Document:

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                                                                    Exhibit 10.2

                              EMPLOYMENT AGREEMENT

         THIS AGREEMENT, made and entered into on September 3, 2003, by and
between Kmart Management Corporation, a Michigan corporation (together with its
successors and assigns permitted under this Agreement, the "Company"), and Janet
L. Kelly (the "Executive").

         WHEREAS, the Company desires that the Executive become employed by the
Company and provide services to the Company and Holding Corp. (as hereinafter
defined), in the best interest of the Company and its affiliates and
constituencies;

         WHEREAS, the Executive desires to be employed by the Company as
provided herein; and

         WHEREAS, the Executive and the Company desire to enter into this
Agreement to set forth the terms and conditions of the Executive's services with
the Company;

         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 Executive (individually a
"Party" and together the "Parties") agree as follows:

                  1. Definitions. The following definitions shall apply to this
Agreement in its entirety.

                           (a) "Base Salary" shall mean the salary granted to
the Executive pursuant to Section 4.

                           (b) "Board" shall mean the Board of Directors of the
Company.

                           (c) "Cause" shall mean (i) the Executive is convicted
of a felony involving moral turpitude or any other felony (other than motor
vehicle related) and, in the case of such other felony, the Executive is unable
to show that she (A) acted in good faith and in a manner she reasonably believed
to be in the best interests of the Company and its affiliates and (B) had no
reasonable cause to believe her conduct was unlawful; or (ii) the Executive
engages in conduct that constitutes willful gross neglect or willful misconduct
in carrying out her duties under this Agreement, resulting, in either case, in
material harm to the Company or its affiliates, unless the Executive believed in
good faith that such act or nonact was in, or was not opposed to, the best
interests of the Company and its affiliates.

                           (d) "Committee" shall mean the Compensation and
Incentives Committee of the Holding Corp. Board or any other committee of the
Holding Corp. Board performing similar functions.

                           (e) "Constructive Termination" by the Executive shall
mean termination, during the Term of Employment, based on the occurrence without
the Executive's express written consent of any of the following: (i) a material
diminution or adverse change in the Executive's responsibilities, duties,
authorities or any reduction in title, other than for Cause or Disability; (ii)
a reduction in the Executive's Base Salary or Target Bonus (as defined in
Section 6) other than for Cause or Disability and other than as part of an
across-the-board salary reduction generally imposed on executives of the
Company; (iii) the failure of the Company to obtain the assumption in writing of
its obligation to perform this Agreement by any successor to all or
substantially all of the assets of the Company on or prior to a merger,
consolidation,

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sale or similar transaction; or (iv) the relocation of the current headquarters
of the Company that would require the relocation of the Executive during the
first two years of her employment. The Executive shall further be required to
comply with the provisions of Section 10(d)(i) of this Agreement with respect to
a Constructive Termination.

                           (f) "Disability" shall mean the Executive's
inability, with or without a reasonable accommodation, to substantially perform
her duties and responsibilities under this Agreement by reason of any physical
or mental incapacity for a period of 180 consecutive days.

                           (g) "Effective Date" shall mean September 3, 2003.

                           (h) "Holding Corp." shall mean Kmart Holding
Corporation, a Delaware corporation and the Company's parent corporation.

                           (i) "Holding Corp. Board" shall mean the board of
directors of Holding Corp.

                  2. Term of Employment. Subject to Holding Corp. Board approval
as set forth in Section 18 and subject to termination pursuant to Section 10,
the Company shall employ the Executive, and the Executive hereby accepts such
employment, for the period commencing on the Effective Date and ending on the
first anniversary thereof (the "Term of Employment"); provided, however, that
the Term of Employment shall be automatically extended for an additional year on
each anniversary of the Effective Date, unless written notice of non-extension
is provided by either Party to the other Party at least 60 days prior to any
such anniversary.

                  3. Position, Duties and Responsibilities.

                           (a) During the Term of Employment, the Executive
shall be employed by the Company and shall serve as Senior Vice President, Chief
Administrative Officer (or such other position or positions as may be agreed
upon in writing by the Executive and Holding Corp. and/or the Company, as
applicable). The Executive shall have all authority commensurate with the
position of Senior Vice President, Chief Administrative Officer, subject to the
direction of the Holding Corp. Board, the Board and/or the Chief Executive
Officer ("CEO") of the Company. The Executive shall report directly to the CEO.
The Executive shall devote substantially all of her business time, attention and
skill to the performance of such duties and responsibilities, and shall use her
best efforts to promote the interests of the Company and its affiliates. The
Executive shall not, without the prior written approval of the Holding Corp.
Board, engage in any other business activity which is in violation of policies
established from time to time by the Company or its affiliates.

                           (b) Anything herein to the contrary notwithstanding,
nothing shall preclude the Executive from (i) serving on the boards of directors
of a reasonable number of other corporations or the boards of a reasonable
number of trade associations and/or charitable organizations (subject to the
reasonable approval of the Holding Corp. Board), (ii) engaging in charitable
activities and community affairs, (iii) managing her personal investments and
affairs, and (iv) serving on the board of trustees of Liberty Funds, provided
that such activities do not materially interfere with the proper performance of
her duties and responsibilities as an executive officer of Holding Corp. and the
Company.

                           (c) The Executive shall perform her services
hereunder primarily at the Company's headquarters. To that end, the Company
shall provide the Executive with office space and staff at its headquarters that
are commensurate with her duties hereunder.

                  4. Base Salary. During the Term of Employment, the Executive
shall be paid an annualized Base Salary, payable in accordance with the regular
payroll practices of the Company, in the amount of $450,000. The Base Salary
shall be reviewed no less frequently than annually for increase in the
discretion of the Holding Corp. Board and/or the Committee. The Base Salary,
including any increase, shall not be decreased during the Term of Employment.

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                  5.       a. Make Whole Payment. The Company shall pay to the
Executive, within 10 days following the Effective Date, a lump sum amount equal
to $250,000. If the Executive is still employed by the Company one year after
the Effective Date, the Company shall pay to the Executive, within 10 days
thereafter, a second lump sum amount equal to $250,000. The purpose of these
make-whole payments is to compensate the Executive for the amount that will be
forfeited as a result of the Executive's ceasing to be employed by her previous
employer.

                           b. Restricted Stock Equity - Make-Whole and Grant. As
an inducement material to the Executive's agreement to enter into employment
with the Company, and subject to the approval of the Committee comprised of a
majority of independent directors or a majority of the Holding Corp.'s
independent directors, within 14 days after the Effective Date, the Executive
shall receive a grant of restricted Holding Corp. stock having a fair market
value of $1 Million on the date of grant (the "Restricted Stock") which
Restricted Stock may not be sold, pledged or otherwise transferred until the
Restricted Stock becomes vested, in accordance with the provisions of this
Section 5(b). The Restricted Stock shall vest as to one-third (1/3) of such
grant on the first anniversary of this Agreement, and as to an additional
one-third (1/3) on each succeeding anniversary date so as to be 100% vested on
the third anniversary thereof, conditioned upon the Executive's continued
employment with the Company as of each vesting date. Notwithstanding the
foregoing, the interest of the Executive in the Restricted Stock shall vest as
to 100% of the grant in the event the Executive's employment is terminated (i)
by the Company without Cause (other than due to Disability or death), (ii) by
reason of a Constructive Termination, or (iii) upon expiration of the Term of
Employment following the Company's having given a notice of non-extension of the
Term of Employment.

                  6. Annual Incentive Awards. During the Term of Employment, the
Executive shall be eligible for an annual target bonus ("Target Bonus") of 60%
of her then-current Base Salary under the annual cash-based incentive program of
the Company (or its affiliate, if applicable) payable if the performance goals
thereunder for the relevant fiscal year are met. Payment of the annual bonus
shall be made at the same time that other senior-level executives receive their
incentive awards. For fiscal year 2003, Executive shall receive a bonus of 60%
of her Base Salary, which shall not be subject to pro-ration by reason of the
Executive's not having been employed by the Company for the entire fiscal year.

                  7. Long-Term Incentive Programs. The Executive shall
participate in such long-term cash- and/or equity-based incentive programs as
the senior executives of the Company participate from time to time. The Parties
understand that, as of the effective date of this Agreement, a long-term cash-
and/or equity-based incentive program is not in existence for the senior
executives of the Company. The Parties anticipate that if implemented, a new
long-term incentive program will be implemented each year and that such
programs, if implemented, will provide for the payment (in common stock and/or
cash) of an amount equal to the average annual salary and target bonuses paid to
the Executive during the three-year plan period, payable at the conclusion of
fiscal year 2006, if the Company meets or exceeds its cumulative EBITDA target
for that three-year period. The Parties also anticipate that if implemented, the
new long-term incentive program will provide that in the event the Executive's
employment is terminated (i) by the Company without Cause (other than due to
Disability or death), (ii) by reason of a Constructive Termination, or (iii)
upon expiration of the Term of Employment following the Company's having given a
notice of non-extension of the Term of Employment, the Company will pay a
pro-rata share of the incentive payment if the Company was ahead of target at
the time of the termination. However, the Parties understand and agree that no
such plan is yet in existence, that such plan may never be in existence, and
that this provision shall not be construed as creating any binding obligation on
the Company to implement such a plan.

