Separation Agreement - Kmart Corp. and James Adamson


                                                                  EXECUTION COPY

                             SEPARATION AGREEMENT

         SEPARATION AGREEMENT (the 'Agreement'), made and entered into as of
January 17, 2003 (the 'Effective Date'), by and between Kmart Corporation, a
Michigan corporation (the 'Company'), and James Adamson (the 'Chairman').

                             W I T N E S S E T H:

         WHEREAS, the Chairman is currently serving as Chairman and Chief
Executive Officer of the Company pursuant to an Employment Agreement,
effective as of March 11, 2002, between the Company and the Chairman (the
'Prior Agreement');

         WHEREAS, the Company and the Chairman have mutually agreed that the
Chairman will resign from his position as Chief Executive Officer as of the
Effective Date and will resign from his position as Chairman and a member of
the Board of Directors of the Company no later than the date of Emergence;

         WHEREAS, the parties hereto desire to enter into this Agreement in
order to reflect the respective rights and obligations of the parties in
connection with the foregoing;

         NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Chairman agree as follows:

1.       Definitions.

         Unless otherwise defined herein, capitalized terms used herein shall
have the meaning ascribed to such term in the Prior Agreement.

2.       Resignation as CEO.

         Effective as of the Effective Date, the Chairman hereby resigns from
his position as Chief Executive Officer of the Company and, except as provided
herein, shall no longer be entitled to any compensation or benefits in respect
of his services as an employee of the Company.

3.       Continuing Services as Chairman.

         (a) From the Effective Date until the date of Emergence, the Chairman
shall continue to serve as non-executive Chairman of the Company, subject to
the Chairman's right to resign prior to the date of Emergence. The Chairman
acknowledges and agrees that from and after the Effective Date, he shall no
longer be considered or deemed to be an executive officer or employee of the
Company. The Chairman shall resign from his positions as Chairman and a
director of the Company no later than the date of Emergence.

         (b) Anything herein to the contrary notwithstanding, nothing shall
preclude the Chairman from (i) subject to Sections 10 and 11 of the Prior
Agreement, engaging in business activity, including as an employee, (ii)
serving on the boards of directors on which he currently serves and/or
charitable organizations (subject to the reasonable approval of the Board),
(iii) engaging in charitable activities and community affairs, and (iv)
managing his personal investment and affairs, provided that such activities do
not materially interfere with his service as a director of the Company.

         (c) For the period from the Effective Date to the earlier of (i) the
Chairman's resignation as a director or (ii) the date of Emergence, the
Chairman shall be eligible to receive fees and other compensation payable
generally to non-employee directors of the Company.

         4. Payments in Connection with Resignation as CEO.

         (a) In connection with the Chairman's resignation from his position
as Chief Executive Officer, the Chairman shall be entitled to receive the
following payments and benefits:

                  (i) payment of accrued but unpaid Base Salary and
         reimbursement of business expenses, as set forth in first paragraph
         of Section 9 of the Prior Agreement;

                  (ii) subject to paragraph (b) below, in accordance with and
         subject to the provisions of Section 9(a)(ii) of the Prior Agreement,
         continued medical, dental, hospitalization and life insurance
         coverage and participation in all other welfare plans and programs of
         the Company in which he was participating immediately prior to the
         Effective Date;

                  (iii) subject to paragraph (b) below, promptly, but in no
         event later than 10 days, following the date of Emergence, a lump sum
         cash severance payment equal to two times the Chairman's Base Salary
         as in effect on the Effective Date (i.e., $3 million); and

                  (iv) subject to paragraph (b) below, promptly, but in no
         event later than 10 days, following the date of Emergence, a lump sum
         cash payment equal to $600,000, in settlement of all amounts (other
         than those referenced to in clause (i) above and qualified plan
         benefits) to which the Chairman is entitled pursuant to the first
         paragraph of Section 9 of the Prior Agreement and in consideration of
         the Chairman executing and honoring the release referenced to in
         Section 4(b) below.

