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2005 Straight Talk Archives

GULP -
Sears Retirees are being Socked Again

June 11, 2005

Retirees to have the GULP (Group Universal Life Plan) recently got a rude awakening when they received a letter from the administrator of the plan informing them that they will no longer be on a flat rate, but that their premiums will be age-related just like active associates, dependents and spouses.

GULP is a separate life insurance program, not related to the life insurance benefit that was subject to a lawsuit/settlement a number of years ago. GULP is paid for by the insured. It was program offered to associates and new retirees.

According to the GULP program manager, since the plan continues to operate in a deficit situation, the previous flat rate premiums are being eliminated and all premiums are now being re-calculated using rates based upon age and smoker status. Depending upon your age and smoking habits, some rates will double! These new rates will become effective July 1, 2005.

This increase in premiums, to a group that can no longer shop around for term life insurance, just makes it clearer to all retirees how much we really all lost in the original reduction of our life insurance by “King Arthur” Martinez.

Unfortunately, premiums can be increased. But such increases are the latest affront to the entire defenseless retiree population at a time when retirees are vulnerable and the cost of replacing the coverage is prohibitive.

Sears is socking it to retirees again, as expected. What’s next? It has been reported that Sears has joined a national coalition called National Health Access, which is designed to help part-time workers, temporary and seasonal employees, contract and franchise workers, pre-Medicare retirees and dependents.

This coalition is expected to be launched this fall and includes, in addition to Sears, Ford, General Electric, McDonald's, IBM, General Mills, SYSCO, and Texas Instruments. If this coalition health-care benefit is offered to retirees, it will be at a group rate, but we suspect that retirees will be shouldering the entire cost of such medical benefits.

So what do you do? First, carefully review your current coverage and decide whether you can continue to afford the premium increase for GULP. We all have household expenses, medical expenses, drug costs, etc. If you find it difficult to afford the premium increase, you may either have to cut back on the amount of life insurance coverage, or, as a last resort, cancel your policy if it is cost prohibitive for you.

If you decide to drop your GULP insurance coverage and withdraw the money in your cash accumulation fund, there may be an impact on your taxes. You should consult your tax advisor before making this decision.

Second, regardless of what you do regarding the GULP, call or write Sears to express your extreme displeasure with the rate increases. Yes, GULP is underwritten by Metropolitan Life Insurance Company and administered by Marsh@WorkSolutions, but this is still a Sears retiree benefit. In other words, go to the “father,” not to the “son.” Sears Holdings Corp. (SHC) may be following the latest corporate trend in attempting to relieve itself of its responsibility. In our opinion, this is just another breach of a fiduciary relationship!

To express your opinions about this issue, you can write to Edward Lampert, chairman of SHC at ESL Investments, 200 Greenwich Ave., Greenwich CT 06830; or, Alan Lacy or Aylwin Lewis at Sears Holdings Corp., 3333 Beverly Road, Hoffman Estates, IL 60179; or call the general switchboard number in Hoffman Estates, 847/286-2500 and ask to be connected to the appropriate executive.

And third, as a last resort, and to express your displeasure with the company’s lack of respect for its retirees (“actions speak louder than words”), there are other stores on the block that you can shop at—for clothing, for appliances, for electronics, for tools, for household items, etc.

In conclusion, we recently received an e-mail from a former Sears executive who told us:

“During my career, I told Sears’ associates that they would never be a ‘drudge’ on society because of now Sears long forgotten retiree benefit package. The merger of Sears and K-Mart is akin to two drunken losers. You put them together, and you have one BIG loser who will be selling more of the assets to maintain a cash flow…”

As has been reported in the press, Sears fate continues to remain the topic of much speculation. Some analysts believe Lampert will liquidate the company and move on, while others see him turning the company around.

Analyst Howard Davidowitz, chairman of Davidowitz & Associates, a retail-consulting and investment-banking firm based in New York, believes Kmart will last no more than three years, and the Sears brand will be dead within six years. Davidowitz rational is:

“Lampert is a short-term player…His strategy is short-term asset maximization [rather than] long-term building of a business.”

