8-K

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): March 24, 2005

Sears Holdings Corporation

(Exact name of registrant as specified in its charter)

Delaware	000-51217	20-1920798
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

3333 Beverly Road, Hoffman Estates, Illinois	60179
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:

(847) 286-2500

Not Applicable

(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):

o  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13.e-4(c))

TABLE OF CONTENTS

	Item 1.01 Entry Into a Material Definitive Agreement
	Item 1.02 Termination of a Material Definitive Agreement
	Item 3.02 Unregistered Sales of Equity Securities
	Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers
	Item 7.01 Regulation FD Disclosure
	Item 8.01 Other Events
	Item 9.01 Financial Statement and Exhibits
SIGNATURES
EXHIBIT INDEX
EX-10.1: AMENDED AND RESTATED EMPLOYMENT AGREEMENT
EX-10.6 FORM OF NONQUALIFIED STOCK OPTION AGREEMENT
EX-10.7 FORM OF RESTRICTED SHARE AGREEMENT
EX-99.1 PRESS RELEASE
EX-99.2 PRESS RELEASE

Item 1.01 Entry Into a Material Definitive Agreement

      On March 24, 2005, Sears Holdings Corporation (“Holdings”) entered into a five-year Amended and Restated Employment Agreement with Aylwin Lewis (the “Lewis Agreement”) pursuant to which Mr. Lewis will serve as President of Holdings, Chief Executive Officer and President of Kmart Holding Corporation (“Kmart”) and Chief Executive Officer of Sears Retail. Mr. Lewis was also appointed to the Board of Directors of Holdings. The Lewis Agreement supersedes and replaces Mr. Lewis’ prior employment agreement with Kmart Management Corporation.

      Under the Lewis Agreement, Mr. Lewis will receive an annual salary of not less than $1,000,000, an annual bonus opportunity with a target amount equal to his annual salary, relocation benefits (including but not limited to guaranteed purchase of Mr. Lewis’ residence in Michigan at fair market value, and during the two-year period following consummation of the Mergers (as defined below) use of a company plane or other private aircraft for travel between Michigan and Chicago and costs associated with temporary housing) and other employee benefits and perquisites made available generally to Kmart’s other senior executives or, in Holdings’ discretion, Holdings’ senior executives or its employees generally. The Lewis Agreement also provides that Mr. Lewis will be deemed to be constructively terminated if neither Edward Lampert (the Chairman of Holdings) or Mr. Lewis becomes the Chief Executive Officer of Holdings if Alan Lacy is no longer Chief Executive Officer of Holdings. In such event, Mr. Lewis will receive his salary and continued welfare benefits for the lesser of three years or the remaining term of the Lewis Agreement, but not less than 12 months, and a pro-rata portion of the annual bonus for the year of termination.

      The foregoing description of the Lewis Agreement is qualified in its entirety by reference to the terms of such agreement which is attached hereto as Exhibit 10.1.

      Pursuant to Mr. Lewis’ Nonqualified Stock Option Agreement and Restricted Shares Agreement with Kmart, dated as of October 18, 2004 (collectively, the “October Equity Agreements”), Mr. Lewis was granted options to acquire 150,000 shares of Kmart common stock with an exercise price equal to $88.6150 (the fair market value of Kmart common stock on October 18, 2004), and 50,781 restricted shares of Kmart common stock (equal to $4,500,000 on October 18, 2004). These options and restricted shares vest in four installments on the last day of fiscal years 2005 through 2008, subject to his continued employment and, in the case of the restricted stock, to a performance condition. If Mr. Lewis’ employment is terminated without cause or as a result of constructive termination, these restricted shares will vest in full and options that would have vested within 12 months of the date of termination (but not less than one additional installment) will vest, and all vested options will remain exercisable for two years. These restricted shares also vest in full upon his death or disability. These grants of options and restricted shares were subject to receiving the approval of the Kmart stockholders on March 24, 2005, which was obtained.

      Pursuant to Mr. Lewis’ Restricted Share Agreement (the “March Equity Agreement” and, together with the October Equity Agreements, the “Lewis Equity Agreements”), that he executed with Kmart on March 24, 2005 immediately following the close of the Kmart stockholder meeting held on that date, Mr. Lewis was also granted an additional 8,011 restricted shares of Kmart common stock (equal to $1,000,000 on March 23, 2005, the trading day immediately prior to the closing date of the Mergers (as defined below)). These additional restricted shares vest in three installments on the last day of fiscal years 2005 through 2007, subject to his continued employment and to a performance condition. These restricted shares vest in full upon his death or disability. This grant of additional restricted shares was subject to receiving the approval of the Kmart stockholders on March 24, 2005, which was obtained.

      As a result of the consummation of the Mergers, these options and restricted shares were exchanged for restricted shares and options of Holdings on a one-for-one basis and are subject to the same vesting and restrictions. The foregoing description of the Lewis Equity Agreements is qualified in its entirety by reference to the terms of such agreements incorporated by reference hereto as Exhibits 10.2 through 10.4.

      Effective March 28, 2005, pursuant to the Employment Agreement with Alan Lacy dated as of November 16, 2004 (the “Lacy Agreement”), Holdings entered into a Restricted Share Agreement and a

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Nonqualified Stock Option Agreement with Mr. Lacy (together, the “Lacy Equity Agreements”). Pursuant to the Lacy Equity Agreements, Mr. Lacy was granted 75,000 restricted shares of Holdings common stock and options to acquire 200,000 shares of Holdings common stock with an exercise price per share of $131.11 (the closing price of Holdings common stock on the Nasdaq National Market on March 28, 2005 (the “Grant Date”)). The options vest in four installments on each of the first four anniversaries of the Grant Date, and the restricted stock will vest in full on June 30, 2006, subject, in each case, to the continued employment of Mr. Lacy through the applicable vesting date. If Mr. Lacy’s employment is terminated by Holdings without cause or as a result of constructive termination, the restricted shares and options will vest in full and all vested options will remain exercisable for three years. The restricted shares and options also vest in full upon Mr. Lacy’s death or disability.

      A description of the Lacy Agreement is contained in the joint proxy statement-prospectus of Kmart and Sears, Roebuck and Co. (‘Sears”) dated February 18, 2005 that forms a part of Holdings’ registration statement on Form S-4 (File No. 333-120954) (the “Joint Proxy Statement-Prospectus”) under the caption “The Mergers — Interests of Directors and Executive Officers in the Mergers — Lacy Employment Agreement”, which is incorporated herein by reference.

      The foregoing description of the Lacy Agreement and the Lacy Equity Agreements is qualified in its entirety by reference to the terms of such agreements which are attached hereto or incorporated herein by reference as Exhibits 10.5 through 10.7.

Item 1.02 Termination of a Material Definitive Agreement

      On March 24, 2005, in connection with the consummation of the mergers (the “Mergers”) contemplated by the Agreement and Plan of Merger, dated as of November 16, 2004, by and among Holdings, Kmart, Sears, Roebuck and Co. (“Sears”), Kmart Acquisition Corp. and Sears Acquisition Corp. (the “Merger Agreement”), Sears Roebuck Acceptance Corp. (“SRAC”), a subsidiary of Holdings as a result of the Mergers, terminated the Three-Year Credit Agreement (the “Old Credit Agreement”) dated as of May 17, 2004, among SRAC, the banks, financial institutions and other institutional lenders parties thereto, Barclays Bank PLC, as syndication agent, Bank of America, N.A., Bank One, NA and Wachovia Bank National Association, as documentation agents, Citigroup Global Markets Inc. and Barclays Capital, the Investment Banking Division of Barclays Bank PLC, as joint lead arrangers and joint bookrunners, and Citibank, N.A., as administrative agent. The Old Credit Agreement was terminated in connection with the effectiveness of the New Credit Agreement as described under Item 8.01 below.

      Prior to its termination, the Old Credit Agreement provided for a $2,000,000,000 revolving credit facility. No material early termination penalties were incurred in connection with the termination of the Old Credit Agreement, and except as described below in this Item 1.02 and under Item 8.01, neither Holdings nor any of its affiliates has any material relationship with any of the other parties to the Old Credit Agreement other than in respect of the Old Credit Agreement.

      Sears and Citibank (USA) N.A. (an affiliate of Citigroup Global Markets Inc. and Citibank, N.A.) are parties to a long-term marketing and servicing alliance under which Citibank (USA) N.A. provides credit and customer service benefits to Sears’ proprietary and Gold MasterCard holders. In addition, Citibank (USA) N.A. supports Sears’ current zero-percent financing program.

      Deutsche Bank AG New York Branch, Morgan Stanley Bank, Lehman Brothers Bank, FSB and State Street Bank and Trust Company were Initial Lenders under the Old Credit Agreement. According to a statement on Schedule 13D filed with the Securities and Exchange Commission (the “SEC”) on March 10, 2005, Deutsche Bank AG was the beneficial owner of approximately 5.4% of Sears’ outstanding common stock.

      Morgan Stanley, an affiliate of Morgan Stanley Bank, was retained by Sears to act as its financial advisor and to provide a fairness opinion to Sears’ Board of Directors in connection with the Mergers. Sears paid Morgan Stanley a transaction fee of $25 million and reimbursement of expenses incurred in performing its services and agreed to indemnify Morgan Stanley, its affiliates, and their respective directors, officers, agents,

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employees and controlling persons against certain liabilities and expenses, including those arising under the federal securities laws, related to or arising out of Morgan Stanley’s engagement and any related transactions. In the past, Morgan Stanley and its affiliates have provided financial advisory and financing services for both Sears and Kmart and have received fees for rendering those services. Specifically, during the past three years, Morgan Stanley received from Sears approximately $13.9 million in connection with its investment banking activities (exclusive of fees related to the Mergers).

      Lehman Brothers was engaged by Kmart to act as its financial advisor and to provide a fairness opinion to Kmart’s Board of Directors with respect to the Mergers. As compensation for its services, Kmart paid Lehman Brothers a fee of $3,000,000 and reimbursement of expenses incurred in performing its services. In addition, Kmart agreed to indemnify Lehman Brothers for certain liabilities that may arise out of its engagement. Lehman Brothers in the past has rendered investment banking services to Kmart, Sears and their affiliates and received customary fees for those services.