                  8. Employee Benefit Programs. During the Term of Employment,
the Executive shall be eligible to participate in all employee pension and
welfare benefit plans and programs made available generally to the Company's
senior-level executives (other than those made available only to the CEO) or to
its employees generally (on terms consistent, respectively, with those offered
to the Company's other senior-level executives and/or its employees generally),
as such plans or programs may be in effect from time to time, including, without
limitation, pension, profit sharing, savings and other retirement plans or
programs, medical, dental, hospitalization, short-term and long-term disability
and life insurance plans,

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accidental death and dismemberment protection, travel accident insurance, and
any other pension or retirement plans or programs and any other employee welfare
benefit plans or programs that may be sponsored by the Company from time to
time, including any plans that supplement the above-listed types of plans or
programs, whether funded or unfunded.

                  9. Reimbursement of Business and Other Expenses: Perquisites;
Vacations.

                           (a) The Executive is authorized to incur reasonable
expenses in carrying out her duties and responsibilities under this Agreement
and the Company shall promptly reimburse her for all reasonable business
expenses incurred in connection with carrying out the business of the Company
and its affiliates, subject to documentation in accordance with the Company's
policy.

                           (b) During the Term of Employment, the Company shall
reimburse the Executive for reasonable personal financial (including tax)
counseling (other than legal fees) by a firm or consultant to be chosen by the
Executive, such reimbursement to be no more than the amount authorized under
Company policy in effect from time to time.

                           (c) During the Term of Employment, the Executive
shall be entitled to four weeks' paid vacation per year.

                           (d) Relocation Expenses.

                                    (i) From the Effective Date until such time
         as the Executive relocates her residence to the metropolitan area of
         the Company's headquarters, (but in no event for longer than six
         months), the Company shall provide to, or reimburse (following receipt
         of appropriate documentation) the Executive for, temporary housing in
         the Troy, Michigan area.

                                    (ii) The Executive shall be afforded a
         relocation package consisting of the following: (A) reimbursement of
         reasonable moving expenses, including an amount equal to $7,500 for the
         purpose of covering incidental moving expenses; (B) reimbursement of
         reasonable travel expenses incurred by the Executive's spouse for the
         purpose of searching for a permanent residence in the area of Company
         headquarters; (C) Company assistance with the sale of the Executive's
         current residence in accordance with the Company's executive relocation
         program; and (D) reimbursement for the closing costs on the purchase of
         a permanent residence in the area of Company headquarters. In addition,
         the Executive shall be entitled to be fully grossed up for certain
         taxes incurred by the Executive as a result of the reimbursements
         provided under the preceding sentence as provided in the Company's
         executive relocation program.

                  10. Termination of Employment.

                           (a) Termination Due to Death. In the event the
Executive's employment is terminated due to her death, her estate or her
beneficiaries as the case may be, shall be entitled to the following:

                                    (i) Base Salary through the date of death;

                                    (ii) an amount equal to a prorated annual
         incentive award for the year in which death occurs, based on the actual
         performance for such year, the amount of which prorated bonus, if any,
         shall be determined and paid promptly following the end of the year to
         which such bonus relates (if the termination occurs during fiscal year
         2003, the amount of said bonus shall be paid in full and shall not be
         pro-rated);

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                                    (iii) the balance of any annual or long-term
         cash incentive awards (if any) earned (but not yet paid) pursuant to
         the terms of the applicable programs;

                                    (iv) any amounts earned, accrued or owing to
         the Executive but not yet paid under this Agreement; and

                                    (v) other or additional benefits in
         accordance with applicable plans and programs of the Company or its
         affiliates.

                           (b) Termination Due to Disability. In the event the
Executive's employment is terminated due to her Disability, she shall be
entitled in such case to the following:

                                    (i) Base Salary through the date of
         termination;

                                    (ii) through the Company's long-term
         disability plans or otherwise, an amount equal to 60% of the Base
         Salary for the period beginning on the date of termination through the
         Executive's attainment of age 65;

                                    (iii) an amount equal to a prorated annual
         incentive award for the year in which termination due to Disability
         occurs, based on the actual performance for such year, the amount of
         which prorated bonus, if any, shall be determined and paid promptly
         following the end of the year to which such bonus relates (if the
         termination occurs during fiscal year 2003, the amount of said bonus
         shall be paid in full and shall not be pro-rated);

                                    (iv) the balance of any annual or long-term
         cash incentive awards (if any) earned (but not yet paid) pursuant to
         the terms of the applicable programs;

                                    (v) any amounts earned, accrued or owing to
         the Executive but not yet paid under this Agreement; and

                                    (vi) other or additional benefits in
         accordance with applicable plans and programs of the Company or its
         affiliates.

         In no event shall a termination of the Executive's employment for
         Disability occur unless the Party terminating her employment gives
         written notice to the other Party in accordance with Section 17 below.

                           (c) Termination by the Company for Cause. In the
event the Company terminates the Executive's employment for Cause, she shall be
entitled to:

                                    (i) Base Salary through the date of the
         termination of her employment;

                                    (ii) the balance of any annual or long-term
         cash incentive awards (if any) earned (but not yet paid) pursuant to
         the terms of the applicable programs;

                                    (iii) an amount equal to a prorated annual
         incentive award for the year in which such termination occurs, based on
         the actual performance for such year, the amount of which prorated
         bonus, if any, shall be determined and paid promptly following the end
         of the year to which such bonus relates (if the termination occurs
         during fiscal year 2003, the amount of said bonus shall be paid in full
         and shall not be pro-rated);

                                    (iv) any amounts earned, accrued or owing to
         the Executive but not yet paid under this Agreement; and

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                                    (v) other or additional benefits in
         accordance with applicable plans or programs of the Company or its
         affiliates;

                                    (vi) a termination for Cause shall not take
         effect unless the provisions of this paragraph (vi) are complied with.
         The Executive shall be given written notice by the Holding Corp. Board
         of the intention to terminate her for Cause, such notice (A) to state
         in detail the particular act or acts or failure or failures to act that
         constitute the grounds on which the proposed termination for Cause is
         based and (B) to be given within six months of the Holding Corp. Board
         learning of such act or acts or failure or failures to act. The
         Executive shall have 10 days after the date that such written notice
         has been given to the Executive in which to cure such conduct, to the
         extent such cure is possible. If she fails to cure such conduct, the
         Executive shall then be entitled to a hearing before the Holding Corp.
         Board. Such hearing shall be held within 15 days of notice to the
         Company by the Executive, provided she requests such hearing within 10
         days of the written notice from the Holding Corp. Board of the
         intention to terminate her employment for Cause. If, within five days
         following such hearing, the Executive is furnished written notice by
         the Holding Corp. Board confirming that the Holding Corp. Board has
         determined, by majority vote at a meeting of the Holding Corp. Board
         duly called and held as to which termination of the Executive is an
         agenda item, that grounds for Cause on the basis of the original notice
         exist, she shall thereupon be terminated for Cause.

                           (d) Termination Without Cause; Constructive
Termination.

                                    (i) A Constructive Termination shall not
         take effect unless the provisions of this paragraph 10(d)(i) are
         complied with. The Company shall be given written notice by the
         Executive of the intention to terminate her employment on account of a
         Constructive Termination, such notice (A) to state in detail the
         particular act or acts or failure or failures to act that constitute
         the grounds on which the proposed Constructive Termination is based and
         (B) to be given within six months of the Executive learning of such act
         or acts or failure or failures to act. The Company shall have 30 days
         after the date that such written notice has been given to the Company
         in which to cure such conduct, to the extent such cure is possible.

                                    (ii) In the event the Executive's employment
         is terminated (1) by the Company without Cause (other than due to
         Disability or death), (2) by reason of a Constructive Termination or
         (3) upon expiration of the Term of Employment following the Company's
         having given a notice of non-extension of the Term of Employment, the
         Executive shall be entitled to:

                                             (A) Base Salary through the date of
                  termination of the Executive's employment;

                                             (B) Base Salary, at the monthly
                  rate in effect on the date of termination of the Executive's
                  employment (or in the event a reduction in Base Salary is the
                  basis for a Constructive Termination, then the Base Salary in
                  effect immediately prior to such reduction), payable over a
                  12-month period following such termination (the "Severance
                  Period"); provided, however, that the Company's obligations
                  under this clause (B) shall be reduced on a dollar-for-dollar
                  basis (but not below zero) to the extent that the Executive
                  earns fees, salary or wages from a subsequent employer
                  (including those arising from self-employment) during the
                  Severance Period;

                                             (C) an amount equal to a prorated
                  annual incentive award for the year in which such termination
                  occurs, based on

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                  the actual performance for such year, the amount of which
                  prorated bonus, if any, shall be determined and paid promptly
                  following the end of the year to which such bonus relates (if
                  the termination occurs during fiscal year 2003, the amount of
                  said bonus shall be paid in full and shall not be pro-rated);

                                             (D) the balance of any annual or
                  long-term cash incentive awards earned (but not yet paid)
                  pursuant to the terms of the applicable programs;

                                             (E) any amounts earned, accrued or
                  owing to the Executive but not yet paid under this Agreement;

                                             (F) continued participation during
                  the Severance Period in medical, dental, hospitalization and
                  life insurance coverage and in all other employee welfare
                  plans and programs (other than disability plans and programs)
                  in which she was participating on the date of termination;
                  provided, that the Company's obligations under this clause (F)
                  shall be reduced to the extent that the Executive receives
                  similar coverage and benefits under the plans and programs of
                  a subsequent employer; and provided, further, that (x) if the
                  Company determines that the Executive is precluded from
                  continuing her participation in any employee benefit plan or
                  program as provided in this clause on account of her
                  employment status or for any other reason, she shall be
                  provided with the after-tax economic equivalent of the
                  benefits provided under the plan or program in which she is
                  unable to participate for the period specified in this clause
                  (F) of this Section 10(d); (y) the economic equivalent of any
                  benefit foregone shall be deemed to be the lowest cost that
                  would be incurred by the Executive in obtaining such benefit
                  herself on an individual basis through payment of COBRA
                  continuation coverage premiums or by other means, and (z)
                  payment of such after-tax economic equivalent shall be made
                  quarterly in advance;

                                             (G) all Restricted Stock granted to
                  the Executive shall become fully vested and the restrictions
                  thereon, as set forth in Section 5(b), shall lapse; and

                                             (H) other or additional benefits in
                  accordance with applicable plans and programs of the Company
                  or its affiliates.

