PREM14C 1 d754394dprem14c.htm PREM14C PREM14C
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14C

 

 

Information Statement Pursuant to Section 14(c) of the

Securities Exchange Act of 1934

 

 

 

Check the appropriate box:
  Preliminary Information Statement
  Confidential, for Use of the Commission Only (as permitted by Rule 14C-5(d)(2))
  Definitive Information Statement

SEARS HOMETOWN AND OUTLET STORES, INC.

(Name of Registrant as Specified In Its Charter)

 

Payment of Filing Fee (Check the appropriate box):
  No fee required.
  Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
  (1)  

Title of each class of securities to which transaction applies:

 

common stock, par value $0.01 per share

   

 

  (2)  

Aggregate number of securities to which transaction applies:

 

10,257,152 shares of common stock (including 781,618 restricted stock units)

   

 

  (3)  

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

$2.25 per share of common stock

   

 

  (4)  

Proposed maximum aggregate value of transaction:

 

$23,078,592

   

 

  (5)  

Total fee paid:

 

$2,797.13 (determined by multiplying 0.0001212 by the proposed maximum aggregate value of the transaction of $23,078,592)

 

   

 

  Fee paid previously with preliminary materials.
  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1)  

Amount Previously Paid:

 

 

   

 

  (2)  

Form, Schedule or Registration Statement No.:

 

 

   

 

  (3)  

Filing Party:

 

 

   

 

  (4)  

Date Filed:

 

 

   

 

 

 

 


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PRELIMINARY COPY – SUBJECT TO COMPLETION

SEARS HOMETOWN AND OUTLET STORES, INC.

5500 Trillium Boulevard, Suite 501

Hoffman Estates, Illinois 60192

NOTICE OF ACTION BY WRITTEN CONSENT AND APPRAISAL RIGHTS

AND

INFORMATION STATEMENT

WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED

NOT TO SEND US A PROXY.

[                    ], 2019

Dear Stockholders:

This notice of action by written consent and appraisal rights and the accompanying information statement are being furnished to the holders of common stock of Sears Hometown and Outlet Stores, Inc., a Delaware corporation (the “Company”), in connection with the Agreement and Plan of Merger, dated as of June 1, 2019 (the “Merger Agreement”), among the Company, Transform Holdco LLC, a Delaware limited liability company (“Transform”), and Transform Merger Corporation, a Delaware corporation (“Merger Subsidiary”), pursuant to which Merger Subsidiary will merge with and into the Company (the “Merger”). Prior to completion of the Merger, the Company is being afforded an opportunity to market and sell the Company’s Sears Outlet and Buddy’s Home Furnishing Stores businesses to a third party (an “Outlet Sale”). If the Merger is completed, each share of common stock, par value $0.01, of the Company (“Common Stock”) issued and outstanding immediately prior to the effective time of the Merger (except for shares (i) owned by the Company as treasury stock or by any subsidiary of either the Company or Transform, (ii) owned by ESL Investments, Inc. or its investment affiliates, including Edward S. Lampert (together, “ESL”), or Transform, or (iii) held by stockholders who are entitled to demand and who properly demand appraisal under Section 262 of the General Corporation Law of the State of Delaware (the “DGCL”) for such shares) will be cancelled and converted automatically into the right to receive $2.25 in cash, without interest, subject to an upward adjustment (as described in more detail in the accompanying information statement) in the event that an Outlet Sale that satisfies certain criteria specified in the Merger Agreement is completed prior to the closing of the Merger (the “Merger Consideration”). Any payment of the Merger Consideration will be subject to any required withholding taxes. A copy of the Merger Agreement is attached as Annex A to the accompanying information statement.

Concurrently with the execution of the Merger Agreement, the Company entered into a letter agreement with Edward S. Lampert (the “ESL Letter Agreement”), pursuant to which Edward S. Lampert has agreed, among other things, not to, and to cause ESL not to, effect any amendment of the Company’s bylaws or take any other stockholder action that is inconsistent with the terms of the Merger Agreement or that would reasonably be expected to frustrate the transactions contemplated thereby, any Outlet Sale conducted in accordance with the terms of the Merger Agreement, or the sale process related thereto. A copy of the ESL Letter Agreement is attached as Annex B to the accompanying information statement.

The Company’s board of directors (the “Board of Directors”) duly established and authorized a special committee of the Board of Directors (the “Special Committee”) currently composed of one independent and disinterested member of the Board of Directors to review, consider, evaluate, negotiate, reject or recommend or not recommend to the Board of Directors a potential negotiated transaction involving the Company and Transform, or any alternative potential transactions. On May 31, 2019, the Special Committee (i) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to and in the best interests of the Company and its stockholders (other than ESL), (ii) approved the Merger Agreement and the transactions contemplated thereby and declared the Merger Agreement advisable and (iii) recommended that the Board of Directors adopt resolutions approving and declaring advisable the Merger Agreement and the


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transactions contemplated thereby and recommending that the Merger Agreement be adopted by the stockholders of the Company. Thereafter, at a meeting of the Board of Directors convened to act on the Special Committee’s recommendations, the Board of Directors unanimously (i) determined that the Merger Agreement and the transactions contemplated thereby are fair to and in the best interests of the Company and its stockholders (other than ESL), (ii) approved, adopted and declared advisable the Merger Agreement and the transactions contemplated thereby, (iii) directed that the Merger Agreement be submitted to the stockholders of the Company for their adoption and approval and (iv) recommended that the Merger Agreement be adopted by the stockholders of the Company.

Under Section 251 of the DGCL and the applicable provisions of the Company’s Certificate of Incorporation (as amended) and Amended and Restated Bylaws, the adoption of the Merger Agreement by the Company’s stockholders required the affirmative vote or written consent of the holders of a majority of the outstanding shares of Common Stock. On June 1, 2019, immediately following execution of the Merger Agreement, Edward S. Lampert and his investment affiliate ESL Partners, L.P. (together, the “Principal Stockholders”) caused to be delivered to the Company an irrevocable written consent (the “Written Consent”) adopting and approving the Merger Agreement and the transactions contemplated thereby, including the Merger, and approving any Outlet Sale to the extent such Outlet Sale would constitute a sale of substantially all of the Company’s property and assets and be subject to the stockholder approval requirements of Section 271(a) of the DGCL, in respect of 13,226,598 shares of Common Stock, representing approximately 58.3% of the outstanding shares of Common Stock entitled to act by written consent with respect to the adoption of the Merger Agreement and any Outlet Sale. Accordingly, the adoption and approval of the Merger Agreement and the transactions contemplated thereby, including the Merger, and any Outlet Sale became effective on June 1, 2019. No further approval of the stockholders of the Company is required to adopt or approve the Merger Agreement or the transactions contemplated thereby, including the Merger, or any Outlet Sale. As a result, the Company has not solicited and will not be soliciting your vote for the adoption or approval of the Merger Agreement or the transactions contemplated thereby, including the Merger, or any Outlet Sale, and does not intend to call a meeting of stockholders for the purpose of voting on the adoption of the Merger Agreement or the transactions contemplated thereby, including the Merger, or any Outlet Sale. A copy of the Written Consent is attached as Annex C to the accompanying information statement.

This notice of action by written consent and appraisal rights and the accompanying information statement constitute notice to you from the Company of the Principal Stockholders’ action by written consent to adopt and approve the Merger Agreement and the transactions contemplated thereby, including the Merger, and any Outlet Sale to the extent such Outlet Sale would constitute a sale of substantially all of the Company’s property and assets and be subject to the stockholder approval requirements of Section 271(a) of the DGCL.

Under Section 262 of the DGCL, if the Merger is completed, subject to compliance with the requirements of Section 262 of the DGCL, holders of shares of Common Stock (other than the Principal Stockholders) will have the right to demand an appraisal for, and be paid the “fair value” of, their shares of Common Stock as determined by the Court of Chancery of the State of Delaware instead of receiving the per share Merger Consideration if the Merger is completed, but only if they strictly comply with the procedures and requirements set forth under Section 262 of the DGCL. In order to exercise your appraisal rights, you must submit a written demand for an appraisal of your shares no later than 20 days after the date of mailing of this notice and the accompanying information statement, or [                    ], 2019, and precisely comply with other procedures set forth under Section 262 of the DGCL, which are summarized in the accompanying information statement. A copy of Section 262 of the DGCL is also attached as Annex E to the accompanying information statement.

This notice and the accompanying information statement constitute notice to you from the Company of the availability of appraisal rights under Section 262 of the DGCL and of action by written consent pursuant to Section 228(e) of the DGCL.

The information statement accompanying this notice provides you with more specific information concerning the Merger Agreement, the Merger and the other transactions contemplated by the Merger


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Agreement. We urge you to read the entire accompanying information statement carefully. Please do not send in your shares of Common Stock at this time. If the Merger is completed, you will receive instructions regarding the surrender of and payment for your shares of Common Stock.

By order of the Board of Directors,

 

 

LOGO

Charles J. Hansen

Vice President, General Counsel and Secretary

Neither the Securities and Exchange Commission nor any state securities or other regulatory agency has approved or disapproved of the transactions described in this document, including the Merger, or determined if the information contained in this document is accurate or adequate. Any representation to the contrary is a criminal offense.

The information statement is dated [                    ], 2019, and is first being mailed to stockholders on or about [                    ], 2019.


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SEARS HOMETOWN AND OUTLET STORES, INC.

5500 Trillium Boulevard, Suite 501

Hoffman Estates, Illinois 60192

INFORMATION STATEMENT

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SUMMARY TERM SHEET

     1  

QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE POTENTIAL OUTLET SALE

     13  

SPECIAL FACTORS

     17  

Background of the Transaction

     17  

Recommendation of the Special Committee and Reasons for Recommendation

     37  

Recommendation of the Board of Directors and Reasons for Recommendation

     42  

Opinion of PJ Solomon

     43  

Position of the Company on the Fairness of the Merger

     52  

Unaudited Projected Financial Information of the Company

     53  

Position of ESL on the Fairness of the Merger

     57  

Purposes and Reasons of the Company in Connection With the Merger

     60  

Purposes and Reasons of the ESL Filing Parties in Connection With the Merger

     61  

Plans for the Company in Connection with the Merger

     62  

Alternatives to the Merger

     62  

Relationships and Transactions with Related Persons

     63  

Record Dates

     65  

Certain Effects of the Merger

     65  

Source and Amount of Funds

     66  

Interests of Directors and Executive Officers in the Merger

     67  

Material U.S. Federal Income Tax Consequences of the Merger

     73  

Regulatory Approvals

     76  

De-listing and De-registration of Company Common Stock

     76  

Fees and Expenses

     76  

Anticipated Accounting Treatment of the Merger

     77  

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     78  

PARTIES INVOLVED IN THE MERGER

     80  

Sears Hometown and Outlet Stores, Inc.

     80  

Transform Holdco LLC

     80  

Transform Merger Corporation

     80  

THE MERGER AGREEMENT

     81  

Explanatory Note Regarding the Merger Agreement

     81  

The Merger

     81  

Merger Consideration

     81  

 

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Certificate of Incorporation; Bylaws; Directors and Officers

     82  

Closing and Effective Time of the Merger

     82  

Effect of the Merger on Company Common Stock

     83  

Payment Procedures

     83  

Treatment of the Company’s Equity Awards and Other Incentive Compensation

     84  

Representations and Warranties; Material Adverse Effect

     86  

Conduct of Business Pending the Merger

     89  

Other Covenants and Agreements

     91  

Conditions to the Merger

     100  

Termination; Effect of Termination

     101  

Specific Performance

     102  

Amendment; Extension; Waivers

     102  

Expenses

     103  

Governing Law; Jurisdiction

     103  

IMPORTANT ADDITIONAL INFORMATION REGARDING THE COMPANY

     104  

About the Company and its Business

     104  

Directors and Executive Officers

     104  

Market Prices and Dividend Data

     106  

Security Ownership of Certain Beneficial Owners and Management

     106  

Historical Consolidated Financial Information

     108  

Prior Public Offerings; Prior Stock Purchases

     109  

IMPORTANT ADDITIONAL INFORMATION REGARDING THE ESL FILING PARTIES

     110  

APPRAISAL RIGHTS

     112  

HOUSEHOLDING

     117  

FUTURE STOCKHOLDER PROPOSALS

     118  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     119  

Annexes

 

Annex A—Merger Agreement

     A-1  

Annex B—ESL Letter Agreement

     B-1  

Annex C—Written Consent

     C-1  

Annex D—PJ Solomon Opinion

     D-1  

Annex E—Section  262 of the General Corporation Law of the State of Delaware

     E-1  

 

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SUMMARY TERM SHEET

The following summary term sheet, together with the following section entitled “Questions and Answers About the Merger and the Potential Outlet Sale” beginning on page 13 of this information statement, highlights selected information from this information statement. Because this summary may not contain all of the information that is important to you, you should carefully read this entire information statement and the other documents to which this information statement refers you for a more complete understanding of the Merger, including, in particular, the copy of the Merger Agreement, the ESL Letter Agreement, the Written Consent and the PJ Solomon Opinion (each as defined below) that are attached to this information statement as Annex A, Annex B, Annex C and Annex D, respectively. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.

In this information statement, all references to the “Company”, “we”, “our” and “us” refer to Sears Hometown and Outlet Stores, Inc., a Delaware corporation, and, where appropriate, its subsidiaries; all references to “Transform” refer to Transform Holdco LLC, a Delaware limited liability company; all references to “Merger Subsidiary” refer to Transform Merger Corporation, a Delaware corporation; all references to the “Merger Agreement” refer to the Agreement and Plan of Merger, dated as of June 1, 2019, among Transform, Merger Subsidiary and the Company, as it may be amended from time to time, a copy of which is attached as Annex A to this information statement; all references to the “Merger” refer to the merger of Merger Subsidiary with and into the Company as contemplated by the Merger Agreement; all references to the “Board of Directors” refer to the Company’s Board of Directors; and all references to “Company Common Stock” refer to the Company’s common stock, par value $0.01 per share.

Parties Involved in the Merger (page 80)

Sears Hometown and Outlet Stores, Inc.

The Company is a national retailer primarily focused on selling home appliances, lawn and garden equipment, tools and hardware. In addition to merchandise, we provide our customers with access to a full suite of related services, including home delivery, installation and extended-service plans. As of July 6, 2019, the Company and its independent dealers and franchisees operated a total of 601 stores across 49 states, Puerto Rico and Bermuda.

The Company’s principal executive offices are located at 5500 Trillium Boulevard, Suite 501, Hoffman Estates, Illinois 60192, and its telephone number is (847) 286-7000. The Company’s website is www.shos.com.

As of July 24, 2019, the most recent practicable date before the filing of this information statement, there were 22,702,132 shares of Company Common Stock issued and outstanding.

Shares of the Company Common Stock are listed with, and trade on, NASDAQ under the symbol “SHOS”.

Transform Holdco LLC

Transform is a privately held company that acquired most of the operating assets of Sears Holdings Corporation out of bankruptcy. Transform is organized as a Delaware limited liability company and is a leading integrated retailer focused on seamlessly connecting the digital and physical shopping experiences to serve its members. Transform is home to Shop Your Way®, a social shopping platform offering members rewards for shopping at Sears, Kmart, the Company, and other retail partners. Transform operates through its subsidiaries with full-line and specialty retail stores across the United States. Transform is a privately held affiliate of ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert (together, “ESL”).

Transform’s principal executive offices are located at 3333 Beverly Road, Hoffman Estates, Illinois 60179, and its telephone number is (847) 286-2500.



 

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Transform Merger Corporation

Merger Subsidiary is a Delaware corporation formed for the sole purpose of completing the merger with the Company. Merger Subsidiary is a wholly owned subsidiary of Transform. Merger Subsidiary has not engaged in any business to date except for activities incidental to its incorporation and activities undertaken in furtherance of the transactions contemplated by the Merger Agreement.

Merger Subsidiary’s principal executive offices are located at 3333 Beverly Road, Hoffman Estates, Illinois 60179, and its telephone number is (847) 286-2500 .

The Merger (page 81)

Pursuant to the terms and subject to the conditions provided in the Merger Agreement, and in accordance with the General Corporation Law of the State of Delaware (the “DGCL”), at the effective time of the Merger, Merger Subsidiary will merge with and into the Company, with the Company continuing as the surviving corporation. Because the Merger Consideration will be paid in cash, after the effective time of the Merger the stockholders other than the Principal Stockholders (as defined below) will have no direct or indirect equity interest in the Company.

As a result of the Merger, the Company will cease to be an independent, publicly traded company and will become wholly owned by Transform and/or ESL.