         (b) As a condition of the Chairman's entitlement to any of the
payments and benefits provided in clauses (ii), (iii) and (iv) of paragraph
(a) above, the Chairman shall execute on the Effective Date and honor a mutual
release of claims substantially in the form attached hereto as Exhibit A. In
addition, for good and valuable consideration, the sufficiency of which the
Company acknowledges, the Company shall execute on the Effective Date and
honor such mutual release of claims.

5.       Press Release.

         The Company shall consult with the Chairman with respect to the
language to be used in a press release concerning the subject matter of this
Agreement.

6.       Legal Fees.

         The Company shall, promptly but in no event later than five business
days following the Effective Date, pay to the Chairman's legal counsel all
reasonable legal fees and expenses incurred and not previously paid by the
Company in connection with such counsel's representation of the Chairman, up
to an aggregate maximum of $250,000.

7.       Restrictive Covenants; Indemnification.

         The parties acknowledge and agree that the provisions of Sections 10
and 11 of the Prior Agreement shall continue to apply in accordance with their
respective terms. The Company further agrees that, in connection with its plan
of reorganization or otherwise, it will treat the Chairman's pre-petition
claims for indemnification no less favorably than such claims of other
non-employee directors of the Company.

8.       Entire Agreement.

         This Agreement contains the entire understanding and agreement
between the parties concerning the subject matter hereof and supersedes all
prior agreements, understandings, discussions, negotiations and undertakings,
whether written or oral, between the parties with respect thereto, including
without limitation the Prior Agreement (except as otherwise provided herein).

9.       Amendment or Waiver.

         No provision in this Agreement may be amended unless such amendment
is agreed to in writing and signed by the Chairman and an authorized officer
or director of the Company. No waiver by either party of any breach by the
other party of any condition or provision contained in this Agreement to be
performed by such other party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent time.
Any waiver must be in writing and signed by the Chairman or an authorized
officer or director of the Company, as the case may be.

10.      Severability.

         In event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, in whole or in part,
the remaining provisions of this Agreement shall be unaffected thereby and
shall remain in full force and effect to the fullest extent permitted by law.

11.      Governing Law/Jurisdiction.

         This Agreement shall be governed by and construed and interpreted in
accordance with the laws of Michigan without reference to principles of
conflict of laws.

12.      Resolution of Disputes.

         Prior to the Restructuring Date, any disputes arising under or in
connection with this Agreement shall be settled in the Bankruptcy Court.
Thereafter, any disputes arising under or in connection with this Agreement
shall, at the election of the Chairman or the Company, be resolved by binding
arbitration, to be held in New York City, New York in accordance with the
rules and procedures of the American Arbitration Association. Judgment upon
the award rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof. All costs and expenses of any arbitration or court
proceeding (including fees and disbursements of counsel) shall be borne by the
respective party incurring such costs and expenses, but the Company shall
reimburse the Chairman for such reasonable costs and expenses if he prevails
to any substantial degree in such arbitration or court proceeding.

13.      Tax Withholding.

         All amounts required to be paid by the Company pursuant to this
Agreement shall be subject to reduction in order to comply with applicable
Federal, state and local tax withholding requirements.

14.      Notices.

         Any notice given to a party shall be in writing and shall be deemed
to have been given when delivered personally or sent to by certified or
registered mail, postage prepaid, return receipt requested, duly addressed to
the party concerned at the address indicated below or to such changed address
as such party may subsequently give such notice of:


                  If to the Company:        Kmart Corporation
                                            100 West Big Beaver Road
                                            Troy, Michigan, 48084-3163
                                            Attention:  General Counsel

                  If to the Chairman:       James Adamson
                                            160 East 72nd Street
                                            New York, New York  10021

                  With copy to:             Brad Eric Scheler, Esq.
                                            c/o Fried, Frank, Harris,
                                                Shriver & Jacobson
                                            One New York Plaza
                                            New York, New York  10004
15.      Headings.

