Document:

<PAGE>

                                                                    EXHIBIT 10.2

                                    AGREEMENT

            This Agreement (this "Agreement") is made and entered into as of
October 18, 2004 (the "Effective Date"), by and among Kmart Management
Corporation, a Michigan corporation (the "Company"), Kmart Holding Corporation,
a Delaware corporation and the Company's parent corporation ("Holding Corp."),
and Julian Day (the "Executive").

            WHEREAS, the Executive and the Company are party to an Employment
Agreement dated as of April 9, 2002 (the "Employment Agreement"), as amended by
the Term Sheet dated as of January 17, 2003 (the "Term Sheet"), and the
Executive Officer has been serving as Chief Executive Officer of the Company and
Holding Corp.;

            WHEREAS, the Company and the Executive have mutually agreed that the
Executive will cease to be so employed and to so serve as of the Effective Date;
and

            NOW, THEREFORE, the Company, Holding Corp. and the Executive hereby
agree as follows:

            1. Resignation. The Executive hereby resigns from his employment
with the Company and Holding Corp., from his position as a member of the Board
of Directors of the Company, and from all other positions the Executive holds as
an officer or member of the board of directors of any of the subsidiaries or
affiliates of Holding Corp. and the Company.

            2. Salary. The Company shall pay the Executive his base salary
through the Effective Date, to the extent not previously paid, on the next
regular payroll date on which the Company pays its senior executives.

            3. Severance Payments and Benefits. (a) The Company has,
simultaneous with its execution hereof, executed a release attached hereto as
Exhibit A (the "Release"). The Executive shall also be entitled to receive the
payments and benefits provided for in this Section 3, if he executes and does
not revoke the Release, and if he complies with his obligations under the
provisions of the Employment Agreement that continue in effect pursuant to
Section 4 below.

            (b) Subject to Section 3(a) above, the Company shall pay the
Executive $2,000,000 in a cash lump sum, on the date when the Release is first
irrevocable by its terms.

            (c) Subject to Section 3(a) above, the Executive shall also be
eligible for the applicable pro-rata portion of his annual bonus for the fiscal
year beginning January 29, 2004 (such bonus, the "2004 Annual Bonus"), computed
and payable in accordance with its terms as in effect as of the Effective Date,
as set forth in Exhibit B hereto, based on actual performance for the entire
fiscal year, the amount of the bonus to equal the amount payable in respect of
the entire fiscal year beginning January 29, 2004 multiplied by 263/363. The
2004 Annual Bonus (if any) shall be paid at the same time as bonuses for 2004
are generally paid under the AIP.

            (d) Subject to Section 3(a) above, with respect to the awards (the
"LTIP Awards") under his Long-Term Incentive Award Agreements dated August 1,
2003 and January 29, 2004 (such LTIP Awards, respectively, the "2003 LTIP Award"
and the "2004 LTIP Award"), as follows: (1) with respect to the 2003 LTIP Award,
the Executive shall receive a

<PAGE>

cash payment of $977,974 if the Company's cumulative EBITDA for the entire
performance period for the 2003 LTIP Award equals at least $1,508 million; and
(2) with respect to the 2004 LTIP Award, the Executive shall receive a cash
payment of $479,053 if the Company's cumulative EBITDA for the entire
performance period for the 2004 LTIP Award equals at least $2,400 million. The
LTIP Awards (if any) that become payable shall be paid the same time as the
long-term incentive awards for the same performance period are generally paid to
the Company's other executives.

            (e) The Executive holds options that were granted to him pursuant to
a Nonqualified Stock Option Agreement between the Executive and Holding Corp.
dated May 6, 2003, as amended as of September 10, 2003 (as so amended, the
"Option Agreement") (such options, the "Options"). The Options have previously
vested with respect to 259,627 shares of Part A and 129,814 shares of Part B (as
those terms are defined in the Option Agreement). Subject to Section 3(a) above,
as of the Effective Date, the Options shall vest with respect to an additional
519,254 shares of Part A and an additional 259,626 shares of Part B, and all
such vested Options shall remain exercisable in accordance with, and subject to,
the Option Agreement through the second anniversary of the Effective Date. The
remainder of the Options shall be forfeited as of the Effective Date. As soon as
practicable hereafter, but in no event later than the date of Holding Corp.'s
November earnings release, Holding Corp. shall, at its expense, cause the shares
of Common Stock subject to the Options that remain outstanding as of the
Effective Date to be registered under the Securities Act of 1933, as amended,
and registered or qualified under applicable state law, to be freely resold.