Merger Consideration (page 81)

Upon completion of the Merger, each issued and outstanding share of Company Common Stock (except for shares (i) owned by the Company as treasury stock or by any subsidiary of either the Company or Transform, (ii) owned by Transform or ESL or (iii) held by stockholders who are entitled to demand and who properly demand appraisal under Section 262 of the DGCL for such shares) will automatically be cancelled and will cease to exist and will be converted into the right to receive $2.25 in cash, without interest (the “Base Merger Consideration”), subject to an upward adjustment (as described in more detail below) in the event that a sale (an “Outlet Sale”) of our Sears Outlet and Buddy’s Home Furnishing Stores businesses (together, the “Outlet Segment”) that satisfies the criteria specified in the Merger Agreement is completed prior to the closing of the Merger (the “Merger Consideration”).

The Base Merger Consideration will be increased if an Outlet Sale satisfying the criteria specified in the Merger Agreement is completed prior to the closing of the Merger and the Outlet Sale results in net proceeds (which will be calculated as the cash proceeds of such Outlet Sale after taking into account certain transaction costs, including all fees, out-of-pocket expenses and taxes (as such taxes may be reduced by any net operating losses or other applicable tax attributes of the Company) incurred by the Company in connection with the sale, and any net working capital transferred to the buyer of the Outlet Segment in excess of $75,000,000) to the Company (the “Net Proceeds”), in excess of $97,500,000. In that case, the Base Merger Consideration will be increased by an amount equal to the quotient of (i) the excess of the Net Proceeds over $97,500,000 divided by (ii) the sum of the aggregate number of shares of Company Common Stock and unvested Company restricted stock units issued and outstanding as of the closing date of the Merger.

If an Outlet Sale is not consummated prior to the closing of the Merger or if an Outlet Sale is consummated prior to the closing of the Merger but the Net Proceeds are less than or equal to $97,500,000, the Base Merger Consideration will not be increased.

Closing and Effective Time of the Merger (page 82)

The closing of the Merger will take place on a date to be mutually agreed by the Company and Transform, which date will be no later than the second business day after the date on which the conditions to the Merger (other than



 

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conditions that by their nature are to be satisfied by actions to be taken at closing, but subject to the satisfaction or, to the extent permissible under applicable law, waiver of those conditions at closing) have been satisfied or waived by the party or parties entitled to the benefit of such conditions, or on such other date as the Company and Transform may mutually agree.

The timing of the closing of the Merger is subject to the following provisions:

 

   

If the period designated in the Merger Agreement for the Company to enter into a definitive agreement for an Outlet Sale has expired and no definitive agreement has been entered into for an Outlet Sale, the closing of the Merger will occur no earlier than the later of (i) 45 days after the last day of such period and (ii) three business days following the date on which Transform receives certain financing information from the Company as further described in the Merger Agreement.

 

   

If a definitive agreement for an Outlet Sale is entered into during the period designated in the Merger Agreement therefor, the closing of the Merger will occur no earlier than the latest of (i) seven business days after the closing of the Outlet Sale, (ii) three business days following the date on which Transform receives from the Company financing information as further described in the Merger Agreement and (iii) 45 days after Transform is notified by the Company of the Company’s entry into the definitive agreement for the Outlet Sale.

 

   

If a definitive agreement for an Outlet Sale is entered into during the period designated therefor but is then later terminated, the closing of the Merger will occur no earlier than the later of (i) 45 days after Transform is notified of such termination and (ii) three business days following the date on which Transform receives certain financing information from the Company as further described in the Merger Agreement.

At the closing of the Merger, Transform and the Company will cause a certificate of merger to be executed and filed with the Secretary of State of the State of Delaware in accordance with the relevant provisions of the DGCL and will make all other filings or recordings required under the DGCL. The Merger will become effective at the time the certificate of merger is duly filed with the Secretary of State of the State of Delaware or on such later date and time as may be agreed upon by the parties and specified in the certificate of merger.

ESL Letter Agreement (Annex B)

Concurrently with the execution of the Merger Agreement, the Company entered into a letter agreement with Edward S. Lampert (the “ESL Letter Agreement”). Pursuant to the ESL Letter Agreement, Mr. Lampert has agreed, among other things, not to, and to cause ESL not to, effect any amendment of the Company’s bylaws or take any other stockholder action that is inconsistent with the terms of the Merger Agreement or that would reasonably be expected to frustrate the transactions contemplated thereby, any Outlet Sale conducted in accordance with the terms of the Merger Agreement, or the sale process related thereto. A copy of the ESL Letter Agreement is attached as Annex B to this information statement.

The Written Consent of Stockholders (Annex C)

Under the DGCL and the applicable provisions of the Company’s Certificate of Incorporation (as amended) and Amended and Restated Bylaws, the adoption of the Merger Agreement by the Company’s stockholders may be provided without a meeting by written consent of the stockholders holding a majority of the voting power of the outstanding shares of Company Common Stock.

On June 1, 2019, the record date for determining stockholders of the Company entitled to act by written consent with respect to the adoption of the Merger Agreement and approval of any Outlet Sale to the extent such Outlet Sale would constitute a sale of substantially all of the Company’s property and assets and be subject to the stockholder approval requirements of Section 271(a) of the DGCL, there were 22,702,132 shares of Company Common Stock outstanding and entitled to vote.



 

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On June 1, 2019, immediately following execution of the Merger Agreement, Edward S. Lampert and his investment affiliate ESL Partners, L.P. (together, the “Principal Stockholders”) caused to be delivered to the Company an irrevocable written consent adopting and approving the Merger Agreement, the terms and conditions set forth therein and the transactions contemplated thereby, including the Merger, and approving any Outlet Sale to the extent such Outlet Sale would constitute a sale of substantially all of the Company’s property and assets and be subject to the stockholder approval requirements of Section 271(a) of the DGCL (the “Written Consent”). A copy of the Written Consent is attached as Annex C to this information statement.

As of June 1, 2019, the Principal Stockholders held shares of Company Common Stock representing approximately 58.3% of the voting power of the shares of Company Common Stock entitled to vote on the adoption of the Merger Agreement. Accordingly, the adoption and approval of the Merger Agreement by the Company’s stockholders was effected in accordance with Sections 228 and 251 of the DGCL and the approval of any Outlet Sale was effected, to the extent applicable, in accordance with Sections 228 and 271(a) of the DGCL on June 1, 2019.

No further approval of the stockholders of the Company is required to adopt or approve the Merger Agreement or the transactions contemplated thereby, including the Merger, or any Outlet Sale. As a result, the Company has not solicited and will not be soliciting your vote for the adoption of the Merger Agreement or the transactions contemplated thereby, including the Merger, or any Outlet Sale, and does not intend to call a meeting of stockholders for purposes of voting on the adoption of the Merger Agreement or the transactions contemplated thereby, including the Merger, or any Outlet Sale.

We are not asking you for a proxy and you are requested not to send us a proxy.

Federal securities laws state that neither the Merger nor any Outlet Sale that is required to be approved by the Company’s stockholders under Section 271(a) of the DGCL may be completed until 20 days after the date of mailing of this information statement to the Company’s stockholders. Therefore, notwithstanding the execution and delivery of the Written Consent, neither the Merger nor any such Outlet Sale will occur until that time has elapsed. We expect the Merger and, if an Outlet Sale will be consummated, such Outlet Sale to be completed during the Company’s third fiscal quarter of 2019, subject to the satisfaction of other conditions to closing set forth in the Merger Agreement and, if applicable, the Outlet Purchase Agreement (as defined below). However, there can be no assurance that the Merger or any Outlet Sale will be completed at that time, or at all.

When stockholder action is taken without a meeting by written consent of less than all of the stockholders entitled to vote on a matter, Section 228(e) of the DGCL requires that notice of the action be provided to those stockholders who did not consent and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for notice of such meeting had been the date that written consents signed by a sufficient number of holders to take the action were delivered to the corporation as provided in subsection (c) of Section 228 of the DGCL. This information statement and the notice attached hereto constitute notice to you of action by written consent as required by Section 228(e) of the DGCL.

Recommendation of the Special Committee (page 37)

The Board of Directors duly established and authorized a special committee of the Board of Directors (the “Special Committee”) currently composed of one independent and disinterested member of the Board of Directors to review, consider, evaluate, negotiate, reject or recommend or not recommend to the Board of Directors a potential negotiated transaction involving the Company and Transform, or any alternative potential transactions. On May 31, 2019, the Special Committee, after careful consideration:

 

   

determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to and in the best interests of the Company and its stockholders (other than ESL);



 

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approved the Merger Agreement and the transactions contemplated thereby and declared the Merger Agreement advisable; and

 

   

recommended that the Board of Directors adopt resolutions approving and declaring advisable the Merger Agreement and the transactions contemplated thereby and recommending that the Merger Agreement be adopted by the stockholders of the Company.

For a discussion of the material factors considered by the Special Committee in reaching its conclusions, see the section entitled “Special Factors—Recommendation of the Special Committee and Reasons for Recommendation” beginning on page 37 of this information statement.

Recommendation of the Board of Directors (page 42)

Our Board of Directors, at a meeting convened on May 31, 2109 to act on the Special Committee’s recommendation, after careful consideration:

 

   

determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to and in the best interests of the Company and its stockholders (other than ESL);

 

   

approved, adopted and declared advisable the Merger Agreement and the transactions contemplated thereby, including the Merger, in accordance with the requirements of the DGCL;

 

   

directed that the Merger Agreement be submitted to the stockholders of the Company for their adoption and approval; and

 

   

resolved to recommend that the Merger Agreement be adopted by the stockholders of the Company.

For a discussion of the material factors considered by the Board of Directors in reaching their conclusions, see the section entitled “Special Factors—Recommendation of the Board of Directors and Reasons for Recommendation” beginning on page 42 of this information statement.

Record Dates (page 65)

On June 1, 2019, the record date for determining stockholders of the Company entitled to act by written consent with respect to the adoption of the Merger Agreement, there were 22,702,132 shares of Company Common Stock outstanding and entitled to vote.

On June 1, 2019, the Company received the Written Consent adopting and approving the Merger Agreement and the transactions contemplated thereby, including the Merger, and approving any Outlet Sale to the extent such Outlet Sale would constitute a sale of substantially all of the Company’s property and assets and be subject to the stockholder approval requirements of Section 271(a) of the DGCL. The Written Consent was executed by the holders of the requisite number of shares of Company Common Stock of the Company in accordance with Sections 228, 251 and 271(a) of the DGCL.

The Board of Directors has not set a record date for determining stockholders entitled to receive notice that appraisal rights are available in connection with the Merger. Accordingly, pursuant to Section 262(d)(2) of the DGCL, the record date for determining stockholders entitled to receive notice that appraisal rights are available in connection with the Merger is the close of business on the day next preceding the date on which this information statement and accompanying notice are mailed to holders of Company Common Stock, which record date is [    ], 2019.



 

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Opinion of PJ Solomon (page 43 and Annex D)

In connection with the Merger, the Special Committee and the Board of Directors received an opinion (the “PJ Solomon Opinion”), dated May 31, 2019, from PJ Solomon Securities, LLC (“PJ Solomon”). The Special Committee retained PJ Solomon to act as its financial and strategic advisor to the Special Committee in connection with the Merger. The Special Committee selected PJ Solomon to act as its financial and strategic advisor on the basis of PJ Solomon’s knowledge of the Company and its industry and business, PJ Solomon’s experience and reputation advising public companies in transactions similar to the Merger and its reputation in the investment community, among other things.

At May 31, 2019 meetings to consider the approval and adoption of the Merger Agreement, the Special Committee and the Board of Directors each received an oral opinion, which was confirmed in writing, from PJ Solomon, to the effect that, as of May 31, 2019, and based upon and subject to various assumptions and limitations described in its opinion, the $2.25 per share in cash of Base Merger Consideration to be paid to the holders of shares of Company Common Stock (other than ESL or Transform) pursuant to the Merger Agreement was fair from a financial point of view to such holders.

The full text of PJ Solomon’s written opinion, which is attached to this information statement as Annex D and is incorporated by reference in its entirety into this information statement, sets forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken by PJ Solomon. Holders of shares of Company Common Stock are urged to read this opinion carefully and in its entirety. PJ Solomon’s opinion was provided for the information of the Special Committee and the Board of Directors in connection with their evaluation of the Merger Consideration from a financial point of view and did not address any other aspects or implications of the Merger. PJ Solomon’s opinion is not intended to be, and does not constitute, a recommendation to any stockholder as to how such stockholder should act on any matters relating to the Merger or otherwise. For a more complete description of PJ Solomon’s opinion, see the section entitled “Special Factors—Opinion of PJ Solomon” beginning on page 43 of this information statement.

Interests of Directors and Executive Officers in the Merger (page 67)

Some of our executive officers and the members of our Board of Directors have interests in the Merger that are different from, or in addition to, the interests of the Company and our stockholders generally.

These interests include:

 

   

with respect to our executive officers, the possible accelerated vesting of, and the cancellation and conversion of, Company restricted stock units. If an Outlet Sale is not consummated at or prior to the closing of the Merger, except as provided under the applicable award, each Company restricted stock unit will be cancelled and converted into the right to receive an amount in cash equal to the Merger Consideration. With respect to restricted stock units scheduled to vest in January 2020, this amount will be paid, to the extent such restricted stock units have not been forfeited, at the effective time of the Merger, if held by any individual other than Will Powell or E.J. Bird, and on the date such restricted stock unit would otherwise have been paid in accordance with its terms (including terms providing for payment upon termination of employment), if held by Mr. Powell or Mr. Bird. With respect to restricted stock units scheduled to vest after January 2020 held by any individual, including the executive officers, this amount will be paid, to the extent such restricted stock units have not been forfeited, on the earlier of the date such restricted stock unit would otherwise have been paid in accordance with its terms (including terms providing for payment upon termination of employment) or no later than 60 days following the first anniversary of the closing of the Merger. If an Outlet Sale is consummated at or prior to the closing of the Merger, except as provided under the applicable award,



 

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each unvested Company restricted stock unit will be cancelled and converted into the right to receive, at the effective time of the Merger, an amount in cash equal to the Merger Consideration;

 

   

with respect to our executive officers, the cancellation of the outstanding portion (or unvested portion, in the event an Outlet Sale is consummated at or prior to the closing of the Merger) of any long term incentive award and conversion of such award into the right to receive a cash payment, at the effective time of the Merger, based on target (or, in the event an Outlet Sale is consummated at or prior to the closing of the Merger, actual) level of achievement, and in each case prorated to reflect the portion of the performance period that has lapsed at the effective time of the Merger;

 

   

with respect to our executive officers, the payment of guaranteed minimum bonuses; and

 

   

the right to continued indemnification and directors’ and officers’ liability insurance for our directors and officers by the surviving corporation for events occurring prior to the effective time of the Merger.

For the discussion of the interests described above, see the section entitled “Special Factors—Interests of Directors and Executive Officers in the Merger” beginning on page 67 of this information statement.

No Solicitation; No Change in Recommendation (page 92)

The Merger Agreement generally requires the Company to terminate any discussions or negotiations with any third party with respect to any acquisition proposal, terminate access to any physical or electronic data rooms related to a possible acquisition proposal and request that any such person and its representatives promptly return or destroy all confidential information concerning the Company and its subsidiaries. In addition, the Company may not, and must cause each of its subsidiaries and their respective representatives not to (in each case, other than in connection with any inquiries or proposals solely in connection with an Outlet Sale that comply with certain requirements set forth in the Merger Agreement):

 

   

solicit, initiate, facilitate or encourage any inquiries regarding, or the making or announcement of any proposal or offer that constitutes, or would reasonably be expected to lead to, an acquisition proposal;

 

   

conduct or engage in or otherwise participate in any discussions or negotiations with, or furnish any information to, any person that is making or is considering making an acquisition proposal;

 

   

approve or recommend any acquisition proposal; or

 

   

enter into any definitive agreement with respect to any acquisition proposal.

The Board of Directors is also restricted from taking certain actions with respect to, including effecting a change or modification of, its recommendation in favor of approval and adoption of the Merger and the Merger Agreement.

The Company has no right to terminate the Merger Agreement to accept a superior proposal.

Sale of the Outlet Segment (page 93)

During the period beginning on the date of the Merger Agreement and ending on August 24, 2019 (such date, as it may be extended in certain circumstances, including by the Company by 10 days upon written notice to Transform certifying that the Company is presently in negotiations with one or more third parties and has a reasonable and good faith expectation of entering into an Outlet Purchase Agreement (as defined below) within such 10-day period, the “Outlet Sale End Date”), the Company has the right to solicit inquiries, proposals and offers from third parties in connection with any Outlet Sale that complies with certain requirements set forth in the Merger Agreement, engage in negotiations with any third party regarding any such Outlet Sale or proposal



 

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therefor, otherwise cooperate with or facilitate any such proposal, and enter into an Outlet Purchase Agreement for, and consummate, any such Outlet Sale. Under the Merger Agreement, any Outlet Purchase Agreement the Company enters into must include certain terms (as further described in the section entitled “Merger Agreement—Other Covenants and Agreements—Sale of the Outlet Segment” beginning on page 93 of this information statement).