      According to a statement on Schedule 13G filed with the SEC on February 17, 2005, State Street Bank and Trust Company beneficially owned approximately 10% of Sears’ outstanding common stock, including shares it held on behalf of participants in Sears’ 401(k) Savings Plan. State Street Bank and Trust Company provides investment management services to the Sears Pension Plan and serves as trustee of the Sears 401(k) Savings Plan and the Sears Puerto Rico Savings Plan. Through a joint venture with Citigroup, it also provides administrative services to the Sears 401(k) Plan and the Sears Pension Plan. In 2004, Sears and those plans together paid State Street Bank and Trust Company approximately $15.7 million for those and related services.

Item 3.02 Unregistered Sales of Equity Securities

      On March 25, 2005, pursuant to the Investment Agreement dated as of January 24, 2003, by and among Kmart Corporation, ESL Investments, Inc. and Third Avenue Trust (on behalf of certain investment series), as amended, as supplemented by the Agreement, dated as of January 31, 2005, by and among Kmart, Holdings, ESL Partners, L.P., ESL Investors, L.L.C., ESL Institutional Partners, L.P., and CRK Partners II, L.P., as amended (the “Investment Agreement”), ESL Institutional Partners, L.P. exercised options to purchase 33,885 shares of Holdings common stock, CRK Partners, LLC exercised options to purchase 100 shares of Holdings common stock, ESL Partners, L.P. exercised options to purchase 4,760,100 shares of Holdings common stock and ESL Investors, L.L.C. exercised options to purchase 1,681,300 shares of Holdings common stock. In accordance with the Investment Agreement, Holdings issued such number of shares of its common stock upon receipt on March 25, 2005 of the payment of the exercise prices for such options in the amounts of $440,505 from ESL Institutional Partners, L.P., $1,300 from CRK Partners, LLC, $61,881,300 from ESL Partners, L.P., and $21,856,900 from ESL Investors, L.L.C. As a result of these transactions, ESL Institutional Partners, L.P., CRK Partners, LLC, ESL Partners, L.P. and ESL Investors, L.L.C. do not own any more options to purchase shares of Holdings pursuant to the Investment Agreement. The transactions were exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) of that Act on the basis that such transactions did not involve a public offering.

Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers

      The Holdings board of directors is currently comprised of the following persons: Edward S. Lampert (Chairman), Alan J. Lacy, Aylwin B. Lewis, Donald J. Carty, William C. Crowley, Julian C. Day, Michael A. Miles, Steven T. Mnuchin, Ann N. Reese and Thomas J. Tisch. Each of the directors will hold office until the 2006 annual meeting of Holdings’ stockholders, or until or until his or her successor is duly elected and qualified.

      The following persons have been named to: (i) Holdings’ Audit Committee: Ms. Reese and Messrs. Carty and Mnuchin, (ii) Holdings’ Compensation Committee: Ms. Reese and Messrs. Lampert and

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Tisch, and (iii) Holdings’ Nominating and Corporate Governance Committee: Messrs. Miles, Mnuchin and Tisch.

      The following persons have been appointed to the following offices of Holdings: (i) Alan J. Lacy, Vice Chairman and Chief Executive Officer, (ii) Aylwin B. Lewis, President, and (iii) William C. Crowley, Executive Vice President and Chief Financial Officer.

      The information required by Items 401(b), (d) and (e) and 404(a) of Regulation S-K that is set forth in (i) the Joint Proxy Statement-Prospectus, (ii) Sears’ Annual Report on Form 10-K for the fiscal year ended January 1, 2005 filed with the SEC on February 24, 2005, and (iii) Kmart’s Annual Report on Form 10-K for the fiscal year ended January 26, 2005 filed with the SEC on March 9, 2005, is incorporated herein by reference.

      In addition, on March 24, 2005, William K. Phelan was appointed Vice President and Controller of Holdings. Mr. Phelan, who is 42 years old, has been Assistant Controller of Sears since 2000. Holdings entered into an employment letter agreement with Mr. Phelan on March 24, 2005, pursuant to which Mr. Phelan is entitled to a base salary, severance of six months’ base salary at the time of termination for involuntary termination of employment, participation in an annual incentive plan and a long term incentive plan, and participation in all employee benefit programs on a basis no less favorable than other executives of his level. In addition, Mr. Phelan agreed to enter into customary severance, non-compete, confidentiality and non-solicitation of employees agreements and also agreed not to aid, assist or render services to any competition of Holdings for six months following termination of employment.

Item 7.01 Regulation FD Disclosure

      On March 28, 2005 and March 30, 2005, Holdings issued press releases announcing the preliminary and final results of the cash and stock elections made by Sears shareholders in connection with the Mergers. Copies of the press releases are attached hereto as Exhibits 99.1 and 99.2, respectively.

Item 8.01 Other Events

      As previously disclosed by Kmart in its Current Report on Form 8-K filed on February 28, 2005, Holdings is party to a five-year credit agreement (the “New Credit Agreement”), dated as of February 22, 2005, among Holdings, Sears Roebuck Acceptance Corp. and Kmart Corporation as borrowers, and the banks, financial institutions and other institutional lenders listed on the signature pages thereof, Citicorp USA, Inc. and Bank of America, N.A. as syndication agents, Barclays Bank PLC, Lehman Commercial Paper Inc., HSBC Bank USA, Merrill Lynch Bank USA, Morgan Stanley Bank, The Royal Bank of Scotland, PLC and Wachovia Bank National Association as documentation agents, J.P. Morgan Securities Inc., Citigroup Global Markets Inc. and Banc of America Securities LLC as lead arrangers and joint bookrunners, and JPMorgan Chase Bank, N.A., as administrative agent. The New Credit Agreement became effective concurrently with the consummation of the Mergers.

      Also, as previously disclosed by Kmart in its Current Report on Form 8-K filed on March 8, 2005, on March 2, 2005, the Audit Committee of Holdings selected Deloitte & Touche LLP to be Holdings’ independent registered public accountant.

Item 9.01 Financial Statement and Exhibits

      (c) Exhibits

Exhibit No.		Description
	Exhibit  10.1	Amended and Restated Employment Agreement dated as of March 24, 2005 between Sears Holdings Corporation and Aylwin Lewis.
	Exhibit  10.2	Form of Nonqualified Stock Option Agreement between Kmart Holding Corporation and Aylwin Lewis (filed as Exhibit No. 4.4 to Sears Holdings Corporation’s Form S-8, filed on March 24, 2005 (File No. 333-123544) and incorporated herein by reference).

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Exhibit No.		Description
	Exhibit  10.3	Form of Restricted Share Agreement between Kmart Holding Corporation and Aylwin Lewis (filed as Exhibit No. 4.5 to Sears Holdings Corporation’s Form S-8, filed on March 24, 2005 (File No. 333-123544) and incorporated herein by reference).
	Exhibit  10.4	Form of Restricted Share Agreement between Kmart Holding Corporation and Aylwin Lewis (filed as Exhibit No. 4.6 to Sears Holdings Corporation’s Form S-8, filed on March 24, 2005 (File No. 333-123544) and incorporated herein by reference).
	Exhibit  10.5	Employment Agreement, dated as of November 16, 2004, among Alan J. Lacy, Kmart Holding Corporation and Sears, Roebuck and Co. (filed as Exhibit No. 10.1 to Sears, Roebuck and Co.’s Form 8-K, filed on November 18, 2004 (File No. 001-00416) and incorporated herein by reference).
	Exhibit  10.6	Nonqualified Stock Option Agreement, dated as of March 28, 2005, between Sears Holdings Corporation and Alan Lacy.
	Exhibit  10.7	Restricted Share Agreement, dated as of March 28, 2005, between Sears Holdings Corporation and Alan Lacy.
	Exhibit  99.1	Press release issued on March 28, 2005.
	Exhibit  99.2	Press release issued on March 30, 2005.

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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 HOLDINGS CORPORATION

By: /s/ William C. Crowley

Name:        William C. Crowley

Title:           Executive Vice President and

                    Chief Financial Officer

Date: March 30, 2005

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EXHIBIT INDEX

Exhibit No.		Description
	Exhibit  10.1	Amended and Restated Employment Agreement dated as of March 24, 2005 between Sears Holdings Corporation and Aylwin Lewis.
	Exhibit  10.2	Form of Nonqualified Stock Option Agreement between Kmart Holding Corporation and Aylwin Lewis (filed as Exhibit No. 4.4 to Sears Holdings Corporation’s Form S-8, filed on March 24, 2005 (File No. 333-123544) and incorporated herein by reference).
	Exhibit  10.3	Form of Restricted Share Agreement between Kmart Holding Corporation and Aylwin Lewis (filed as Exhibit No. 4.5 to Sears Holdings Corporation’s Form S-8, filed on March 24, 2005 (File No. 333-123544) and incorporated herein by reference).
	Exhibit  10.4	Form of Restricted Share Agreement between Kmart Holding Corporation and Aylwin Lewis (filed as Exhibit No. 4.6 to Sears Holdings Corporation’s Form S-8, filed on March 24, 2005 (File No. 333-123544) and incorporated herein by reference).
	Exhibit  10.5	Employment Agreement, dated as of November 16, 2004, among Alan J. Lacy, Kmart Holding Corporation and Sears, Roebuck and Co. (filed as Exhibit No. 10.1 to Sears, Roebuck and Co.’s Form 8-K, filed on November 18, 2004 (File No. 001-00416) and incorporated herein by reference).
	Exhibit  10.6	Nonqualified Stock Option Agreement, dated as of March 28, 2005, between Sears Holdings Corporation and Alan Lacy.
	Exhibit  10.7	Restricted Share Agreement, dated as of March 28, 2005, between Sears Holdings Corporation and Alan Lacy.
	Exhibit  99.1	Press release issued on March 28, 2005.
	Exhibit  99.2	Press release issued on March 30, 2005.