            (f) Subject to Section 3(a) above, from the Effective Date through
the second anniversary thereof, the Executive shall be provided with continued
welfare benefits or the equivalent thereof, subject to reduction and otherwise
on the terms and conditions set forth in Section 11(d)(ii)(F) of the Employment
Agreement. The period during which the Executive is eligible for health
continuation coverage under the requirements of Section 601 et seq. of the
Employee Retirement Income Security Act of 1974, as amended, and Section 4980B
of the Internal Revenue Code of 1986, as amended (known as "COBRA coverage")
shall begin on the day after the Effective Date.

            4. Continued Applicability of Certain Employment Agreement
Provisions. Sections 12, 13, 16 and 17 of the Employment Agreement shall
continue to apply in accordance with their terms following the Effective Date,
as if they were part of this Agreement.

            5. Entire Agreement; Amendments. This Agreement sets forth the
entire agreement of the Company and the Executive with respect to the subject
matter hereof, and supersedes the Employment Agreement and the Term Sheet in
their entirety except as specifically provided herein. This Agreement may not be
amended except in a writing signed by the Executive and an authorized
representative or representatives of Holding Corp. and the Company.

            6. Successors. (a) This Agreement is personal to the Executive and
shall not be assignable by the Executive, except by will or the laws of descent
and distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal representatives.

                                     - 2 -
<PAGE>

            (b) This Agreement shall inure to the benefit of and be binding upon
the Company, Holding Corp. and their respective successors.

            Notices. (a) Any notice given to a party to this Agreement shall be
in writing and shall be deemed to have been given when delivered personally or
sent 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 or Holding Corp.:

                  Kmart Management Corporation
                  3100 West Big Beaver Road
                  Troy, MI 48084-3163
                  Attention:  James E. Defebaugh

            If to the Executive:

                  Julian Day
                  c/o Andrew J. Bernstein, Esq.
                  Pillsbury Winthrop LLC
                  1540 Broadway
                  New York, New York  10036

                                     - 3 -
<PAGE>

            (c) The Company may withhold from any amounts payable under this
Agreement such Federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.

            IN WITNESS WHEREOF, each of the parties hereto has duly executed
this Agreement as of the date first set forth above.

                                    KMART MANAGEMENT CORPORATION

                                    By: ________________________________________
                                    Title:

                                    KMART HOLDING CORPORATION

                                    By: ________________________________________
                                    Title:

                                    THE EXECUTIVE

                                    ____________________________________________
                                         Julian Day

                                     - 4 -
<PAGE>

                                    EXHIBIT A

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

            7. In consideration of the payments and benefits set forth in the
Agreement (the "Agreement") dated as of October 11, 2004 (the "Effective Date"),
by and among Kmart Management Corporation, a Michigan corporation (the
"Company"), Kmart Holding Corporation, a Delaware corporation and the Company's
parent corporation ("Holding Corp."), and Julian Day (the "Executive"), the
Executive hereby releases and forever discharges the Company, Holding Corp. and
any affiliates or divisions and their current and former directors, officers,
employees and agents (hereinafter referred to collectively as the "Company
Releasees") from any and all charges, complaints, claims, liabilities,
obligations, promises, agreements, controversies, damages, remedies, actions,
causes of action, suits, rights, demands, costs, losses, debts and expenses
(including attorneys' fees and costs) of any nature whatsoever, which the
Executive or his heirs, administrators, representatives, executors, successors
and assigns may have had or may not have, known or unknown, whether in law or
equity and whether arising under federal, state or local law, 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 and the common law and statutes of the State of Delaware,
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 payments or benefits which may be due the
Executive under, the Agreement, or (ii) any claim for benefits which may be due
the Executive under any "employee benefit plan" (as defined in Section 3(3) of
ERISA) of the Company and its related or affiliated companies or divisions in
which he was a participant. The Executive 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 Executive 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.

