Chief Creative Officer Employment Agreement -Lisa Schultz

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


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


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


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;


(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;


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