In the event that no Outlet Sale is agreed to and no definitive purchase agreement for an Outlet Sale satisfying the criteria set forth in the Merger Agreement (an “Outlet Purchase Agreement”) is executed by the Outlet Sale End Date, the Company must cease all discussions with all third parties regarding any Outlet Sale. In the event that an Outlet Purchase Agreement has been executed by the Outlet Sale End Date, but such Outlet Sale does not close prior to October 23, 2019 (such date, as it may be extended in certain circumstances, including, if certain conditions have been met, by the Company by 15 days upon written notice to Transform certifying that (i) the Company and the counterparty under the Outlet Purchase Agreement are working diligently and in good faith to consummate the Outlet Sale and (ii) the Company and such counterparty have a reasonable expectation of doing so within such 15-day period, the “Outlet Closing Deadline”), the Company must terminate such Outlet Purchase Agreement without any further liability or obligation to the Company, other than any liability for any breach by the Company of such Outlet Purchase Agreement prior to its termination.

In the event that an Outlet Sale is consummated prior to the closing of the Merger, the Company must cause the Net Proceeds of the Outlet Sale to be applied or reserved to pay down any debt outstanding under the Company’s credit agreements.

Conditions to the Merger (page 100)

As more fully described in this information statement and the Merger Agreement, the completion of the Merger depends on the satisfaction or waiver of a number of conditions. If these conditions are not satisfied or waived, the Merger will not be completed.

The conditions that each party must satisfy to consummate the Merger are more fully described in the section entitled “The Merger Agreement—Conditions to the Merger” beginning on page 100 of this information statement

Source and Amount of Funds (page 66)

The Merger is not contingent on the receipt of any proceeds from any financing. Concurrently with the execution of the Merger Agreement, ESL Investments, Inc. entered into a commitment letter pursuant to which it committed, subject to the terms and conditions set forth therein, to contribute approximately $21,000,000 to Transform to be used by Transform to pay the Merger Consideration.

Treatment of the Company’s Equity Awards and Other Incentive Compensation (page 84)

The Merger Agreement provides that, if an Outlet Sale is not consummated at or prior to the closing of the Merger, then, except as provided under the applicable award:

 

   

each restricted stock unit of the Company will be cancelled and converted into the right to receive an amount in cash, without interest, equal to the Merger Consideration. With respect to restricted stock units scheduled to vest in January 2020, this amount will be paid, to the extent such restricted stock units have not been forfeited, at the effective time of the Merger, if held by any individual other than Mr. Powell or Mr. Bird, and on the date such restricted stock unit would otherwise have been paid in accordance with its terms (including terms providing for payment upon termination of employment), if held by Mr. Powell or Mr. Bird. With respect to restricted stock units scheduled to vest after January



 

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2020 held by any individual, including Mr. Powell or Mr. Bird, this amount will be paid, to the extent such restricted stock units have not been forfeited, on the earlier of the date such restricted stock unit would otherwise have been paid in accordance with its terms (including terms providing for payment upon termination of employment) or no later than 60 days following the first anniversary of the closing of the Merger;

 

   

the outstanding portion of any award under the Company’s long-term incentive plan will be cancelled and converted into the right to receive at the effective time of the Merger an amount in cash, based on the target level of achievement, prorated based on the number of completed months of the applicable performance period as of the effective time of the Merger; and

 

   

each participant in the Company’s annual incentive plan who has a guaranteed minimum bonus provided in such participant’s retention agreement will be paid an amount in cash equal to such guaranteed minimum bonus, and, in connection with that payment, any then unpaid installments of the special retention or incentive awards to which such participant was entitled under previous agreements will be reduced to zero and the participant will cease to have any further right to payment under those agreements.

The Merger Agreement provides that, if an Outlet Sale is consummated at or prior to the closing of the Merger, then, except as provided under the applicable award:

 

   

at the effective time of the Merger, each unvested restricted stock unit will be cancelled and converted into the right to receive at the effective time of the Merger an amount in cash, without interest, equal to the Merger Consideration;

 

   

the unvested portion of any award under the Company’s long-term incentive plan will be cancelled and converted into the right to receive at the effective time of the Merger an amount in cash, based on the actual level of achievement, prorated based on the number of completed months of the applicable performance period as of the effective time of the Merger; and

 

   

each participant in the Company’s annual incentive plan, whether or not that participant has a guaranteed minimum bonus pursuant to a retention agreement, will be paid a bonus for the portion of fiscal year 2019 that has been completed as of the effective time of the Merger in an amount equal to the greater of (i) the amount determined under the annual incentive plan using actual performance as of the date of the Merger Agreement (which was zero), prorated based on the number of completed days in the fiscal year as of the effective time of the Merger, and (ii) if applicable, the guaranteed minimum bonus provided in such annual incentive plan participant’s retention agreement, and in connection with that payment, any then unpaid installments of the special retention or incentive awards to which such participant was entitled under previous agreements will be reduced to zero and the participant will cease to have any further right to payment under those agreements.

For a more detailed discussion of the above, see the section entitled “The Merger Agreement—Treatment of the Company’s Equity Awards and Other Incentive Compensation” beginning on page 84 of this information statement.

Termination of the Merger Agreement (page 101)

The Merger Agreement may be terminated and the transactions may be abandoned at any time prior to the effective time of the Merger:

 

   

by mutual written agreement of Transform and the Company (provided that any such termination has been approved by the Special Committee);



 

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by either Transform or the Company (provided that any such termination by the Company has been approved by the Special Committee), if:

 

   

the Merger has not occurred on or before 5:00 p.m. (New York City time) on the End Date (as defined in the Merger Agreement), except this termination right is not available to any party whose breach of any provision of the Merger Agreement results in the failure of the Merger to be consummated by such time;

 

   

any applicable law or order by a governmental authority (which has become final and nonappealable) makes consummation of the Merger illegal or otherwise prohibits the consummation of the Merger, except this termination right is not available to a party whose breach of the Merger Agreement results in the existence of any such law or order;

 

   

by the Company if there is a breach or failure by Transform or Merger Subsidiary of any of their respective representations, warranties, covenants or agreements under the Merger Agreement that would cause the related condition to fail and such breach or failure is incapable of being cured by the End Date or, if curable by the End Date, Transform does not cure such breach or failure within 30 days after receipt of written notice from the Company of such breach or failure (or, if sooner, the End Date), except this termination right is not available if the Company is in material breach of any of its representations, warranties, covenants or agreements in the Merger Agreement;

 

   

by Transform if there is a breach or failure by the Company of any of its representations, warranties, covenants or agreements in the Merger Agreement that would cause the related condition to fail and such breach or failure is incapable of being cured by the End Date or, if curable by the End Date, the Company does not cure such breach or failure within 30 days after receipt of written notice from Transform of such breach or failure (or, if sooner, the End Date), except this termination right is not available if Transform is in material breach of any of its representations, warranties, covenants or agreements in the Merger Agreement or if failure of the Company’s condition related to the absence of any event of default under a credit agreement is solely a result of actions taken by Transform in violation of the Merger Agreement or ESL in violation of the ESL Letter Agreement.

If the Merger Agreement is validly terminated pursuant to the termination rights described above in this section, the Merger Agreement will become void and of no effect, without liability of any party (or any stockholder or representative of such party) to the other party except for liability for damages resulting from such party’s fraud or willful and material breach of the Merger Agreement prior to its termination and except for the provision regarding public announcements, provisions relating to the effect of termination and certain other specified general provisions of the Merger Agreement, each of which will survive the termination of the Merger Agreement.

Appraisal Rights (page 112)

The Company’s stockholders (other than the Principal Stockholders) did not vote to approve the adoption of the Merger Agreement and, under the DGCL, will have the right to demand an appraisal for and be paid the “fair value” of their shares of Company Common Stock as determined by the Court of Chancery of the State of Delaware (the “Court”) instead of receiving the per share Merger Consideration if the Merger is completed, but only if they strictly comply with the procedures and requirements set forth in Section 262 of the DGCL (“Section 262”). In order to exercise your appraisal rights, you must submit a written demand for an appraisal of your shares no later than 20 days after the date of mailing of this information statement and the accompanying notice, which 20th day is [                    ], 2019, and precisely comply with other procedures set forth in Section 262.

A copy of Section 262 is included as Annex E to this information statement. We urge you to read these provisions carefully and in their entirety. Moreover, due to the complexity of the procedures for exercising the



 

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right to demand appraisal, stockholders who are considering exercising such rights are encouraged to seek the advice of legal counsel. Failure to comply strictly with all of the requirements of Section 262 may result in loss of the right of appraisal. You should be aware that the “fair value” of your shares of Company Common Stock as determined by the Court could be more than, the same as, or less than the value that you are entitled to receive under the terms of the Merger Agreement.

For a more detailed discussion of the above, see the section entitled “Appraisal Rights” beginning on page 112 of this information statement.

Material U.S. Federal Income Tax Consequences of the Merger (page 73)

The exchange of shares of Company Common Stock for the Merger Consideration pursuant to the Merger will be a taxable transaction for U.S. federal income tax purposes. Accordingly, a Company stockholder that is a “U.S. holder” (as defined in the section entitled “Special FactorsMaterial U.S. Federal Income Tax Consequences of the Merger” beginning on page 73 of this information statement) will recognize taxable gain or loss in an amount equal to the difference, if any, between (i) the Merger Consideration received by such U.S. holder in the Merger and (ii) such U.S. holder’s adjusted tax basis in the shares of Company Common Stock exchanged therefor. With respect to a Company stockholder that is a “non-U.S. holder” (as defined in the section entitled “Special FactorsMaterial U.S. Federal Income Tax Consequences of the Merger” beginning on page 73 of this information statement), the exchange of shares of Company Common Stock for the Merger Consideration pursuant to the Merger generally will not result in U.S. federal income tax to such non-U.S. holder unless such non-U.S. holder has certain connections with the United States. Backup withholding may apply to the cash payment made pursuant to the Merger unless the Company stockholder or other payee provides a valid taxpayer identification number and complies with certain certification procedures (generally, by providing a properly completed and executed U.S. Internal Revenue Service (“IRS”) Form W-9 or IRS Form W-8 or applicable successor form).

You are urged to read the discussion in the section entitled “Special Factors—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 73 of this information statement and to consult your tax advisor to determine the particular U.S. federal, state or local or non-U.S. income or other tax consequences to you of the Merger.

De-listing and De-registration of Company Common Stock (page 76)

If the Merger is completed, the Company Common Stock will be de-listed from NASDAQ and de-registered under the Exchange Act. As such, following completion of the Merger and such de-registration, the Company will no longer file periodic and other reports with the Securities and Exchange Commission (“SEC”).

Expenses (page 103)

Except as otherwise provided in the Merger Agreement, all costs and expenses incurred in connection with the Merger Agreement will be paid by the party incurring such cost or expense.

Specific Performance (page 102)

The Company, Transform and Merger Subsidiary have agreed that they will be entitled to an injunction or injunctions to prevent breaches of the Merger Agreement and to specifically enforce the terms and provisions of the Merger Agreement, in addition to any other remedy to which they are entitled at law or in equity.

Market Price of Company Common Stock and Dividend Data (page 106)

The Company Common Stock is listed with, and trades on, NASDAQ under the symbol “SHOS”. The closing sale price of the Company Common Stock on April 5, 2019, the last trading day prior to the Company’s



 

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announcement that it had received an acquisition proposal from Transform, was $1.90 per share. The closing sale price of the Company Common Stock on May 31, 2019, the last trading day prior to the execution of the Merger Agreement, was $2.18 per share. The closing sale price of the Company Common Stock on July 24, 2019, the most recent practicable date before the filing of this information statement, was $2.61 per share. You are encouraged to obtain current market quotations for Company Common Stock.

Following completion of the Merger, there will be no further market for Company Common Stock, and Company Common Stock will be de-listed from NASDAQ and de-registered under the Exchange Act. As a result, following completion of the Merger and such de-registration, we will no longer file periodic and other reports with the SEC.

For a more complete description, please see the section entitled “Important Additional Information About the Company—Market Prices and Dividend Data” beginning on page 106 of this information statement.

* * *

Neither the SEC nor any state securities or other regulatory agency has approved or disapproved of the transactions described in this document, including the Merger, or determined if the information contained in this document is accurate or adequate. Any representation to the contrary is a criminal offense.



 

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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE POTENTIAL OUTLET SALE

The following questions and answers are intended to address briefly some commonly asked questions regarding the Merger Agreement, the Merger and any Outlet Sale. These questions and answers may not address all questions that may be important to you as a stockholder of the Company. Please refer to the additional information contained elsewhere in this information statement, the annexes to this information statement and the documents referred to in this information statement.

 

Q.

WHY DID I RECEIVE THIS INFORMATION STATEMENT?

 

A.

On June 1, 2019, the Company, Transform and Merger Subsidiary entered into the Merger Agreement, and immediately thereafter the Principal Stockholders adopted the Merger Agreement and approved the Merger and the other transactions contemplated by the Merger Agreement, as well as any Outlet Sale to the extent such Outlet Sale would constitute a sale of substantially all of the Company’s property and assets and be subject to the stockholder approval requirements of Section 271(a) of the DGCL. Applicable provisions of the DGCL and certain securities regulations require us to provide you with information regarding the Merger and the potential Outlet Sale, even though your vote or consent is neither required nor requested to adopt the Merger Agreement or complete the Merger or any Outlet Sale. We are not asking you for a proxy and you are requested not to send us a proxy.

 

Q.

WHAT IS THE PROPOSED TRANSACTION?

 

A.

The proposed transaction is the acquisition by Transform of all shares of Company Common Stock not owned by ESL or Transform, by the Company as treasury stock or by any subsidiary of either the Company or Transform. The proposed transaction will be effected through a merger of Merger Subsidiary, a wholly owned subsidiary of Transform, with and into the Company, with the Company continuing as the surviving corporation. If the Merger is completed, the Company will become wholly owned by Transform and ESL and the Company Common Stock will cease to be listed on NASDAQ, will be de-registered with the SEC and will no longer be publicly traded.

In addition, prior to completion of the Merger, the Company is being afforded an opportunity to market and sell the Outlet Segment to a third party. In the event that a sale of the Outlet Segment that satisfies certain criteria specified in the Merger Agreement is completed prior to the closing of the Merger, the amount of consideration paid for your shares of Company Common Stock in the Merger will be increased.

 

Q.

IF THE MERGER IS COMPLETED, WHAT WILL I RECEIVE FOR MY SHARES OF COMPANY COMMON STOCK?

 

A.

If the Merger is completed, each share of Company Common Stock that is issued and outstanding (except for shares (i) owned by the Company as treasury stock or by any subsidiary of either the Company or Transform, (ii) owned by Transform or ESL or (iii) held by stockholders who are entitled to demand and who properly demand appraisal under Section 262 of the DGCL for such shares) will be converted into the right to receive the Merger Consideration, consisting of the Base Merger Consideration of $2.25 in cash per share, without interest, subject to an upward adjustment (as described in more detail below) in the event that a sale of the Outlet Segment that satisfies certain criteria specified in the Merger Agreement is completed prior to the closing of the Merger. As a result of the Merger, upon the surrender of your shares of Company Common Stock, you will receive a total amount of cash equal to the product obtained by multiplying the Merger Consideration by the number of shares of Company Common Stock that you own, unless you properly exercise and do not withdraw or fail to perfect appraisal rights as provided under Section 262 of the DGCL.

 

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Q.

IS THE MERGER CONSIDERATION SUBJECT TO AN INCREASE?

 

A.

Yes, if an Outlet Sale that satisfies certain criteria specified in the Merger Agreement is completed prior to the closing of the Merger. The Base Merger Consideration is $2.25 in cash per share, without interest. However, the Base Merger Consideration will be increased if an Outlet Sale satisfying the criteria specified in the Merger Agreement is completed prior to the closing of the Merger and such Outlet Sale results in Net Proceeds in excess of $97,500,000. In that case, the Base Merger Consideration will be increased by an amount equal to the quotient of (i) the excess of the Net Proceeds over $97,500,000 divided by (ii) the sum of the aggregate number of shares of Company Common Stock and unvested Company restricted stock units issued and outstanding as of the closing date of the Merger. See the section entitled “The Merger Agreement—Merger Consideration” beginning on page 81 of this information statement.

 

Q.

DID THE BOARD OF DIRECTORS APPROVE THE MERGER AND THE MERGER AGREEMENT?

 

A.