            8. In consideration of the Executive's release set forth above and
the covenants contained herein, Holding Corp., the Company and their respective
subsidiaries and divisions, whether direct or indirect (for purposes of this
Mutual Release, collectively, "Kmart"), hereby release and forever discharge the
Executive and his heirs, administrators, representatives, executors, successors
and assigns from any and all charges, complaints, claims, liabilities,
obligations, promises, agreements, controversies, damages, remedies, actions,
causes of action, suits, rights,

                                     - 5 -
<PAGE>

demands, costs, losses, debts and expenses (including attorneys' fees and costs)
of any nature 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 Executive's services as an employee, director or
consultant, the common law of the State of Michigan and the common law and
statutes of the State of Delaware, 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 Executive, or (ii) arising out
of a violation of any provision referred to in Section 4 of the Agreement. Kmart
represents that it has not filed against the Executive 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 Executive arising out of any of the matters released in this
paragraph.

            9. 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.

            10. The Executive, Holding Corp. and the Company 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 Executive and
that any such liability is expressly denied.

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

            12. The Executive agrees that he will honor the restrictive
covenants set forth in the provisions referred to in Section 4 of the Agreement
and the Prior Agreement.

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

            14. The Executive acknowledges that: (i) this entire Mutual Release
and the Agreement are written in a manner calculated to be understood by him;
(ii) he has been advised to consult with an attorney before executing this
Mutual Release and the Agreement; (iii) he was given a period of twenty-one days
within which to consider this Mutual Release; and (iv) to the extent he executes
this Mutual Release before the expiration of the twenty-one-day period, he does
so knowingly and voluntarily and only after consulting his attorney. The
Executive shall have the right to cancel and revoke this Mutual Release during a
period of seven days following the Execution Date, and this Mutual Release shall
not become effective, and no payments or benefits shall be made or provided
pursuant to Section 3 of the Agreement, until the day after the expiration of
such seven-day period. The seven-day period of revocation shall commence upon
the Effective Date. In order to revoke this Agreement, the Executive shall
deliver to the Company, prior to the expiration of such seven-day period, a
written notice of revocation. Upon such revocation, this Mutual Release shall be
null and void and of no further force or effect.

            15. The Executive, Holding Corp. and the Company acknowledge that
this Mutual Release will be governed by and construed and enforced in accordance
with the internal

                                     - 6 -
<PAGE>

laws of the State of Michigan. If a dispute arises concerning any provisions of
this Mutual Release, it shall be resolved by arbitration in accordance with
Section 17 of the Employment Agreement (as defined in the Agreement).

            16. THE EXECUTIVE 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.

                                        JULIAN DAY

                                        ________________________________________
                                        Date: __________________________________

                                        KMART HOLDING CORPORATION

                                        By: ____________________________________
                                            [TITLE]
                                        Date: __________________________________

                                        KMART MANAGEMENT CORPORATION

                                        By: ____________________________________
                                            [TITLE]
                                        Date: __________________________________

                                     - 7 -
<PAGE>

                                    EXHIBIT B
                                2004 ANNUAL BONUS

            The amount of the 2004 Annual Bonus shall be determined based upon
the Company's adjusted EBITDA (as defined in the Company's business plan) for
the fiscal year beginning January 29, 2004 as compared to a target amount of
$400 million, as follows, with linear interpolation to be applied for
incremental performance, provided that there shall be no such interpolation for
performance in excess of 300% of target or below 75% of target:

<TABLE>
<CAPTION>
                             Bonus as a Percentage
Performance Against Target       Of Base Salary
--------------------------   ---------------------
<S>                          <C>
      Below  75%                      0
             75%                     50%
            100%                    100%
            200%                    200%
            300% or more            400%
</TABLE>

                                     - 8 -<PAGE>

                                                                    EXHIBIT 10.3

                               FIRST AMENDMENT TO
                           LETTER OF CREDIT AGREEMENT

      This First Amendment to Letter of Credit Agreement (the "First Amendment")
is made as of the 4th day of October, 2004 by and among

      KMART CORPORATION ("Kmart"), a corporation organized under the laws of the
      State of Michigan having a place of business at 3100 West Big Beaver Road,
      Troy, Michigan 48084,

      BANK OF AMERICA, NATIONAL ASSOCIATION ("BOA"), a national banking
      association having a place of business at 100 Federal Street, Boston,
      Massachusetts 02110;

      FLEET NATIONAL BANK ("Fleet" and together with BOA, the "Issuing Banks"),
      a national banking association having a place of business at 100 Federal
      Street, Boston, Massachusetts 02110.