EX-10.1

Exhibit 10.1

EXECUTION COPY

AMENDED AND RESTATED

EMPLOYMENT AGREEMENT

      THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the “Agreement”), is made and entered into as of March 24, 2005 (the “Effective Date”), by and between Sears Holdings Corporation, a Delaware corporation (together with its successors and assigns permitted under this Agreement, the “Company”), and Aylwin Lewis (the “Executive”). As of the Effective Time, as defined in Section 1.7 of the Merger Agreement (as defined below), this Agreement shall supersede and replace the Executive’s Employment Agreement with Kmart Management Corporation, a Michigan corporation (“Management”), made as of October 18, 2004, and all amendments thereto (collectively, the “Prior Agreement”).

      WHEREAS, pursuant to the Agreement and Plan of Merger, dated as of November 16, 2004, as supplemented by a joinder agreement (the “Merger Agreement”), by and between Sears, Roebuck and Co., a New York corporation (“Sears”), Kmart Holding Corporation, a Delaware corporation (“Kmart”), Sears Acquisition Corp., a New York Corporation, Kmart Acquisition Corp., a Delaware corporation, and the Company, Sears and Kmart shall each become a wholly-owned subsidiary of the Company (the “Mergers”);

      WHEREAS, the Company desires that the Executive become employed by the Company and provide services to the Company, 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 to the Company;

      WHEREAS, in the event that the Mergers fail to be consummated, this Agreement shall be void ab initio and the Prior Agreement shall remain in full force and effect;

      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 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’s commission of a felony, (ii) the Executive’s willful neglect or willful misconduct in carrying out his duties under this Agreement, or (iii) other willful gross misconduct by the Executive that the Board determines in good faith has resulted, or is likely to result, in material harm to the business or reputation of the Company or any of its affiliates.

      (d) “Committee” shall mean the Compensation Committee of the Board or any other committee of the Board performing similar functions.

      (e) “Constructive Termination” by the Executive shall mean the Executive’s voluntary termination of his employment, during the Term of Employment, in accordance with the procedures set forth in Section 13(d)(i) and based on any action by the Company or the Board that, without the Executive’s express written consent, results in any of the following: (i) the Executive’s ceasing to hold the titles of President of the Company, Chief Executive Officer and President of Kmart, and Chief Executive Officer of Sears Retail, other than as permitted by Section 3(b) or as a result of his death or Disability or a termination of his employment for Cause; (ii) following Alan J. Lacy’s ceasing to hold the title of Chief Executive Officer of the Company, any individual, other than the Executive or Edward S. Lampert, assuming the title of Chief Executive Officer of the Company;

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(iii) a diminution or adverse change in the Executive’s responsibilities, duties, authorities, that in either case is material, other than as permitted by Section 3(b) or as a result of his death or Disability or a termination of his employment for Cause; (iv) a reduction in the Executive’s Base Salary or Target Bonus (as defined in Sections 4 and 5), other than as a result of his death or Disability or a termination of his employment for Cause; or (v) the failure of the Company to comply with the third sentence of Section 16. Notwithstanding the foregoing, any action by the Board taken pursuant to Section 13(c)(i) shall not be deemed to constitute Constructive Termination, provided that, if such actions do not result in a termination of the Executive’s employment for Cause, they are reversed promptly following completion of the procedures set forth in Section 13(c)(i).

      (f) “Disability” shall mean the Executive’s inability, with or without a reasonable accommodation, to substantially perform his duties and responsibilities under this Agreement for a period of 180 consecutive days, or for an aggregate of 180 days out of any period of 365 consecutive days, by reason of any physical or mental incapacity.

      (g) “Fair Market Value” as of a given date shall mean the average of the highest and lowest per-share sales prices for a share of Kmart Common Stock on Nasdaq during normal business hours on such date, or if such date was not a trading day, on the most recent preceding day that was a trading day; provided that, with respect to the Merger Restricted Stock, Fair Market Value shall mean the closing price of Kmart Common Stock on Nasdaq on the last trading day on which Kmart Common Stock is traded prior to the day on which the Effective Time occurs.

      (h) “Fiscal Year” shall mean a fiscal year of the Company, designated by reference to the calendar year in which such fiscal year begins, but determined based upon the Company’s schedule of fiscal years as in effect on the Effective Date, without regard to any subsequent change thereto (for example, Fiscal Year 2005 shall mean the Company’s fiscal year that ended on January 28, 2006).

      (i) “Party” shall mean the Company or the Executive, and “Parties” shall mean both of them.

      2. Term of Employment. 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 fifth anniversary thereof (the “Term of Employment”), subject to termination of the Executive’s employment pursuant to Section 13.

      3. Position, Duties and Responsibilities.

      (a) During the Term of Employment, the Executive shall be employed by the Company and shall serve as President of the Company, Chief Executive Officer and President of Kmart, and Chief Executive Officer of Sears Retail. The Executive shall also be appointed as a member of the Board. The Executive shall report to the Office of the Chairman.

      (b) The Executive shall devote substantially all of his business time, attention and skill to the performance of his duties and responsibilities pursuant to Section 3(a), and shall use his best efforts to promote the interests of the Company and its affiliates. The Executive shall not, without the prior written approval of the Board, engage in any other business activity which is in violation of policies established from time to time by the Company or its affiliates.

      (c) 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 in each case to the reasonable approval of the Board), (ii) engaging in charitable activities and community affairs, and (iii) managing his personal investments and affairs, provided that such activities do not materially interfere with the proper performance of his duties and responsibilities to the Company.

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      4. Base Salary. During the Term of Employment, the Executive shall be paid a Base Salary, payable in accordance with the regular payroll practices of the Company, in an annual amount of not less than $1,000,000.

      5. Annual Bonuses. For each Fiscal Year that ends during the Term of Employment, the Executive shall be eligible for an annual bonus (the “Annual Bonus”), the target amount of which (the “Target Bonus”) shall equal 100% of his then-current Base Salary under the annual cash-based incentive program of the Company (or its affiliate, if applicable), payable if and to the extent that 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.

      6. Option Grant. As an inducement material to the Executive’s agreement to enter into employment with Management, as of October 18, 2004, the Executive received a grant of non-qualified stock options to acquire 150,000 shares of the common stock, par value $0.01 per share, of Kmart (the “Kmart Common Stock”), having a per-share exercise price equal to the Fair Market Value on such date (such options being referred to as the “Options”). The Options shall have a term of ten years from the date of grant, and shall become vested and exercisable in four equal installments on the last day of the Company’s 2005, 2006, 2007 and 2008 Fiscal Years, conditioned upon the Executive’s continued employment with the Company through the relevant vesting date and subject to Section 9. Notwithstanding the foregoing, in the event the Executive’s employment is terminated during the Term of Employment (i) by the Company without Cause (other than due to Disability or death) or (ii) by reason of a Constructive Termination, any installment of the Options that would have vested on or before the first anniversary of the date of termination (but in any event, not less than one additional installment), had the Executive remained employed, shall vest on the date of termination, and all vested Options shall remain exercisable until the second anniversary of the date of termination. As of the Effective Time, the Company shall assume the Options, which shall cease to represent options to acquire Kmart Common Stock and shall be converted into options to acquire, on the same terms and conditions as were applicable under the original award, that number of shares of the common stock of the Company (the “Company Common Stock”) equal to the number of shares of Kmart Common Stock subject to the Options immediately prior to the Effective Time, at a per share price equal to the per share exercise price specified in such Options immediately prior the Effective Time.

      7. Restricted Stock Grant. As an inducement material to the Executive’s agreement to enter into employment with Management, the Executive received a grant of restricted Kmart Common Stock having a Fair Market Value of $4,500,000 on October 18, 2004 (the “Restricted Stock”), which Restricted Stock may not be sold, pledged or otherwise transferred unless and until the Restricted Stock becomes vested, in accordance with the provisions of this Section 7. The Restricted Stock shall be eligible to become vested in four installments (each, an “Installment”), as set forth below, with each of the first three Installments consisting of a portion of the Restricted Stock that had a fair market value on October 18, 2004 of $1 million, rounded to the nearest whole number of shares, and the final such Installment representing the remainder of the Restricted Stock. Each Installment shall vest as of the later of (a) the last day of the first Fiscal Year, of Fiscal Years 2005 through 2008, during which the Performance Goal is met and (b) in the case of the first Installment, the last day of Fiscal Year 2005; in the case of the second Installment, the last day of Fiscal Year 2006; in the case of the third Installment, the last day of Fiscal Year 2007; and in the case of the final Installment, the last day of Fiscal Year 2008; conditioned, in each case, on the Executive’s continued employment with the Company as of the relevant vesting date and subject to Section 9. If the Restricted Stock does not vest on or before the last day of Fiscal Year 2008, it shall thereupon be forfeited. The “Performance Goal” will be considered to have been met if, for any of Fiscal Years 2005 through 2008, either Kmart’s earnings before interest, taxes, depreciation and amortization, as reported in its audited financial statements for such Fiscal Year (“EBITDA”), equals or exceeds $100 million, or Kmart realizes gross proceeds from sales of real estate equal to or greater than $50 million. Notwithstanding the foregoing, in the event the Executive’s employment is terminated during the Employment Term (i) by the Company without Cause, (ii) as a result of his Disability or death, or (iii) by the Executive in a Constructive Termination, any Installments

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of the Restricted Stock that have not yet vested shall vest as of the date of termination. As of the Effective Time, the Company shall assume the Restricted Stock, which shall vest and become free of such restrictions to the extent required by the terms thereof and shall be converted into the right to receive the Kmart Consideration, as defined in Section 2.5(a) of the Merger Agreement, in accordance with the Merger Agreement; provided that all Company Common Stock issuable upon conversion of such Restricted Stock shall be subject to the same terms (including the vesting terms) as were applicable to such restricted shares of Kmart Common Stock in respect of which they are issued.