Yes. After careful consideration and evaluation of the Merger, and in consideration of, among other things, the recommendation of the Special Committee that the Board of Directors adopt resolutions approving and declaring advisable the Merger Agreement and the opinion of PJ Solomon that, based upon and subject to the factors and assumptions set forth in such opinion, the Merger Consideration to be paid to holders of Company Common Stock pursuant to the Merger Agreement is fair, from a financial point of view, to the holders of shares of Company Common Stock (other than ESL or Transform), our Board of Directors approved and declared advisable the Merger Agreement and the Merger. To review our Board of Directors’ reasons for recommending and approving the Merger and the Merger Agreement, see the sections entitled “Special Factors—Recommendation of the Special Committee and Reasons for Recommendation” beginning on page 37 of this information statement and “Special Factors—Recommendation of the Board of Directors and Reasons for Recommendation” beginning on page 42 of this information statement.

 

Q.

DID THE BOARD OF DIRECTORS APPROVE AN OUTLET SALE?

 

A.

After careful consideration and evaluation of the Merger Agreement and the transactions contemplated thereby, including a potential Outlet Sale complying with the requirements set forth therein, and in consideration of, among other things, the recommendation of the Special Committee that the Board of Directors adopt resolutions approving and declaring advisable the Merger Agreement, our Board of Directors adopted a resolution recommending, in accordance with the provisions of the Company’s amended and restated bylaws, a potential Outlet Sale complying with the requirements set forth in the Merger Agreement. Any actual Outlet Sale to a specific third party, including any definitive transaction agreement providing therefore, will be subject to the further approval of the Board of Directors.

 

Q.

IS THE APPROVAL OF STOCKHOLDERS NECESSARY TO ADOPT OR APPROVE THE MERGER AGREEMENT, THE MERGER OR AN OUTLET SALE? WHY AM I NOT BEING ASKED TO VOTE ON THE MERGER AGREEMENT, THE MERGER OR AN OUTLET SALE?

 

A.

The Merger requires the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of Company Common Stock and, to the extent an Outlet Sale would constitute a sale of substantially all of the Company’s property and assets, an Outlet Sale would require adoption by the holders of a majority of the outstanding shares of Company Common Stock under Section 271(a) of the DGCL. The requisite stockholder approvals were obtained on June 1, 2019, the date on which the Principal Stockholders caused to be delivered to the Company an irrevocable written consent, in respect of approximately 58.3% of our outstanding Company Common Stock, adopting and approving the Merger Agreement and the transactions contemplated thereby, including the Merger, and approving any Outlet Sale to the extent such Outlet Sale would constitute a sale of substantially all of the Company’s property and assets and be subject to the stockholder approvals requirements of Section 271(a) of the DGCL. Therefore, your vote is not required and is not being sought. We are not asking you for a proxy and you are requested not to send us a proxy.

 

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Q.

ARE THERE ANY REQUIREMENTS FOR AN OUTLET SALE?

 

A.

Yes. Under the Merger Agreement, any Outlet Purchase Agreement the Company enters into must include certain terms, including that the Net Proceeds of the Outlet Sale must be at least $97,500,000, the buyer of the Outlet Segment must assume all obligations and liabilities primarily arising out of or relating to the Outlet Segment, consideration for the Outlet Sale must be payable to the Company exclusively in cash at the closing of the Outlet Sale, and the Outlet Purchase Agreement must generally be terminable by the Company without any further liability or obligation from and after the Outlet Closing Deadline. See the section entitled “The Merger Agreement—Other Covenants and Agreements—Sale of the Outlet Segment” beginning on page 93 of this information statement.

 

Q.

IS THE MERGER SUBJECT TO THE FULFILLMENT OF CERTAIN CONDITIONS?

 

A.

Yes. Before completion of the Merger, the Company, Transform and Merger Subsidiary must fulfill or waive several closing conditions. If these conditions are not satisfied or waived, the Merger will not be completed. See the section entitled “The Merger Agreement—Conditions to the Merger” beginning on page 100 of this information statement.

 

Q.

AM I ENTITLED TO APPRAISAL RIGHTS?

 

A.

Yes. Under the DGCL, stockholders who did not provide a consent to the adoption of the Merger Agreement (i.e., stockholders other than the Principal Stockholders) are entitled to appraisal rights in connection with the Merger with respect to their shares, so long as they precisely follow specific procedures to exercise their rights under the DGCL. See the section entitled “Appraisal Rights” beginning on page 112 of this information statement.

 

Q.

WHEN IS THE MERGER EXPECTED TO BE COMPLETED?

 

A.

We expect the Merger to be completed during the Company’s third fiscal quarter of 2019, subject to satisfaction of the closing conditions set forth in the Merger Agreement; however, there can be no assurance that the Merger will be completed at that time, or at all.

 

Q.

WHEN WILL AN OUTLET SALE BE COMPLETED?

 

A.

Any definitive Outlet Purchase Agreement must be entered into by the Company by August 24, 2019. However, that deadline may be extended in certain circumstances, including by the Company by 10 days upon written notice to Transform certifying that the Company is presently in negotiations with one or more third parties and has a reasonable and good faith expectation of entering into an Outlet Purchase Agreement within such 10-day period.

If an Outlet Purchase Agreement is entered into within the time period described above, an Outlet Sale must be completed, if at all, by October 23, 2019. However, that deadline may be extended in certain circumstances, including, if certain conditions are met, by the Company by 15 days upon written notice to Transform certifying that (i) the Company and the counterparty to the Outlet Purchase Agreement are working diligently and in good faith to consummate the Outlet Sale and (ii) the Company and such counterparty have a reasonable expectation of doing so within such 15-day period. See the section entitled “The Merger Agreement—Other Covenants and Agreements—Sale of the Outlet Segment” beginning on page 93 of this information statement.

 

Q.

WHAT HAPPENS IF THE MERGER IS NOT COMPLETED?

 

A.

If the Merger is not completed for any reason, stockholders will not receive any payment for their shares of Company Common Stock in connection with the Merger. Instead, the Company will remain a publicly traded company, and shares of Company Common Stock will continue to trade on NASDAQ.

 

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Q.

WHAT HAPPENS IF NO OUTLET SALE IS COMPLETED?

 

A.

If no Outlet Sale is completed, the Merger Consideration will equal the Base Merger Consideration and the Outlet Segment will continue to be owned and operated by the Company following the closing of the Merger.

 

Q.

SHOULD I SURRENDER MY SHARES OF COMPANY COMMON STOCK NOW?

 

A.

No. After the Merger is completed, you will be sent detailed instructions for exchanging your shares of Company Common Stock for the Merger Consideration.

 

Q.

WILL I OWE TAXES AS A RESULT OF THE MERGER?

 

A.

The Merger will be a taxable transaction for U.S. holders of Company Common Stock. As a result, assuming you are a U.S. holder, any gain you recognize as a result of the Merger will be subject to U.S. federal income tax and also may be taxed under applicable state, local or other tax laws. In general, you will recognize gain or loss equal to the difference between (1) the Merger Consideration you receive and (2) the adjusted tax basis of the shares of Company Common Stock you surrender in the Merger. Assuming you are a non-U.S. holder, your exchange of shares of Company Common Stock for the Merger Consideration generally will not result in U.S. federal income tax unless you have certain connections with the United States. See the section entitled “Special Factors—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 73 of this information statement for a more detailed explanation of the tax consequences of the Merger. You should consult your tax advisor on how specific tax consequences of the Merger apply to you.

 

Q.

WHERE CAN I FIND MORE INFORMATION ABOUT THE COMPANY?

 

A.

We file periodic reports and other information with the U.S. Securities and Exchange Commission (the “SEC”). Some of these reports are attached as annexes to this information statement. You may read and copy this information at the SEC’s public reference facilities. Please call the SEC at 1-800-SEC-0330 for information about these facilities. This information is also available on the internet site maintained by the SEC at www.sec.gov. For a more detailed description of the information available, please refer to the section entitled “Where You Can Find Additional Information” beginning on page 119 of this information statement.

 

Q.

WHO CAN HELP ANSWER MY QUESTIONS?

 

A.

If you have questions about the Merger after reading this information statement, please call the Office of the General Counsel, Sears Outlet and Hometown Stores, Inc., at (847) 286-7000.

 

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SPECIAL FACTORS

The following section, together with the sections entitled “Summary Term Sheet”, “Questions and Answers about the Merger and the Potential Outlet Sale”, “Cautionary Statements Regarding Forward-Looking Statements”, “Parties Involved in the Merger”, “The Merger Agreement”, “Important Additional Information Regarding the Company”, “Important Additional Information Regarding the ESL Filing Parties”, “Appraisal Rights”, “Householding”, “Future Stockholder Proposals” and “Where You Can Find Additional Information” constitutes a description of certain aspects of the Merger as required by applicable SEC regulations. Such description, however, may not contain all of the information that is important to you. We encourage you to read carefully this entire information statement, including the Merger Agreement attached as Annex A, for a more complete understanding of the Merger. You may obtain additional information without charge by following the instructions in the section entitled “Where You Can Find Additional Information” beginning on page 119 of this information statement.

Background of the Transaction

Since 2012, ESL has been the controlling stockholder of the Company and the largest holder of outstanding shares of common stock of Sears Holdings Corporation. ESL is also the controlling member of Transform. The Company has significant business relationships with Transform as a result of the February 2019 acquisition by Transform of most of the operating assets of Sears Holdings Corporation and its subsidiaries (together, the “Sears Holdings Companies”) in connection with the voluntary petitions filed in the United States Bankruptcy Court for the Southern District of New York in October 2018 by the Sears Holdings Companies seeking relief under Chapter 11 of Title 11 of the United States Code (the “SHC Bankruptcy Proceedings”). As part of this acquisition, various agreements (the “Separation Agreements”) between the Company, and its subsidiaries, on the one hand, and the Sears Holdings Companies, on the other hand, including agreements under which the Sears Holdings Companies provided the Company and its subsidiaries with merchandise and services, were assigned by the Sears Holdings Companies to, and assumed by, Transform. The Separation Agreements were originally entered into in connection with the Company’s 2012 separation from the Sears Holdings Companies. The Company and Transform regularly engage in commercial discussions related to matters arising under the Separation Agreements.

In November 2016, the Board of Directors established the Special Committee and delegated to it the exclusive power and authority to evaluate and determine a course of action with respect to certain matters that may arise from time to time involving ESL and the Sears Holdings Companies. Upon its formation, the Special Committee consisted of David Robbins and Kevin Longino, both of whom were independent and disinterested with respect to matters involving ESL and the Sears Holdings Companies. The Special Committee was formed in light of the open market purchases of Company Common Stock that had recently been made by ESL, the Company’s consideration at the time of a potential stock repurchase program, as well as the Board of Directors’ concern that the Sears Holdings Companies might engage in a financial restructuring or file for bankruptcy.

In December 2016, the Special Committee engaged PJ Solomon to provide it with certain financial advice and to perform valuation work. The Special Committee held four meetings between November 15, 2016 and January 6, 2017. At an in-person meeting of the Special Committee held on January 6, 2017, at which members of Company senior management and representatives of PJ Solomon and Shearman & Sterling LLP (“Shearman & Sterling”), counsel to the Special Committee, were present at the invitation of the Special Committee, representatives of PJ Solomon reviewed a preliminary financial analysis of the Company and alternative courses of action that were available to it, and members of Company senior management discussed the financial performance and position of the Company. During the meeting a potential transaction involving the acquisition of the Sears Home Services business from the Sears Holdings Companies was also discussed. The Company evaluated this potential transaction at the request of Mr. Lampert and engaged in related preliminary discussions with the Sears Holdings Companies, but did not ultimately pursue the potential transaction.

In early October 2018, Mr. Lampert contacted Will Powell, the Chief Executive Officer and President of the Company and a member of the Board of Directors, regarding the possibility of the Company operating, on behalf

 

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of ESL, certain Sears stores then operated by the Sears Holdings Companies, in the event that ESL were to acquire those stores. Mr. Powell and E.J. Bird, Chief Financial Officer of the Company and a member of the Board of Directors, engaged in preliminary discussions with Mr. Lampert on this topic and, at the request of Mr. Lampert, provided a preliminary estimate of the costs of the Company providing these operational services.

The SHC Bankruptcy Proceedings were commenced on October 15, 2018. From their commencement through Transform’s February 2019 acquisition of most of the operating assets of the Sears Holdings Companies, Company senior management, the Board of Directors and the Special Committee regularly monitored developments in the SHC Bankruptcy Proceedings and engaged in contingency planning, including with the Company’s lenders, for potential outcomes of those proceedings.

At a special meeting of the Board of Directors held on October 22, 2018, at which members of Company senior management who were not also directors and representatives of Shearman & Sterling were present at the invitation of the Board of Directors, Company senior management reviewed with the Board of Directors an assessment of the most likely outcomes of the SHC Bankruptcy Proceedings. In light of the pendency of these proceedings and that the potential outcomes could involve a transaction with the Company proposed by ESL, the Board of Directors at the meeting confirmed the prior establishment of the Special Committee and established that all matters relating to the SHC Bankruptcy Proceedings were within the power and authority of the Special Committee. The Board of Directors also designated William K. Phelan, then the Chairman of the Board of Directors and who was independent and disinterested with respect to matters involving ESL and the Sears Holdings Companies, to serve on the Special Committee with Mr. Longino and Mr. Robbins.

In early November 2018, Mr. Lampert contacted Mr. Powell to discuss the status of the SHC Bankruptcy Proceedings and to request that the Company senior management consider formulating a proposal for a potential management-led acquisition of the Company for ESL to review and consider funding. Representatives of Shearman & Sterling and Cleary Gottlieb Steen & Hamilton LLP (“Cleary Gottlieb”), counsel to ESL, also discussed Mr. Lampert’s request. Also in early November 2018, the Special Committee re-engaged PJ Solomon as its financial advisor.

At a meeting of the Special Committee held on November 9, 2018, at which Mr. Powell, Mr. Bird, representatives of PJ Solomon and representatives of Shearman & Sterling were present at the invitation of the Special Committee, Mr. Powell and representatives of Shearman & Sterling described the conversations that had recently occurred with Mr. Lampert and Cleary Gottlieb and the potential advantages and disadvantages of pursuing the potential transaction suggested by Mr. Lampert were discussed. Following this discussion, the Special Committee directed Shearman & Sterling to advise Cleary Gottlieb that Mr. Lampert should communicate directly with Mr. Robbins, then the Chairman of the Special Committee, if Mr. Lampert wished to potentially fund or otherwise pursue a transaction involving the Company, and directed Mr. Powell and Mr. Bird to refrain from devoting further time or attention to Mr. Lampert’s request unless and until Mr. Lampert had communicated to Mr. Robbins a serious intention to evaluate and pursue a potential transaction. Representatives of Shearman & Sterling spoke to representatives of Cleary Gottlieb later that evening and communicated the Special Committee’s directive.

On January 22, 2019, Mr. Lampert contacted Mr. Powell to advise Mr. Powell of the status of Transform’s bid to acquire assets of the Sears Holdings Companies through the SHC Bankruptcy Proceedings and to discuss possible future alternatives for the Company and any assets actually so acquired by Transform. No specific transaction proposals were made by Mr. Lampert during this communication. Mr. Powell notified Mr. Robbins and Mr. Phelan on the following day of his communication from Mr. Lampert and also described the communication at a regular meeting of the Board of Directors held on January 30, 2019.

On March 7, 2019, the Board of Directors held a special meeting at which members of Company senior management who were not also directors were present at the invitation of the Board of Directors. During the meeting, Company senior management updated the Board on recent developments that were adversely affecting

 

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the results of operations and financial condition of the Company’s Hometown Segment. Company senior management also reviewed with the Board of Directors potential courses of action to address these issues, including expense reductions and a liquidation of the Company’s Hometown Segment.

On March 12, 2019, Mr. Powell spoke separately with both Kunal Kamlani, President of ESL Investments, Inc., and Robert Riecker, Chief Financial Officer of Transform, to request that Transform agree to extend the term of certain of the Separation Agreements to February 1, 2023. An agreement between the Company and certain of its subsidiaries, on the one hand, and certain subsidiaries of Transform, on the other hand, memorializing this extension was executed on the same day.

On March 14, 2019, the Special Committee held a meeting at which members of Company senior management and representatives of Shearman & Sterling were present at the invitation of the Special Committee. At the meeting, Company senior management updated the Special Committee on their recent discussions with Mr. Kamlani and Mr. Riecker, and again reviewed the deteriorating financial condition of the Company’s Hometown Segment and noted that management’s likely recommendation would be that the Company liquidate its Hometown Segment unless a transaction involving the Company’s Hometown Segment (a “Hometown Transaction”) on terms acceptable to the Special Committee quickly materialized. In that regard, Company senior management also requested authorization from the Special Committee for Mr. Powell and Mr. Robbins to contact Mr. Lampert to gauge Mr. Lampert’s interest in a potential Hometown Transaction. After a discussion of relevant process considerations, the Special Committee provided its authorization.