         The Executive agrees to notify the Company immediately upon subsequent
         employment (including self-employment) so that the Company may
         determine and administer the offsets provided under subparagraphs (B)
         and (F) of this Section 10(d)(ii).

                           (e) Voluntary Termination. In the event of a
termination of employment by the Executive on her own initiative, other than a
termination due to death or Disability or a Constructive Termination, the
Executive shall have the same entitlements as provided in Section 10(c) above
for a termination for Cause. A voluntary termination under this Section 10(e)
shall be effective upon 30 days' prior written notice to the Company and shall
not be deemed a breach of this Agreement.

                           (f) Mitigation; No Offset. In the event of any
termination of employment under this Section 10, the Executive shall be
obligated to seek other employment. There shall be no offset against amounts due
the Executive under this Agreement on account of any remuneration attributable
to any subsequent employment that she may obtain except as specifically provided
in this Section 10.

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                           (g) Nature of Payments. Any amounts due under this
Section 10 are in the nature of severance payments considered to be reasonable
by the Company. Failure to qualify for any such payment is not in the nature of
a penalty.

                           (h) Exclusivity of Severance Payments. Upon
termination of the Executive's employment during the Term of Employment, she
shall not be entitled to any payments or benefits from the Company or its
affiliates, other than as provided herein, or any payments by the Company or its
affiliates on account of any claim by her of wrongful termination, including
claims under any federal, state or local human and civil rights or labor laws,
other than the payments and benefits provided hereunder, except for any benefits
which may be due under any employee benefit plan of the Company or its
affiliates which provides benefits after termination of employment (as set forth
above and incorporated herein).

                           (i) Non-competition. The Executive agrees that any
right to receive any payments and/or benefits hereunder, other than Base Salary
and/or any pension, and/or any other compensation already earned by the
Executive and required to be paid by state law other than under this Agreement,
will cease and be immediately forfeited if the Executive breaches the provisions
of Section 11. The Executive agrees that any violation of the provisions of
Section 11 will result in the immediate forfeiture of any rights to exercise or
receive stock options or restricted stock. The foregoing is in addition to the
rights of the Company under Section 11.

                           (j) Release of Claims. As a condition of the
Executive's entitlement to the payment and/or delivery of any of the severance
rights and benefits provided in this Section 10 (other than in the event of the
Executive's death), the Executive shall be required to execute and honor a
release of claims in the form reasonably requested by the Company.

                           (k) Termination at Will. Notwithstanding anything
herein to the contrary, the Executive's employment with the Company is
terminable at will with or without Cause; provided, however, that a termination
of the Executive's employment shall be governed in accordance with the terms
hereof.

                  11. Restrictive Covenants.

                           (a) Non-Compete. By and in consideration of the
substantial compensation and benefits provided by the Company hereunder, and
further in consideration of the Executive's exposure to the proprietary
information of the Company and its affiliates, the Executive agrees that she
shall not, during the Term of Employment and for a period ending 12 months
following termination of employment for any reason, directly or indirectly own,
manage, operate, join, control, be employed by, or participate in the ownership,
management, operation or control of or be connected in any manner, including,
but not limited to, holding the positions of officer, director, shareholder,
consultant, independent contractor, employee, partner, or investor, with any
Competing Enterprise; provided, however, that the Executive may invest in
stocks, bonds or other securities of any corporation or other entity (but
without participating in the business thereof) if such stocks, bonds, or other
securities are listed for trading on a national securities exchange or
NASDAQ-National Market and the Executive's investment does not exceed 1% of the
issued and outstanding shares of capital stock, or in the case of bonds or other
securities, 1% of the aggregate principal amount thereof issued and outstanding.
For purposes of this Section 11, "Competing Enterprise" shall mean any and/or
all of the following: (i) Albertson's Inc., American Retail Group, Inc.,
Carrefour se, Fleming Companies, Inc., Kohl's Corporation, The May Department
Store Company, J.C. Penny Company, Royal Ahold, Safeway, Inc., Sears, Roebuck
and Co., ShopKo Stores, Inc., Supervalue Inc., Target Corp., The Home Depot,
Inc., Toys R Us Inc., TJX Companies, Inc., and Wal-Mart Stores, Inc., and any of
their parents and/or subsidiaries that are engaged in retail operations, and/or
(ii) an entity or enterprise whose business is in competition with the business
of the Company which operates retail stores selling general merchandise and/or
food if at least 10 of such stores have an area of 50,000 or more square feet
and at least 10 of such stores with 50,000 or more square feet are within 25
miles of any one or more Kmart stores.

                           (b) Nonsolicitation. By and in consideration of the
substantial compensation and benefits to be provided by the Company and its
affiliates hereunder, and further in consideration of the Executive's exposure
to the proprietary information of the Company and its affiliates, the Executive
agrees

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that she shall not, during the Term of Employment and for a period of 12 months
following termination of employment for any reason, without the express prior
written approval of the Company, (i) directly or indirectly, in one or a series
of transactions, recruit, solicit or otherwise induce or influence any
proprietor, partner, stockholder, lender, director, officer, employee, sales
agent, joint venturer, investor, lessor, supplier, agent, representative or any
other person which has a business relationship with the Company or any of its
subsidiaries or affiliates, or had a business relationship with the Company or
any of its subsidiaries or affiliates within the 24-month period preceding the
date of the incident in question, to discontinue, reduce or modify such
employment, agency or business relationship with the Company or such
subsidiary(ies) or affiliate(s), or (ii) directly or indirectly, employ or seek
to employ (including through any employer of the Executive) or cause any
Competing Enterprise to employ or seek to employ any person who is then (or was
at any time within six months prior to the date THE Executive or the Competing
Enterprise employs or seeks to employ such person) employed by the Company or
any of its subsidiaries or affiliates. The parties acknowledge that the
Executive shall not be deemed to employ or seek to employ any person unless
Executive is involved or has otherwise provided input into the decision to hire
such individual. For example, if Executive is a senior executive of a company
that hires an employee of the Company without Executive's involvement or input,
Executive will not be deemed to have "employed" such person.

                           (c) Confidential Information. During the Term of
Employment and at all times thereafter, Executive agrees that she will not
divulge to anyone or make use of any Confidential Information except in the
performance of her duties as an executive of Holding Corp. or the Company or
when legally required to do so (in which case the Executive shall give prompt
written notice to the Company in order to allow the Company the opportunity to
object or otherwise resist such disclosure). "Confidential Information" shall
mean any knowledge or information of any type relating to the business of the
Company or any of its subsidiaries or affiliates, as well as any information
obtained from customers, clients or other third parties, including, without
limitation, all types of trade secrets and confidential commercial information.
The Executive agrees that she will return to the Company, immediately upon
termination, any and all documents, records or reports (including electronic
information) that contain any Confidential Information. Confidential Information
shall not include information (i) that is or becomes part of the public domain,
other than through the breach of this Agreement by the Executive or (ii)
regarding the business or industry of the Company or any of its subsidiaries or
affiliates properly acquired by the Executive in the course of her career as an
executive in the Company's industry and independent of the Executive's
employment by the Company. The Executive acknowledges that the Company and its
affiliates have expended, and will continue to expend, significant amounts of
time, effort and money in the procurement of its Confidential Information, that
the Company and its affiliates have taken all reasonable steps in protecting the
secrecy of the Confidential Information, that said Confidential Information is
of critical importance to the Company and its affiliates.

                           (d) Non-Disparagement. The Parties agree that, during
the Term of Employment and thereafter (including following the Executive's
termination of employment for any reason): (i) the Executive will not make
statements or representations, or otherwise communicate, directly or indirectly,
in writing, orally, or otherwise, or take any action which may, directly or
indirectly, disparage the Company or any subsidiary or affiliate or their
respective officers, directors, employees, advisors, businesses or reputations;
and (ii) the officers of the Company will not make any statements or
representations or otherwise communicate, directly or indirectly, in writing,
orally, or otherwise, or take any action which may, directly or indirectly,
disparage the Executive. Notwithstanding the foregoing, nothing in this
Agreement shall preclude either the Executive or the Company from making
truthful statements or disclosures that are required by applicable law,
regulation or legal process.

