PROPOSAL 1 — ELECTION OF DIRECTORS

The Company's Articles of Incorporation and By-Laws provide that the number of directors, as determined from time to time by the Board, shall be not less than seven nor more than twenty-one. The Board has fixed the number of directors at 10, as of May 15, 2001. The Articles and By-Laws further provide that directors shall be divided into three classes (Class I, Class II and Class III) serving staggered three-year terms, with each class to be as nearly equal in number as possible.

Director standing for election for a term expiring in 2002

The Board of Directors has appointed Mr. Conaway as Class I director. Mr. Conaway was appointed to fill the vacancy created by the resignation of Floyd Hall in 2000. In accordance with the recommendation of its Committee on Directors and Corporate Governance and in accordance with the Articles and By-Laws, the Board has nominated Mr. Conaway for election as Class I director for term expiring at the 2002 Annual Meeting and until his successor is elected and qualified.

Class I Director. The following Class I Director is standing for election:

CHARLES C. CONWAY, 40

Chairman of the Board and Chief Executive Officer. Previously served as President, as Chief Operating Officer, as Executive Vice President and Chief Financial Officer of CVS Corporation and as Executive Vice President and Chief Financial Officer of Melville Corporation. Has served as director of Kmart Corporation since 2000.

Director standing for election for a term expiring in 2003

The Board of Directors has, effective April 17, 2001, appointed Richard J. Statuto as Class II director. Mr. Statuto was appointed on March 20,2001 in anticipation of vacancies created by the retirement of Joseph A. Califano, Jr., J. Richard Munro and James O. Welch, Jr. as of the 2001 Annual Meeting. In accordance with the recommendation of its Committee on Directors and Corporate Governance and in accordance with the Articles and By-Laws, the Board has nominated Mr. Statuto for election as a Class II director for a term expiring at the 2003 Annual Meeting and until his successor is elected and qualified.

Class II Director. The following Class II Director is standing for election:

RICHARD J. STATUTO, 43

President and Chief Executive Officer of St. Joseph Health Systems (provider of hospital, physician, homecare, wellness and insurance services). Previously served as Chief Operating Officer and Vice President of Marketing and Planning of St. Joseph Health Systems. Also Vice Chairman of CHRISTUS Health. Has served as director of Kmart Corporation since 2001.

Directors standing for election for terms expiring in 2004

In accordance with the recommendation of its Committee on Directors and Corporate Governance, the Board has nominated Ms. Affinito and Messrs. Cline, Davis and Flannery for election as Class III directors for terms expiring at the 2004 Annual Meeting and until their successors are elected and qualified. All of the nominees are presently directors of the Company whose terms expire at the 2001 Annual Meeting.

Class III Directors. The following Class III directors are standing for election:

LILYAN H. AFFINITO, 69

Former Vice Chairman of the Board of Maxxam Group Inc. (forest products operations, real estate management and development and aluminum production). Director of Caterpillar, Inc. and KeySpan Corporation. Has served as director of Kmart Corporation since 1990.

RICHARD G. CLINE, 66

Chairman, Hawthorne Investors, Inc. (management advisory services and private investments). Previously served as Chairman and Chief Executive Officer and as Chairman, President and Chief Executive Officer of Nicor, Inc. (natural gas distribution and containerized shipping) and as Chairman, Hussmann International, Inc. (refrigerated merchandising equipment and refrigeration). Director of Ryerson Tull, Inc. and Whitman Corporation. Trustee of Northern Funds and Northern Institutional Funds. Has served as a director of Kmart Corporation since 1995.

WILLIE D. DAVIS, 66

President of All Pro Broadcasting, Inc. (radio stations). Director of Alliance Bank, Bassett Furniture Industries, Incorporated, Checkers, Inc., The Dow Chemical Company, Johnson Controls, Inc., MGM Mirage, Inc., MGM, Inc., Sara Lee Corporation, Strong Funds and Wisconsin Energy Corporation. Has served as director of Kmart Corporation since 1986.

JOSEPH P. FLANNERY, 69

Chairman of the Board, President and Chief Executive Officer of Uniroyal Holding, Inc. (investment management company). Director of ArvinMeritor, Inc., Ingersoll Rand Company, Newmont Mining Corporation and The Scotts Company. Has served as director of Kmart Corporation since 1985.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ELECTION OF MR. CONAWAY AS A CLASS I DIRECTOR, MR. STATUTO AS A CLASS II DIRECTOR AND MS. AFFINITO AND MESSRS. CLINE, DAVIS AND FLANNERY AS CLASS III DIRECTORS.