      8. Additional Restricted Stock Grant. Immediately prior to the Effective Time, the Executive received a grant of restricted Kmart Common Stock having a Fair Market Value of $1,000,000 (the “Merger Restricted Stock”), which Merger Restricted Stock may not be sold, pledged or otherwise transferred unless and until the Merger Restricted Stock becomes vested, in accordance with the provisions of this Section 8. The Merger Restricted Stock shall be eligible to become vested in three equal installments (each, an Installment), as set forth below. Each Installment shall vest as of the later of (a) the last day of the first Fiscal Year, of Fiscal Years 2005 through 2007, during which the Performance Goal is met and (b) in the case of the first Installment, the last day of Fiscal Year 2005; in the case of the second Installment, the last day of Fiscal Year 2006; and in the case of the final Installment, the last day of Fiscal Year 2007; conditioned, in each case, on the Executive’s continued employment with the Company as of the relevant vesting date and subject to Section 9. If the Merger Restricted Stock does not vest on or before the last day of Fiscal Year 2007, it shall thereupon be forfeited. The “Performance Goal” will be considered to have been met if, for any of Fiscal Years 2005 through 2007, either Kmart’s EBITDA equals or exceeds $100 million, or Kmart realizes gross proceeds from sales of real estate equal to or greater than $50 million. Notwithstanding the foregoing, in the event the Executive’s employment is terminated during the Employment Term as a result of his Disability or death, any Installments of the Merger Restricted Stock that have not yet vested shall vest as of the date of termination. As of the Effective Time, the Company shall assume the Merger Restricted Stock, which shall vest and become free of such restrictions to the extent required by the terms thereof and shall be converted into the right to receive the Kmart Consideration, as defined in Section 2.5(a) of the Merger Agreement, in accordance with the Merger Agreement; provided that all Company Common Stock issuable upon conversion of such Merger Restricted Stock shall be subject to the same terms (including the vesting terms) as were applicable to such restricted shares of Kmart Common Stock in respect of which they are issued.

      9. Conditions to Grant of Options, Restricted Stock and Merger Restricted Stock. The vesting of the Options, the Restricted Stock and the Merger Restricted Stock has been approved by Kmart’s shareholders, in a manner satisfying the requirements of Section 162(m)(4)(C) of the Internal Revenue Code of 1986, as amended (the “Code”), of a plan under which such grants are made, or of the grants themselves, and of the Performance Goal set forth above for vesting of the Restricted Stock and the Merger Restricted Stock. Kmart sought and obtained such approval at a special meeting of shareholders on March 24, 2005. In addition, in the event that, before the Options, the Restricted Stock and/or the Merger Restricted Stock are granted or before the grant thereof is fully documented, there occurs a stock dividend, stock split, reverse stock split, share combination, or recapitalization or similar event affecting Company Common Stock (or, prior to the Effective Time, Kmart Common Stock), the number of shares of Company Common Stock (or, prior to the Effective Time, Kmart Common Stock) to be subject to the Options, the Restricted Stock and/or the Merger Restricted Stock upon grant shall be adjusted, to the extent and in the manner determined by the Committee (or, prior to the Effective Time, the Compensation Committee of the Board of Directors of Kmart) to be equitable and appropriate; it being understood that similar adjustments for such events occurring after the grants are made and fully documented will be set forth in the documentation thereof.

      10. Other Incentive Plans. It is understood and agreed that the incentive compensation provided for in Sections 5 through 9 above shall be the only equity-based or other incentive compensation provided to the Executive during the Term of Employment, unless and to the extent the Committee in its sole

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discretion determines otherwise. Without limiting the generality of the foregoing, it is not expected that the Executive will participate in the Kmart Long Term Incentive Plan during the Term of Employment.

      11. 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 Kmart’s or, in the Company’s discretion, the Company’s senior-level executives or to its employees generally (on terms consistent, respectively, with those offered to Kmart’s or 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 Kmart or, in the Company’s discretion, the Company from time to time, including any plans that supplement the above-listed types of plans or programs, whether funded or unfunded.

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

      (a) The Executive is authorized to incur reasonable expenses in carrying out his duties and responsibilities under this Agreement and the Company shall promptly reimburse him 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 Executive shall receive the perquisites that are made available generally to Kmart’s or, in the Company’s discretion, the Company’s senior-level executives or to its employees generally (on terms consistent, respectively, with those offered to Kmart’s or, in the Company’s discretion, the Company’s other senior-level executives and/or its employees generally), as in effect from time to time.

      (c) Vacation. During the Term of Employment, the Executive shall be entitled to four weeks’ paid vacation per year, to be taken in accordance with the Company’s vacation policy as in effect from time to time for its senior executives.

      (d) Relocation Expenses. The Company shall reimburse Executive for all reasonable and customary costs and expenses that are incurred by Executive (i) during the three-year period following the Effective Time and are associated with (A) the physical move of Executive’s family and belongings to the Chicago metropolitan area (e.g., transportation, packing, storing and unpacking of household goods), and (B) the sale of Executive’s home in Troy, Michigan (the “Michigan Residence”) and Executive’s purchase of a primary residence in the Chicago metropolitan area (e.g., brokers’ commissions, taxes, legal fees, inspection, appraisal and survey charges, title search and insurance charges, and closing costs), and (ii) during the two-year period following the Effective Time and are associated with temporary housing in the Chicago metropolitan area. The Company shall reimburse such costs and expenses promptly following Executive’s submission of written documentation satisfactory to the Company evidencing that Executive has incurred such costs and expenses. During the two-year period following the Effective Time, the Executive shall also have the use of a Company plane, to the extent reasonably available, or other private aircraft for travel between Troy, Michigan and the Chicago metropolitan area. In addition, if, during the three-year period following the Effective Time, the Executive makes good faith efforts to sell the Michigan Residence for at least three months and is unable, within such time, to reach a definitive agreement to sell such residence at a price not less than the Appraised Value (as defined in the next sentence), then the Executive may offer to sell such residence to the Company, in which case the Company shall purchase it, or cause it to be purchased by a third party, for the Appraised Value. The “Appraised Value” shall mean the fair market value of the Michigan Residence, determined by an expert appraiser selected by mutual agreement of the Executive and the Company.

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      13. Termination of Employment.

      (a) Termination Due to Death. In the event the Executive’s employment is terminated due to his death, his estate or his 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 Bonus for the Fiscal Year in which death occurs, based on the actual performance for such Fiscal Year, the amount of which prorated Annual Bonus, if any, shall be determined and paid promptly following the end of the Fiscal Year to which such Annual Bonus relates;

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

      (iv) other or additional benefits, if any, in accordance with applicable plans and programs of the Company or its affiliates.

      (b) Termination Due to Disability.

      (i) A termination of the Executive’s employment for Disability shall be effected by the Executive’s giving written notice thereof to the Company, or vice versa, in either case in accordance with Section 20 below.

      (ii) In the event the Executive’s employment is terminated due to his Disability, the Executive shall be entitled to the following:

      (A) Base Salary through the date of termination;

      (B) 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;

      (C) an amount equal to a prorated Annual Bonus for the Fiscal Year in which termination due to Disability occurs, based on the actual performance for such Fiscal Year, the amount of which prorated Annual Bonus, if any, shall be deter mined and paid promptly following the end of the Fiscal Year to which such Annual Bonus relates;

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

      (E) other or additional benefits, if any, in accordance with applicable plans and programs of the Company or its affiliates.

      (c) Termination by the Company for Cause.

      (i) A termination of the Executive’s employment by the Company shall not be considered to be for Cause unless the provisions of this Section 13(c)(i) are complied with. The Executive shall be given written notice by the Board of the intention to terminate him 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 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. The Executive shall also be entitled to a hearing before the Board, to be held within 15 days of notice to the Company by the Executive, provided he requests such hearing within 10 days of the written notice from the Board of the intention to terminate his employment for Cause. Notwithstanding the foregoing procedures, the Board shall have the right to suspend or terminate the Executive’s employment at any time upon or after giving the written notice described above, regardless of whether the Executive’s opportunity to cure has expired and regardless of whether or not any such hearing

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has been requested or held, without prejudice to the question of whether Cause exists, and without having been deemed to have breached this Agreement.

      (ii) In the event the Company terminates the Executive’s employment for Cause, the Executive shall be entitled to:

      (A) Base Salary through the date of the termination of his employment;

      (B) an amount equal to a prorated Annual Bonus for the Fiscal Year in which such termination occurs, based on the actual performance for such Fiscal Year, the amount of which prorated Annual Bonus, if any, shall be determined and paid promptly following the end of the Fiscal Year to which such Annual Bonus relates;

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

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

      (d) Termination Without Cause; Constructive Termination.

      (i) A Constructive Termination shall not take effect unless the provisions of this Section 13(d)(i) are complied with. The Company shall be given written notice by the Executive of the intention to terminate his 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. If such conduct is not cured within that period, the Executive may then terminate his employment by reason of Constructive Termination.

      (ii) In the event the Executive’s employment is terminated (1) by the Company without Cause (other than due to Disability or death) or (2) by reason of a Constructive Termination, the Executive shall be entitled to:

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

      (B) Base Salary, at the 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 at the rate in effect immediately prior to such reduction), payable for a period (the “Severance Period”) from the date of termination through the later of (i) the third anniversary of the date of termination or, if sooner, the last day of the Employment Term, and (ii) the first anniversary of the date of termination;

      (C) an amount equal to a prorated Annual Bonus for the Fiscal Year in which such termination occurs, based on the actual performance for such Fiscal Year, the amount of which prorated Annual Bonus, if any, shall be determined and paid promptly following the end of the Fiscal Year to which such Annual Bonus relates;

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

      (E) 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 he was participating on the date of termination, on the same basis as such coverage is provided to active employees from time to time during the Severance Period; provided, that the Company’s obligations under this clause (E) shall be reduced to the extent that the Executive receives similar coverage and

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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 his participation in any employee benefit plan or program as provided in this clause on account of his employment status or for any other reason, he shall be provided with the after-tax economic equivalent of the benefits provided under the plan or program in which he is unable to participate for the period specified in this clause (E) of this Section 13(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 himself 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;

      (F) other or additional benefits, if any, in accordance with applicable plans and programs of the Company or its affiliates, other than severance plans and programs.

      (iii) The Executive agrees to notify the Company immediately upon obtaining subsequent employment (including self-employment), and to provide all information related to the terms thereof that the Company may reasonably request, so that the Company may determine and administer the offset provided under clause (E) of Section 13(d)(ii).

      (e) Voluntary Termination. In the event of a termination of employment by the Executive on his 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 13(c) above for a termination for Cause. A voluntary termination under this Section 13(e) shall be effective upon 30 days’ prior written notice to the Company and shall not be deemed a breach of this Agreement.