                           (e) Cooperation. The Executive agrees to cooperate
with the Company, during the Term of Employment and thereafter (including
following the Executive's termination of employment for any reason), by being
reasonably available to testify on behalf of the Company or any subsidiary or
affiliate in any action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, and to assist the Company, or any subsidiary
or affiliate, in any such action, suit or proceeding, by providing information
and meeting and consulting with the Holding Corp. Board or the Board or their
representatives or counsel, or representatives or counsel to the Company, or any
subsidiary or affiliate, as reasonably

<PAGE>

requested. The Company agrees to reimburse the Executive for all expenses
actually incurred in connection with her provision of testimony or assistance
(including attorneys' fees incurred in connection therewith) upon submission of
appropriate documentation to the Company.

                           (f) Remedies. The Executive agrees that any breach of
the terms of this Section 11 would result in irreparable injury and damage to
the Company for which the Company would have no adequate remedy at law; the
Executive therefore also agrees that in the event of said breach or any threat
of said breach, the Company shall be entitled to an immediate injunction and
restraining order to prevent such breach and/or threatened breach and/or
continued breach by the Executive and/or any and all persons and/or entities
acting for and/or with the Executive. The terms of this paragraph shall not
prevent the Company from pursuing any other available remedies for any breach or
threatened breach hereof, including, but not limited to, remedies available
under this Agreement and the recovery of damages. The Executive and the Company
further agree that the provisions of the covenant not to compete are reasonable.
Should a court or arbitrator determine, however, that any provision of the
covenant not to compete is unreasonable, either in period of time, geographical
area, or otherwise, the parties hereto agree that the covenant shall be
interpreted and enforced to the maximum extent which such court or arbitrator
deems reasonable.

                           (g) Continuing Operation. The provisions of this
Section 11 shall survive any termination of this Agreement and the Term of
Employment, and the existence of any claim or cause of action by the Executive
against the Company, whether predicated on this Agreement or otherwise, shall
not constitute a defense to the enforcement by the Company of the covenants and
agreements of this Section.

                           (h) Notice to Employer. The Executive agrees that as
long as the provisions of Section 11(a) or 11(b) continue to bind the Executive,
she will provide written notice of the terms and provisions of this Section 11
to any prospective employer.

                  12. Indemnification.

                           (a) The Company agrees that if the Executive is made
a party, or is threatened to be made a party, to any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "Proceeding"), by
reason of the fact that she is or was a director or employee of the Company or
any of its affiliates or is or was serving at the request of the Company as a
director, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether or not the basis of such Proceeding is the Executive's alleged
action in an official capacity while serving as a director, employee or agent,
the Executive shall be indemnified and held harmless by the Company to the
fullest extent legally permitted or authorized by the Company's certificate of
incorporation or bylaws or resolutions of the Board or, if greater, by the laws
of the State of Michigan against all cost, expense, liability and loss
(including, without limitation, attorney's fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by the Executive in connection therewith, and such
indemnification shall continue as to the Executive even if she has ceased to be
a director, employee or agent of the Company or other entity and shall inure to
the benefit of the Executive's heirs, executors and administrators. The Company
shall advance to the Executive all reasonable costs and expenses incurred by her
in connection with a Proceeding within 20 days after receipt by the Company of a
written request for such advance. Such request shall include an undertaking by
the Executive to repay the amount of such advance if it shall ultimately be
determined that she is not entitled to be indemnified against such costs and
expenses.

                           (b) Neither the failure of the Company (including the
Board or the Holding Corp. Board or their respective independent legal counsel
or stockholders) to have made a determination prior to the commencement of any
Proceeding concerning payment of amounts claimed by the Executive under Section
12(a) above that indemnification of the Executive is proper because she has met
the applicable standard of conduct, nor a determination by the Company
(including the Board or the Holding Corp. Board or their respective independent
legal counsel or stockholders) that the Executive has not met such applicable
standard of conduct, shall create a presumption that the Executive has not met
the applicable standard of conduct.

<PAGE>

The Company agrees to continue and/or maintain a directors and officers'
liability insurance policy covering the Executive to the same extent the Company
provides such coverage for its other executive officers and directors and for
not less than the amounts in effect for its other executive officers and
directors.

                  13. Assignability; Binding Nature. This Agreement shall be
binding upon and inure to the benefit of the Parties and their respective
successors, heirs (in the case of the Executive) and assigns. No rights or
obligations of the Company under this Agreement may be assigned or transferred
by the Company except that such rights or obligations may be assigned or
transferred pursuant to a merger or consolidation in which the Company is not
the continuing entity, or the sale or liquidation of all or substantially all of
the assets of the Company, provided that the assignee or transferee is the
successor to all or substantially all of the assets of the Company and such
assignee or transferee assumes the liabilities, obligations and duties of the
Company, as contained in this Agreement, either contractually or as a matter of
law. The Company further agrees that, in the event of a sale or reorganization
transaction as described in the preceding sentence, it shall take whatever
action it legally can in order to cause such assignee or transferee to expressly
assume the liabilities, obligations and duties of the Company hereunder. No
rights or obligations of the Executive under this Agreement may be assigned or
transferred by the Executive other than her rights to compensation and benefits,
which may be transferred only by will or operation of law, except as otherwise
provided herein.

                  14. Miscellaneous Provisions.

                           (a) This Agreement contains the final and entire
understanding and agreement between the Parties concerning the subject matter
hereof and supersedes all prior representations, agreements, discussions,
negotiations and undertakings, whether written or oral, between the Parties with
respect thereto; provided, however, that this Agreement shall not supersede any
separate written commitments by the Company with respect to indemnification.

                           (b) No provision in this Agreement may be amended
unless such amendment is authorized by the Holding Corp. Board or the Committee
and agreed to in writing and signed by the Executive and an authorized officer
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 Executive or an authorized officer of the Company, as
the case may be.

                           (c) In the 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.

                           (d) The respective rights and obligations of the
Parties hereunder shall survive any termination of the Executive's employment to
the extent necessary to the intended preservation of such rights and
obligations.

                           (e) The Executive shall be entitled, to the extent
permitted under any applicable law, to select and change a beneficiary or
beneficiaries to receive any compensation or benefit payable hereunder following
the Executive's death by giving the Company written notice thereof. In the event
of the Executive's death or a judicial determination of her incompetence,
reference in this Agreement to the Executive shall be deemed, where appropriate,
to refer to her beneficiary, estate or other legal representative.

                           (f) All amounts required to be paid by the Company
shall be subject to reduction in order to comply with applicable Federal, state
and local tax withholding requirements, except as otherwise provided herein.

<PAGE>

                           (g) 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.

                           (h) This Agreement may be executed in two or more
counterparts.

                           (i) Notwithstanding any provision of this Agreement
to the contrary, any action to be taken by the Board shall require the
concurrence of the Holding Corp. Board.

                  15. 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. Subject to Section
16, the Company and the Executive hereby consent to the jurisdiction of any or
all of the following courts for purposes of resolving any dispute under this
Agreement: (i) the United States District Court of Detroit, Michigan or (ii) the
State of Michigan Courts of Oakland County, Michigan. The Company and the
Executive further agree that any service of process or notice requirements in
any such proceeding shall be satisfied if the rules of such court relating
thereto have been substantially satisfied. The Company and the Executive hereby
waive, to the fullest extent permitted by applicable law, any objection which it
or the Executive may now or hereafter have to such jurisdiction and any defense
of inconvenient forum.

                  16. Resolution of Disputes. Any disputes arising under or in
connection with this Agreement shall be resolved by binding arbitration, to be
held in the metropolitan area of Company headquarters 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 Executive for such reasonable costs and expenses in the event she
substantially prevails in such arbitration or court proceeding. Notwithstanding
the foregoing, the Company shall be entitled to seek equitable relief pursuant
to Section 11(f) hereof in a Court of competent jurisdiction without otherwise
waiving the right to exclusive arbitration of all other disputes.

                  17. Notices. Any notice given to a Party 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:     Kmart Management Corporation
                                         3100 West Big Beaver Road
                                         Troy, MI 48084-3163
                                         Attention: Chief Executive Officer

                  With a copy to:        James E. Defebaugh, Esquire
                                         Senior Vice President, Deputy General
                                            Counsel & Chief Compliance Officer
                                         Kmart Management Corporation
                                         3100 W. Big Beaver Road
                                         Troy, MI 48084

                  If to the Executive:   Janet L. Kelly
                                         9534 W. Gull Lake Drive
                                         Richland, MI 49083

                  With a copy to:        jekjkelly@aol.com

<PAGE>

                  18. Approvals. Except with respect to the Company's
obligations under Section 9(d), the effectiveness of this Agreement shall be
subject to the approval of this Agreement by the Holding Corp. Board. The
Company agrees to seek such approval no later than the first meeting of the
Board that takes place following the Effective Date. Absent such approval by the
Holding Corp. Board, this Agreement shall not be effective except with respect
to the Company's obligations under Section 9(d).