                                   WITNESSETH

      WHEREAS, Kmart and the Issuing Banks have entered into a Letter of Credit
Agreement dated as of August 13, 2004 (as amended and in effect, the "Credit
Agreement"); and

      WHEREAS, Kmart and the Issuing Banks have agreed to amend certain
provisions of the Credit Agreement as set forth herein.

      NOW THEREFORE, it is hereby agreed as follows:

1.    Definitions: All capitalized terms used herein and not otherwise defined
      shall have the same meaning herein as in the Credit Agreement.

2.    Amendments to Article 1. The provisions of Article 1 of the Credit
      Agreement are hereby amended as follows:

      a.    The definition of "Availability" is hereby deleted in its entirety
            and the following substituted in its stead.

                  "Availability" means, at any time of determination, (i) except
                  as provided in clause (ii) below, (A) prior to January 7,
                  2005, $200,000,000, and (B) on and after January 7, 2005, an
                  amount equal to the difference between the amounts on deposit
                  in the Cash Collateral Account and 100.5% of the Letter of
                  Credit Outstandings, or (ii) if the Inventory Collateral
                  Election Effective

                                       1
<PAGE>

                  Date has occurred, the difference between the Borrowing Base
                  and 100.5% of the Letter of Credit Outstandings.

      b.    The definition of "Collateral" is hereby deleted in its entirety and
            the following substituted in its stead:

            "Collateral" means (i) the Mortgaged Property, (ii) any and all
            "Collateral" as defined in the Pledge and Security Agreement, and
            (iii) if the Inventory Collateral Election Effective Date has
            occurred, all Inventory and the proceeds thereof.

      c.    The definition of "Credit Documents" is hereby deleted in its
            entirety and the following substituted in its stead:

            "Credit Documents" means this Agreement, the Letters of Credit, each
            letter of credit application, the Mortgage, the Pledge and Security
            Agreement, and, if the Inventory Collateral Election Effective Date
            has occurred, the Security Agreement, and any other instrument or
            agreement now or hereafter executed and delivered in connection
            herewith or therewith, each as amended and in effect from time to
            time.

      d.    The definition of "Security Documents" is hereby deleted in its
            entirety and the following substituted in its stead:

            "Security Documents" means the Pledge and Security Agreement, the
            Mortgage, and, if the Inventory Collateral Election Effective Date
            occurs, the Security Agreement.

      e.    The definition of "Unused Commitment" is hereby deleted in its
            entirety and the following substituted in its stead:

            "Unused Commitment" shall mean, on any day, (a) (i) the balance in
            the Cash Collateral Account divided by 100.5% minus (ii) the then
            Letter of Credit Outstandings, or (b) if the Inventory Collateral
            Election Effective Date has occurred, (i) the Commitment minus (ii)
            the then Letter of Credit Outstandings.

      f.    The following new definitions are hereby added in appropriate
            alphabetical order:

            i.    "Borrowing Base" shall mean the result of (i) the lesser of
                  (A) a percentage of the cost of Inventory, such percentage to
                  be determined upon completion of due diligence by the Issuing
                  Banks after receipt of an Inventory Election Notice from
                  Kmart, and (B) a percentage of the appraised liquidation value
                  of Inventory, such percentage to be determined

                                       2
<PAGE>

                  upon completion of due diligence by the Issuing Banks after
                  receipt of an Inventory Election Notice from Kmart, minus (ii)
                  such reserves (including, without limitation on account of
                  Permitted Liens) as the Issuing Banks may establish from time
                  to time in their reasonable credit judgment, upon ten days
                  notice to Kmart (other than the initial Reserves which may be
                  established on the Inventory Collateral Election Effective
                  Date without furnishing such ten days notice).