      (f) No Mitigation; No Offset. In the event of any termination of employment under this Section 13, the Executive shall have no obligation 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 he may obtain except as specifically provided in this Section 13.

      (g) Nature of Payments. Any amounts due under this Section 13 are in the nature of severance payments and liquidated damages. 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, he 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 him 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 14. The Executive agrees that any violation of the provisions of Section 14 will result in the immediate forfeiture of any rights to exercise or receive the Options or any other stock options and to receive and vest in the Restricted Stock or any other restricted stock or other equity-based award. The foregoing is in addition to the rights of the Company under Section 14.

      (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 13 (other than in the

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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.

      14. 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 he shall not, during the Term of Employment and for a period ending on the first anniversary of the termination of his 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 14, “Competing Enterprise” shall mean any and/or all of the following: (i) American Retail Group, Inc., Carrefour SA, Fleming Companies, Inc., Kohl’s Corporation, The May Department Store Company, J.C. Penney Company, ShopKo Stores, 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 direct competition with a business that the Company hereafter acquires and which reports directly to the Executive during his employment hereunder, provided that such business represents at least ten percent of the combined EBITDA of Kmart. Notwithstanding the foregoing, if, following Alan J. Lacy’s ceasing to hold the title of Chief Executive Officer of the Company, any individual, other than the Executive or Edward S. Lampert, assumes the title of Chief Executive Officer of the Company, the provisions of this Section 14(a) shall not apply.

      (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 he shall not, during the Term of Employment and for a period ending on the first anniversary of the termination of his 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 he will not divulge to anyone or make use of any Confidential Information

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except in the performance of his duties as an executive of the Company or any of its subsidiaries or affiliates 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 he 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 his 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, and 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 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 his 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 14 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 Section 14 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

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area, or otherwise, the Parties 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 14 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 14.

      (h) Notice to Employer. The Executive agrees that as long as the provisions of Section 14(a) or 14(b) continue to bind the Executive, he will provide written notice of the terms and provisions of this Section 14 to any prospective employer.

      15. 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 he 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 its certificate of incorporation or bylaws or resolutions of the Board or, if greater, by the laws of its state of incorporation 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 he 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 him 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 he is not entitled to be indemnified against such costs and expenses.

      (b) The Company agrees to continue and/or maintain a directors and officers’ liability insurance policy covering the Executive to the same extent it 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.

      16. 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 by operation 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 assume the liabilities, obligations and duties of the Company hereunder, if such assumption does not take place by operation of law. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his rights to compensation and benefits, which may be transferred only by will or operation of law, except as otherwise provided herein.

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      17. 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 Board or the Committee and agreed to in writing and signed by the Executive and an authorized officer of the Company. No waiver by any Party of any breach by another 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.

      (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 his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to his 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.

      18. Governing Law. This Agreement shall be governed by and construed and interpreted in accordance with the laws of Delaware without reference to principles of conflict of laws.

      19. Arbitration.

      (a) Any and all controversies, disputes or claims arising between the Executive, on the one hand, and the Company, on the other hand, including any purported controversies, disputes or claims not arising under contract, that have not been resolved within twenty (20) days after notice is given in writing of the controversy, dispute or claim shall be submitted for arbitration in accordance with the rules of the American Arbitration Association in effect as of the Effective Date. Arbitration shall take place at an appointed time and place in New York, New York. The Executive and the Company shall each select one arbitrator, and the two so designated shall select a third arbitrator. If either the Executive or the Company shall fail to designate an arbitrator within fifteen (15) calendar days after arbitration is requested, or if the two arbitrators shall fail to select a third arbitrator within thirty (30) calendar days after arbitration is requested, then such arbitrator shall be selected by the American Arbitration Association, or any successor thereto, upon application of either such Party.

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      (b) Arbitration under this provision shall be the sole and exclusive forum and remedy for resolution of controversies, disputes and claims of any kind or nature, whether or not presently known or anticipated, including any purported controversies, disputes or claims not arising under contract, between the Executive, on the one hand, and the Company, on the other hand, and no recourse shall be had to any other judicial or other forum for any such resolution. The award of the arbitrators may grant any relief that a court of general jurisdiction has authority to grant, including, without limitation, an award of damages and/or injunctive relief. All costs and expenses of arbitration (including fees and disbursements of counsel and experts) shall be borne by the respective Party incurring such costs and expenses, except that the Executive, on the one hand, and the Company, on the other hand, shall bear one-half of the aggregate fees and disbursements of the arbitrators and costs of the American Arbitration Association. Any award of the majority of arbitrators shall be binding and not subject to judicial appeal or review of the award, including without limitation any proceedings under sections 9 and 10 of the Federal Arbitration Act, 9 U.S.C. § 1 et seq., or any comparable provision for review of an arbitral award under any comparable statute or law of any jurisdiction, all rights to which are hereby expressly waived by the Parties. Subject to the preceding sentence, the United States District Court for the District of Delaware and the courts of the State of Delaware shall have sole and exclusive jurisdiction solely for the purpose of entering judgment upon any award by the majority of arbitrators.

      20. 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:

          Sears Holdings Corporation

          3333 Beverly Road

          Hoffman Estates, IL 60179

          Attention: General Counsel

          If to the Executive:

          Aylwin Lewis

          c/o Sears Holdings Corporation

          3333 Beverly Road

          Hoffman Estates, IL 60179

      21. Certain Additional Payments by the Company.

      (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any Payment would be subject to the Excise Tax, then the Executive shall be entitled to receive an additional payment (the “Gross-Up Payment”) in an amount such that, after payment by the Executive of all taxes (and any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 21(a), if it shall be determined that the Executive is entitled to the Gross-Up Payment, but that the Parachute Value of all Payments does not exceed 110% of the Safe Harbor Amount, then no Gross-Up Payment shall be made to the Executive and the amounts payable under this Agreement shall be reduced so that the Parachute Value of all Payments, in the aggregate, equals the Safe Harbor Amount. The reduction of the amounts payable hereunder, if applicable, shall be made by first reducing the payments under Section 13(d)(i)(B) unless an alternative method of reduction is elected by the Executive, and in any event shall be made in such a manner as to maximize the Value of all Payments actually made to the Executive. For purposes of reducing the Payments to the Safe Harbor Amount, only amounts

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payable under this Agreement (and no other Payments) shall be reduced. If the reduction of the amount payable under this Agreement would not result in a reduction of the Parachute Value of all Payments to the Safe Harbor Amount, no amounts payable under the Agreement shall be reduced pursuant to this Section 21(a). The Company’s obligation to make Gross-Up Payments under this Section 21 shall not be conditioned upon the Executive’s termination of employment.

      (b) Subject to the provisions of Section 21(c), all determinations required to be made under this Section 21, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized certified public accounting firm designated by the Company (the “Accounting Firm”). The Accounting Firm shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 21, shall be paid by the Company to the Executive within 5 days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (the “Under-payment”), consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Section 21(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

      (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable, but no later than 10 business days after the Executive is informed in writing of such claim. The Executive shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that the Company desires to contest such claim, the Executive shall:

      (i) give the Company any information reasonably requested by the Company relating to such claim,

      (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

      (iii) cooperate with the Company in good faith in order effectively to contest such claim, and

      (iv) permit the Company to participate in any proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 21(c), the Company shall control all proceedings taken in connection with such contest, and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either pay the tax claimed to the

14

appropriate taxing authority on behalf of the Executive and direct the Executive to sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that, if the Company pays such claim and directs the Executive to sue for a refund, the Company shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties) imposed with respect to such payment or with respect to any imputed income in connection with such payment; and provided, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which the Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

      (d) If, after the receipt by the Executive of a Gross-Up Payment or payment by the Company of an amount on the Executive’s behalf pursuant to Section 21(c), the Executive becomes entitled to receive any refund with respect to the Excise Tax to which such Gross-Up Payment relates or with respect to such claim, the Executive shall (subject to the Company’s complying with the requirements of Section 21(c), if applicable) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after payment by the Company of an amount on the Executive’s behalf pursuant to Section 21(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then the amount of such payment shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

      (e) Notwithstanding any other provision of this Section 21, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for the benefit of the Executive, all or any portion of any Gross-Up Payment, and the Executive hereby consents to such withholding.

      (f) Definitions. The following terms shall have the following meanings for purposes of this Section 21.

      (i) “Excise Tax” shall mean the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax.

      (ii) “Parachute Value” of a Payment shall mean the present value as of the date of the change of control for purposes of Section 280G of the Code of the portion of such Payment that constitutes a “parachute payment” under Section 280G(b)(2), as determined by the Accounting Firm for purposes of determining whether and to what extent the Excise Tax will apply to such Payment.

      (iii) A “Payment” shall mean any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Executive, whether paid or payable pursuant to this Agreement or otherwise.

      (iv) The “Safe Harbor Amount” shall mean 2.99 times the Executive’s “base amount,” within the meaning of Section 280G(b)(3) of the Code.

      (v) “Value” of a Payment shall mean the economic present value of a Payment as of the date of the change of control for purposes of Section 280G of the Code, as deter-mined by the Accounting Firm using the discount rate required by Section 280G(d)(4) of the Code.