Directors Continuing in Office

Class I Directors. The following Class I directors' terms expire at the 2002 annual meeting. Messrs. Adamson and Kennedy were elected at the Company's 1999 Annual Meeting.

JAMES B. ADAMSON, 53

Chairman, Advantica Restaurant Group (formerly Flagstar Corporation) (food services and restaurant franchises). Previously served as Chief Executive Officer and President, Denny's, Inc. and as Chief Executive Officer, as Chief Operating Officer and as Retail President of Burger King Corporation. Has served as a director of Kmart Corporation since 1996.

ROBERT D. KENNEDY, 68

Former Chairman and Chief Executive Officer of Union Carbide Corporation (chemicals and plastics manufacturer). Director of Chase Industries, Inc., International Paper, Inc. and Sunoco, Inc. Has served as director of Kmart Corporation since 1996.

Class II Directors. The following Class II directors' terms expire at the 2003 Annual Meeting. Ms. Smith and Mr. Stallkamp were elected at the Company's 2000 Annual Meeting.

ROBIN B. SMITH, 61

Chairman and Chief Executive Officer of Publishers Clearing House (distribution of publications). Previously served as President and Chief Executive Officer of Publishers Clearing House. Director of BellSouth Corp., Springs Industries, Inc. and Texaco, Inc. Trustee of Prudential Investments mutual funds. Has served as director of Kmart Corporation since 1996.

THOMAS T. STALLKAMP, 54

Vice Chairman and Chief Executive Officer, MSX International (provider of technology based business systems and services). Previously served as Vice Chairman and as President of DaimlerChrysler Corporation and as President of Chrysler Corporation. Director of Baxter International, Inc. Has served as director of Kmart Corporation since 1999.

How are directors compensated?

Directors who are not employees of the Company or its subsidiaries receive an annual retainer of $50,000, with no additional amount payable for attending meetings. Fifty percent (and at the election of the director, up to 100%) of the annual retainer is paid in Common Stock in lieu of cash pursuant to the Directors Stock Plan. In addition, under the Directors Stock Plan, restricted stock units, which are distributed as shares of Common Stock upon termination of Board service, are accrued for period of time equal to the director's Board service, but no more than ten years, in an amount equal to 50% of the annual retainer, plus, for Committee chairpersons, an amount equal to 10% of the annual retainer.

Under the Company's Deferred Compensation Plan for Non-Employee Directors and the Directors Stock Plan, a director may elect to defer all or any portion of his or her compensation for services as a director which is payable in cash or Common Stock. Under these Plans, deferred cash amounts earn interest at rate equivalent to the ten-year U.S. Treasury Note rate plus 5%, and deferred shares of Common Stock are credited with an amount equal to any dividends payable on such shares, which are converted on quarterly basis to additional shares.

In addition, on January 27,2000, each of the Company's non-employee directors received an option grant pursuant to the Directors Stock Plan which entitles them to purchase 6,600 shares of Common Stock. This option vests in three equal installments on each of the first three anniversaries of the date of grant and has a per share exercise price of $8.84.

Effective January 1, 1996, benefits under the Company's Directors Retirement Plan were terminated with respect to new directors and the accrual of future benefits for existing directors was terminated. Non-employee directors who served on the Board prior to December 31,1995 and who serve at least five years are entitled to benefits under the Plan. Upon retirement from the Board, such directors will receive an annual benefit equal to the annual retainer at the time of retirement for a period equal to the director's accrued years under the frozen Plan, not to exceed ten years. Ms. Affinito and Messrs. Davis and Flannery have vested benefits under the frozen Directors Retirement Plan.

Directors who are employees of the Company or its subsidiaries do not receive the above compensation or benefits.

How often did the Board meet during fiscal 2000?

The Board of Directors met 12 times during fiscal 2000. Except for Mr. Stallkamp, who attended 71% of the Board and Committee meetings, each director attended at least 83% of the Board and Committee meetings held while he or she served as a director or member of a Committee.

What are the standing Committees of the Board?

The Board of Directors has the following standing Committees: Audit, Executive, Compensation and Incentives, Finance and Committee on Directors and Corporate Governance. Except for the Executive Committee, the Committees are comprised solely of non-employee directors.

BOARD COMMITTEE MEMBERSHIP