            ii.   "Inventory" shall have the meaning given that term in the UCC,
                  including, without limitation, all: (a) goods which are held
                  by Kmart for sale or lease or to be furnished under a contract
                  of service, (b) goods which consist of raw materials, work in
                  process, or materials used or consumed in Kmart's business;
                  (c) goods of said description in transit; and (d) documents
                  which represent any of the foregoing.

            iii.  "Inventory Collateral Election Effective Date" shall mean the
                  date upon which each of the following conditions have been
                  satisfied:

                  a)    The Issuing Banks have received an Inventory Election
                        Notice from Kmart.

                  b)    The Issuing Banks have received the results of a
                        commercial finance examination of Kmart and its
                        subsidiaries, an appraisal of the Inventory, and other
                        due diligence, undertaken by such Persons and with
                        results as are reasonably satisfactory to the Issuing
                        Banks.

                  c)    The Issuing Banks shall have entered into an
                        intercreditor agreement with the agent under the
                        Existing Financing Agreement (or any holder of
                        replacement financing therefor) on terms reasonably
                        acceptable to the Issuing Banks, if at the time of the
                        Inventory Collateral Election Effective Date, the
                        Existing Financing Agreement (or any replacement
                        therefor) continues to be in force and effect.

                  d)    The Issuing Banks shall have received the duly executed
                        Security Agreement from Kmart.

                  e)    All documents and instruments, including Uniform
                        Commercial Code financing statements, required by law or
                        reasonably requested by the Issuing Banks to be filed,
                        registered or recorded to create or perfect the liens
                        intended to be created under the Security Agreement and
                        all such documents and instruments shall have been so
                        filed, registered or recorded to the satisfaction of the
                        Issuing Banks. The liens of the Issuing Banks in the
                        Inventory

                                       3
<PAGE>

                        shall be subject only to (i) Permitted Liens, and (ii)
                        to the extent the Existing Financing Agreement (or any
                        replacement therefor) continues to be in force and
                        effect on the Inventory Collateral Election Effective
                        Date, the liens of the agent under the Existing
                        Financing Agreement (or of any holder of replacement
                        financing therefor).

                  f)    The Issuing Banks shall have received a favorable
                        written opinion of Kmart's counsel covering such matters
                        as the Issuing Banks shall reasonably request.

                  g)    The Issuing Banks shall have received evidence
                        satisfactory to it that the Inventory is insured in such
                        amounts and against such casualties and contingencies as
                        the Issuing Banks shall reasonably require.

                  h)    The Issuing Banks (or their counsel) shall have received
                        from each party hereto such other instruments documents
                        and agreements as the Issuing Banks may reasonably
                        require, including, without limitation, such further
                        amendments to this Agreement as the Issuing Banks
                        reasonably determine are necessary to insure a
                        successful syndication of the credit facility
                        established hereunder.

                  i)    Kmart shall have provided to the Issuing Banks its
                        calculation of the Borrowing Base, which calculation
                        shall be acceptable to the Issuing Banks in their
                        reasonable discretion.

            iv.   "Inventory Election Notice" shall mean written notice from
                  Kmart to the Issuing Banks indicating that Kmart desires to
                  grant a lien on its Inventory as substitute collateral for all
                  or any portion of the amount on deposit in the Cash Collateral
                  Account.

            v.    "LIBOR" means on any day of calculation, the rate appearing on
                  Page 3750 of the Telerate Service (or on any successor or
                  substitute page of such Service, or any successor to or
                  substitute for such Service, providing rate quotations
                  comparable to those currently provided on such page of such
                  Service, as determined by the Issuing Banks from time to time
                  for purposes of providing quotations of interest rates
                  applicable to dollar deposits in the London interbank market)
                  at approximately 11:00 a.m., London time, as the rate for
                  dollar deposits with a maturity comparable to the expiry of
                  such Letter of Credit. In the event that such rate is not
                  available at such time for any reason, then the "LIBOR Rate"
                  shall be the rate at which dollar deposits and for a maturity
                  comparable to expiry of

                                       4
<PAGE>

                  such Letter of Credit are offered by the principal London
                  office of the Issuing Banks in immediately available funds in
                  the London interbank market at approximately 11:00 a.m.,
                  London time.