         The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.

16.      Counterparts.

         This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.


         IN WITNESS WHEREOF, the undersigned have executed this Agreement as
of the date first set forth above.


                                          KMART CORPORATION



                                          By: /s/ Robert Kennedy
                                              ----------------------------------
                                              Robert Kennedy
                                              Chairman, Compensation and
                                              Incentives Committee of the
                                              Board of Drectors


                                          CHAIRMAN



                                          /s/ James Adamson
                                          --------------------------------------
                                          JAMES ADAMSON



                                   MUTUAL COVENANT NOT TO SUE AND
                               FULL AND COMPLETE RELEASE OF LIABILITY

1.   In consideration of the payments set forth in clauses (ii), (iii) and
     (iv) of Section 4 of the Separation Agreement entered into between Kmart
     Corporation and the Chairman, dated as of January 17, 2003 (the
     'Agreement') and the mutual covenants contained herein, James Adamson
     (hereinafter referred to as the 'Chairman') hereby releases and forever
     discharges Kmart Corporation and any related or affiliated companies or
     divisions or their current or former directors, officers, employees, or
     agents (hereinafter referred to collectively as the 'Company Releasees')
     from any and all actions, causes of action, suits, controversies, claims
     and demands whatsoever, for or by reason of any matter, cause or thing
     whatsoever, which the Chairman, his heirs, executors, administrators and
     assigns may have had or may not have, whether known or unknown, which has
     or may have arisen out of any act or omission occurring on or prior to
     the date of the execution of this Mutual Covenant Not To Sue and Full and
     Complete Release of Liability ('Mutual Release'), including, but not
     limited to, all claims arising under or in connection with the Michigan
     Elliott-Larsen Civil Rights Act, as amended, Michigan Whistle Blowers'
     Protection Act, as amended, the Michigan Persons With Disabilities Civil
     Rights Act, as amended, Age Discrimination in Employment Act of 1967, as
     amended, Americans With Disabilities Act of 1990, as amended, Title VII
     of the Civil Rights Act of 1964, as amended, Civil Rights Act of 1991, as
     amended, Employee Retirement Income Security Act of 1974 ('ERISA'), as
     amended, Older Workers Benefit Protection Act of 1990, as amended, the
     Worker Adjustment Retraining and Notification Act, the Fair Labor
     Standards Act, as amended, the Family & Medical Leave Act of 1993, as
     amended, the common law of the State of Michigan, for tort, breach of
     express or implied employment contract, wrongful discharge, intentional
     infliction of emotional distress, and defamation or injuries incurred on
     the job or incurred as a result of loss of employment. The release
     described in this Paragraph 1 shall not apply to (i) any actions to
     enforce rights arising under, or any claim for benefits which may be due
     the Chairman under the Agreement, or (ii) any claim for benefits which
     may be due the Chairman under any 'employee benefit plan' (as defined in
     Section 3(3) of ERISA) of Kmart Corporation and its related or affiliated
     companies or divisions in which he was a participant. The Chairman
     represents that he has not filed against the Company Releasees any
     complaints, charges, or lawsuits arising out of his employment, or any
     other matter arising on or prior to the date of this Mutual Release. The
     Chairman covenants and agrees that he will not seek recovery against the
     Company Releasees arising out of any of the matters released in this
     Paragraph 1.