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

SEARS HOLDINGS CORPORATION

By: /s/ William C. Crowley

Title: Executive Vice President, Finance
and Integration

THE EXECUTIVE

/s/ Aylwin Lewis

Aylwin Lewis

16 EX-10.6 3 y07301aexv10w6.htm EX-10.6 FORM OF NONQUALIFIED STOCK OPTION AGREEMENT

Exhibit 10.6

SEARS HOLDINGS CORPORATION

NONQUALIFIED STOCK OPTION AGREEMENT

      NONQUALIFIED STOCK OPTION AGREEMENT, entered into as of March 28, 2005, between Sears Holdings Corporation, a Delaware corporation (the “Company”), and Alan J. Lacy (the “Executive”);

      WHEREAS, Sears, Roebuck & Co., a New York corporation, and Kmart Holding Corporation, a Delaware corporation, and the Executive have entered into an employment agreement dated as of the 16th day of November, 2004 (the “Employment Agreement”), which has been assumed by the Company, pursuant to which, among other things, the Company has determined that, as an inducement material to the Executive’s agreement to enter into employment with the Company, in satisfaction of certain of the Company’s obligations under Section 3(b)(iii) of the Employment Agreement, the Executive should be granted by the Company a nonqualified option to purchase shares of its common stock (the “Option”);

      WHEREAS, the Company desires to grant such Option to the Executive;

      NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto do hereby agree as follows:

1.	Capitalized Terms. Capitalized terms not defined herein shall have the definitions ascribed to such terms in the Employment Agreement.
2.	Grant. Pursuant to Section 3(b)(iii) of the Employment Agreement, the Executive is hereby granted as of March 28, 2005 (the “Grant Date”) and subject to the terms and conditions of this Agreement, a nonqualified stock option (the “Option”) to purchase an aggregate of 200,000 shares of the Company’s common stock, par value $0.01 (“Common Stock”). Shares of Common Stock subject to the Option shall be referred to herein as “Option Shares”.
3.	Equity Plan. At such time, if any, as the Company shall have adopted (and, if required, there shall have been approved by the Company’s shareholders) an equity incentive plan under which stock options may be granted (the “Plan”), the Option and this Agreement shall be subject to the terms of such Plan, to the extent the terms of such Plan are not inconsistent with the terms of this Agreement and the applicable provisions of the Employment Agreement.
4.	Option Term. Subject to earlier termination as provided herein, the Option shall expire on the tenth anniversary of the Grant Date (the “Expiration Date”).
5.	Purchase Price. The purchase price per share of Common Stock with respect to the Option shall be $131.11 per share, which is the closing price of a share of the Company’s common stock on the NASDAQ on the Grant Date.
6.	Vesting/ Exercisability. The Option shall vested and become exercisable with respect to 50,000 shares of Common Stock on each of the first four (4) anniversaries of the Grant Date, provided that the Executive is employed by or rendering services to the Company or a subsidiary or affiliate thereof as of each such date. The Option may be exercised either for the total number of shares of Common Stock vested, or for less than the total number in multiples of 100 shares of Common Stock.
7.	No Rights as a Shareholder. The Executive or other permitted holder of the Option shall have none of the rights of a shareholder of Common Stock with respect to the shares of Common Stock covered by the Option until the Option Shares are issued or transferred to such holder upon exercise of the Option.
8.	Method of Exercise. Upon the exercise of the Option, the purchase price may be paid (a) in cash or cash equivalents, or (b) by tendering to the Company shares of Common Stock already owned by the Executive, which, in the case of shares of Common Stock purchased by the Executive pursuant to the exercise of an option granted by the Company, have been held by the Executive for no less than six months following the date of such purchase, in any case having a total Fair Market Value (as defined in

the Plan and, if no Plan, based on the closing price of a share of the Company’s common stock on the New York Stock Exchange or the NASDAQ (as to be agreed by the parties) on the date of exercise) equal to the aggregate purchase price, (c) to the extent permitted by law, by a “cashless exercise” procedure approved by the Compensation Committee of the Board of Directors of the Company or any other committee of the board of directors of the Company performing similar functions (the “Committee”), or (d) by a combination of the foregoing methods. The Option shall be exercised by written notice of election in such form as shall be determined by the Committee and delivered in person or by regular mail to the Company at its principal executive office.

9.

Withholding. The Company may require that the Executive pay to the Company at the time of exercise of any portion of the Option the amount necessary to satisfy the Company’s liability to withhold federal, state or local income tax or any other employment taxes incurred by reason of the exercise of the Option. The Executive may satisfy the foregoing requirement by (a) tendering to the Company shares of Common Stock already owned by the Executive, which, in the case of shares of Common Stock purchased by the Executive pursuant to the exercise of an option granted by the Company, have been held by the Executive for no less than six months following the date of such purchase, or (b) by electing to have the Company withhold from delivery Option Shares, provided that, in either case, such shares have a Fair Market Value equal to the minimum amount of tax required to be withheld. Such shares of Common Stock shall be valued at their Fair Market Value (as defined above) on the date as of which the amount of tax to be withheld is determined.

10.  Effect of Termination of Employment.

(a)	If the employment of the Executive with the Company and its subsidiaries and affiliates is terminated by reason of his death or Disability, or by the Company without Cause or by the Executive for Good Reason, the Option shall become immediately vested and exercisable in full as of the date of such termination of employment and any portion of the Option that is or becomes vested and exercisable pursuant to this Section 10(a) as of the date of the Executive’s termination of employment shall be exercisable by the Executive (or other Option holder, as applicable) for the period ending on the third anniversary of such termination of employment, but no later than the Expiration Date.
(b)	If the employment of the Executive with the Company and its subsidiaries and affiliates is terminated by the Company for Cause, the Option shall immediately be forfeited and cancelled in its entirety as of the date of such termination of employment.
(c)	If the employment of the Executive with the Company and its subsidiaries and affiliates is terminated other than as provided under Sections 10(a) and 10(b) above, any vested portion of the Option as of the date of termination of employment shall remain exercisable for 90 days, but no later than the Expiration Date, and the remainder of the Option shall immediately be forfeited and cancelled in its entirety as of the date of such termination of employment.

11.  Adjustment. In the event of (a) a stock dividend, stock split, reverse stock split, share combination, or recapitalization or similar event of or by the Company (each, a “Share Change”), or (b) a merger, consolidation, acquisition of property or shares, separation, spinoff, reorganization, stock rights offering, liquidation, disaffiliation, or similar event of or by the Company (each, a “Corporate Transaction”), in each case, affecting the Common Stock, the Committee or the Board may in its discretion make such substitutions or adjustments as it deems appropriate and equitable to (i) adjust the number and kind of shares subject to the Stock Option, (ii) adjust the exercise price per share of the Stock Option. In the case of Corporate Transactions, (x) unless otherwise determined by the Committee, if the Corporate Transaction results in shareholders of Common Stock receiving cash, securities, property, or any combination thereof in exchange for each share of Common Stock, such consideration being exchanged for each share of Common Stock shall be substituted for each share of Common Stock subject to this Agreement, and (y) the Committee may in its discretion make such alternative or additional substitutions or adjustments as it deems appropriate and equitable, including, without limitation, (A) the cancellation of the Stock Option in exchange for payments of cash, property or a combination thereof having an

2

	aggregate value equal to the value of the Stock Option, as determined by the Committee or the Board in its sole discretion (it being understood that in the case of a Corporate Transaction with respect to which shareholders of Common Stock receive consideration other than equity securities of the ultimate surviving entity, any such determination by the Committee that the value of the Stock Option shall for this purpose be deemed to equal the excess, if any, of the value of the consideration being paid for each share of Common Stock pursuant to such Corporate Transaction over the exercise price per share of the Stock Option shall conclusively be deemed valid) and (B) the substitution of other property (including, without limitation, cash or other securities of the Company and securities of entities other than the Company) for the Stock Option. The determination of the Committee regarding any adjustment will be final and conclusive.
12.	Transferability of Option. The Option shall not be transferable other than (a) by will or the laws of descent and distribution or (b) to the Participant’s family members, whether directly or indirectly or by means of a trust or partnership or otherwise or (c) as otherwise determined by the Committee. For purposes of this Agreement, “family member” shall have the meaning given to such term in General Instructions A.1(a)(5) to Form S-8 under the Securities Act of 1933, as amended, and any successor thereto. The Option shall be exercisable during the Executive’s lifetime only by the Executive or by his guardian or legal representative or the permitted transferees pursuant to clause (a), (b) and (c) of this Section 12.
13.	Laws and Regulations. No shares of Common Stock shall be issued under this Option unless and until all legal requirements applicable to the issuance of such shares of Common Stock have been complied with to the satisfaction of the Committee. The Committee shall have the right to condition any issuance of shares to the Executive hereunder on the Executive’s undertaking in writing to comply with such restrictions on the subsequent disposition of such shares as the Committee shall deem necessary or advisable as a result of any applicable law or regulation.
14.	Registration. As of the Grant Date, the Company shall, at its expense, cause issuance of the Option, the exercise of the Option and the resale of the shares of Common Stock subject to the Option to be registered under the Securities Act of 1933, as amended, and registered or qualified under applicable state law, to be freely resold. The Company shall thereafter maintain the effectiveness of such registration and qualification for so long as the Executive holds the Option (or any portion thereof) or any of the Option Shares, or until such earlier date as such Option Shares may otherwise be freely sold under applicable law. The Company shall take all corporate action necessary to reserve for issuance a sufficient number of shares of common stock for delivery with respect to the Options.
15.	Notices. Any notices required or permitted hereunder shall be addressed to the Company at its corporate headquarters, attention: General Counsel, or to the Executive at the address then on record with the Company, as the case may be, and deposited, postage prepaid, in the United States mail. Either party may, by notice to the other given in the manner aforesaid, change his/her or its address for future notices.
16.	Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to its conflict of laws principles.
17.	Successor. This Agreement shall bind and inure to the benefit of the Company, its successors and assigns, and the Executive and his or her personal representatives and assigns.
18.	Amendment. This Agreement may be amended or modified at any time by an instrument in writing signed by the parties hereto.

19. Miscellaneous.

(a)	This Agreement shall not be construed so as to grant the Executive any right to remain in the employ of the Company.
(b)	This Agreement may be executed in counterparts, which together shall constitute one and the same original.

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      IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its officer thereunder duly authorized and the Executive has hereunto set his hand, all as of the day and year first set forth above.

SEARS HOLDINGS CORPORATION

/s/ William C. Crowley

Name: William C. Crowley

Title: Executive Vice President and

Chief Financial Officer

ACCEPTED:

The undersigned hereby acknowledges having read this Nonqualified Stock Option Agreement and hereby agrees to be bound by all provisions set forth herein.