            vi.   "Permitted Liens" means the following Liens: (a) Liens for
                  taxes or assessments or other governmental charges not yet due
                  and payable, (b) carriers', warehousemen's or other similar
                  possessory Liens arising by operation of law in the ordinary
                  course of business, (c) landlords' Liens arising in the
                  ordinary course of business, (d) materialmen's and mechanics'
                  Liens arising in the ordinary course of business, (e) any
                  attachment or judgment Lien not constituting or relating to an
                  Event of Default under Section 7.01(l), (f) consignments and
                  claims under the Perishable Agricultural Commodities Act of
                  1930 and the Packers and Stockyard Act of 1921, (g) claims in
                  favor of the appropriate governmental authorities on the
                  proceeds from sales or services relating to hunting and
                  fishing licenses and/or the sale of lottery tickets, and (h)
                  claims in favor of Western Union in respect of proceeds from
                  sales or services with respect to money transfers through
                  Western Union.

            vii.  "Security Agreement" shall mean a security agreement granting
                  the Issuing Banks a lien on Kmart's Inventory and the proceeds
                  thereof to secure the Obligations, containing such
                  representations and covenants and otherwise reasonably
                  satisfactory in form and substance to the Issuing Banks.

3.    Amendments to Article 2. The provisions of Section 2.08 of the Credit
      Agreement are hereby amended by deleting clauses (a)(i) and (a)(ii) and
      substituting the following in their stead:

            i.    Standby Letters of Credit: At a per annum rate equal to 0.20%
                  unless the Inventory Election Effective Date has occurred, in
                  which event at a per annum rate equal to LIBOR plus 3.00%.

            ii.   Commercial Letters of Credit: At a per annum rate equal to 0%
                  unless the Inventory Election Effective Date has occurred, in
                  which event at a per annum rate equal to LIBOR plus 3.00%.

4.    Amendments to Article 5. The provisions of Article 5 of the Credit
      Agreement are hereby amended as follows:

      a.    The provisions of Sections 5.05 and 5.06 are hereby amended by
            adding the following at the beginning thereof:

            Subject to the provisions of Section 5.11 hereof,

                                       5
<PAGE>

      b.    The following new Section is added at the end of Article 5:

            5.11 Inventory Collateral Effective Date. Upon the occurrence of the
      Inventory Collateral Effective Date, the provisions of Sections 5.05 and
      5.06 shall no longer be applicable.

5.    Conditions to Effectiveness. This First Amendment shall not be effective
      until each of the following conditions precedent have been fulfilled to
      the satisfaction of the Issuing Banks:

      a.    This First Amendment shall have been duly executed and delivered by
            the Kmart and the Issuing Banks.

      b.    All action on the part of Kmart necessary for the valid execution,
            delivery and performance by Kmart of this First Amendment shall have
            been duly and effectively taken.

      c.    Kmart shall reimburse the Issuing Banks for all expenses incurred by
            the Issuing Banks in connection herewith, including, without
            limitation, reasonable attorneys' fees.

      d.    No Default or Event of Default shall have occurred and be
            continuing.

6.    Miscellaneous.

      a.    Except as provided herein, all terms and conditions of the Credit
            Agreement and the other Credit Documents remain in full force and
            effect. Kmart hereby ratifies, confirms, and reaffirms all of the
            representations, warranties and covenants therein contained.

      b.    This First Amendment may be executed in several counterparts and by
            each party on a separate counterpart, each of which when so executed
            and delivered, each shall be an original, and all of which together
            shall constitute one instrument. Delivery of an executed counterpart
            of a signature page hereto by telecopy shall be effective as
            delivery of a manually executed counterpart hereof.

      c.    This First Amendment expresses the entire understanding of the
            parties with respect to the matters set forth herein and supersedes
            all prior discussions or negotiations hereon.

                                       6
<PAGE>

      IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be executed and their seals to be hereto affixed as the date first above
written.

                                      KMART CORPORATION

                                      By___________________________________
                                      Print Name:__________________________
                                      Title:_______________________________

                                      FLEET NATIONAL BANK

                                      By___________________________________
                                      Print Name:__________________________
                                      Title:_______________________________

                                      BANK OF AMERICA, NATIONAL ASSOCIATION

                                      By___________________________________
                                      Print Name:__________________________
                                      Title:_______________________________

                                       7

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