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 ------------------------------------
Separation Agreement - Kmart Corp. and James Adamson
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