On March 20, 2019, Mr. Powell, Mr. Robbins, Mr. Lampert and Mr. Kamlani spoke via telephone and discussed the state of the Company’s Hometown Segment, including the Company’s consideration of the liquidation of the Hometown Segment, a potential Hometown Transaction and potential next steps. Mr. Lampert indicated to Mr. Powell and Mr. Robbins that he would give the matter further consideration and would be back in contact to indicate whether or not he was interested in further exploring a potential Hometown Transaction.

During the weekend of March 23 and 24, 2019, representatives of Shearman & Sterling and Cleary Gottlieb, at the request of Mr. Lampert, discussed potential transaction structures that could be further explored and related process matters. In the course of these discussions, Cleary Gottlieb indicated that Mr. Lampert was likely to prefer a transaction in which ESL or an affiliated entity would acquire all of the outstanding shares of Company Common Stock not owned by ESL (a “Company Transaction”), as opposed to a Hometown Transaction, and that, based on Cleary Gottlieb’s experience in advising Mr. Lampert on other transactions, Mr. Lampert was likely going to believe that the per share consideration to be paid to the Company’s unaffiliated stockholders in a Company Transaction, were such a potential transaction to be explored, should be based on the Company’s current stock price plus a premium customary for acquisition transactions. Cleary Gottlieb also requested that the Company and ESL or an affiliated entity enter into a confidentiality agreement to permit it to receive non-public information that could inform its evaluation of a potential transaction.

On March 25, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. At the meeting, the Special Committee discussed the conversations that had recently occurred between Shearman & Sterling and Cleary Gottlieb, including the request to enter into a confidentiality agreement. After discussing the benefits and risks of entering into a confidentiality agreement with ESL or an affiliated entity, the Special Committee determined that it would be advisable to do so and directed Shearman & Sterling to send a draft confidentiality agreement to Cleary Gottlieb for its review. Representatives of PJ Solomon also updated the Special Committee on the status of its valuation work.

Shearman & Sterling sent Cleary Gottlieb a draft confidentiality agreement on March 26, 2019. Shearman & Sterling and Cleary Gottlieb negotiated and exchanged subsequent drafts between March 27, 2019 and March 29, 2019, the date on which the Company and Transform entered into the confidentiality agreement. Following the entry into the confidentiality agreement and until the Merger Agreement was executed on June 1, 2019, Transform, ESL and their advisors conducted due diligence on the Company and its operations.

 

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On March 27, 2019, the Board of Directors held a regular meeting at which members of Company senior management who were not also directors and representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Board of Directors. Company senior management updated the Board of Directors on the status of the Company’s Hometown Segment, the continuing decline of its business and financial condition and the significant risks to the Company and its stockholders that Company management believed existed as a result. Company senior management stated that they had completed their analysis of potential alternative courses of action to address those risks and had concluded that a complete liquidation of the Hometown Segment would be the best alternative for the Company and its stockholders in the absence of a Hometown Transaction on terms approved by the Special Committee, and explained the considerations that Company management had taken into account in reaching that conclusion (including the impact of a liquidation on the Company’s employees and Hometown dealers). Company senior management also reviewed their plan for implementing the liquidation if such transaction could not be achieved, including with respect to transition assistance that would be made available to Hometown dealers.

Representatives of Shearman & Sterling reviewed for the Board of Directors the recent activities of the Special Committee, and the Board of Directors discussed the timing of a potential transaction with ESL or an affiliated entity in light of the status of the Company’s Hometown Segment. Following that discussion, the Board of Directors, including all of the members of the Special Committee, directed Shearman & Sterling to advise Cleary Gottlieb that the interest of the Special Committee and the Board of Directors in entering into a definitive transaction agreement would likely not extend beyond April 15, 2019. The Board of Directors also adopted resolutions more specifically describing the Special Committee’s exclusive power and authority to review, consider, evaluate, negotiate or reject a potential negotiated transaction with Mr. Lampert or his affiliated entities, and to review, consider and evaluate potential alternative transactions.

Later in the day on March 27, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. At the meeting, Shearman & Sterling reviewed with the Special Committee the status of negotiations with Cleary Gottlieb on the confidentiality agreement, and the Special Committee and its advisors discussed various process considerations in relation to further transaction discussions with ESL and its advisors. The Special Committee also confirmed the direction given to Shearman & Sterling at the earlier Board of Directors meeting to communicate to Cleary Gottlieb the April 15, 2019 deadline, and this communication occurred later on the same day.

On April 1, 2019, Mr. Lampert, Mr. Kamlani, representatives of PJ Solomon, Mr. Powell and Mr. Bird met at the offices of ESL Investments, Inc. to discuss the status of and outlook for the Company’s business. Mr. Powell, Mr. Bird and PJ Solomon reviewed for Mr. Lampert and Mr. Kamlani the significant issues affecting the Company’s Hometown Segment, the alternatives Company management had considered to address those issues and certain pro forma financial projections of the Company prepared by Company management that assumed that a liquidation of the Company’s Hometown Segment would be effected, as more fully described in the section entitled “Unaudited Projected Financial Information of the Company—Summary of the Pre-ESL Bylaw Amendment Projections” beginning on page 55 of this information statement. The meeting participants also discussed the process for further exploring a potential transaction, but did not discuss or exchange potential economic terms.

On April 3, 2019, at the direction of the Special Committee, representatives of PJ Solomon contacted Mr. Lampert to discuss potential valuation ranges of the Company in the context of a Company Transaction. PJ Solomon indicated to Mr. Lampert that it and the Special Committee believed that a per share range of “mid to high single digits” would be appropriate based on the expected financial performance of the Company following a liquidation of the Hometown Segment.

In the afternoon of April 5, 2019, Cleary Gottlieb sent a draft merger agreement in respect of a Company Transaction to Shearman & Sterling. In its transmittal, Cleary Gottlieb noted that the board of directors of Transform would be meeting later in the afternoon to discuss next steps with respect to its evaluation of a

 

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potential transaction involving the Company, that no decision had yet been made about whether the Transform board of directors would or would not make a transaction proposal and that the draft merger agreement, which did not include economic terms, was being provided in the interest of time. The draft merger agreement did not contain a majority-of-the-minority stockholder vote condition.

Later in the afternoon on April 5, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The Special Committee and its advisors discussed Shearman & Sterling’s receipt of the draft merger agreement from Cleary Gottlieb and the fact that a transaction proposal from Transform could be received later in the day. Representatives of PJ Solomon updated the Special Committee on the status of valuation analyses it was performing, and representatives of Shearman & Sterling updated the Special Committee on the Company’s progress on securing the lender waivers and amendments under the Company’s credit agreements that would be required if the Company were to elect to proceed to liquidate its Hometown Segment and that would also extend the maturity of the credit agreements.

Also in the afternoon on April 5, 2019, the Transform board of directors met to consider whether to make a transaction proposal to the Company, and the terms of such proposal. The Transform board of directors approved the submission of a proposal and in the evening of April 5, 2019, Cleary Gottlieb, on behalf of Transform, sent the following transaction proposal letter to Shearman & Sterling along with supporting presentation materials:

Transform Holdco LLC

3333 Beverly Road

Hoffman Estates, Illinois 60179

Board of Directors

Sears Hometown and Outlet Stores, Inc.

5500 Trillium Blvd., Suite 501

Hoffman Estates, IL 60192

Members of the Board:

Transform Holdco LLC is pleased to present this proposal to acquire all of the outstanding shares of Sears Hometown and Outlet Stores, Inc. (the “Company”) not already owned by ESL Investments, Inc. and its affiliates (“ESL”) for a purchase price of $2.25 per share in cash, a 23.6% premium to the volume weighted average price for the last five trading days ($1.82) through April 5, 2019.

We believe our proposal, which will provide certain value and liquidity at a considerable premium to the market price, presents a superior outcome for the Company’s stockholders as compared to the uncertain outcomes facing the Company if it continues on its current path as a stand-alone company. In addition to the immediate value provided to the Company’s stockholders, we believe that the transaction would benefit the Company’s other stakeholders, including employees, independent dealers and franchisees and the local communities that rely on them.

We would only intend to proceed with our proposal if it is approved by the full Board of Directors of the Company upon the recommendation of the special committee of independent directors that we understand has been formed to consider any proposal from us. We intend to finance the transaction with cash or loans from ESL and our other members.

Our proposal is non-binding and may be withdrawn at any time and for any or no reason. A binding agreement will only arise upon execution by all parties thereto of a definitive merger agreement.

Due to ESL’s obligations under the federal securities laws, ESL intends to promptly file an amendment to its Schedule 13D, including a copy of this letter, with the Securities and Exchange Commission.

 

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We are prepared to immediately negotiate and finalize definitive agreements to implement our proposal, and look forward to working together to complete this transaction.

 

Best regards,

/s/ Edward S. Lampert

Edward S. Lampert
Chairman, Transform Holdco LLC

On April 6, 2019, representatives of Cleary Gottlieb and Shearman & Sterling discussed Transform’s transaction proposal.

Later in the day on April 6, 2019, the Special Committee held a meeting at which members of Company senior management and representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. At the request of the Special Committee, Company senior management discussed the supporting presentation materials that had been received the prior evening from Cleary Gottlieb with the Transform transaction proposal letter, as well as the preparations being undertaken by Company management in support of a Hometown Transaction should Mr. Lampert express an interest in pursuing that transaction. The members of Company senior management were then excused from the meeting.

Representatives of Shearman & Sterling reviewed for the Special Committee the proposal received from Transform and possible responses to it. Representatives of PJ Solomon then reviewed its financial analysis, which resulted in a range of implied equity values of $0.00 to $3.36 per share of Company Common Stock when using the last twelve months earnings before interest, taxes, depreciation and amortization, excluding non-recurring items, for the Company and of $5.96 to $9.58 per share of Company Common Stock when using Company senior management’s financial projections for the Company assuming a Hometown liquidation were to occur, as more fully described in the section entitled “Unaudited Projected Financial Information of the Company—Summary of the Pre-ESL Bylaw Amendment Projections” beginning on page 55 of this information statement. The Special Committee further discussed with its advisors Transform’s proposal and potential responses and alternatives to it, including a liquidation of the Company’s Hometown Segment. Following this discussion, the Special Committee directed Shearman & Sterling to communicate to Cleary Gottlieb that the Special Committee had reviewed Transform’s proposal and concluded that a transaction on the proposed terms would not be in the best interests of the Company’s unaffiliated stockholders.

Shearman & Sterling did so on April 7, 2019. Over the course of that day Shearman & Sterling and Cleary Gottlieb engaged in further discussions regarding Transform’s transaction proposal and potential alternative transactions, including a Company Transaction that would include a contingent value right feature, as well as a Hometown Transaction. Shearman & Sterling also indicated that the Board of Directors was considering a liquidation of the Hometown Segment and, in the absence of a negotiated transaction, expected to make a decision on such a liquidation around April 15, 2019. No agreement was reached on the terms of a potential transaction, and on Monday, April 8, 2019, both ESL and the Company made filings with the SEC prior to the commencement of trading on NASDAQ reporting Transform’s April 5, 2019 transaction proposal, the Special Committee’s response to that proposal and that the parties were continuing to discuss potential transactions.

From April 8, 2019 until April 15, 2019, Company management continued their preparations for the possible liquidation of the Hometown Segment, including by negotiating the terms of waivers and amendments under the Company’s credit agreements that would be required from the Company’s lenders to proceed with the liquidation, while the Special Committee and its advisors continued to discuss potential transactions with ESL and Cleary Gottlieb.

On April 9, 2019, the Special Committee held a meeting at which members of Company senior management and representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee.

 

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At the meeting, representatives of Shearman & Sterling reviewed with the Special Committee a draft term sheet setting forth potential terms for a Hometown Transaction with Transform that Shearman & Sterling and PJ Solomon had, at the request of the Special Committee, prepared with input from Company management. Representatives of PJ Solomon also reviewed preliminary financial analyses of the potential economics of the transaction, including in comparison to a liquidation of the Company’s Hometown Segment. The Special Committee and its advisors also discussed potential alternatives for further engagement with Mr. Lampert on a potential transaction, and the benefits and risks of those alternatives. Following this discussion, the Special Committee directed Shearman & Sterling to send the draft term sheet, after reflecting certain changes discussed at the meeting, to Cleary Gottlieb, and directed PJ Solomon to contact Mr. Lampert to discuss the term sheet and to restate the Special Committee’s views on valuation of the Company in the context of a Company Transaction. Shearman & Sterling sent the draft term sheet for the Hometown Transaction (which contemplated a purchase price equal to 76.58% of the book value of transferred Hometown Segment inventory), and representatives of PJ Solomon had this discussion with Mr. Lampert, later on the same day.

On April 10, 2019, the Board of Directors held a special meeting at which members of Company senior management who were not also directors, and representatives of PJ Solomon, Shearman & Sterling and Richards, Layton & Finger, P.A. (“Richards Layton”), Delaware counsel to the Company, were present at the invitation of the Board of Directors. Representatives of Shearman & Sterling and PJ Solomon provided the Board of Directors with an update on recent events and discussions with Mr. Lampert and Cleary Gottlieb concerning potential transactions. At the request of the Board of Directors, Shearman & Sterling confirmed that, as previously directed, they had advised Cleary Gottlieb of the expectation that the Board of Directors would make a decision on the liquidation of the Hometown Segment under consideration around April 15, 2019. Representatives of Richards Layton and Shearman & Sterling also discussed with the Board of Directors certain legal issues that could arise in connection with a liquidation of the Company’s Hometown Segment, including whether a stockholder vote would be required.

Company senior management updated the Board of Directors on the status of the Company’s Hometown Segment, the Company’s discussions with its lenders concerning the waivers and amendments under the Company’s credit agreements that would be required to proceed with the potential liquidation of the Hometown Segment and other related preparations that were underway.

During the morning of April 12, 2019, the Board of Directors held a special meeting at which members of Company senior management who were not also directors, and representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Board of Directors. Also present at the invitation of the Board of Directors were Mr. Lampert, who had requested the opportunity to address the Board of Directors, and representatives of Cleary Gottlieb. Mr. Lampert provided the Board of Directors with an overview of the history of the Company and its relationship with ESL as majority stockholder, noting that ESL had never sought to determine the Company’s strategy or business decisions since its separation from Sears Holdings Corporation. Mr. Lampert acknowledged his understanding that the Board of Directors would likely authorize the liquidation of the Company’s Hometown Segment if the Special Committee and Transform were unable to reach agreement on a negotiated transaction. Mr. Lampert stated that, as the Company’s largest stockholder, ESL did not support a liquidation of the Company’s Hometown Segment, as he believed such action would significantly diminish the Company’s long-term value and viability. He explained that ESL viewed the continued operation of the Company as a public company owning only the Outlet Segment, following a liquidation of the Hometown Segment, to be risky, based on the scale of the Outlet Segment, the cost structure of the remaining company and fluctuations in the operating performance that the Outlet Segment had experienced over its history. Mr. Lampert also discussed the negative impact that a liquidation of the Hometown Segment would have on the Company’s other stakeholders, including owners of Hometown stores and their families, who had supported the Company for more than 25 years, along with their employees and the communities that they served. Other than Mr. Lampert’s general reference to potentially increasing the consideration contemplated by Transform’s April 5, 2019 transaction proposal by including a contingent value right feature for stockholders unaffiliated with ESL, the meeting participants did not discuss or exchange potential economic terms.

 

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Immediately after the conclusion of that meeting of the Board of Directors, a meeting of the Special Committee was held at which Mr. Lampert and representatives of PJ Solomon, Shearman & Sterling and Cleary Gottlieb were present at the invitation of the Special Committee. Mr. Lampert discussed his views on the Company’s Hometown Segment and the terms of the Hometown Transaction that the Special Committee had proposed in the draft term sheet of April 9, 2019, and stated that, notwithstanding Transform’s preference for a Company Transaction, Transform could be prepared to consider a Hometown Transaction for consideration based on 62.5% of the book value of transferred inventory. Mr. Lampert also explained that Transform’s proposal for a Company Transaction was based on his view that the recent improvement in the Outlet Segment’s operating performance was not likely to be sustained. He noted, however, that Transform might be prepared to pay more if this performance were sustained, by supplementing the consideration contemplated by its April 5, 2019 Company Transaction proposal to include a contingent value right feature that would pay out $0.75 per share of Company Common Stock to each unaffiliated Company stockholder if the Company’s Outlet Segment achieved or exceeded $30 million in 2019 Adjusted EBITDA. The Special Committee and Mr. Lampert then engaged in a discussion on the outlook for the Company’s Outlet Segment and appropriate valuations for the Company and its Hometown Segment.