However, analyst Kurt Barnard, president of Barnard’s Retail Consulting Group, a Nutley, New Jersey based firm that forecasts industry trends and consumer spending patterns, disagrees, saying he believes Lampert wants to run Sears for the long-term, in the tradition of Wal-Mart founder Sam Walton, by listening to customers, gaining knowledge from suppliers and becoming more nimble and technologically savvy. But, Barnard cautioned “Lampert also clearly leaves open any and all options.”

Let’s hope that the options ultimately selected by Lampert will be beneficial for shareholders, associates and retirees alike!

 

Sears Holdings Corporation files Joint Proxy Statement-Prospectus with SEC Regarding Proposed Merger
January 21, 2005

On January 7, 2005 Sears Holdings Corporation filed a joint proxy statement-prospectus on behalf of Kmart Corporation and Sears, Roebuck and Co. regarding the proposed merger of the two companies and the formation of Sears Holdings Corporation. The date for the respective special meetings of stockholders of Kmart and Sears stockholders was left blank in this SEC filing.

However, each company will have special stockholders' meetings to vote on this proposed merger. The purpose of these special meetings are described in the filing as follows:

Kmart.  At the Kmart special meeting, Kmart's stockholders will be asked to consider and vote upon a proposal to adopt the merger agreement, to approve the grant of restricted shares and options to Aylwin B. Lewis and to transact such other business as may properly come before the special meeting or any adjournment or postponement thereof.

Sears.  At the Sears special meetingerger agreement and to transact such other business as may properly come before t, Sears' stockholders will be asked to consider and vote upon a proposal to adopt the mhe special meeting or any adjournment or postponement thereof.

We have received many retiree inquiries about this proposed merger. As a result, we are setting forth below the "risk factors" that this joint proxy statement-prospectus mentions for stockholders in deciding whether to vote for adoption of the merger agreement. These risk factors are in the 139 page document, plus attachments, which were filed with the SEC. Please review all of the risk factors very carefully to assist you in your voting decision.

RISK FACTORS
In addition to the other information contained in or incorporated by reference into this joint proxy statement-prospectus, including the matters addressed under the caption "Information Regarding Forward-Looking Statements" on page 27, you should carefully consider the following risk factors in deciding whether to vote for adoption of the merger agreement.

Sears stockholders may not receive the form of merger consideration that they elect.
The merger agreement contains provisions that are designed to ensure that, in the aggregate, 45% of Sears shares will be converted into cash and 55% of Sears shares will be converted into Holdings common stock. The value of the share consideration at the time of the mergers may be higher than the value of the cash consideration at such time, or vice versa. If elections are made by Sears stockholders to receive more cash or more shares of Holdings than these percentages, either those electing to receive cash or those electing to receive shares of Holdings, respectively, will have the consideration of the type they selected reduced by a pro rata amount, and will receive a portion of their consideration in the form that they did not elect to receive. Accordingly, it is likely that a substantial number of Sears stockholders will not receive a portion of the merger consideration in the form that they elect and that the consideration they do receive will have a lower value than what they elected to receive.

In connection with a support agreement, the ESL Companies have agreed to elect to receive shares of Holdings common stock in the Sears merger even if the value of the share consideration at the time of the mergers is less than the cash consideration. Nonetheless, the ESL Companies will be subject to proration, like all Sears stockholders, if holders of more than 55% of the Sears shares elect shares of Holdings. The ESL Companies as of the record date owned approximately 31.1 million shares of Sears common stock or approximately 15% of the outstanding Sears common stock.