2.   In consideration of the Chairman's release set forth above and the
     covenants contained herein, Kmart Corporation and its subsidiaries and
     divisions, whether direct or indirect (for purposes of this Mutual
     Release, ('Kmart'), hereby release and forever discharge the Chairman and
     his heirs, executors, administrators and assigns from any and all
     actions, causes of action, suits, controversies, claims and demands
     whatsoever, for or by reason of any matter, cause or thing whatsoever,
     whether known or unknown, which has or may have arisen out of any act or
     omission occurring on or prior to the date of the execution of this
     Mutual Release, including, but not limited to, all claims arising under
     or in connection with the Chairman's services as an employee, director or
     consultant, the common law of the State of Michigan, for tort, breach of
     express or implied employment contract and defamation; provided, however,
     that nothing contained herein shall constitute a waiver or release by
     Kmart of claims or causes of action (i) arising out of illegal conduct by
     the Chairman, (ii) arising out of or related to facts or circumstances
     arising prior to the Filing Date that have been the subject of inquiry in
     connection with Kmart's stewardship investigation being conducted under
     the auspices of its Audit Committee or (iii) arising out of a violation
     of any provision of Section 10 of the Prior Agreement (as defined in the
     Agreement). Kmart represents that it has not filed against the Chairman
     any complaints, charges, or lawsuits arising out of any matter arising on
     or prior to the date of this Mutual Release. Kmart covenants and agrees
     that it will not seek recovery against the Chairman arising out of any of
     the matters released in this paragraph.

3.   Nothing in this Mutual Release shall limit either party from filing a
     lawsuit or other action for the sole purpose of enforcing this Mutual
     Release.

4.   The Chairman and Kmart agree that the acts done and evidenced hereby, and
     the releases granted hereunder, are done and granted to compromise any
     doubtful and disputed claims and to avoid litigation, and are not an
     admission of liability on the part of Kmart or the Chairman and that any
     such liability is expressly denied.

5.   The Chairman acknowledges that he has no seniority, recall,
     reinstatement, or rehire rights with Kmart in any capacity.

6.   The Chairman agrees that he will honor the restrictive covenants
     concerning noncompetition, nonsolicitation, cooperation and nondisclosure
     set forth in the Prior Agreement.

7.   If any provision or paragraph of this Mutual Release is ever determined
     not enforceable, the remaining provisions and paragraphs shall remain in
     full force and effect.

8.   The Chairman acknowledges that he has been given 21 days within which to
     consider this Mutual Release and that he has 7 days following his
     execution to revoke his signature. If the Chairman revokes his consent
     hereto prior to the expiration of such 7-day period, the Mutual Release
     shall not be effective, and Kmart shall have no obligations to provide
     the Chairman with the payments and benefits set forth in clauses (ii),
     (iii) and (iv) of Section 4 of the Agreement.

9.   The Chairman and Kmart acknowledge that this Mutual Release will be
     governed by and construed and enforced in accordance with the internal
     laws of the State of Michigan. If a dispute arises concerning any
     provisions of this Mutual Release, it shall be resolved by arbitration in
     Troy, Michigan in accordance with the rules of the American Arbitration
     Association.

10.  Nothing in this Mutual Release shall impair any indemnification rights
     the Chairman may have as an officer or director of Kmart Corporation.

11.  THE CHAIRMAN ACKNOWLEDGES THAT HE HAS READ THIS MUTUAL RELEASE, THAT HE
     HAS BEEN PROVIDED 21 DAYS TO CONSIDER THIS MUTUAL RELEASE, THAT HE HAS
     BEEN ADVISED THAT HE HAS 7 DAYS TO REVOKE HIS SIGNATURE, THAT HE HAS BEEN
     ADVISED THAT HE SHOULD CONSULT WITH AN ATTORNEY BEFORE HE EXECUTES THIS
     MUTUAL RELEASE, AND THAT HE UNDERSTANDS ALL OF ITS TERMS AND EXECUTES IT
     VOLUNTARILY AND WITH FULL KNOWLEDGE OF ITS SIGNIFICANCE AND THE
     CONSEQUENCES THEREOF.

                                       JAMES ADAMSON


                                       /s/ James Adamson
                                       -----------------------------------------
                                       Date: January 17, 2003
                                            ------------------------------------

                                       KMART CORPORATION


                                       By: /s/ Robert Kennedy
                                          --------------------------------------
                                             Chairman, Compensation and
                                             Incentives Committee of the
                                             Board of Drectors
                                       Date: January 17, 2003
                                            ------------------------------------