/s/ Alan J. Lacy

Executive

EX-10.6

EX-10.6

EX-10.7

Exhibit 10.7

SEARS HOLDINGS CORPORATION

RESTRICTED SHARE AGREEMENT

      RESTRICTED SHARE AGREEMENT, entered into as of March 28, 2005, between Sears Holdings Corporation, a Delaware corporation (the “Company”), and Alan J. Lacy (the “Executive”);

      WHEREAS, Sears, Roebuck & Co., a New York corporation, and Kmart Holding Corporation, a Delaware corporation, and the Executive have entered into an employment agreement dated as of the 16th day of November, 2004 (the “Employment Agreement”), which has been assumed by the Company, pursuant to which, among other things, the Company has determined that, as an inducement material to the Executive’s agreement to enter into employment with the Company, in satisfaction of certain of the Company’s obligations under Section 3(b)(iii) of the Employment Agreement, and subject to the restrictions stated below, the Executive should be granted shares of the Company’s common stock, par value $.01 (the “Common Stock”);

      WHEREAS, the Company desires to grant the Executive 75,000 shares of restricted Common Stock (the “Restricted Shares”);

      NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto do hereby agree as follows:

1.	Capitalized Terms. Capitalized terms not defined herein shall have the definitions ascribed to such terms in the Employment Agreement.
2.	Grant. Pursuant to Section 3(b)(iii) of the Employment Agreement, the Executive is hereby granted, effective as of March 28, 2005 (the “Grant Date”) and subject to the terms and conditions of this Agreement, 75,000 Restricted Shares.
3.	Equity Plan. At such time, if any, as the Company shall have adopted (and, if required, there shall have been approved by the Company’s shareholders) an equity incentive plan under which restricted shares of Common Stock may be granted (the “Plan”), the Restricted Shares and this Agreement shall be subject to the terms of such Plan, to the extent the terms of such Plan are not inconsistent with the terms of this Agreement and the applicable provisions of the Employment Agreement.
4.	Issuance of Stock. The Restricted Shares shall be held in the custody of the Company or its designee for the Executive’s benefit. The Restricted Shares shall be subject to the restrictions described herein. The Restricted Shares shall bear appropriate legends with respect to the restrictions described herein.
5.	Vesting.

(a)	The Restricted Shares shall vest in full and become free of restrictions on June 30, 2006, provided that the Executive is employed by or rendering services to the Company or a subsidiary or affiliate thereof as of each such date.
(b)	Notwithstanding the foregoing, any unvested Restricted Shares shall immediately vest in full, and become free of restriction upon the Executive’s termination of employment (i) by the Company without Cause, (ii) by the Executive for Good Reason, or (iii) by reason of the Executive’s death or Disability.

6.  Restrictions.

(a)  No portion of the Restricted Shares or rights granted hereunder may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of by the Executive until such portion of the Restricted Shares becomes vested in accordance with Section 3 of this Agreement, and any purported sale, transfer, assignment, pledge, encumbrance or disposition shall be void and unenforceable against the Company. The period of time between the Grant Date and the date all Restricted Shares become vested is referred to herein as the “Restriction Period.”

(b)  If the Executive’s employment with the Company terminates for any reason which does not result in vesting of the Restricted Shares as provided in Section 3 above, the balance of the Restricted Shares subject to the provisions of this Agreement which have not vested at the time of the Executive’s termination of employment shall be forfeited by the Executive, and ownership transferred back to the Company.

7.	Executive Shareholder Rights. During the Restriction Period, the Executive shall have all the rights of a shareholder with respect to the Restricted Shares except for the right to transfer the Restricted Shares, as set forth in Section 4 of this Agreement. Accordingly, the Executive shall have the right to vote the Restricted Shares and to receive any cash dividends paid to or made with respect to the Restricted Shares, provided, however, that dividends paid, if any, with respect to that Restricted Shares which has not vested at the time of the dividend payment shall be held in the custody of the Company and shall be subject to the same restrictions that apply to the corresponding Restricted Shares; provided, further, that if such a restriction on dividends would be subject to the tax imposed under the provisions of Section 409A of the Code, such dividends shall be paid to the Executive immediately and shall not be subject to the same restrictions that apply to the corresponding Restricted Shares.
8.	Changes in Stock. In the event of (a) a stock dividend, stock split, reverse stock split, share combination, or recapitalization or similar event of or by the Company (each, a “Share Change”), or (b) a merger, consolidation, acquisition of property or shares, separation, spinoff, reorganization, stock rights offering, liquidation, disaffiliation, or similar event of or by the Company (each, a “Corporate Transaction”), in each case, affecting the Common Stock, the Committee or the Board may in its discretion make such substitutions or adjustments as it deems appropriate and equitable to adjust the number and kind of Restricted Shares. In the case of Corporate Transactions, (x) unless otherwise determined by the Committee, if the Corporate Transaction results in shareholders of Common Stock receiving cash, securities, property, or any combination thereof in exchange for each share of Common Stock, such consideration being exchanged for each share of Common Stock shall be substituted for each Restricted Share subject to this Agreement, and (y) the Committee may in its discretion make such alternative or additional substitutions or adjustments as it deems appropriate and equitable, including, without limitation, (i) the cancellation of the Restricted Shares in exchange for payments of cash, property or a combination thereof having an aggregate value equal to the value of the Restricted Shares, as determined by the Committee or the Board in its sole discretion (it being understood that in the case of a Corporate Transaction with respect to which shareholders of Common Stock receive consideration other than equity securities of the ultimate surviving entity, any such determination by the Committee that the value of the Restricted Shares shall for this purpose be deemed to equal the value of the consideration being paid for each share of Common Stock pursuant to such Corporate Transaction shall conclusively be deemed valid); and (ii) the substitution of other property (including, without limitation, cash or other securities of the Company and securities of entities other than the Company) for the Restricted Shares. The determination of the Committee regarding any adjustment shall be final and conclusive.
9.	Taxes. No later than the date as of which an amount first becomes includible in the gross income of the Executive for federal income tax purposes with respect to any Restricted Shares, the Executive shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, all federal, state, local and foreign taxes that are required by applicable laws and regulations to be withheld with respect to such amount. The Executive may direct the Company, to the extent permitted by law, to deduct any such taxes from any payment otherwise due to the Executive, including the delivery of the Restricted Shares that gives rise to the withholding requirement.

10.

Notices. Any notices required or permitted hereunder shall be addressed to the Company at its corporate headquarters, attention: General Counsel, or to the Executive at the address then on record with the Company, as the case may be, and deposited, postage prepaid, in the United States mail. Either party may, by notice to the other given in the manner aforesaid, change his/her or its address for future notices.

11.

Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to its conflict of laws principles.

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12.	Successor. This Agreement shall bind and inure to the benefit of the Company, its successors and assigns, and the Executive and his or her personal representatives and assigns.
13.	Amendment. This Agreement may be amended or modified at any time by an instrument in writing signed by the parties hereto.
14.	Certificates. Certificates representing the Restricted Shares as originally or from time to time constituted shall bear the following legend:

The Shares represented by this stock certificate have been granted as restricted stock under a Restricted Share Agreement between the registered holder of these Shares and the Company. The Shares represented by this stock certificate may not be sold, exchanged, assigned, transferred, pledged, hypothecated or otherwise encumbered or disposed of until the restrictions set forth in the Restricted Stock Agreement between the registered holder of these Shares and the Company shall have lapsed.

As soon as administratively practicable after the lapsing of the restrictions with respect to any Restricted Shares, the Company shall deliver to the Executive or his or her personal representative, in book-entry or certificate form, the formerly Restricted Shares that do not bear any restrictive legend making reference to this Agreement. Such Shares shall be free of restrictions, except for any restrictions required under Federal securities laws.

15.	Laws and Regulations. No shares of Common Stock shall be issued under this Agreement unless and until all legal requirements applicable to the issuance of such shares have been complied with to the satisfaction of the Committee. The Committee shall have the right to condition any issuance of shares of Common Stock to the Executive hereunder on the Executive’s undertaking in writing to comply with such restrictions on the subsequent disposition of such shares as the Committee shall deem necessary or advisable as a result of any applicable law or regulation.
16.	Registration. As of the Grant Date, the Company shall, at its expense, cause issuance of the Restricted Shares and the resale thereof to be registered under the Securities Act of 1933, as amended, and registered or qualified under applicable state law, to be freely resold. The Company shall thereafter maintain the effectiveness of such registration and qualification for so long as the Executive holds the Restricted Shares (or any portion thereof) or any of the shares of Common Stock that were previously Restricted Shares, or until such earlier date as such Restricted Shares and shares of Common Stock, as applicable, may otherwise be freely sold under applicable law.
17.	Miscellaneous.

(a)	The Company shall not be required (i) to transfer on its books any Restricted Shares which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement, or (ii) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred.
(b)	This Agreement shall not be construed so as to grant the Executive any right to remain in the employ of the Company.
(c)	This Agreement may be executed in counterparts, which together shall constitute one and the same original.

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      IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its officer thereunder duly authorized and the Executive has hereunto set his hand, all as of the day and year first set forth above.

SEARS HOLDINGS CORPORATION

/s/ William C. Crowley

Name: William C. Crowley

Title: Executive Vice President and

Chief Financial Officer

ACCEPTED:

The undersigned hereby acknowledges having read this Restricted Share Agreement and hereby agrees to be bound by all provisions set forth herein.

/s/ Alan J. Lacy

Executive

EX-99.1

Exhibit 99.1

SEARS HOLDINGS ANNOUNCES PRELIMINARY RESULTS OF CASH AND

STOCK ELECTIONS BY SEARS, ROEBUCK AND CO. SHAREHOLDERS

Hoffman Estates, IL, March 28, 2005 – Sears Holdings Corporation (Nasdaq: SHLD), the major new retail company resulting from the merger of Kmart Holding Corporation and Sears, Roebuck and Co., has been informed by EquiServe Trust Company, N.A., the exchange agent in connection with the merger, that preliminary results of the cash and stock elections by Sears, Roebuck and Co. shareholders are as follows:

Cash Elections: Elections to receive $50 in cash for each share of Sears, Roebuck common stock were made with respect to approximately 8.3 million shares of Sears, Roebuck common stock, of which approximately 1 million shares remain subject to outstanding guarantees of delivery;

Stock Elections: Elections to receive 0.5 of a share of Sears Holdings common stock for each share of Sears common stock were made with respect to approximately 219.5 million shares of Sears, Roebuck common stock, of which approximately 36 million shares remain subject to outstanding guarantees of delivery;

Non-Elections: No election was made with respect to approximately 9.5 million shares of Sears, Roebuck stock.