Because the exchange ratios are fixed, the market value of Holdings common stock issued to you may be less than the value of your shares of Kmart common stock or Sears common stock.
Kmart stockholders and Sears stockholders who receive shares in the mergers will receive a fixed number of shares of common stock of Holdings rather than a number of shares with a particular fixed market value. The market values of Kmart and Sears common stock at the time of the mergers may vary significantly from their prices on the date the merger agreement was executed, the date of this joint proxy statement-prospectus or the date on which Kmart and Sears stockholders vote on the mergers. Because the exchange ratio will not be adjusted to reflect any changes in the market value of Kmart or Sears common stock, the market value of the Holdings common stock issued in the mergers and the Kmart and Sears common stock surrendered in the mergers may be higher or lower than the values of such shares on such earlier dates, and may be higher or lower than the $50.00 to be paid to Sears stockholders in the cash portion of the Sears merger. Stock price changes may result from a variety of factors that are beyond the control of Kmart and Sears, including changes in their businesses, operations and prospects, regulatory considerations and general and industry specific market and economic conditions. Neither Kmart nor Sears is permitted to terminate the merger agreement solely because of changes in the market price of either party's common stock.

If you deliver your Sears shares to the exchange agent to make an election, you will not be able to sell those shares, unless you revoke your election prior to the election deadline or the merger agreement is terminated.
The deadline for making a cash or share election for Sears shares is 5:00 p.m., New York City time, on           , 2005, the day of the special meeting of Sears stockholders, unless the completion of the Sears merger will occur more than four business days following the date of this special meeting, in which case the election deadline will be extended until two business days before the completion of the Sears merger. After you submit a form of election, under the terms of the election, you will not be able to sell any Sears shares covered by your form of election, regardless of whether those shares are held in certificated or book entry form, unless you revoke your election before the deadline by providing written notice to the exchange agent. If you do not revoke your election, you will not be able to sell your Sears shares covered by a form of election prior to completion of the Sears merger. In the time between your submission of a form of election and the completion of the Sears merger, the trading price of Sears common stock may change, and you might otherwise want to sell your Sears shares covered by a form of election to gain access to cash, make other investments, or reduce the potential for an adverse change in the value of your investment.

We may fail to realize the anticipated benefits of the mergers.
The success of the mergers will depend, in part, on our ability to realize the anticipated growth opportunities and cost savings from combining the businesses of Kmart and Sears. Our managements have conservatively estimated that the combined companies expect to realize approximately $200 million in incremental operating profit synergies from increased revenues by capitalizing on cross-selling opportunities between Kmart's and Sears' proprietary brands and by converting a substantial number of Kmart stores to the Sears nameplate over time. There can be no assurance, however, that these cross-selling opportunities or conversions will be successful.

Moreover, expanding the offering and distribution of proprietary brands may impact the value of those brands and lead to cannibalization of sales from either Sears or Kmart. There is also the risk that national brands will not sell to the combined companies. In addition, Holdings may be unable to realize the value it expects from the combined real estate portfolio, including being able to differentiate product offerings at its various locations. If these benefits are not achieved, Holdings' results of operations could be materially adversely affected.

Our managements have also conservatively estimated that the combined entities expect to achieve annual cost savings of over $300 million principally through improved merchandising and non-merchandising purchasing scale as well as improved supply chain, administrative and other operational efficiencies. However, to realize the anticipated benefits from the mergers, we must successfully combine the businesses of Kmart and Sears in a manner that permits those costs savings and revenue synergies to be realized. In addition, we must achieve these savings without adversely affecting revenues. If we are not able to successfully achieve these objectives, the anticipated benefits of the mergers may not be realized fully or at all or may take longer to realize than expected.

The integration of Kmart and Sears following the mergers will present significant challenges.
Kmart and Sears have operated and, until the completion of the mergers, will continue to operate, independently. Kmart and Sears will face significant challenges in consolidating functions, integrating their organizations, procedures and operations in a timely and efficient manner and retaining key Kmart and Sears personnel. The integration of Kmart and Sears will be costly, complex and time consuming, and the managements of Kmart and Sears will have to devote substantial resources and efforts to it.

The integration process and other disruptions from the mergers could result in the disruption of each company's ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with customers, suppliers, employees and others with whom we have business dealings or to achieve the anticipated benefits of the mergers.

