UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 16, 2004
SEARS, ROEBUCK AND CO.
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(Exact name of registrant as specified in its charter)
New York 1-416 36-1750680
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(State or other jurisdiction of (Commission (IRS Employer
incorporation) File Number) Identification No.)
3333 Beverly Road, Hoffman Estates, Illinois 60179
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 286-2500
Not Applicable
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(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13.e-4(c)
ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
On November 16, 2004, Kmart Holding Corporation ("Kmart") and Sears,
Roebuck and Co. ("Sears") entered into an Agreement and Plan of Merger (the
"Merger Agreement"). Concurrently, and in connection therewith, (i) ESL
Partners, L.P., ESL Investors, L.L.C., ESL Institutional Partners, L.P., ESL
Investment Management, L.L.C., CRK Partners, LLC and CRK Partners II, L.P.
(collectively, the "ESL Companies") entered into a Support Agreement and
Irrevocable Proxy (the "Support Agreement") with Kmart and Sears, and (ii) Kmart
and Sears entered into an employment agreement with Alan J. Lacy, the current
Chairman and Chief Executive Officer of Sears (the "Employment Agreement").
MERGER AGREEMENT
The Merger Agreement provides for a business combination whereby (i) Kmart
will form a newly-organized Delaware corporation to be named "Sears Holdings
Corporation" ("Holdings"), (ii) a newly-organized Delaware corporation and
wholly-owned subsidiary of Holdings ("Kmart Merger Sub") will merge with and
into Kmart with Kmart surviving (the "Kmart Merger"), and (iii) a
newly-organized New York corporation and wholly-owned subsidiary of Holdings
("Sears Merger Sub") will merge with and into Sears, with Sears surviving (the
"Sears Merger" and, together with the Kmart Merger, the "Mergers").
At the effective time of and as a result of the Mergers, (i) Kmart and
Sears will become wholly-owned subsidiaries of Holdings, (ii) each share of
Kmart common stock (other than shares owned by Kmart or Kmart Merger Sub) will
be converted into the right to receive one share of Holdings common stock, and
(iii) each share of Sears common stock (other than dissenting shares and shares
owned by Sears, Sears Merger Sub, Kmart or any wholly-owned subsidiary of Kmart
or Sears) will be converted into the right to receive, at the election of the
holder thereof, (a) $50.00 in cash (the "Cash Consideration") or (b) 0.50 shares
of common stock of Holdings (the "Stock Consideration"), subject to proration.
Sears stockholder elections will be subject to proration to ensure that 55% of
Sears shares will be exchanged for Holdings shares and 45% of Sears shares will
be exchanged for cash. All outstanding Sears stock options will be exchanged for
the right to receive cash in an amount equal to the number of shares of Sears
common stock subject to such option times the excess, if any, of the sum of (a)
the product of 45% multiplied by the Cash Consideration and (b) the product of
55% multiplied by the value of the Stock Consideration (based on the closing
price of a share of Kmart common stock on the last trading day immediately
preceding the effective time of the Mergers). All outstanding Kmart stock
options will be converted into options to purchase an equivalent number of
shares of Holdings common stock. All shares of restricted stock of Kmart and
Sears will be exchanged for shares of Holdings common stock at the same exchange
ratio applicable to Kmart common stock and Sears common stock in the Mergers,
subject the same terms and conditions, but taking into account any required
acceleration of vesting as a result of the Mergers.
Following the effective time of the Mergers, Holdings will have a
ten-member board of directors, which will include a total of seven current Kmart
directors and three current Sears directors. Edward S. Lampert, chairman of
Kmart, will be the Chairman of Holdings. He will be joined in an Office of the
Chairman by Alan J. Lacy, current Chairman and Chief Executive Officer of Sears,
and Aylwin B. Lewis, current President and Chief Executive Officer of Kmart. Mr.
Lacy will be Vice Chairman and Chief Executive Officer of Holdings, and Mr.
Lewis will be President of Holdings and Chief Executive Officer of Kmart and
Sears Retail.
