items 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 the
Board members in advance so that Board meeting time may be conserved and
discussion time focused on questions that the Board has about the material. On
those occasions in which the subject matter is too sensitive to put on paper,
the presentation will be discussed at the meeting.
Committee Matters
21. Number of Committees
There are currently five standing Board committees: Audit, Compensation and
Incentives, Executive, Finance, and Directors and Corporate Governance. The
Board may form, merge or dissolve a Committee as the Board determines,
depending on circumstances.
25
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 Directors and Corporate
Governance Committees is limited to outside directors only. All Committee
changes are approved by the Board, upon recommendation of the Committee on
Directors and Corporate Governance.
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.
25. Audit Committee
The Audit Committee operates pursuant to a charter, which sets forth the
responsibilities and procedures that the Audit Committee must follow. The Audit
Committee charter is set forth in Appendix A to this Proxy Statement.
Leadership Development
26. 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.
27. Succession Planning
The CEO meets annually with the outside directors to report on succession
planning.
28. Management Development
The CEO meets annually with the outside directors to report on management
development.
26
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 2002 Annual Meeting
of Stockholders pursuant to SEC Rule 14a-8 must be received by the Secretary of
the Company on or before December 5, 2001 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 2002
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 14, 2002 unless the meeting is not held within eight days of May 15,
2002. 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 2000 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
APPENDIX A
CHARTER OF
THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
OF KMART CORPORATION
Background
This document sets forth the Audit Committee's responsibilities and how they
are being carried out and has been approved by the Board of Directors. The
Audit Committee will review and update this Charter annually to reassess its
adequacy.
Mission
The Audit Committee is an independent committee of the Board of Directors
whose primary duty is to assist the Board of Directors in fulfilling its
oversight responsibilities by regularly reviewing, and reporting on and making
recommendations to the Board regarding, the financial information which will be
publicly disseminated, the systems of internal controls which management has
established, the Company's audit process and the performance of the independent
accountants.
Authority
Article IV, Section 3 of the Company's By-Laws, duly adopted by the Board of
Directors as permitted by applicable Michigan law, establishes the Board Audit
Committee.
Membership
The Audit Committee shall meet the requirements of the New York Stock
Exchange.
The Audit Committee shall consist of at least three directors, none of whom
shall be an officer of the Company or any of its subsidiaries. One member shall
serve as Committee Chair.
The Committee and Chair shall be appointed by, and their term of membership
shall be at the discretion of, the Board of Directors.
No Committee member shall have a relationship with the Company that might
interfere with the exercise of his or her independence from management and the
Company.
Meetings / Procedures
The Audit Committee will normally hold four regular meetings per year and
such additional meetings as the Chair of the Committee deems necessary.
The Committee's primary liaison with Company management will be the senior
Audit Services executive, who will brief the Committee Chair in advance on all
matters to be covered at Committee meetings, will designate a secretary to keep
minutes of Committee meetings and will undertake follow-up actions by
management at the Committee's direction.
Committee meetings will be led by the Committee Chair or his/her designee,
using an agenda and support materials distributed to Committee members in
advance of Committee meetings.
Committee meetings will be attended by the senior Audit Services executive
and any members of management or other persons requested to provide pertinent
information.
A-1
The Audit Committee shall be given full and unrestricted access to all
personnel, records, operations, properties and other information sources of the
Company, as required to discharge its responsibilities.
The Committee may engage independent consultants or experts as it sees fit
and may commit to the expenditure of reasonable sums to support such
activities.
An annual work plan shall be developed outlining the business to be
discussed at Committee meetings during the upcoming year.
Responsibilities
The Committee will keep minutes of its proceedings, and all action of the
Committee shall be reported at the next meeting of the Board of Directors.
Recommendations will be made to the Board regarding matters for which full
Board approval is necessary or desirable. The responsibilities of the Audit
Committee shall include the following:
Financial Statements
. In consultation with management, the independent accountants and Audit
Services, monitor the integrity of the financial reporting process
including the review of audit findings and any significant suggestions
for improvements provided to management by the independent accountants.
. Inquire of the existence and substance of any significant accounting
accruals, reserves or other estimates made by management having a
material impact on the financial statements.
. Evaluate significant accounting and reporting issues, including recent
professional and regulatory pronouncements, and understand their impact
on the financial statements.
. Discuss with management and the independent accountants their qualitative
judgments about the appropriateness, not just the acceptability, of
accounting principles and financial disclosure practices used or proposed
to be adopted by the Company and, particularly, the degree of
aggressiveness or conservatism of its accounting principles and
underlying estimates.
. Review with the Company's Counsel any legal matters that could have a
significant impact on the Company's financial statements.
. Review with management and the independent accountants drafts of SEC
periodic reports, and in particular, determine that the quarterly and
annual reporting and management discussion and analysis processes are
adequate to ensure proper reporting and adequate disclosure of any
unusual material items and changes in accounting policy. The Chair of the
Committee, or other Committee member designated by the Chair, may
represent the entire Committee for purposes of this review.
Independent Accountants
. Annually recommend to the Board for its approval the selection of the
independent accountants and the conditions of their appointment and their
audit compensation; review the scope and monitor the results of the audit
plan and the independent accountants' non-audit compensation; evaluate
the performance of the independent accountants; review and monitor the
maintenance of the independent accountants' independence; and approve any
discharge and replacement of the independent accountants.
. Instruct the independent accountants that they are accountable to the
Board of Directors and the Audit Committee.
. Provide opportunity for the independent accountants to be available to
the Board of Directors.
. Review the coordinated activities of Audit Services and the independent
accountants to monitor the adequacy of audit coverage and to maximize the
cost effectiveness of the total audit resource.