During the afternoon of April 12, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The Special Committee and its advisors discussed the remarks Mr. Lampert had made earlier in the day to the Board of Directors and the Special Committee, including with respect to his expressed concerns regarding the risks and uncertainty to the Company of operating on the basis of only its Outlet Segment in the event of a sale of the Hometown Segment to Transform. The Special Committee and its advisors also discussed potential responses to Transform, including in light of the Special Committee’s understanding that Transform desired a specific counterproposal to its April 5, 2019 Company Transaction proposal and of the uncertainty involved with the contingent value right feature Mr. Lampert had discussed. Following this discussion, the Special Committee directed PJ Solomon to contact Mr. Lampert and again describe the valuation ranges for the Company that the Special Committee viewed as appropriate in the context of a Company Transaction (the high end of that range being approximately $9.50 per share of Company Common Stock). The Special Committee also directed PJ Solomon to convey to Mr. Lampert that the Special Committee did not view the potential inclusion of a contingent value right feature in a Company Transaction positively and that PJ Solomon would soon be in a position to further discuss a Hometown Transaction after completing its analysis of the potential terms for a Hometown Transaction Mr. Lampert had discussed earlier in the day.

Representatives of PJ Solomon and Mr. Lampert subsequently spoke in the evening of April 12, 2019. Also that evening, representatives of Shearman & Sterling and Cleary Gottlieb discussed the potential structure of a Hometown Transaction.

Representatives of PJ Solomon and Mr. Lampert spoke on April 13, 2019 to continue their discussion from the prior evening. During their conversation they again exchanged views on the appropriate valuation of the Company in the context of a Company Transaction. PJ Solomon also reiterated the Special Committee’s prior economic proposal for a Hometown Transaction, noting that transacting at a lower valuation would be very difficult for the Company due to the debt level and liquidity requirements of its lenders. Mr. Lampert rejected the Special Committee’s economic proposal for a Hometown Transaction and also again stated that ESL did not believe that a liquidation of the Company’s Hometown Segment would be in the best interests of the Company or its stockholders.

On April 14, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. Representatives of PJ Solomon updated the Special Committee on the discussions that had occurred on April 12 and 13, 2019 with Mr. Lampert, and the Special Committee and its advisors discussed potential responses or actions ESL could have or take in light of Mr. Lampert’s most recent conversations with PJ Solomon and in light of Mr. Lampert’s knowledge that the Board of Directors was likely to approve the liquidation of the Company’s Hometown Segment the following day in the absence of a negotiated transaction with Transform.

 

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During the morning of April 15, 2019, ESL acted by written consent of stockholders (the “ESL Action”) to remove Mr. Phelan and Mr. Robbins as directors of the Company, and to appoint Alberto Franco and John E. Tober to the Board of Directors to fill the vacancies created by the removal of Mr. Phelan and Mr. Robbins.

ESL also amended the Company’s Amended and Restated Bylaws pursuant to the ESL Action (the “ESL Bylaw Amendment”) to, among other things, provide for specified approval and procedural requirements that must be met prior to the Company effecting the closure of 20% or more of the stores operating any line of business of the Company or a liquidation, sale or disposal of Company assets representing 20% or more of the consolidated assets of the Company and its subsidiaries, other than in the ordinary course of business, or a line of business of the Company representing 20% or more of the consolidated net sales or net income of the Company and its subsidiaries (each a “Liquidation Action”). Under the ESL Bylaw Amendment, prior to commencing a Liquidation Action the Board of Directors must adopt at a meeting a resolution recommending such Liquidation Action with the affirmative vote of at least 90% of directors then in office. Following the adoption of such a resolution, the Company must make a public announcement of such recommendation and the Board of Directors must then approve such Liquidation Action by an affirmative vote of no less than 90% of directors then in office at a second meeting at least thirty business days following the first meeting.

In connection with the ESL Action, ESL issued the following letter to the stockholders of the Company and the following letter to the Board of Directors:

ESL Investments, Inc.

1170 Kane Concourse

Bay Harbor Islands, FL 33154

April 15, 2019

To: Stockholders of Sears Hometown and Outlet Stores, Inc.

Fellow Stockholders:

As you know, on April 5, 2019, Transform Holdco LLC (“Transform”) sent a non-binding proposal to the Board of Directors (the “Board”) of Sears Hometown and Outlet Stores, Inc. (the “Company”) to acquire all of the outstanding shares of the Company not already owned by ESL Investments, Inc. and its affiliates (“ESL”) for a purchase price of $2.25 per share in cash, a 23.6% premium to the volume weighted average price for the previous five trading days ($1.82) through April 5, 2019 (the “Proposal”).

Transform provided the Company with the Proposal after the Company had communicated to ESL that, absent a transaction, the Board was likely to determine to liquidate the Company’s Hometown segment (the “Hometown Business”). ESL owns approximately 58% of the Company’s outstanding stock and strongly disagrees with any decision by the Board to liquidate the Hometown Business. We believe any such decision would significantly diminish the Company’s value and create significant risk should the Outlet segment’s recent one-year profit performance prove ephemeral.

Any decision to liquidate the Hometown Business would also negatively affect many of the Company’s other stakeholders, including the many Hometown owners and their families, who have supported the Company for more than 25 years, along with their employees and the communities that they serve. Transform emphasized that these owners have a vested interest in seeing the Hometown business remain operating and that, as a new owner, Transform would make investments, including subsidies in the short term, to preserve the network of Hometown Stores and encourage these long time owners to continue to operate their businesses.

Despite Transform’s engagement with the Board and its special committee, the parties were unable to reach agreement on terms for a negotiated transaction. The special committee proposed a price of $9.50 per share, and

 

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we were informed that unless agreement was reached on a transaction by today, it was expected that the Board would vote to liquidate the Hometown Business by this afternoon.

As we strongly disagreed with this decision and saw no hope of Transform reaching agreement with the special committee on a transaction given its unrealistic proposal, we decided today to replace two of the directors with individuals that we hope, together with the remaining directors, will listen to the views of the Company’s stockholders and consider additional paths forward for the Company. We removed William K. Phelan and David B. Robbins and replaced them with the following individuals:

Alberto Franco

John Tober

We also have amended the Company’s bylaws today to ensure that any decision to liquidate the Hometown segment could only be made after proper notice to stockholders and further deliberation and consideration by the Board. The bylaw amendment requires that any such decision can only be made if voted upon by the Board in two meetings at least 30 business days apart with the support of at least of 90% of the directors then in office.

We encourage the Board to consider alternatives to a liquidation of the Hometown Business. We also expect that we will propose that Transform and the Company cooperate to reduce their collective cost structure, including by sharing technology and other operational resources. Any transactions between the Company and Transform would be approved by a committee of independent directors of the Board, and would be on arm’s length terms. We also encourage the Board to consider whether the Company should terminate its NASDAQ listing and the registration of its common stock under the Securities Exchange Act of 1934. We believe that such steps would provide significant cost savings to the Company.

We look forward to engaging with the Board and other stockholders of the Company in evaluating the best path forward for the Company.

 

Best regards,

/s/ Edward S. Lampert

Edward S. Lampert
Chairman and Chief Executive Officer
ESL Investments, Inc.

 

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ESL Investments, Inc.

1170 Kane Concourse

Bay Harbor Islands, FL 33154

April 15, 2019

Board of Directors

Sears Hometown and Outlet Stores, Inc.

5500 Trillium Blvd., Suite 501

Hoffman Estates, IL 60192

Members of the Board:

As you know, on April 5, 2019, Transform Holdco LLC (“Transform”) sent you a non-binding proposal to acquire all of the outstanding shares of Sears Hometown and Outlet Stores, Inc. (the “Company”) not already owned by ESL Investments, Inc. and its affiliates (“ESL”) for a purchase price of $2.25 per share in cash, a 23.6% premium to the volume weighted average price for the previous five trading days ($1.82) through April 5, 2019 (the “Proposal”).

Transform provided you with the Proposal after you had communicated to us that, absent a transaction, the Company’s Board of Directors (the “Board”) was likely to determine to liquidate the Company’s Hometown segment (the “Hometown Business”). As you know, ESL owns approximately 58% of the Company’s outstanding stock and strongly disagrees with any decision by the Board to liquidate the Hometown Business. We believe any such decision would significantly diminish the Company’s value and create significant risk should the Outlet segment’s recent one-year profit performance prove ephemeral.

Any decision to liquidate the Hometown Business would also negatively affect many of the Company’s other stakeholders, including the many Hometown owners and their families, who have supported the Company for more than 25 years, along with their employees and the communities that they serve. Transform emphasized that these owners have a vested interest in seeing the Hometown business remain operating and that, as a new owner, Transform would make investments, including subsidies in the short term, to preserve the network of Hometown stores and encourage these long time owners to continue to operate their businesses.

The special committee of the Board’s advisors communicated to Transform on April 7, 2019 that the special committee concluded that a transaction on the terms contemplated by Transform’s Proposal would not be in the best interests of the Company’s unaffiliated stockholders. Since that time, ESL has engaged with the Board to reconsider its plan to liquidate the Hometown Business and Transform has engaged with the special committee and its advisors to determine whether the parties could agree on terms for a negotiated transaction.

The special committee continues to request a price for a transaction that would represent an unprecedented premium to the market value of the Company’s stock. While we disagreed with the decision to operate as an Outlet-only business, Transform also proposed, at the special committee’s request, acquiring the inventory and assets associated with the Hometown Business, but these proposed terms were rejected as well.

We were informed that unless Transform reaches agreement with the Board and special committee by today, the Board was expected to vote to liquidate the Company’s Hometown Business this afternoon.

As we strongly disagreed with this decision and saw no hope of Transform reaching agreement with the special committee on a transaction given its unrealistic proposal, we decided today to replace two of the directors with individuals that we hope, together with the remaining members of the Board, will listen to the views of the Company’s stockholders and consider additional paths forward for the Company. We removed William K. Phelan and David B. Robbins and replaced them with the following individuals:

Alberto Franco

John Tober

 

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We also have amended the Company’s bylaws today to ensure that any such decision could only be made after proper notice to stockholders and further deliberation and consideration by the Board. The bylaw amendment requires that any such decision can only be made if voted upon by the Board in two meetings at least 30 business days apart with the support of at least 90% of the directors then in office.

We encourage the Board to consider alternatives to a liquidation of the Hometown Business. We also expect that we will propose that Transform and the Company cooperate to reduce their collective cost structure, including by sharing technology and other operational resources. Any transactions between the Company and Transform should be approved by a committee of independent directors of the Board, and be on arm’s length terms. We also encourage the Board to consider whether the Company should terminate its NASDAQ listing and the registration of its common stock under the Securities Exchange Act of 1934. We believe that such steps would provide significant cost savings to the Company.

We look forward to engaging with the Board and other stockholders of the Company in evaluating the best path forward for the Company.

 

Best regards,

/s/ Edward S. Lampert

Edward S. Lampert
Chairman and Chief Executive Officer
ESL Investments, Inc.

Also during the morning of April 15, 2019, Cleary Gottlieb, on behalf of Transform, sent a notice under the confidentiality agreement to Shearman & Sterling notifying the Company that, as permitted by the confidentiality agreement, Transform was electing that the provisions of the confidentiality agreement that restricted the ability of Transform and its representatives from communicating with the Company and its directors, officers and employees, other than through the Special Committee and its advisors, would no longer apply. Later the same day, Mr. Lampert contacted Mr. Powell and another member of the Board of Directors (but not the Special Committee) to explain his rationale for taking the ESL Action, including the desire to preserve the value of the Company as a going concern, and to express his interest in continuing discussions with the Special Committee regarding a potential transaction. On April 16, 2019, representatives of Cleary Gottlieb contacted representatives of Shearman & Sterling to convey a substantially similar message.

Because a liquidation of the Company’s Hometown Segment would constitute a Liquidation Action within the meaning of the ESL Bylaw Amendment, the special meeting of the Board of Directors that had been scheduled for the afternoon of April 15, 2019 was cancelled. The Company’s lenders, after becoming aware of the ESL Action on the same day, also notified the Company that they were no longer willing to execute the waiver and amendment agreements that the Company had negotiated with them in preparation for the potential liquidation of the Hometown Segment and that would also have extended the maturity of the credit agreements.

On April 17, 2019, the Special Committee (now consisting of only Mr. Longino) held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. Representatives of Shearman & Sterling reviewed the ESL Action and provided a more general situational update. Mr. Longino noted that he was continuing to consider whether he would be willing to continue to serve on the Special Committee, either alone or alongside new members that may be appointed by the Board of Directors, given the actions taken pursuant to the ESL Action. The Special Committee and its advisors then discussed possible responses, and their advantages and disadvantages, to the ESL Action, including commencing a legal challenge to the ESL Action and the enforceability of the ESL Bylaw Amendment. In considering the advisability of recommending, or not recommending, this response to the Board of Directors, the Special Committee considered, among other factors, the time and expense involved in pursuing a legal challenge, the risk that any legal challenge would be unsuccessful and the continuing financial and operational challenges facing the

 

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Company as a result of the performance of the Hometown Segment. The Special Committee and its advisors also discussed the possibility of continuing transaction discussions with Transform, the likely negative impact of the ESL Bylaw Amendment on the Company valuation analyses that had previously been performed by PJ Solomon and the reaction of the Company’s lenders to the ESL Action.

Later in the day on April 17, 2019, the Board of Directors (now reflecting the removal of Mr. Phelan and Mr. Robbins, and the addition of Mr. Franco and Mr. Tober) held a special meeting at which members of Company senior management who were not also directors, and representatives of PJ Solomon, Shearman & Sterling and Richards Layton were present at the invitation of the Board of Directors. Representatives of Shearman & Sterling reviewed the ESL Action with the Board of Directors and provided a more general situational update. Representatives of PJ Solomon provided a comprehensive overview of the events that had occurred subsequent to the discussions that Mr. Lampert had initiated with Mr. Powell in November 2018 regarding a potential transaction, including the discussions between PJ Solomon and Mr. Lampert that had occurred in the days prior to the ESL Action, and the Board of Directors also discussed the contacts that Mr. Lampert had made with the Company following the ESL Action.

Company senior management described for the Board of Directors the negative reaction of the Company’s lenders to the ESL Action and their stated unwillingness to continue amendment discussions and reviewed the Company’s current financial position, as well as the likelihood that the audit opinion included in the Company’s Form 10-K for the fiscal year ended February 2, 2019 to be filed with the SEC no later than May 3, 2019 would include a “going concern” qualification because the Company’s credit agreements would mature in less than twelve months, and that this qualification would cause an event of default under the credit agreements unless waived by the lenders (a “Going Concern Waiver”). Representatives of Shearman & Sterling and Richards Layton also reviewed with the Board of Directors the implications of the removal of Mr. Phelan and Mr. Robbins from the Board of Directors and the Special Committee and the continued existence and functioning of the Special Committee, were there to be further engagement with Mr. Lampert, as well as the standards that Delaware courts would apply in determining whether members of the Special Committee are independent and disinterested. The Board of Directors and other meeting participants engaged in a further discussion regarding the composition of the Special Committee, and the Board of Directors preliminarily concluded that it would be advisable to not appoint additional members to the Special Committee, assuming that Mr. Longino were willing to continue to serve as the Special Committee’s sole member. Mr. Longino committed to advise the Board of Directors of his decision within 24 hours, and the Board of Directors, pending Mr. Longino’s response, directed Company management to assist PJ Solomon in updating financial analyses that may be needed by the Special Committee.

During the evening of April 17, 2019, representatives of Shearman & Sterling and Cleary Gottlieb discussed the potential timing for further transaction discussions, should the Special Committee determine that engaging in those discussions was advisable.

On April 18, 2019, Mr. Longino confirmed his willingness to continue to serve as the Special Committee’s sole member, and the Board of Directors, acting by unanimous written consent, confirmed the prior establishment and continued existence and powers of the Special Committee.

Also on April 18, 2019, the Special Committee held a meeting at which representatives of PJ Solomon, Shearman & Sterling and Richards Layton were present at the invitation of the Special Committee. Representatives of PJ Solomon discussed with the Special Committee the status of the updated financial projections being prepared by Company management to take account of the ESL Action and of PJ Solomon’s related valuation work. The Special Committee and its advisors then continued their discussion from the prior Special Committee meeting of possible courses of action, and related timing, cost and other considerations, that the Company could take in response to the ESL Action, including commencing a legal challenge to the ESL Action and the enforceability of the ESL Bylaw Amendment, approving the liquidation of the Company’s Hometown Segment in accordance with the procedures set forth in the ESL Bylaw Amendment, seeking to raise

 

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capital through a common stock rights offering, disengaging from transaction discussions with Transform and continuing transaction discussions with Transform. Representatives of Shearman & Sterling then reviewed for the Special Committee certain terms, in addition to the amount of the merger consideration, of a Company Transaction that would need to be negotiated in connection with finalizing a merger agreement, including the treatment of restricted stock units and other employee awards in the transaction, and the positions (and potential implications of those positions) that that the Special Committee could take. After further discussion, the Special Committee directed PJ Solomon to contact Mr. Lampert and indicate that the Special Committee was prepared to engage in further transaction discussions and that it preferred a Hometown Transaction, assuming acceptable terms could be negotiated.