                  19. Additional Payments. If any payment or benefit received or
to be received by the Executive (whether pursuant to the terms of this Agreement
or any other plan, arrangement or agreement with the Company or any affiliate)
(all such payments and benefits, excluding the Gross-Up Payment (as hereinafter
defined), being hereinafter called "Total Payments") will be subject (in whole
or part) to any excise tax (the "Excise Tax") imposed under section 4999 of the
Internal Revenue Code of 1986, as amended, then the Company shall pay to the
Executive an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Executive, after deduction of any Excise Tax on the Total
Payments and any federal, state and local income and employment taxes and Excise
Tax upon the Gross-Up Payment, shall be equal to the Total Payments.

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

                                       KMART MANAGEMENT CORPORATION

                                       By:    /s/ Julian C. Day
                                       Title: Chief Executive Officer

                                              /s/ Janet L. Kelly<PAGE>

                                                                    Exhibit 10.3

                              EMPLOYMENT AGREEMENT

         THIS AGREEMENT, made and entered into on September 3, 2003, by and
between Kmart Management Corporation, a Michigan corporation (together with its
successors and assigns permitted under this Agreement, the "Company"), and Lisa
Schultz (the "Executive").

         WHEREAS, the Company desires that the Executive become employed by the
Company and provide services to the Company and Holding Corp. (as hereinafter
defined), in the best interest of the Company and its affiliates and
constituencies;

         WHEREAS, the Executive desires to be employed by the Company as
provided herein; and

         WHEREAS, the Executive and the Company desire to enter into this
Agreement to set forth the terms and conditions of the Executive's services with
the Company;

         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 Executive (individually a
"Party" and together the "Parties") agree as follows:

                  20. Definitions. The following definitions shall apply to this
Agreement in its entirety.

                           (a) "Base Salary" shall mean the salary granted to
the Executive pursuant to Section 4.

                           (b) "Board" shall mean the Board of Directors of the
Company.

                           (c) "Cause" shall mean (i) the Executive is convicted
of a felony involving moral turpitude or any other felony (other than motor
vehicle related) and, in the case of such other felony, the Executive is unable
to show that she (A) acted in good faith and in a manner she reasonably believed
to be in the best interests of the Company and its affiliates and (B) had no
reasonable cause to believe her conduct was unlawful; or (ii) the Executive
engages in conduct that constitutes willful gross neglect or willful misconduct
in carrying out her duties under this Agreement, resulting, in either case, in
material harm to the Company or its affiliates, unless the Executive believed in
good faith that such act or nonact was in, or was not opposed to, the best
interests of the Company and its affiliates.

                           (d) "Committee" shall mean the Compensation and
Incentives Committee of the Holding Corp. Board or any other committee of the
Holding Corp. Board performing similar functions.

                           (e) "Constructive Termination" by the Executive shall
mean termination, during the Term of Employment, based on the occurrence without
the Executive's express written consent of any of the following: (i) a material
diminution or adverse change in the Executive's responsibilities, duties,
authorities or any reduction in title, other than for Cause or Disability; (ii)
a reduction in the Executive's Base Salary or Target Bonus (as defined in
Section 6) other than for Cause or Disability and other than as part of an
across-the-board salary reduction generally imposed on executives of the
Company; or (iii) the failure of the Company to obtain the assumption in writing
of its obligation to perform this Agreement by

<PAGE>

any successor to all or substantially all of the assets of the Company on or
prior to a merger, consolidation, sale or similar transaction. The Executive
shall further be required to comply with the provisions of Section 10(d)(i) of
this Agreement with respect to a Constructive Termination.

                           (f) "Disability" shall mean the Executive's
inability, with or without a reasonable accommodation, to substantially perform
her duties and responsibilities under this Agreement by reason of any physical
or mental incapacity for a period of 180 consecutive days.

                           (g) "Effective Date" shall mean the date on which the
Executive first reports to the Company's headquarters to commence employment
with the Company. The Executive will use her best efforts to commence employment
with the Company as soon as possible, and will commence employment with the
Company by September 2, 2003.

                           (h) "Holding Corp." shall mean Kmart Holding
Corporation, a Delaware corporation and the Company's parent corporation.

                           (i) "Holding Corp. Board" shall mean the board of
directors of Holding Corp.

                  21. Term of Employment. Subject to Holding Corp. Board
approval as set forth in Section 18 and subject to termination pursuant to
Section 10, the Company shall employ the Executive, and the Executive hereby
accepts such employment, for the period commencing on the Effective Date and
ending on the third anniversary thereof (the "Term of Employment"); provided,
however, that the Term of Employment shall be automatically extended for
additional one-year periods on each subsequent annual anniversary of the
Effective Date, unless written notice of non-extension is provided by either
Party to the other Party at least 60 days prior to any such anniversary.

                  22. Position, Duties and Responsibilities.

                           (a) During the Term of Employment, the Executive
shall be employed by the Company and shall serve as Senior Vice President, Chief
Creative Officer (or such other position or positions as may be agreed upon in
writing by the Executive and Holding Corp. and/or the Company, as applicable).
The Executive shall have all authority commensurate with the position of Senior
Vice President, Chief Creative Officer, subject to the direction of the Holding
Corp. Board, the Board and/or the Chief Executive Officer ("CEO") of the
Company. The Executive shall report directly to the CEO. The Executive shall
devote substantially all of her business time, attention and skill to the
performance of such duties and responsibilities, and shall use her best efforts
to promote the interests of the Company and its affiliates. The Executive shall
not, without the prior written approval of the Holding Corp. Board, engage in
any other business activity which is in violation of policies established from
time to time by the Company or its affiliates.

                           (b) Anything herein to the contrary notwithstanding,
nothing shall preclude the Executive from (i) serving on the boards of directors
of a reasonable number of other corporations or the boards of a reasonable
number of trade associations and/or charitable organizations (subject to the
reasonable approval of the Holding Corp. Board), (ii) engaging in charitable
activities and community affairs, and (iii) managing her personal investments
and affairs, provided that such activities do not materially interfere with the
proper performance of her duties and responsibilities as an executive officer of
Holding Corp. and the Company.

                           (c) The Executive shall perform her services
hereunder primarily at a location of her choosing in New York City, NY. The
Company shall provide the Executive with office space and clerical support at
its headquarters offices to the extent necessary when the Executive does perform
services at the Company's headquarters offices.

                  23. Base Salary. During the Term of Employment, the Executive
shall be paid an annualized Base Salary, payable in accordance with the regular
payroll practices of the Company, in the

<PAGE>

amount of $500,000. The Base Salary shall be reviewed no less frequently than
annually for increase in the discretion of the Holding Corp. Board and/or the
Committee. The Base Salary, including any increase, shall not be decreased
during the Term of Employment.

                  24. Restricted Stock Equity -Grant. As an inducement material
to the Executive's agreement to enter into employment with the Company, and
subject to the approval of the Committee comprised of a majority of independent
directors or a majority of the Holding Corp.'s independent directors, within 14
days after the Effective Date, the Executive shall receive a grant of restricted
Holding Corp. stock having a fair market value of $500,000 on the date of grant
(the "Restricted Stock") which Restricted Stock may not be sold, pledged or
otherwise transferred until the Restricted Stock becomes vested, in accordance
with the provisions of this Section 5. The Restricted Stock shall vest as to
one-third (1/3) of such grant at 12:01 a.m. on the date after the end of fiscal
year 2004, as to an additional one-third (1/3) of such grant at 12:01 a.m. on
the date after the end of fiscal year 2005, and as to the final one-third (1/3)
of such grant at 12:01 a.m. on the date after the end of fiscal year 2006,
conditioned upon the Executive's continued employment with the Company as of
each vesting date. Notwithstanding the foregoing, in the event the Executive's
employment is terminated (i) by the Company without Cause (other than due to
Disability or death), (ii) by reason of a Constructive Termination, or (iii)
upon expiration of the Term of Employment following the Company's having given a
notice of non-extension of the Term of Employment, the interest of the Executive
in the Restricted Stock shall vest as to any portion of the grant that would
have vested within twelve (12) months of the termination date had the Executive
remained employed.

                  25. Annual Incentive Awards. During the Term of Employment,
the Executive shall be eligible for an annual target bonus ("Target Bonus") of
75% of her then-current Base Salary under the annual cash-based incentive
program of the Company (or its affiliate, if applicable) payable if the
performance goals thereunder for the relevant fiscal year are met. Payment of
the annual bonus shall be made at the same time that other senior-level
executives receive their incentive awards. The actual bonus, if any, earned by
the Executive for fiscal year 2003 shall be subject to pro-ration by reason of
the Executive's not having been employed by the Company for the entire fiscal
year.