A-2
Audit Services
. Review and concur in the appointment, replacement, reassignment or
discharge of the senior Audit Services executive.
. Review and evaluate the results of Audit Services activities for the year
including evaluating the organizational structure, independence,
objectivity and qualifications of the Audit Services staff.
. Review the scope of the Audit Services work plan for the year.
Other
. Inquire of management, the senior Audit Services executive and the
independent accountants regarding significant risks or exposures and
assess the steps management has taken to minimize such risk to the
Company.
. Evaluate the adequacy, effectiveness and efficiency of Audit Services and
the Company's internal systems, financial and operating controls.
. Both provide and receive direct and unrestricted access to management,
the Board of Directors, Audit Services and the independent accountants to
ensure a climate and a process in which any concerns can be dealt with in
a timely and effective manner.
. Review management's monitoring of compliance with the Company's Code of
Conduct.
. Review and approve the Committee report included in the Company proxy
statement.
. Perform other duties as prescribed by the Board of Directors.
Evaluating Committee Performance
The Audit Committee shall, as determined by the Chair, periodically evaluate
the Committee's performance and report the results to the Board of Directors.
----------------
While the Audit Committee has the responsibilities and powers set forth in
this Charter, it is not the duty of the Audit Committee to plan or conduct
audits or to determine that the Company's financial statements are complete and
accurate and are in accordance with generally accepted accounting principles.
This is the responsibility of management and the independent accountants. Nor
is it the duty of the Audit Committee to conduct investigations, to resolve
disagreements, if any, between management and the independent accountants or to
assure compliance with laws and regulations and the Company's Code of Conduct.
A-3
ADMISSION TICKET
TO
KMART CORPORATION
ANNUAL MEETING
OF STOCKHOLDERS
May 15, 2001
- CUT AND DETACH HERE -
- --------------------------------------------------------------------------------
Detroit Opera House
1526 Broadway
Detroit, Michigan 48226
10:00 A.M., Tuesday, May 15, 2001
Stockholder parking will
be made available at no
charge at the following
parking structures upon
submission of this
parking voucher. (See map
above.) STOCKHOLDER
PARKING
.Detroit Opera House Garage VOUCHER
1426 Broadway
.Grand Circus Park Underground Garage
Woodward at Adams
3440-PS-01
[LOGO OF KMART]
[LOGO OF KMART] (R)
DIRECTIONS TO KMART CORPORATION ANNUAL MEETING OF STOCKHOLDERS
Detroit Opera House
1526 Broadway
Detroit, Michigan 48226
10:00 A.M., E.T., Tuesday, May 15, 2001
- --------------------------------------------------
Stockholder parking will be made available at no
charge at the following parking structures upon
submission of the parking voucher on the back of
the proxy statement. (See map at right.)
[MAP]
. Detroit Opera House Garage Enter meeting via the
1426 Broadway Madison Avenue entrance
to Detroit Opera House.
. 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 15,2001
-------------------------------------------------------------
The signer(s) hereby appoint Charles C. Conaway and James E. Defebaugh, or
either of them, with power of substitution in each, to act as proxies to vote
all Kmart Corporation common stock which the signer(s) would be entitled to vote
at the Annual Meeting of Stockholders to be held at the Detroit Opera House,
1526 Broadway, Detroit, Michigan 48226, on Tuesday, May 15, 2001 at 10:00 A.M.,
E.T., 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, or response is by
phone or Internet, without voting instructions, the shares represented by this
Proxy will be voted FOR Proposals 1 and 2 and voted AGAINST Proposals 3 and 4.
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 or by voting by
phone or Internet. If this card is signed and returned, or response is by phone
or Internet, 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, or the shares are not voted
by phone or Internet, the 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.
THANK YOU FOR VOTING
- -----------------------
PLEASE SEE REVERSE SIDE
- -----------------------
[LOGO OF KMART](R)
c/o Proxy Services
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
10 A.M., E.T., MAY 15, 2001
You may vote your Proxy 24 hours a day, 7 days a week, using either touch-tone
telephone or 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 VIA TOUCH-TONE TELEPHONE 1-877-PRX-VOTE (1-
- ------------- 877-779-8683) OR CALL COLLECT VIA 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 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 INTERNET
You may elect to receive future proxy and other materials via Internet if you
have an e-mail account and Internet access. To take advantage of this offer,
please access http://www.econsent.com/km and then simply follow the
instructions. You will be asked to enter the 9-digit Account Number located in
the second group of numbers appearing in the lower left of this form, just
beneath the perforation line. 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 43016, Providence, RI 02940-3016; or
http://www.equiserve.com.
Detach
If you are voting by telephone or Internet, please do not mail back your Proxy Card. Here
- ------------------------------------------------------------------------------------------------------------------------------------
[X] Please mark
votes as in
this example.
The Board of Directors recommends
The Board of Directors recommends a vote FOR Proposals 1 and 2. a vote AGAINST Proposals 3 and 4.
- ------------------------------------------------------------------------------------------------------------------------------------
WITHHOLD
1. Election of Directors FOR FROM ALL Proposal 2: FOR AGAINST ABSTAIN Proposal 3: FOR AGAINST ABSTAIN
(01) Lilyan H. Affinito [__] [__] Ratification of [__] [__] [__] Endorsement of [__] [__] [__]
(02) Richard G. Cline Independent Accountants CERES Principles
(03) Charles C. Conaway
(04) Willie D. Davis Proposal 4: [__] [__] [__]
(05) Joseph P. Flannery Vendor Standards
(06) Richard J. Statuto Proposal
-------------------------------------------
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).
- ------------------------------------------------------------------------------------------------------------------------------------
If You Plan To Attend Meeting, [__]
Mark Here
For Change Of Address Mark Here [__]
And Note At Left.
------------------------------------------
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.