Directors of Kmart and Sears may have potential conflicts of interest in recommending that you vote in favor of the adoption of the merger agreement.
A number of directors of Kmart and a number of directors of Sears who recommend that you vote in favor of the adoption of the merger agreement have employment or severance agreements, equity compensation and other benefit arrangements or other interests that provide them with interests in the mergers that differ from yours. In addition, a number of directors of Kmart and Sears will continue as directors of Holdings while other directors will not, and in either case Holdings will indemnify and provide insurance for their services as directors of Kmart and Sears prior to the mergers. In particular, Kmart's Chairman and one other director of Kmart have material relationships with the ESL Companies, which are significant stockholders of Kmart and Sears.

The receipt of compensation or other benefits in the mergers, the continuation of indemnification and insurance arrangements for current directors of Kmart and Sears following completion of the mergers, and relationships with significant stockholders of Kmart and Sears may have influenced these directors in making their recommendation that you vote in favor of the adoption of the merger agreement. You should be aware of these interests when you consider your board's recommendation that you vote in favor of the mergers.

Affiliates of the Chairman of Holdings, whose interests may be different than your interests, will have substantial influence over Holdings.
Assuming that Holdings issues approximately 146 million shares pursuant to the mergers and depending upon the elections of Sears stockholders to receive cash or stock consideration, the ESL Companies would be expected to beneficially own between approximately 39% and 43% of the outstanding shares of Holdings common stock immediately after the mergers (including the beneficial ownership of shares of Holdings common stock underlying the options and convertible notes of Kmart currently held by the ESL Companies). The ESL Companies (other than ESL Investment Management, L.L.C.) are controlled, directly or indirectly, by Edward S. Lampert, the current Chairman of Kmart, and the designated Chairman of Holdings. Mr. Lampert directly controls ESL Investment Management, L.L.C. Accordingly, the ESL Companies, and thus Mr. Lampert, would have substantial influence over many if not all actions to be taken by Holdings stockholders after the mergers, including the election of the directors to the Holdings board and transactions involving a change of control.

This substantial influence may have the effect of discouraging offers to acquire Holdings because the consummation of any such acquisition would likely require the consent of the ESL Companies. The interests of the ESL Companies, which have investments in other companies, may from time to time diverge from the interests of other Holdings stockholders, particularly with regard to new investment opportunities.

Following the mergers, Holdings will have significantly less cash on hand than Kmart and Sears prior to the mergers.
Following an assumed completion of the mergers in March 2005 and after payment of the merger consideration and payment in respect of options to purchase Sears common stock and all other pro forma adjustments relating to the mergers, Holdings is expected to have approximately $1.0 billion in cash and cash equivalents. In addition, Holdings is expected to have approximately $5.8 billion in indebtedness, including $640 million related to obligations under capital leases ($55 million short-term, $585 million long-term) and $1.1 billion of other short-term borrowing. The expected cash on hand in March 2005 assumes a build-up of cash from the seasonal low-point at the end of the third quarter 2004, 2004 holiday sales consistent with seasonal buying patterns and Holdings' ability to maintain access to the commercial paper markets. No assurances can be given as to the actual amount of cash and cash equivalents that Holdings will have on hand following the mergers.

As a result, Holdings will be required to obtain additional financing to meet its liquidity needs. Although Holdings anticipates entering into a credit facility prior to the completion of the mergers, Holdings may not be able to obtain financing on terms that are acceptable to it. Holdings' ability to obtain financing will be dependent largely on its operating performance and its credit ratings from the major credit ratings agencies. Standard and Poors has indicated that it expects Holdings to have a below-investment grade long-term debt rating and Moody's cut Sears' long-term debt rating following the announcement of the proposed mergers. If Holdings' debt ratings are below investment grade or if Holdings' operating performance were to be worse, its financing costs could be higher than expected and its access to financing, and in particular, the ability to issue commercial paper, could be limited. In such a case, Holdings' financial flexibility could be limited, adversely affecting its ability to grow and compete.

Holdings does not expect to pay dividends for the foreseeable future.
Although Sears stockholders have historically received quarterly dividends from Sears, Holdings does not expect to pay dividends in the foreseeable future. Former Sears stockholders who become stockholders of Holdings will no longer be able to rely on receiving dividend payments, and instead they (and former Kmart stockholders) must rely on increases in the trading price of Holdings common stock for any return on their investment.