                  26. Long-Term Incentive Programs. Beginning in February 2004,
the Executive shall participate in such long-term cash- and/or equity-based
incentive programs as the senior executives of the Company participate from time
to time. The Parties understand that, as of the effective date of this
Agreement, a long-term cash- and/or equity-based incentive program is not in
existence for the senior executives of the Company. The Parties anticipate that
if implemented, a new long-term incentive program will be implemented each year
and that such programs, if implemented, will provide for the payment (in common
stock and/or cash) of an amount equal to the average annual salary and target
bonuses paid to the Executive during the three-year plan period, payable at the
conclusion of fiscal year 2006 (February 2007), if the Company meets or exceeds
its cumulative EBITDA target for that three-year period. The Parties also
anticipate that if implemented, the new long-term incentive program will provide
that in the event the Executive's employment is terminated (i) by the Company
without Cause (other than due to Disability or death), (ii) by reason of a
Constructive Termination, or (iii) upon expiration of the Term of Employment
following the Company's having given a notice of non-extension of the Term of
Employment, the Company will pay a pro-rata share of the incentive payment if
the Company was ahead of target at the time of the termination. However, the
Parties understand and agree that no such plan is yet in existence, that such
plan may never be in existence, and that this provision shall not be construed
as creating any binding obligation on the Company to implement such a plan.

                  27. Employee Benefit Programs. During the Term of Employment,
the Executive shall be eligible to participate in all employee pension and
welfare benefit plans and programs made available generally to the Company's
senior-level executives (other than those made available only to the CEO) or to
its employees generally (on terms consistent, respectively, with those offered
to the Company's other senior-level executives and/or its employees generally),
as such plans or programs may be in effect from time to time, including, without
limitation, pension, profit sharing, savings and other retirement plans or
programs, medical, dental, hospitalization, short-term and long-term disability
and life insurance plans, accidental death and dismemberment protection, travel
accident insurance, and any other pension or

<PAGE>

retirement plans or programs and any other employee welfare benefit plans or
programs that may be sponsored by the Company from time to time, including any
plans that supplement the above-listed types of plans or programs, whether
funded or unfunded.

                  28. Reimbursement of Business and Other Expenses: Perquisites;
Vacations.

                           (a) The Executive is authorized to incur reasonable
expenses in carrying out her duties and responsibilities under this Agreement
and the Company shall promptly reimburse her for all reasonable business
expenses incurred in connection with carrying out the business of the Company
and its affiliates, subject to documentation in accordance with the Company's
policy.

                           (b) During the Term of Employment, the Company shall
reimburse the Executive for reasonable personal financial (including tax)
counseling (other than legal fees) by a firm or consultant to be chosen by the
Executive, such reimbursement to be no more than the amount authorized under
Company policy in effect from time to time.

                           (c) During the Term of Employment, the Executive
shall be entitled to four weeks' paid vacation per year.

                  29. Termination of Employment.

                           (a) Termination Due to Death. In the event the
Executive's employment is terminated due to her death, her estate or her
beneficiaries as the case may be, shall be entitled to the following:

                                    (i) Base Salary through the date of death;

                                    (ii) an amount equal to a prorated annual
         incentive award for the year in which death occurs, based on the actual
         performance for such year, the amount of which prorated bonus, if any,
         shall be determined and paid promptly following the end of the year to
         which such bonus relates;

                                    (iii) the balance of any annual or long-term
         cash incentive awards (if any) earned (but not yet paid) pursuant to
         the terms of the applicable programs;

                                    (iv) any amounts earned, accrued or owing to
         the Executive but not yet paid under this Agreement; and

                                    (v) other or additional benefits in
         accordance with applicable plans and programs of the Company or its
         affiliates.

                           (b) Termination Due to Disability. In the event the
Executive's employment is terminated due to her Disability, she shall be
entitled in such case to the following:

                                    (i) Base Salary through the date of
         termination;

                                    (ii) through the Company's long-term
         disability plans or otherwise, an amount equal to 60% of the Base
         Salary for the period beginning on the date of termination through the
         Executive's attainment of age 65;

                                    (iii) an amount equal to a prorated annual
         incentive award for the year in which termination due to Disability
         occurs, based on the actual performance for such year, the amount of
         which prorated bonus, if any, shall be determined and paid promptly
         following the end of the year to which such bonus relates;

<PAGE>

                                    (iv) the balance of any annual or long-term
         cash incentive awards (if any) earned (but not yet paid) pursuant to
         the terms of the applicable programs;

                                    (v) any amounts earned, accrued or owing to
         the Executive but not yet paid under this Agreement; and

                                    (vi) other or additional benefits in
         accordance with applicable plans and programs of the Company or its
         affiliates.

         In no event shall a termination of the Executive's employment for
         Disability occur unless the Party terminating her employment gives
         written notice to the other Party in accordance with Section 17 below.

                           (c) Termination by the Company for Cause. In the
event the Company terminates the Executive's employment for Cause, she shall be
entitled to:

                                    (i) Base Salary through the date of the
         termination of her employment;

                                    (ii) the balance of any annual or long-term
         cash incentive awards (if any) earned (but not yet paid) pursuant to
         the terms of the applicable programs;

                                    (iii) an amount equal to a prorated annual
         incentive award for the year in which such termination occurs, based on
         the actual performance for such year, the amount of which prorated
         bonus, if any, shall be determined and paid promptly following the end
         of the year to which such bonus relates (if the termination occurs
         during fiscal year 2003, the amount of said bonus shall be paid in full
         and shall not be pro-rated);

                                    (iv) any amounts earned, accrued or owing to
         the Executive but not yet paid under this Agreement; and

                                    (v) other or additional benefits in
         accordance with applicable plans or programs of the Company or its
         affiliates;

                                    (vi) a termination for Cause shall not take
         effect unless the provisions of this paragraph (vi) are complied with.
         The Executive shall be given written notice by the Holding Corp. Board
         of the intention to terminate her for Cause, such notice (A) to state
         in detail the particular act or acts or failure or failures to act that
         constitute the grounds on which the proposed termination for Cause is
         based and (B) to be given within six months of the Holding Corp. Board
         learning of such act or acts or failure or failures to act. The
         Executive shall have 10 days after the date that such written notice
         has been given to the Executive in which to cure such conduct, to the
         extent such cure is possible. If she fails to cure such conduct, the
         Executive shall then be entitled to a hearing before the Holding Corp.
         Board. Such hearing shall be held within 15 days of notice to the
         Company by the Executive, provided she requests such hearing within 10
         days of the written notice from the Holding Corp. Board of the
         intention to terminate her employment for Cause. If, within five days
         following such hearing, the Executive is furnished written notice by
         the Holding Corp. Board confirming that the Holding Corp. Board has
         determined, by majority vote at a meeting of the Holding Corp. Board
         duly called and held as to which termination of the Executive is an
         agenda item, that grounds for Cause on the basis of the original notice
         exist, she shall thereupon be terminated for Cause.

                           (d) Termination Without Cause; Constructive
Termination.

<PAGE>

                                    (i) A Constructive Termination shall not
         take effect unless the provisions of this paragraph 10(d)(i) are
         complied with. The Company shall be given written notice by the
         Executive of the intention to terminate her employment on account of a
         Constructive Termination, such notice (A) to state in detail the
         particular act or acts or failure or failures to act that constitute
         the grounds on which the proposed Constructive Termination is based and
         (B) to be given within six months of the Executive learning of such act
         or acts or failure or failures to act. The Company shall have 30 days
         after the date that such written notice has been given to the Company
         in which to cure such conduct, to the extent such cure is possible.

                                    (ii) In the event the Executive's employment
         is terminated (1) by the Company without Cause (other than due to
         Disability or death), (2) by reason of a Constructive Termination or
         (3) upon expiration of the Term of Employment following the Company's
         having given a notice of non-extension of the Term of Employment, the
         Executive shall be entitled to:

                                             (A) Base Salary through the date of
                  termination of the Executive's employment;

                                             (B) Base Salary, at the monthly
                  rate in effect on the date of termination of the Executive's
                  employment (or in the event a reduction in Base Salary is the
                  basis for a Constructive Termination, then the Base Salary in
                  effect immediately prior to such reduction), payable over a
                  12-month period following such termination (the "Severance
                  Period"); provided, however, that the Company's obligations
                  under this clause (B) shall be reduced on a dollar-for-dollar
                  basis (but not below zero) to the extent that the Executive
                  earns fees, salary or wages from a subsequent employer
                  (including those arising from self-employment) during the
                  Severance Period;

                                             (C) an amount equal to a prorated
                  annual incentive award for the year in which such termination
                  occurs, based on the actual performance for such year, the
                  amount of which prorated bonus, if any, shall be determined
                  and paid promptly following the end of the year to which such
                  bonus relates;

                                             (D) the balance of any annual or
                  long-term cash incentive awards earned (but not yet paid)
                  pursuant to the terms of the applicable programs;

                                             (E) any amounts earned, accrued or
                  owing to the Executive but not yet paid under this Agreement;

                                             (F) continued participation during
                  the Severance Period in medical, dental, hospitalization and
                  life insurance coverage and in all other employee welfare
                  plans and programs (other than disability plans and programs)
                  in which she was participating on the date of termination;
                  provided, that the Company's obligations under this clause (F)
                  shall be reduced to the extent that the Executive receives
                  similar coverage and benefits under the plans and programs of
                  a subsequent employer; and provided, further, that (x) if the
                  Company determines that the Executive is precluded from
                  continuing her participation in any employee benefit plan or
                  program as provided in this clause on account of her
                  employment status or for any other reason, she shall be
                  provided with the after-tax economic equivalent of the
                  benefits provided under the plan or program in which she is
                  unable to

<PAGE>

                  participate for the period specified in this clause (F) of
                  this Section 10(d); (y) the economic equivalent of any benefit
                  foregone shall be deemed to be the lowest cost that would be
                  incurred by the Executive in obtaining such benefit herself on
                  an individual basis through payment of COBRA continuation
                  coverage premiums or by other means, and (z) payment of such
                  after-tax economic equivalent shall be made quarterly in
                  advance;

                                             (G) all Restricted Stock granted to
                  the Executive that would have otherwise vested within twelve
                  (12) months after the date of termination shall become fully
                  vested and the restrictions thereon, as set forth in Section
                  5, shall lapse; and

                                             (H) other or additional benefits in
                  accordance with applicable plans and programs of the Company
                  or its affiliates.