This communication occurred on April 19, 2019, the following day. On the same day, representatives of Shearman & Sterling and Cleary Gottlieb also discussed timing for potential further transaction discussions.

Also on April 19, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of PJ Solomon and Shearman & Sterling reviewed with the Special Committee the discussions that had occurred earlier in the day with Mr. Lampert and representatives of Cleary Gottlieb, and the Special Committee and its advisors discussed alternative means of seeking to progress transaction discussions with Transform regarding both a Hometown Transaction and a Company Transaction. After this discussion, the Special Committee directed Shearman & Sterling to contact Cleary Gottlieb and request additional information on the contingent value right feature of a Company Transaction that Mr. Lampert had previously discussed, including with respect to terms that Transform would be willing to offer that would protect the ability of the Company, following the closing of the transaction, to achieve applicable payment thresholds. This communication occurred later in the same day, and representatives of Cleary Gottlieb indicated that they would discuss the matter with Mr. Lampert.

On April 22, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The Special Committee and its advisors discussed the status of the updated financial modeling being performed by Company management, including related valuation work being performed by PJ Solomon, as well a potential proposal that the Special Committee could make to Transform, once the modeling was complete, regarding a Hometown Transaction that included the provision to the Company of junior debt financing from ESL to allow the Company to maintain appropriate liquidity levels.

On April 23, 2019, representatives of Cleary Gottlieb and Shearman & Sterling discussed certain aspects of the contingent value right feature of a Company Transaction that Mr. Lampert had previously discussed, including potential calculation methodologies and triggers, covenants and audit and reporting rights.

Later in the day on April 23, 2019, the Special Committee held an in-person meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of PJ Solomon discussed with the Special Committee the updated valuation work being performed by PJ Solomon based on the updated financial projections provided by Company management that took account of the impact of the ESL Bylaw Amendment. The Special Committee and its advisors also discussed potential alternative courses of action, and their benefits and risks, including seeking to sell the Company’s Outlet Segment to a third party purchaser with the support of ESL given the significantly different views on the value of that business held by the Special Committee and ESL, disengaging from further transaction discussions with Transform and seeking to utilize the contingent value rights feature discussed by Mr. Lampert in a Company Transaction.

On April 24, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The Special Committee and its advisors discussed the status of the Company’s efforts to obtain a Going Concern Waiver from its lenders, as well as the possibility that ESL could take further unilateral stockholder action to seek to consummate a

 

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transaction with the Company. Representatives of PJ Solomon also reviewed with the Special Committee updated Company valuation work PJ Solomon had performed, which resulted in a range of implied equity values of up to $3.82 per share of Company Common Stock when using the updated financial projections provided by Company management that assumed the continued operation of the Company’s Outlet Segment and Hometown Segment (as more fully described in the section entitled “Unaudited Projected Financial Information of the Company – Summary of the Post-ESL Bylaw Amendment Projections” beginning on page 56 of this information statement) and, for comparison purposes, of $4.43 to $11 per share of Company Common Stock using a sum-of-the-parts valuation methodology assuming that a liquidation of the Hometown Segment were to occur and the Company realized net value equal to 70.0% of the book value of the inventory of the Hometown Segment.

On April 25, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of PJ Solomon reviewed with the Special Committee an analysis PJ Solomon had performed of the historical trading levels of Company’s stock price. The Special Committee and its advisors also discussed potential courses of action the Special Committee could take. At the conclusion of the discussion, the Special Committee determined that it would be advisable to try to better understand ESL’s and Transform’s present intentions and directed Shearman & Sterling to contact Cleary Gottlieb and inquire as to whether Transform (i) would submit the proposal referred to in its April 15, 2019 letter regarding potential cooperation between Transform and the Company to reduce their collective cost structure and (ii) intended to continue to abide by the statement in its April 5, 2019 letter that Transform would only intend to proceed with its transaction proposal of the same date if it is approved by the full Board of Directors upon the recommendation of the Special Committee. The Special Committee and its advisors also discussed the outlook for the Company’s Outlet Segment, and how it was anticipated to operate on a go-forward basis in the absence of a transaction with Transform. The Special Committee directed its advisors to arrange a call with Company senior management to discuss this topic in more detail, and that call occurred later in the same day.

Later in the day on April 25, 2019, the Special Committee held another meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. Representatives of Shearman & Sterling updated the Special Committee on the discussion they had with representatives of Cleary Gottlieb following the meeting of the Special Committee earlier in the day and reported that Cleary Gottlieb had indicated that Transform (i) was not intending, at the present time, to submit the proposal referred to in its April 15, 2019 letter regarding potential cooperation between Transform and the Company to reduce their collective cost structure, but might be prepared to do so in the future depending on the circumstances, and (ii) was not, at the present time, affirming or withdrawing the statement in its April 5, 2019 letter that Transform would only intend to proceed with its transaction proposal of the same date if it is approved by the full Board of Directors upon the recommendation of the Special Committee. The Special Committee and its advisors also discussed potential alternative courses of action, and the Special Committee directed PJ Solomon to contact Mr. Lampert and discuss potential transactions with him, including a Hometown Transaction and a transaction involving the sale of the Company’s Outlet Segment to a third party.

On April 26, 2019, representatives of PJ Solomon and Mr. Lampert discussed potential transactions that could bridge the Company’s and Transform’s valuation gap with respect to the Outlet Segment, including a Company Transaction in which the Company would, following the execution of a merger agreement, have the opportunity to effect an Outlet Sale, which would allow any realized proceeds in excess of Transform’s valuation to be shared among all of the Company’s stockholders (an “Outlet Go Shop Transaction”). Mr. Lampert expressed an interest in exploring such a transaction.

Later in the day on April 26, 2019, the Special Committee held another meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. Representatives of PJ Solomon updated the Special Committee on the discussion that had occurred earlier in the day with Mr. Lampert, including his expressed interest in Transform pursuing a potential Outlet Go Shop Transaction. The Special Committee and its advisors discussed various aspects of a potential Outlet Go Shop Transaction, including

 

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structuring alternatives, potentially interested buyers of the Outlet Segment, potential value implications for the Company’s unaffiliated stockholders and execution risks. The Special Committee and its advisors also discussed potential alternative courses of action and their benefits and risks, including the possibility of PJ Solomon contacting Mr. Lampert to engage in further discussions regarding a potential Company Transaction that was not an Outlet Go Shop Transaction.

On April 30, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. Representatives of PJ Solomon and Shearman & Sterling further reviewed with the Special Committee a number of aspects of a potential Outlet Go Shop Transaction, including potential structures and mechanics for implementing such a transaction. The Special Committee and its advisors also discussed the potential benefits and risks of such a transaction.

On May 1, 2019, the Board of Directors held a special meeting at which members of Company senior management who were not also directors and representatives of PJ Solomon, Shearman & Sterling and Richards Layton were present at the invitation of the Board of Directors. Representatives of Shearman & Sterling and Richards Layton discussed the ESL Bylaw Amendment with the Board of Directors, including the requirements imposed by the ESL Bylaw Amendment for the Board of Directors’ approval of certain strategic decisions related to the Company’s business, the challenges involved in monitoring the Company’s compliance with the ESL Bylaw Amendment in light of certain vagueness and ambiguities in its text and the scope of activities the Company could undertake without first obtaining the Board of Director approvals required by the ESL Bylaw Amendment, as well as the process, costs and uncertainty that would be involved in any legal challenge to the ESL Bylaw Amendment by the Company. Mr. Longino and the Special Committee’s advisors then updated the Board of Directors on the recent activities of the Special Committee, including discussions regarding a potential Outlet Go Shop Transaction. Company senior management reviewed with the Board of Directors the status of the Company’s discussions with its lenders regarding a Going Concern Waiver, including the lenders’ willingness to provide the Going Concern Waiver, subject to various terms, including a requirement that all amounts outstanding under the Company’s credit agreements be repaid at the closing of any merger or similar acquisition transaction with Mr. Lampert or his affiliated entities. Members of the Company’s senior management also reviewed with the Board of Directors the state of the Company’s business and the continuing deterioration in the Hometown Segment’s results of operations and prospects, including as a result of worsening comparable store sales, Kenmore and Craftsman product availability issues, increasing supply chain costs and the increasing number of dealers who were refusing to meet their contractual obligations to the Company.    

On May 2, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The Special Committee and its advisors discussed the update that the Board of Directors had received the prior day from Company senior management regarding the state of the Company’s business, as well as the potential benefits and risks of continuing transaction discussions with Transform in light of that update. Representatives of PJ Solomon reviewed with the Special Committee its preliminary financial analyses of a potential Outlet Sale, and the Special Committee and its advisors discussed the process of engaging in further discussions with Mr. Lampert regarding the potential structure of an Outlet Sale. Following this discussion, the Special Committee directed PJ Solomon and Shearman & Sterling to finalize materials discussing that transaction and to send them to Mr. Lampert and Cleary Gottlieb later that day.

On May 3, 2019, representatives of PJ Solomon and Mr. Lampert discussed the materials addressing an Outlet Sale, as well as alternative potential transaction structures that contemplated (i) a Company Transaction with a contingent value right based on the performance of the Outlet Segment, (ii) the sale of the Hometown Segment to Transform, followed by the marketing and potential sale of the Company (then owning only the Outlet Segment) to a third party purchaser (a “Hometown First Transaction”) and (iii) a Company Transaction supplemented to provide for a post-closing marketing and potential sale of the Outlet Segment to a third party purchaser. Mr. Lampert indicated that, in light of the uncertainties facing the Company’s Hometown Segment, he believed it would be important to engage in a transaction that would allow Transform to manage and stabilize the Company’s Hometown Segment as quickly as possible.

 

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Later in the day on May 3, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of PJ Solomon updated the Special Committee on their conversation with Mr. Lampert earlier in the day, and the Special Committee and its advisors discussed the benefits and risks of the alternative transaction structures, including in comparison to an Outlet Go Shop Transaction and Company Transaction with the contingent value right feature that previously had been discussed by Mr. Lampert.

Later in the day on May 3, 2019, representatives of Cleary Gottlieb and Shearman & Sterling discussed structuring aspects of the alternative transactions that Mr. Lampert and representatives of PJ Solomon had discussed. Also on May 3, 2019, the Company and its lenders executed waiver, consent and amendment agreements providing for the Going Concern Waivers and the other terms discussed at the May 1, 2019 meeting of the Board of Directors.

On May 5, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of PJ Solomon updated the Special Committee on their conversation with Company management regarding the Hometown First Transaction structure discussed with Mr. Lampert, including with respect to updated financial modeling that Company management was performing with respect to Hometown inventory values and Company liquidity needs, and discussed with the Special Committee the fact that a Hometown First transaction structure would likely need to include a component of financing from ESL to the Company to support the Company’s liquidity position. The Special Committee and its advisors also discussed the benefits and risks of a Hometown First Transaction, including the risk of the Company’s Outlet Segment not performing well following the sale of the Hometown Segment to Transform, as well as the benefits and risks of other transaction structures that had been discussed with Mr. Lampert. Based on the Special Committee’s beliefs regarding which transaction structures were likely to be acceptable to Transform, as well as the relative benefits and risks of those transaction structures, the Special Committee directed its advisors to finalize a draft term sheet draft contemplating the Hometown First transaction structure and providing for a purchase price equal to 66.5% of the book value of transferred inventory and a $25 million bridge loan from ESL or one of its affiliated entities to the Company, and to send the term sheet to Cleary Gottlieb later that day.

On May 8, 2019, representatives of Cleary Gottlieb and Shearman & Sterling discussed the draft term sheet. The representatives of Cleary Gottlieb stated that after further consideration, including in light of concerns regarding the risks to the Company of operating only its Outlet Segment, Mr. Lampert believed an Outlet Go Shop Transaction presented a better path forward and that Cleary Gottlieb would be sending a revised term sheet later in the day reflecting this transaction structure, which revised term sheet was sent to Shearman & Sterling later that day. The representatives of Cleary Gottlieb also stated that Transform was considering an Outlet Go Shop Transaction that would include base merger consideration of $2.25 per share, the right of the Company to sell the Outlet Segment for net sale proceeds of $103 million (the “Outlet Sale Minimum Proceeds Amount”) or more with the Company’s unaffiliated stockholders participating pro rata in net proceeds above that threshold, the right of Transform to match any proposed Outlet sale that would generate net proceeds of at least $103 million but less than $125 million (the “Transform Matching Ceiling”), a period of 75 days from the signing of the merger agreement to enter into a definitive agreement providing for an Outlet Sale (the “Outlet Marketing Period”) and a period of 120 days from the signing of the merger agreement to close an Outlet Sale (the “Outlet Closing Period”).

On May 9, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of PJ Solomon and Shearman & Sterling reviewed with the Special Committee the terms of the revised term sheet received from Cleary Gottlieb the prior day and the other terms of the Outlet Go Shop Transaction that Cleary Gottlieb had communicated Transform was considering, and representatives of PJ Solomon reviewed its preliminary financial analysis of the economic terms set forth in the term sheet and such other terms under consideration. The Special Committee and its advisors also discussed certain aspects of the term sheet that needed to be clarified, as well as responsive positions that the Special Committee could take in a further revised draft of the term sheet.

 

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On May 10, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of PJ Solomon reviewed with the Special Committee an updated preliminary financial analysis of the economic terms set forth in the term sheet received from Cleary Gottlieb on May 8, 2019 and the other terms under consideration by Transform, which took into account certain clarifications that had been received from Cleary Gottlieb subsequent to their transmission of the term sheet and also included an analysis of the potential impact of structuring the transaction so that all outstanding Company restricted stock units would be entitled to receive merger consideration at the closing of the transaction. The Special Committee and its advisors discussed the potential benefits and risks of the Outlet Go Shop Transaction structure, including with respect to the proposed matching right in favor of Transform, as well as the potential marketing and sale process that the Company would engage in during the Outlet Marketing Period contemplated by the Outlet Go Shop Transaction and the range of potential outcomes that might, or might not, be achieved. The Special Committee and its advisors also discussed potential revisions to the term sheet that might be proposed to Transform, including with respect to the Outlet Sale Minimum Proceeds Amount, the Transform Matching Ceiling, the Outlet Marketing Period and the Outlet Closing Period and the Special Committee directed Shearman & Sterling to revise the term sheet to reflect the positions discussed at the meeting and to send it to Cleary Gottlieb.

Later in the day on May 10, 2019, Shearman & Sterling sent the revised draft to Cleary Gottlieb. The revisions reflected, among other terms, an Outlet Sale Minimum Proceeds Amount of $92.3 million, a Transform Matching Ceiling of $115 million, an Outlet Marketing Period of 85 days from the signing of the merger agreement, extendable by 10 days in certain circumstances, an Outlet Closing Period of 145 days from the signing of the merger agreement, extendable by 15 days in certain circumstances and the full acceleration, at the closing of the merger, and payout, in the amount of the merger consideration (as adjusted in the case of a successful sale of the Outlet Segment), of all outstanding Company restricted stock units.

On May 12, 2019, representatives of Cleary Gottlieb and Shearman & Sterling discussed the revised term sheet that Shearman & Sterling had sent to Cleary on May 10, 2019, the process for progressing transaction negotiations and additional information requests from Mr. Lampert, including in respect of the historical working capital level of the Outlet Segment. Later in the day on May 12, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee, to discuss transaction status.

On May 18, 2019, Cleary Gottlieb sent Shearman & Sterling a draft merger agreement reflecting an Outlet Go Shop Transaction structure. The draft merger agreement did not reflect a specific Outlet Sale Minimum Proceeds Amount or Transform Matching Ceiling amount, but did reflect, among other terms, base merger consideration of $2.25 per share, an Outlet Marketing Period of 75 days from the signing of the merger agreement, extendable by 10 days in certain circumstances, an Outlet Closing Period of 120 days from the signing of the merger agreement, extendable by 15 days in certain circumstances, and did not provide for the full acceleration at the closing of the merger and payout of all outstanding Company restricted stock units.

On May 20, 2019, representatives of Cleary Gottlieb and Shearman & Sterling discussed various aspects of the draft merger agreement and potential transaction, including the scope of potential rights that Transform might have during the pendency of the potential transaction in respect Company’s Hometown business.

On May 21, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. Representatives of Shearman & Sterling reviewed with the Special Committee the terms of the draft merger agreement that had been received from Cleary Gottlieb, including with respect to (i) the proposed length of the Outlet Marketing Period and the Outlet Closing Period and the proposed parameters of the Company’s right to market and potentially enter into a definitive Outlet sale agreement during the Outlet Marketing Period, and (ii) the proposed structure of the merger, including that the requisite stockholder approval would be given by ESL in connection with the signing of the merger agreement and that consequently the draft merger agreement did not contain a “fiduciary out” in

 

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relation to unsolicited third party acquisition proposals or generally permit the Special Committee or the Board of Directors to change its recommendation in favor of the merger. The Special Committee and its advisors discussed the potential benefits and risks of the terms proposed on the draft merger agreement, as well as potential revisions to those terms that the Special Committee could propose.