Kmart and Sears made customary representations, warranties and covenants
in the Merger Agreement, including, among others, covenants (i) not to (a)
solicit proposals relating to alternative business combination transactions or
(b), subject to certain exceptions, enter into discussions concerning or provide
confidential information in connection with, alternative business combination
transactions, (ii) to cause stockholder meetings to be held to consider approval
of the Mergers irrespective of any alternative proposal that may be received and
related transactions and (iii) subject to certain exceptions, for their
respective boards of directors to recommend adoption and approval by its
stockholders of the Merger Agreement and related transactions.
Consummation of the Mergers is subject to various customary conditions,
including the approval by the stockholders of Kmart and Sears, no legal
impediment to the Mergers and the receipt of required regulatory
approvals. The Merger Agreement contains certain termination rights for both
Kmart and Sears and further provides that, upon termination of the Merger
Agreement under specified circumstances (i) Sears may be required to pay Kmart a
termination fee of up to $400 million and (ii) Kmart may be required to pay
Sears a termination fee of up to $380 million.
A copy of the Merger Agreement is included herein as Exhibit 2.1 and is
incorporated herein by reference. The foregoing description of the Merger
Agreement is qualified in its entirety by reference to the full text of the
Merger Agreement.
SUPPORT AGREEMENT
Pursuant to the Support Agreement and subject to certain conditions
specified therein, the ESL Companies agreed (i) to vote their shares of common
stock of Kmart (a) in favor of the Kmart Merger at the stockholders meeting to
be called to consider the Kmart Merger and (b) against any other transaction,
and (ii) to vote their common shares of Sears (a) in favor of the Sears Merger
at the stockholders meeting to be called to consider the Sears Merger and (b)
against any other transaction. The requirement of the ESL Companies to vote
their shares of Kmart common stock as described above is subject to limitations
if the Kmart board of directors changes its recommendation with respect to the
Kmart Merger, in which case only a number of shares equal to one third of
outstanding shares of Kmart common stock would be required to be so voted, with
the remaining shares being required to be voted pro rata with all other shares
of Kmart common stock not beneficially owned by the ESL Companies. The ESL
Companies also agreed not to transfer or otherwise dispose of any of their
shares of Kmart common stock or Sears common stock. The ESL Companies
beneficially own approximately 53% of the outstanding shares of Kmart common
stock (including the beneficial ownership of shares of Kmart common stock
underlying certain convertible notes and options beneficially owned by the ESL
Companies) and beneficially own approximately 15% of the outstanding Sears
common shares. The ESL Companies have also agreed to irrevocably elect to
receive Holdings common stock in the Sears Merger.
The ESL Companies are controlled, directly or indirectly, by ESL
Investments, Inc., which in turn is controlled by Edward S. Lampert. As noted
above, Mr. Lampert is the Chairman of Kmart.
A copy of the Support Agreement is included herein as Exhibit 99.1 and is
incorporated herein by reference. The foregoing description of the Support
Agreement is qualified in its entirety by reference to the full text of the
Support Agreement.
EMPLOYMENT AGREEMENT
The Employment Agreement provides that it shall be assumed by Holdings as
soon as practicable following its formation, but no later than completion of the
Mergers. The Employment Agreement provides for a term of employment commencing
upon completion of the Mergers and ending on the fifth anniversary thereof. If
the Mergers ares completed, the Employment Agreement will supersede the
Executive Non-Disclosure and Non-Solicitation of Employees Agreement and the
Executive Severance/Non-Compete Agreement, which Mr. Lacy executed with Sears as
of November 26, 2001. During the term, Mr. Lacy will serve as Chief Executive
Officer and Vice Chairman of Holdings and a member of its board of directors.