         The Executive agrees to notify the Company immediately upon subsequent
         employment (including self-employment) so that the Company may
         determine and administer the offsets provided under subparagraphs (B)
         and (F) of this Section 10(d)(ii).

                           (e) Voluntary Termination. In the event of a
termination of employment by the Executive on her own initiative, other than a
termination due to death or Disability or a Constructive Termination, the
Executive shall have the same entitlements as provided in Section 10(c) above
for a termination for Cause. A voluntary termination under this Section 10(e)
shall be effective upon 30 days' prior written notice to the Company and shall
not be deemed a breach of this Agreement.

                           (f) Mitigation; No Offset. In the event of any
termination of employment under this Section 10, the Executive shall be
obligated to seek other employment. There shall be no offset against amounts due
the Executive under this Agreement on account of any remuneration attributable
to any subsequent employment that she may obtain except as specifically provided
in this Section 10.

                           (g) Nature of Payments. Any amounts due under this
Section 10 are in the nature of severance payments considered to be reasonable
by the Company. Failure to qualify for any such payment is not in the nature of
a penalty.

                           (h) Exclusivity of Severance Payments. Upon
termination of the Executive's employment during the Term of Employment, she
shall not be entitled to any payments or benefits from the Company or its
affiliates, other than as provided herein, or any payments by the Company or its
affiliates on account of any claim by her of wrongful termination, including
claims under any federal, state or local human and civil rights or labor laws,
other than the payments and benefits provided hereunder, except for any benefits
which may be due under any employee benefit plan of the Company or its
affiliates which provides benefits after termination of employment (as set forth
above and incorporated herein).

                           (i) Non-competition. The Executive agrees that any
right to receive any payments and/or benefits hereunder, other than Base Salary
and/or any pension, and/or any other compensation already earned by the
Executive and required to be paid by state law other than under this Agreement,
will cease and be immediately forfeited if the Executive breaches the provisions
of Section 11. The Executive agrees that any violation of the provisions of
Section 11 will result in the immediate forfeiture of any rights to exercise or
receive stock options or restricted stock. The foregoing is in addition to the
rights of the Company under Section 11.

                           (j) Release of Claims. As a condition of the
Executive's entitlement to the payment and/or delivery of any of the severance
rights and benefits provided in this Section 10 (other than

<PAGE>

in the event of the Executive's death), the Executive shall be required to
execute and honor a release of claims in the form reasonably requested by the
Company.

                           (k) Termination at Will. Notwithstanding anything
herein to the contrary, the Executive's employment with the Company is
terminable at will with or without Cause; provided, however, that a termination
of the Executive's employment shall be governed in accordance with the terms
hereof.

                  30. Restrictive Covenants.

                           (a) Non-Compete. By and in consideration of the
substantial compensation and benefits provided by the Company hereunder, and
further in consideration of the Executive's exposure to the proprietary
information of the Company and its affiliates, the Executive agrees that she
shall not, during the Term of Employment and for a period ending 12 months
following termination of employment for any reason, directly or indirectly own,
manage, operate, join, control, be employed by, or participate in the ownership,
management, operation or control of or be connected in any manner, including,
but not limited to, holding the positions of officer, director, shareholder,
consultant, independent contractor, employee, partner, or investor, with any
Competing Enterprise; provided, however, that the Executive may invest in
stocks, bonds or other securities of any corporation or other entity (but
without participating in the business thereof) if such stocks, bonds, or other
securities are listed for trading on a national securities exchange or
NASDAQ-National Market and the Executive's investment does not exceed 1% of the
issued and outstanding shares of capital stock, or in the case of bonds or other
securities, 1% of the aggregate principal amount thereof issued and outstanding.
For purposes of this Section 11, "Competing Enterprise" shall mean any and/or
all of the following: (i) Albertson's Inc., American Retail Group, Inc.,
Carrefour se, Fleming Companies, Inc., Kohl's Corporation, The May Department
Store Company, J.C. Penny Company, Royal Ahold, Safeway, Inc., Sears, Roebuck
and Co., ShopKo Stores, Inc., Supervalue Inc., Target Corp., The Home Depot,
Inc., Toys R Us Inc., TJX Companies, Inc., and Wal-Mart Stores, Inc., and any of
their parents and/or subsidiaries that are engaged in retail operations, and/or
(ii) an entity or enterprise whose business is in competition with the business
of the Company which operates retail stores selling general merchandise and/or
food if at least 10 of such stores have an area of 50,000 or more square feet
and at least 10 of such stores with 50,000 or more square feet are within 25
miles of any one or more Kmart stores.

                           (b) Nonsolicitation. By and in consideration of the
substantial compensation and benefits to be provided by the Company and its
affiliates hereunder, and further in consideration of the Executive's exposure
to the proprietary information of the Company and its affiliates, the Executive
agrees that she shall not, during the Term of Employment and for a period of 12
months following termination of employment for any reason, without the express
prior written approval of the Company, (i) directly or indirectly, in one or a
series of transactions, recruit, solicit or otherwise induce or influence any
proprietor, partner, stockholder, lender, director, officer, employee, sales
agent, joint venturer, investor, lessor, supplier, agent, representative or any
other person which has a business relationship with the Company or any of its
subsidiaries or affiliates, or had a business relationship with the Company or
any of its subsidiaries or affiliates within the 24-month period preceding the
date of the incident in question, to discontinue, reduce or modify such
employment, agency or business relationship with the Company or such
subsidiary(ies) or affiliate(s), or (ii) directly or indirectly, employ or seek
to employ (including through any employer of the Executive) or cause any
Competing Enterprise to employ or seek to employ any person or agent who is then
(or was at any time within six months prior to the date the Executive or the
Competing Enterprise employs or seeks to employ such person) employed or
retained by the Company or any of its subsidiaries or affiliates.

                           (c) Confidential Information. During the Term of
Employment and at all times thereafter, Executive agrees that she will not
divulge to anyone or make use of any Confidential Information except in the
performance of her duties as an executive of Holding Corp. or the Company or
when legally required to do so (in which case the Executive shall give prompt
written notice to the Company in order to allow the Company the opportunity to
object or otherwise resist such disclosure). "Confidential Information" shall
mean any knowledge or information of any type relating to the business of the
Company or any of its subsidiaries or affiliates, as well as any information
obtained from customers, clients or other third parties, including, without
limitation, all types of trade secrets and confidential

<PAGE>

commercial information. The Executive agrees that she will return to the
Company, immediately upon termination, any and all documents, records or reports
(including electronic information) that contain any Confidential Information.
Confidential Information shall not include information (i) that is or becomes
part of the public domain, other than through the breach of this Agreement by
the Executive or (ii) regarding the business or industry of the Company or any
of its subsidiaries or affiliates properly acquired by the Executive in the
course of her career as an executive in the Company's industry and independent
of the Executive's employment by the Company. The Executive acknowledges that
the Company and its affiliates have expended, and will continue to expend,
significant amounts of time, effort and money in the procurement of its
Confidential Information, that the Company and its affiliates have taken all
reasonable steps in protecting the secrecy of the Confidential Information, that
said Confidential Information is of critical importance to the Company and its
affiliates.

                           (d) Non-Disparagement. The Parties agree that, during
the Term of Employment and thereafter (including following the Executive's
termination of employment for any reason): (i) the Executive will not make
statements or representations, or otherwise communicate, directly or indirectly,
in writing, orally, or otherwise, or take any action which may, directly or
indirectly, disparage the Company or any subsidiary or affiliate or their
respective officers, directors, employees, advisors, businesses or reputations;
and (ii) the officers of the Company will not make any statements or
representations or otherwise communicate, directly or indirectly, in writing,
orally, or otherwise, or take any action which may, directly or indirectly,
disparage the Executive. Notwithstanding the foregoing, nothing in this
Agreement shall preclude either the Executive or the Company from making
truthful statements or disclosures that are required by applicable law,
regulation or legal process.

                           (e) Cooperation. The Executive agrees to cooperate
with the Company, during the Term of Employment and thereafter (including
following the Executive's termination of employment for any reason), by being
reasonably available to testify on behalf of the Company or any subsidiary or
affiliate in any action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, and to assist the Company, or any subsidiary
or affiliate, in any such action, suit or proceeding, by providing information
and meeting and consulting with the Holding Corp. Board or the Board or their
representatives or counsel, or representatives or counsel to the Company, or any
subsidiary or affiliate, as reasonably requested. The Company agrees to
reimburse the Executive for all expenses actually incurred in connection with
her provision of testimony or assistance (including attorneys' fees incurred in
connection therewith) upon submission of appropriate documentation to the
Company.