These elections are subject to proration calculations so that, in the aggregate, 55 percent of the Sears, Roebuck shares outstanding as of the closing on March 24, 2005 will be converted into the right to receive 0.5 of a share of Sears Holdings common stock per share and 45 percent will be converted into the right to receive $50 in cash per share. Based on these preliminary results of the elections and subject to confirmation of the validity of elections made, the number of failed guaranteed deliveries, whether the failed deliveries relate to stock or cash elections and final proration calculations, the merger consideration currently estimated to be paid to Sears shareholders is as follows:

Cash Elections: Sears, Roebuck shareholders who validly elected cash would be expected to receive $50 for each Sears, Roebuck share with respect to which that election was made;

Stock Elections: Sears, Roebuck shareholders who validly elected to receive Sears Holdings stock would be expected to receive 0.5 of a share of Sears Holdings common stock for approximately 59 percent of their shares and $50 in cash for approximately 41 percent of their shares with respect to which that election was made; and

Non-Elections: Sears, Roebuck shareholders who did not make a valid election would be expected to receive $50 in cash for each of their Sears, Roebuck shares.

The final results of the cash and stock elections, including the consideration to be received by Sears, Roebuck shareholders who validly elected cash and those who validly elected stock are expected to be announced on or about Wednesday, March 30, 2005.

Pursuant to the Agreement and Plan of Merger dated as of November 16, 2004, by and among Sears Holdings, Kmart, Sears, Roebuck, Kmart Acquisition Corp. and Sears Acquisition Corp., fractional shares of Sears Holdings will not be issued. In lieu thereof, shareholders will receive cash based on the closing Kmart stock price of $124.83 on March 23, 2005.

Kmart shareholders received one share of Sears Holdings common stock for each Kmart share.

About Sears Holdings Corporation

      Sears Holdings Corporation is the nation’s third largest broadline retailer, with approximately $55 billion in annual revenues, and with approximately 3,800 full-line and specialty retail stores in the United States and Canada. Sears Holdings is the leading home appliance retailer as well as a leader in tools, lawn and garden, home electronics and automotive repair and maintenance. Key proprietary brands include Kenmore,

Craftsman and DieHard, and a broad apparel offering, including such well-known labels as Lands’ End, Jaclyn Smith and Joe Boxer, as well as the Apostrophe and Covington brands. It also has Martha Stewart Everyday products, which are offered exclusively in the U.S. by Kmart and in Canada by Sears Canada. For more information, visit Sears Holdings’ website at http://www.searshc.com.

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      This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about the benefits of the business combination transaction involving Sears Holdings Corporation, Kmart Holding Corporation and Sears, Roebuck and Co., including future financial and operating results, the combined company’s plans, objectives, expectations and intentions and other statements that are not historical facts. Such statements are based upon the current beliefs and expectations of Sears Holdings’ management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements.

      The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: the risk that the Kmart and Sears, Roebuck businesses will not be integrated successfully; failure to quickly realize synergies and cost-savings from the transaction as a result of technical, logistical, competitive and other factors; disruption from the transaction making it more difficult to maintain relationships with clients, employees or suppliers; competitive conditions in retail and related services industries; changes in consumer confidence, tastes, preferences and spending; the availability and level of consumer debt; anticipated cash flow and the ability of Sears Holdings to maintain sufficient operating cash flow and liquidity; the successful execution of, and customer response to, strategic initiatives, including the full-line store strategy and the conversion and integration of the Kmart stores and other new store locations; the pace of growth in store locations, which may be higher or lower than anticipated; the possibility that new business and strategic options for one or more business segments will be identified, potentially including selective acquisitions, dispositions, restructurings, joint ventures and partnerships; trade restrictions, tariffs, and other factors potentially affecting the ability to find qualified vendors and access products in an efficient manner; the ability to successfully implement initiatives to improve inventory management capabilities; anticipated cash flow; changes in interest rates; the outcome of pending legal proceedings and bankruptcy claims; social and political conditions such as war, political unrest and terrorism or natural disasters; the possibility of negative investment returns in any pension plans; volatility in financial markets; changes in debt ratings, credit spreads and cost of funds; the possibility of interruptions in systematically accessing the public debt markets; the impact of seasonal buying patterns, which are difficult to forecast with certainty; and general economic conditions and normal business uncertainty. These forward-looking statements speak only as of the time first made, and no undertaking has been made to update or revise them as more information becomes available. Additional factors that could cause Kmart’s and Sears, Roebuck’s results to differ materially from those described in the forward-looking statements can be found in the 2004 Annual Reports on Forms 10-K of Kmart and Sears, Roebuck filed with the SEC and available at the SEC’s Internet site (http://www.sec.gov).

EX-99.2

Exhibit 99.2

Contacts:

For Sears Holdings Corporation

Chris Brathwaite

(847) 286-4681

SEARS HOLDINGS ANNOUNCES FINAL RESULTS OF CASH AND STOCK

ELECTIONS BY SEARS, ROEBUCK AND CO. SHAREHOLDERS

HOFFMAN ESTATES, Ill., March 30, 2005 – Sears Holdings Corporation (Nasdaq: SHLD), the major new retail company resulting from the merger of Kmart Holding Corporation and Sears, Roebuck and Co., has been informed by EquiServe Trust Company, N.A., the exchange agent in connection with the merger, that final results of the cash and stock elections by Sears, Roebuck and Co. shareholders are as follows:

Cash Elections: Valid elections to receive $50 in cash for each share of Sears, Roebuck common stock were made with respect to 7,382,118 shares of Sears, Roebuck common stock;

Stock Elections: Valid elections to receive 0.5 of a share of Sears Holdings common stock for each share of Sears common stock were made with respect to 197,655,072 shares of Sears, Roebuck common stock; and

Non-Elections: No election was made with respect to 21,185,749 shares of Sears, Roebuck stock.

These elections were subject to proration calculations so that, in the aggregate, 55 percent of the Sears, Roebuck shares outstanding as of the closing on March 24, 2005 were converted into the right to receive 0.5 of a share of Sears Holdings common stock per share and 45 percent were converted into the right to receive $50 in cash per share. Based on these final results of the elections, the merger consideration to be paid to Sears shareholders is as follows:

Cash Elections: Sears, Roebuck shareholders who validly elected cash will receive $50 for each Sears, Roebuck share with respect to which that election was made;

Stock Elections: Sears, Roebuck shareholders who validly elected to receive Sears Holdings stock will receive 0.5 of a share of Sears Holdings common stock for approximately 62.95 percent of their shares and $50 in cash for approximately 37.05 percent of their shares with respect to which that election was made; and

Non-Elections: Sears, Roebuck shareholders who did not make a valid election will receive $50 in cash for each of their Sears, Roebuck shares.

Pursuant to the Agreement and Plan of Merger dated as of November 16, 2004, by and among Sears Holdings, Kmart, Sears, Roebuck, Kmart Acquisition Corp. and Sears Acquisition Corp., fractional shares of Sears Holdings will not be issued. In lieu thereof, shareholders will receive cash based on the closing Kmart stock price of $124.83 on March 23, 2005.

Kmart shareholders received one share of Sears Holdings common stock for each Kmart share.

In connection with the consummation of the merger, approximately 157.4 million shares of Sears Holdings common stock are being issued to former Sears, Roebuck and Kmart shareholders and approximately $5.1 billion in cash is being paid to former Sears, Roebuck shareholders.

About Sears Holdings Corporation

      Sears Holdings Corporation is the nation’s third largest broadline retailer, with approximately $55 billion in annual revenues, and with approximately 3,800 full-line and specialty retail stores in the United States and Canada. Sears Holdings is the leading home appliance retailer as well as a leader in tools, lawn and garden, home electronics and automotive repair and maintenance. Key proprietary brands include Kenmore, Craftsman and DieHard, and a broad apparel offering, including such well-known labels as Lands’ End, Jaclyn Smith and Joe Boxer, as well as the Apostrophe and Covington brands. It also has Martha Stewart Everyday

products, which are offered exclusively in the U.S. by Kmart and in Canada by Sears Canada. For more information, visit Sears Holdings’ website at http://www.searshc.com .

# # #

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about the benefits of the business combination transaction involving Sears Holdings Corporation, Kmart Holding Corporation and Sears, Roebuck and Co., including future financial and operating results, the combined company’s plans, objectives, expectations and intentions and other statements that are not historical facts. Such statements are based upon the current beliefs and expectations of Sears Holdings’ management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements.

The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: the risk that the Kmart and Sears, Roebuck businesses will not be integrated successfully; failure to quickly realize synergies and cost-savings from the transaction as a result of technical, logistical, competitive and other factors; disruption from the transaction making it more difficult to maintain relationships with clients, employees or suppliers; competitive conditions in retail and related services industries; changes in consumer confidence, tastes, preferences and spending; the availability and level of consumer debt; anticipated cash flow and the ability of Sears Holdings to maintain sufficient operating cash flow and liquidity; the successful execution of, and customer response to, strategic initiatives, including the full-line storestrategy and the conversion and integration of the Kmart stores and other new store locations; the pace of growth in store locations, which may be higher or lower than anticipated; the possibility that new business and strategic options for one or more business segments will be identified, potentially including selective acquisitions, dispositions, restructurings, joint ventures and partnerships; trade restrictions, tariffs, and other factors potentially affecting the ability to find qualified vendors and access products in an efficient manner; the ability to successfully implement initiatives to improve inventory management capabilities; anticipated cash flow; changes in interest rates; the outcome of pending legal proceedings and bankruptcy claims; social and political conditions such as war, political unrest and terrorism or natural disasters; the possibility of negative investment returns in any pension plans; volatility in financial markets; changes in debt ratings, credit spreads and cost of funds; the possibility of interruptions in systematically accessing the public debt markets; the impact of seasonal buying patterns, which are difficult to forecast with certainty; and general economic conditions and normal business uncertainty. These forward-looking statements speak only as of the time first made, and no undertaking has been made to update or revise them as more information becomes available. Additional factors that could cause Kmart’s and Sears, Roebuck’s results to differ materially from those described in the forward-looking statements can be found in the 2004 Annual Reports on Forms 10-K of Kmart and Sears, Roebuck filed with the SEC and available at the SEC’s Internet site (http://www.sec.gov).

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