During the term, Mr. Lacy will receive an annual base salary of no less
than $1,500,000 and a target bonus of 150% of his annual base salary and will be
eligible for, and receive benefits under, employee benefit and perquisite
arrangements no less favorable than those generally applicable or made available
to senior executives of Holdings. Upon completion of the Mergers, Mr. Lacy will
be granted 75,000 shares of restricted stock of Holdings, which will vest in
full on June 30, 2006, subject to Mr. Lacy's continued employment with Holdings
through such date. In addition, upon completion of the Mergers, Mr. Lacy will be
granted a stock option to purchase 200,000 shares of Holdings' common stock with
a per share exercise price equal to the fair market value of Holdings common
stock on the date of grant. The stock option will vest with respect to
one-quarter of the shares subject to the stock option on each of the first four
anniversaries of completion of the Mergers, subject to Mr. Lacy's continued
employment with Holdings through each applicable vesting date.
If Mr. Lacy's employment is terminated by Holdings without cause (as
defined in the Employment Agreement) or Mr. Lacy resigns with good reason (as
defined below), Mr. Lacy will be entitled, subject to execution of a release in
favor of Holdings, to receive severance benefits, including:
- A pro rata bonus based on the performance of Holdings for the year
in which the termination occurs;
- Two times the sum of Mr. Lacy's annual base salary and target bonus;
- Two additional years of age and service credit under all welfare
benefit plans, programs, agreements and arrangements of Holdings;
- Accelerated vesting of equity-based awards and three years to
exercise any vested options; and
- Continued welfare benefits for two years.
For purposes of the agreement, "good reason" means (i) the assignment to
Mr. Lacy of duties inconsistent with, or any diminution of, the position,
authority, duties or responsibilities called for by the Employment Agreement,
(ii) the failure to pay Mr. Lacy his compensation under the agreement, (iii) Mr.
Lacy's relocation of employment, (iv) the failure of Sears or Kmart to require
the assumption of the Employment Agreement by Holdings or the failure of
Holdings to require the assumption of the Employment Agreement by a successor or
(v) the failure to elect or reelect Mr. Lacy to Holdings' board of directors. In
addition, "good reason" means any termination by Mr. Lacy during the 30-day
period immediately following June 30, 2006.
If Mr. Lacy's employment is terminated due to his death or disability (as
defined in the Employment Agreement), Mr. Lacy (or his estate) will be entitled
to receive a pro-rata bonus for the year of termination, accelerated vesting of
equity-based awards and three years to exercise vested options and continued
welfare benefits for two years.
Under the Employment Agreement, Mr. Lacy is restricted from revealing
confidential information of Holdings and, for one year following Mr. Lacy's
termination of employment during the term for any reason, Mr. Lacy may not
solicit for employment any employees of Holdings and may not compete with
Holdings. In the event that any payments to Mr. Lacy are subject to an excise
tax under Section 4999 of the Internal Revenue Code, Mr. Lacy will be entitled
to an additional gross-up payment so that he remains in the same after-tax
position he would have been in had the excise tax not been imposed.
A copy of the Employment Agreement is included herein as Exhibit 10.1 and
is incorporated herein by reference. The foregoing description of the Employment
Agreement is qualified in its entirety by reference to the full text of the
Employment Agreement.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
2.1 Agreement and Plan of Merger, dated as of November 16, 2004, between
Kmart Holding Corporation and Sears, Roebuck and Co.
10.1 Employment Agreement, dated as of November 16, 2004, among Alan J.
Lacy, Kmart Holding Corporation and Sears, Roebuck and Co.
99.1 Support Agreement and Irrevocable Proxy, dated as of November 16,
2004, among certain affiliates of ESL Investments, Inc., Kmart Holding
Corporation and Sears, Roebuck and Co.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SEARS, ROEBUCK AND CO.
Date: November 18, 2004
By: /s/ Andrea L. Zopp
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Name: Andrea L. Zopp
Title: Senior Vice President and General
Counsel
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1 Agreement and Plan of Merger, dated as of November 16, 2004,
between Kmart Holding Corporation and Sears, Roebuck and Co.
10.1 Employment Agreement, dated as of November 16, 2004, among
Alan J. Lacy, Kmart Holding Corporation and Sears, Roebuck
and Co.
99.1 Support Agreement and Irrevocable Proxy, dated as of November
16, 2004, among certain affiliates of ESL Investments, Inc.,
Kmart Holding Corporation and Sears, Roebuck and Co.