                           (f) Remedies. The Executive agrees that any breach of
the terms of this Section 11 would result in irreparable injury and damage to
the Company for which the Company would have no adequate remedy at law; the
Executive therefore also agrees that in the event of said breach or any threat
of said breach, the Company shall be entitled to an immediate injunction and
restraining order to prevent such breach and/or threatened breach and/or
continued breach by the Executive and/or any and all persons and/or entities
acting for and/or with the Executive. The terms of this paragraph shall not
prevent the Company from pursuing any other available remedies for any breach or
threatened breach hereof, including, but not limited to, remedies available
under this Agreement and the recovery of damages. The Executive and the Company
further agree that the provisions of the covenant not to compete are reasonable.
Should a court or arbitrator determine, however, that any provision of the
covenant not to compete is unreasonable, either in period of time, geographical
area, or otherwise, the parties hereto agree that the covenant shall be
interpreted and enforced to the maximum extent which such court or arbitrator
deems reasonable.

                           (g) Continuing Operation. The provisions of this
Section 11 shall survive any termination of this Agreement and the Term of
Employment, and the existence of any claim or cause of action by the Executive
against the Company, whether predicated on this Agreement or otherwise, shall
not constitute a defense to the enforcement by the Company of the covenants and
agreements of this Section.

                           (h) Notice to Employer. The Executive agrees that as
long as the provisions of Section 11(a) or 11(b) continue to bind the Executive,
she will provide written notice of the terms and provisions of this Section 11
to any prospective employer.

<PAGE>

                  31. Indemnification.

                           (a) The Company agrees that if the Executive is made
a party, or is threatened to be made a party, to any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "Proceeding"), by
reason of the fact that she is or was a director or employee of the Company or
any of its affiliates or is or was serving at the request of the Company as a
director, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether or not the basis of such Proceeding is the Executive's alleged
action in an official capacity while serving as a director, employee or agent,
the Executive shall be indemnified and held harmless by the Company to the
fullest extent legally permitted or authorized by the Company's certificate of
incorporation or bylaws or resolutions of the Board or, if greater, by the laws
of the State of Michigan against all cost, expense, liability and loss
(including, without limitation, attorney's fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by the Executive in connection therewith, and such
indemnification shall continue as to the Executive even if she has ceased to be
a director, employee or agent of the Company or other entity and shall inure to
the benefit of the Executive's heirs, executors and administrators. The Company
shall advance to the Executive all reasonable costs and expenses incurred by her
in connection with a Proceeding within 20 days after receipt by the Company of a
written request for such advance. Such request shall include an undertaking by
the Executive to repay the amount of such advance if it shall ultimately be
determined that she is not entitled to be indemnified against such costs and
expenses.

                           (b) Neither the failure of the Company (including the
Board or the Holding Corp. Board or their respective independent legal counsel
or stockholders) to have made a determination prior to the commencement of any
Proceeding concerning payment of amounts claimed by the Executive under Section
12(a) above that indemnification of the Executive is proper because she has met
the applicable standard of conduct, nor a determination by the Company
(including the Board or the Holding Corp. Board or their respective independent
legal counsel or stockholders) that the Executive has not met such applicable
standard of conduct, shall create a presumption that the Executive has not met
the applicable standard of conduct.

The Company agrees to continue and/or maintain a directors and officers'
liability insurance policy covering the Executive to the same extent the Company
provides such coverage for its other executive officers and directors and for
not less than the amounts in effect for its other executive officers and
directors.

                  32. Assignability; Binding Nature. This Agreement shall be
binding upon and inure to the benefit of the Parties and their respective
successors, heirs (in the case of the Executive) and assigns. No rights or
obligations of the Company under this Agreement may be assigned or transferred
by the Company except that such rights or obligations may be assigned or
transferred pursuant to a merger or consolidation in which the Company is not
the continuing entity, or the sale or liquidation of all or substantially all of
the assets of the Company, provided that the assignee or transferee is the
successor to all or substantially all of the assets of the Company and such
assignee or transferee assumes the liabilities, obligations and duties of the
Company, as contained in this Agreement, either contractually or as a matter of
law. The Company further agrees that, in the event of a sale or reorganization
transaction as described in the preceding sentence, it shall take whatever
action it legally can in order to cause such assignee or transferee to expressly
assume the liabilities, obligations and duties of the Company hereunder. No
rights or obligations of the Executive under this Agreement may be assigned or
transferred by the Executive other than her rights to compensation and benefits,
which may be transferred only by will or operation of law, except as otherwise
provided herein.

                  33. Miscellaneous Provisions.

                           (a) This Agreement contains the final and entire
understanding and agreement between the Parties concerning the subject matter
hereof and supersedes all prior representations, agreements, discussions,
negotiations and undertakings, whether written or oral, between the Parties with

<PAGE>

respect thereto; provided, however, that this Agreement shall not supersede any
separate written commitments by the Company with respect to indemnification.

                           (b) No provision in this Agreement may be amended
unless such amendment is authorized by the Holding Corp. Board or the Committee
and agreed to in writing and signed by the Executive and an authorized officer
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 Executive or an authorized officer of the Company, as
the case may be.

                           (c) In the 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.

                           (d) The respective rights and obligations of the
Parties hereunder shall survive any termination of the Executive's employment to
the extent necessary to the intended preservation of such rights and
obligations.

                           (e) The Executive shall be entitled, to the extent
permitted under any applicable law, to select and change a beneficiary or
beneficiaries to receive any compensation or benefit payable hereunder following
the Executive's death by giving the Company written notice thereof. In the event
of the Executive's death or a judicial determination of her incompetence,
reference in this Agreement to the Executive shall be deemed, where appropriate,
to refer to her beneficiary, estate or other legal representative.

                           (f) All amounts required to be paid by the Company
shall be subject to reduction in order to comply with applicable Federal, state
and local tax withholding requirements, except as otherwise provided herein.

                           (g) 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.

                           (h) This Agreement may be executed in two or more
counterparts.

                           (i) Notwithstanding any provision of this Agreement
to the contrary, any action to be taken by the Board shall require the
concurrence of the Holding Corp. Board.

                  34. 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. Subject to Section
16, the Company and the Executive hereby consent to the jurisdiction of any or
all of the following courts for purposes of resolving any dispute under this
Agreement: (i) the United States District Court of Detroit, Michigan or (ii) the
State of Michigan Courts of Oakland County, Michigan. The Company and the
Executive further agree that any service of process or notice requirements in
any such proceeding shall be satisfied if the rules of such court relating
thereto have been substantially satisfied. The Company and the Executive hereby
waive, to the fullest extent permitted by applicable law, any objection which it
or the Executive may now or hereafter have to such jurisdiction and any defense
of inconvenient forum.

                  35. Resolution of Disputes. Any disputes arising under or in
connection with this Agreement shall be resolved by binding arbitration, to be
held in the metropolitan area of Company headquarters 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

<PAGE>

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
Executive for such reasonable costs and expenses in the event she substantially
prevails in such arbitration or court proceeding. Notwithstanding the foregoing,
the Company shall be entitled to seek equitable relief pursuant to Section 11(f)
hereof in a Court of competent jurisdiction without otherwise waiving the right
to exclusive arbitration of all other disputes.

                  36. Notices. Any notice given to a Party 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:     Kmart Management Corporation
                                         3100 West Big Beaver Road
                                         Troy, MI 48084-3163
                                         Attention: Chief Executive Officer

                  With a copy to:        James E. Defebaugh, Esquire
                                         Senior Vice President, Deputy General
                                            Counsel & Chief Compliance Officer
                                         Kmart Management Corporation
                                         3100 W. Big Beaver Road
                                         Troy, MI 48084

                  If to the Executive:   Lisa Schultz
                                         10 Gracie Square
                                         New York, NY 10028

                  With a copy to:        Lawrence S. Blumberg, Esq.
                                         Gerald & Lawrence Blumberg, LLP
                                         521 Fifth Avenue
                                         New York, NY 10175

                  37. Approvals. Except with respect to the Company's
obligations under Section 9(d), the effectiveness of this Agreement shall be
subject to the approval of this Agreement by the Holding Corp. Board. The
Company agrees to seek such approval no later than the first meeting of the
Board that takes place following the Effective Date. Absent such approval by the
Holding Corp. Board, this Agreement shall not be effective except with respect
to the Company's obligations under Section 9(d).

                  38. Additional Payments. If any payment or benefit received or
to be received by the Executive (whether pursuant to the terms of this Agreement
or any other plan, arrangement or agreement with the Company or any affiliate)
(all such payments and benefits, excluding the Gross-Up Payment (as hereinafter
defined), being hereinafter called "Total Payments") will be subject (in whole
or part) to any excise tax (the "Excise Tax") imposed under section 4999 of the
Internal Revenue Code of 1986, as amended, then the Company shall pay to the
Executive an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Executive, after deduction of any Excise Tax on the Total
Payments and any federal, state and local income and employment taxes and Excise
Tax upon the Gross-Up Payment, shall be equal to the Total Payments.

<PAGE>

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

                                               KMART MANAGEMENT CORPORATION

                                               By:     /s/ Julian C. Day
                                                       -------------------------
                                               Title:  Chief Executive Officer

                                                       /s/ Lisa Schultz
                                               ---------------------------------

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