Holdings will be dependent upon key personnel.
Following the mergers, Holdings will be dependent upon the contributions of its senior management team, including Edward S. Lampert (Chairman of Holdings), Alan J. Lacy (Vice Chairman and Chief Executive Officer of Holdings), Aylwin B. Lewis (President of Holdings and Chief Executive Officer of Kmart and Sears Retail), Glenn R. Richter (Executive Vice President and Chief Financial Officer of Holdings), William C. Crowley (Executive Vice President, Finance and Integration of Holdings), and other key employees for its future success. While Messrs. Lacy and Lewis have employment agreements with Holdings, Sears or Kmart, if any of these executives, or other key employees, were to cease to be employed by Holdings, including as a result of the integration of Sears and Kmart following the mergers, Holdings could be adversely affected.

The market price of Holdings' shares after the mergers may be affected by factors different from those currently affecting the shares of Kmart or Sears.
Although Holdings' business will be a combination of Kmart's and Sears' businesses, this combination may be susceptible to factors that did not have a material effect on Kmart or Sears as separate businesses. Accordingly the results of operations of the combined companies may be affected by factors different from those currently affecting the results of operations of Kmart or Sears, and therefore the uncertainty of the market's ability to value Holdings' business model or to understand Holdings' results of operations may affect Holdings' stock price in ways different from factors that currently affect the shares of Kmart or Sears.

Former Sears stockholders who become stockholders of Holdings will be governed by the restated certificate of incorporation and restated by-laws of Holdings.
Sears stockholders who receive Holdings common stock in the mergers will become Holdings stockholders and their rights as stockholders will be governed by the restated certificate of incorporation and restated by-laws of Holdings and Delaware corporate law. As a result, there will be material differences between the current rights of Sears stockholders and the rights they can expect to have as Holdings stockholders. material differences between the current rights of Sears stockholders and the rights they can expect to have as Holdings stockholders.

For example, among other differences, Sears provides for a staggered board of directors but Holdings does not, and thus an acquisition or change in control of Holdings by a third party that stockholders, in their judgment, might not have favored may be easier to effect. Sears provides for the cumulative voting of directors but Holdings does not, and thus a group of controlling stockholders, like the ESL Companies, may be able to elect all of the directors of Holdings.

Moreover, New York corporate law differs in certain respects from Delaware corporate law. For example, among other differences, a stockholder becomes an "interested stockholder" of a Delaware corporation at a lower ownership threshold than a stockholder of a New York corporation but can effect a business combination at an earlier date than an "interested stockholder" of a New York corporation. A merger involving a New York corporation also requires the affirmative vote of at least two-thirds of the outstanding shares instead of just a majority of the outstanding shares of a Delaware corporation. Furthermore, the process for stockholders to perfect appraisal rights differs under New York and Delaware corporate law. For additional information, see "Comparison of Stockholder Rights" beginning on page 117.

Holdings' restated certificate of incorporation will not contain certain bankruptcy provisions that exist in Kmart's current certificate of incorporation.
The restated certificate of incorporation of Holdings will not have certain bankruptcy provisions that exist in the current certificate of incorporation of Kmart. One bankruptcy provision has already expired pursuant to its terms, and the other bankruptcy provisions will expire in May 2005. In particular, Holdings' restated certificate of incorporation will not include the prohibition against the issuance of Kmart nonvoting equity securities on or prior to the second anniversary of Kmart's emergence from bankruptcy protection or the rights of certain named stockholders to designate directors to the board of directors of Kmart until the annual meeting of Kmart stockholders for 2005.

We are parties to pending lawsuits in connection with the mergers.
We are parties to several lawsuits filed by third parties seeking monetary damages or injunctive relief, or both, in connection with the mergers. Predicting the outcome of these lawsuits is difficult; and an adverse judgment for monetary damages could have a material adverse effect on the operations of Holdings after the mergers, a preliminary injunction could delay or jeopardize the completion of the mergers and an adverse judgment granting injunctive relief could permanently enjoin the consummation of the mergers.

 

 

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