On May 22, 2019, Shearman & Sterling sent a revised merger agreement to Cleary Gottlieb that reflected the Special Committee’s comments, other than with respect to the Outlet Sale Minimum Proceeds Amount, the Transform Matching Ceiling amount, the Outlet Marketing Period and the Outlet Closing Period, which terms remained under consideration by both the Special Committee and Transform.

On May 23, 2019, representatives of Cleary Gottlieb and Shearman & Sterling discussed a number of issues in relation to the potential transaction, including the treatment of working capital and the Special Committee’s understanding that Transform was not prepared to include a majority-of-the-minority stockholder vote condition in a potential transaction. Later in the day, Cleary Gottlieb contacted Shearman & Sterling to confirm that the Special Committee’s understanding on that topic was correct.

On May 24, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The Special Committee and its advisors discussed the principal open issues in the merger agreement, including the Outlet Sale Minimum Proceeds Amount, the Transform Matching Ceiling amount, the Outlet Marketing Period, the Outlet Closing Period and the treatment of Company restricted stock units, and potential positions on these issues that the Special Committee could propose to Transform. The Special Committee and its advisors also discussed the possibility of asking Transform to reconsider alternative transaction structures, including a Hometown Transaction, but believed that Transform would be unwilling to engage in discussions on alternative transaction structures on terms that the Special Committee would find acceptable and that Mr. Lampert had also repeatedly made clear, particularly in more recent discussions, that Transform would not engage in a transaction that would result in the Company continuing to own and operate only its Outlet Segment. Following this discussion, the Special Committee directed PJ Solomon to contact Mr. Lampert and communicate that the Special Committee was prepared to continue discussions concerning an Outlet Go Shop Transaction on the basis of an Outlet Marketing Period of 85 days from the signing of the merger agreement, extendable by 10 days in certain circumstances, an Outlet Closing Period of 160 days from the signing of the merger agreement, extendable by 15 days in certain circumstances, Outlet Sale Minimum Proceeds of $97.5 million and a Transform Matching Ceiling amount of $120 million.

Later in the day on May 24, 2019, Mr. Powell, at the request of the Special Committee, discussed with Mr. Lampert the approach to certain operational and employee matters in the potential transaction, and representatives of PJ Solomon separately discussed with Mr. Lampert the terms that the Special Committee had directed PJ Solomon to communicate.

On May 25, 2019, Cleary Gottlieb sent a revised merger agreement, and an initial draft of the Equity Commitment Letter (as defined below), to Shearman & Sterling. The draft merger agreement generally reflected the terms that representatives of PJ Solomon had communicated to Mr. Lampert the prior day, except with respect to the length of the Outlet Closing Period, and also reflected other comments from Transform, including to the definition of Net Proceeds and the addition of financing cooperation covenants from the Company.

On May 26, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of Shearman & Sterling reviewed with the Special Committee the revised draft merger agreement and the draft Equity Commitment Letter that had been received from Cleary Gottlieb the prior day, the Special Committee discussed with its advisors potential revisions that it could propose to Transform in response. Shearman & Sterling sent revised drafts of the merger agreement and the Equity Commitment Letter to Cleary Gottlieb on May 27, 2019.

 

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On May 27, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of PJ Solomon and Shearman & Sterling discussed with the Special Committee the status of negotiations, including with respect to ongoing discussions concerning the treatment of working capital in the transaction. Representatives of PJ Solomon reviewed with the Special Committee a financial analysis of the proposed transaction and the assumptions underlying that analysis, including that a Hometown liquidation plan previously prepared by Company management could not immediately be implemented in light of the ESL Bylaw Amendment. Representatives of Shearman & Sterling reviewed with the Special Committee its fiduciary duties in considering the proposed transaction, the material terms of the proposed transaction, including those that remained subject to ongoing discussion and negotiation between the parties such as the definition of Net Proceeds, the scope of the financing cooperation covenants, the merger agreement termination date and the treatment of Company restricted stock units and other employee awards in the proposed transaction.

Later in the evening of May 27, 2019, the Board of Directors held a special meeting at which members of Company senior management who were not also directors and representatives of PJ Solomon, Shearman & Sterling, Richards Layton and Pillsbury Winthrop Shaw Pittman LLP (“Pillsbury”), counsel to the Audit Committee of the Board of Directors, were present at the invitation of the Board of Directors. At the meeting the representatives of PJ Solomon and Shearman & Sterling updated the Board of Directors on the status of, and recent developments in, transaction negotiations with Transform. Representatives of PJ Solomon also reviewed with the Board of Directors its financial analysis of the proposed transaction and the assumptions underlying that analysis, and representatives of Shearman & Sterling reviewed with the Board of Directors its fiduciary duties in considering the proposed transaction, the material terms of the proposed transaction and the material terms which remained subject to ongoing discussion and negotiation between the parties. At this meeting, the Board of Directors also confirmed that notwithstanding that a transaction with Transform would constitute a related party transaction, the Audit Committee was not required to separately approve any such transaction given the mandate of the Special Committee.

Between May 28, 2019 and the execution of the Merger Agreement on June 1, 2019, the parties and their advisors continued to exchange and discuss revised drafts of the Merger Agreement, Equity Commitment Letter and other transaction documentation, including discussions between Mr. Longino and Mr. Kamlani regarding the treatment of Company restricted stock units and other employee awards in the transaction and discussions between Company management and representatives of PJ Solomon, on the one hand, and Mr. Kamlani, on the other hand, regarding the treatment of working capital in the transaction.

On May 28, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee, where remaining open issues and related conversations that were occurring with Mr. Kamlani were discussed.

On May 29, 2019, the Board of Directors held a special in-person meeting at which members of Company senior management who were not also directors and representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Board of Directors. The representatives of PJ Solomon and Shearman & Sterling updated the Board of Directors on the ongoing transaction discussions with Transform and its representatives, including with respect to issues that remained open. The Board of Directors and other meeting participants also discussed the effects on the Company’s businesses that could arise if the negotiations with Transform were to continue without an expeditious resolution, and Company senior management reviewed with the Board of Directors certain alternatives, and their risks, including in light of the ESL Bylaw Amendment, that the Company could seek to implement to protect its value in the absence of a transaction with Transform.

On May 31, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of Shearman & Sterling updated the Special Committee on transaction status and conversations with Transform and its representatives, the terms of the Merger Agreement and related transaction documents and how open issues

 

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related to the Merger Agreement and other transaction documents had been resolved. Representatives of PJ Solomon again reviewed PJ Solomon’s financial analysis of the proposed transaction and then orally rendered the opinion of PJ Solomon, which was subsequently confirmed in writing that, as of May 31, 2019 and subject to the assumptions set forth in the draft written opinion that had been circulated to the Special Committee, the Base Merger Consideration to be paid to the Company’s unaffiliated stockholders pursuant to the Merger Agreement is fair, from a financial point of view, to such unaffiliated stockholders.

Following a discussion among the Special Committee and its advisors regarding the proposed transaction, and after considering the proposed terms of the Merger Agreement and the other transaction agreements and the presentations of its advisors, the Special Committee unanimously determined that the Merger Agreement and the proposed transactions were fair to and in the best interests of the Company and its unaffiliated stockholders, approved the Merger Agreement and the proposed transactions and resolved to recommend that the Board of Directors adopt resolutions approving and declaring advisable the Merger Agreement and the proposed transactions and recommending that the Merger Agreement be adopted by the stockholders of the Company.

The Board of Directors held a special meeting thereafter at which members of Company senior management who were not also directors and representatives of PJ Solomon, Shearman & Sterling, Richards Layton and Pillsbury were present at the invitation of the Board of Directors. Mr. Longino and the representatives of PJ Solomon and Shearman & Sterling updated the Board of Directors on transaction status and conversations with Transform and its representatives, the terms of the Merger Agreement and related transaction documents, how open issues related to the Merger Agreement and other transaction documents had been resolved and on the determinations reached, and recommendation made by, the Special Committee prior to the meeting of the Board of Directors.

Company senior management again reviewed with the Board of Directors the status of the Company’s business and financial position and outlook, including with respect to the significant challenges that the Company would continue to face in the absence of a transaction with Transform.

Representatives of PJ Solomon again reviewed its financial analysis of the proposed transaction and then orally rendered to the Board of Directors the same opinion it had rendered at the earlier Special Committee meeting.

Following a discussion, the Board of Directors unanimously determined that the Merger Agreement and the proposed transactions were fair to and in the best interests of the Company and its unaffiliated stockholders, approved, adopted and declared advisable the Merger Agreement and the proposed transactions, directed that the Merger Agreement be submitted to the Company’s stockholders for adoption and resolved to recommend that the Merger Agreement be adopted by the stockholders of the Company.

The Merger Agreement, the Equity Commitment Letter and the ESL Letter Agreement were executed on June 1, 2019, and the Company and Transform issued a joint press release on June 3, 2019 prior to the open of trading on NASDAQ announcing the transaction.

Recommendation of the Special Committee and Reasons for Recommendation

Recommendation of the Special Committee

On May 31, 2019, the Special Committee (i) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to and in the best interests of the Company and its stockholders (other than ESL), (ii) approved the Merger Agreement and the transactions contemplated thereby and declared the Merger Agreement advisable, and (iii) recommended that the Board of Directors adopt resolutions approving and declaring advisable the Merger Agreement and the transactions contemplated thereby and recommending that the Merger Agreement be adopted by the stockholders of the Company.

 

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Reasons for Recommendation

In evaluating the Merger Agreement and the Merger, the Special Committee consulted with the Company’s senior management and its outside legal and financial advisors and, in reaching its determination to recommend that the Board of Directors adopt resolutions approving and declaring advisable the Merger Agreement and the transactions contemplated thereby and recommending that the Merger Agreement be adopted by the stockholders of the Company, the Special Committee relied upon and considered numerous factors, including the material factors set forth below (which are not intended to be exhaustive and are not presented in any order of relative importance or significance):

Process and Consideration of Alternatives

 

   

The belief, based on a review of the other possible alternatives to a sale of the Company, including the prospects of continuing to operate in accordance with the Company’s standalone plan, the potential value to the Company’s stockholders of such alternatives and the timing and likelihood of actually achieving additional value for such stockholders from these alternatives, that none of these options, on a risk- and time-adjusted basis, was reasonably likely to create value for the Company’s stockholders greater than the Merger Consideration.

 

   

The fact that no third party approached or made any contact with the Company or its representatives regarding a potential acquisition of the Company from April 8, 2019 (the date the Company publicly announced that it had received an acquisition proposal from Transform) through until May 31, 2019 (the date the Special Committee approved the Merger Agreement).

 

   

The Special Committee’s belief that a liquidation of the Company’s Hometown Segment and continued operation of the Company’s Outlet Segment constituted the best strategic alternative for the Company and its stockholders, but such course of action would require the Board of Directors to first comply with the requirements set forth in the ESL Bylaw Amendment, which would require a 30 business day period to elapse between the public announcement of the Board of Directors’ recommendation to liquidate the Hometown Segment and the actual commencement of the liquidation and therefore impose significant execution risks to the successful implementation and completion of the liquidation.

Financial Terms; Certainty of Value

 

   

The belief that, the Base Merger Consideration of $2.25 per share in cash of Company Common Stock represents fair value for shares of Company Common Stock, taking into account the Company’s current and historical financial condition, results of operations, business, competitive position and prospects, the constraints imposed by the ESL Bylaw Amendment, as well as the Company’s standalone plan in the event the Company were to remain an independent public company.

 

   

The future prospects and risks associated with remaining an independent public company and the risks and uncertainties associated with the execution of the Company’s standalone plan, including in view of the deteriorating operating performance and growing operating losses of the Company’s Hometown Segment and the constraints imposed on the Company as a result of the ESL Bylaw Amendment.

 

   

The Special Committee’s belief that, following extensive discussions with Mr. Lampert, the Merger and the Merger Consideration comprised the best transaction terms the Special Committee could negotiate with ESL and therefore represented the highest possible value available for the Company’s unaffiliated stockholders given the absence of actionable alternative transactions with ESL or third parties and the significant operational challenges facing the Company if it continued on a standalone basis.

 

   

The belief that the Merger Consideration to be paid by Transform is the highest price per share of Company Common Stock that Transform was willing to pay, that the terms and conditions of the Merger Agreement were the most favorable to the Company and its stockholders to which Transform was willing to agree, and

 

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that continued efforts to obtain a higher price from Transform, or soliciting interest from unaffiliated third parties, would be unlikely to lead to a higher price from Transform or a more favorable transaction with an unaffiliated third party, and could lead to the loss of the proposed transaction with Transform.

 

   

The opportunity for the Company’s stockholders to realize substantial value based on the receipt of the Base Merger Consideration representing a premium of 18.4% to the closing share price of April 5, 2019, the last trading day prior to the Company’s announcement that it had received a proposal from Transform to acquire the Company, a premium of approximately 10.3% to the 30-day volume-weighted average price of shares of Company Common Stock as of April 30, 2019, and a premium of approximately 6.1% to the 90-day volume-weighted average price of shares of Company Common Stock as of May 31, 2019, the last trading day prior to the Company’s announcement of its entry into the Merger Agreement.

 

   

The potential for the Company’s stockholders to realize additional value via an increase in the Base Merger Consideration in the event the Company consummates an Outlet Sale satisfying certain conditions set forth in the Merger Agreement.

 

   

The fact that the Merger Consideration consists solely of cash, which provides certainty of value and liquidity to the Company’s unaffiliated stockholders and does not expose them to any future risks related to the business or the financial markets generally, as compared to a transaction in which stockholders receive equity or other securities, or as compared to remaining an independent, standalone company.

 

   

The oral opinion of PJ Solomon (which oral opinion was subsequently confirmed by delivery of a written opinion, dated as of May 31, 2019), provided to the Special Committee and the Board of Directors, to the effect that, as of that date and based on and subject to various procedures, assumptions and matters considered and the qualifications and limitations described in its opinion, the Merger Consideration to be paid to the holders of shares of Company Common Stock (other than ESL or Transform) pursuant to the Merger Agreement is fair, from a financial point of view to such holders. A copy of the PJ Solomon Opinion is attached to this information statement as Annex D.

 

   

The fact that appraisal rights will be available to the unaffiliated holders of Company Common Stock who properly exercise their rights under the DGCL, which would give these stockholders the ability to seek and be paid a judicially determined appraisal of the “fair value” of their shares of Company Common Stock if they do not wish to accept the Merger Consideration.

Prospects of the Company

 

   

The Company’s current and historical business, financial condition, results of operations, competitive position, strategic options and prospects, as well as the Company’s standalone plan in the event the Company were to remain an independent public company, the risks and challenges associated with remaining an independent public company and the risks and uncertainties associated with the execution of the standalone plan, and the potential impact of those factors on the future trading price of Company Common Stock, including risks related to:

 

   

the general business environment for, and impact of general economic conditions on, the retail industry, including a failure of the economy to sustain its recovery, a renewed decline in consumer-spending levels and other conditions, which could lead to reduced revenues and gross margins, and negatively impact the Company’s results of operations;

 

   

the deteriorating operating performance and growing operating losses of the Company’s Hometown Segment coupled with the ESL Bylaw Amendment, which the Special Committee believed constrained the Company’s ability to successfully address such performance and losses;

 

   

the competitive landscape, the business, financial and execution risks and the Company’s relationships with customers, vendors and suppliers, including in respect of increasing supply chain costs and uncertainty being experienced by the Company, and the potential impact of those factors on the trading price of shares of Company Common Stock and the Company’s ability to execute its standalone plan in the event the Company were to remain an independent public company;

 

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the amount of debt required by the Company to operate its business and the uncertainty and potential related costs associated with the possibility that the Company will need to obtain an extension of the Going Concern Waiver or refinance all of the debt outstanding under its credit agreements in the Company’s third fiscal quarter of 2019 (or the Company’s fourth fiscal quarter of 2019 in the event a Going Concern Waiver extension through such quarter were obtained) in the event the Company were to remain an independent public company;

 

   

the additional costs and burdens involved with being a public company;

 

   

the other risks and uncertainties identified in the Company’s filings with the SEC, including in its Annual Report on Form 10-K for the fiscal year ended February 2, 2019 and its Quarterly Report on Form 10-Q for the quarterly period ended May 4, 2019; and

 

   

the Special Committee’s belief, after consideration of the factors described in this section, that the consummation of the transactions contemplated by the Merger Agreement represent the Company’s best reasonably available alternative for maximizing stockholder value.

 

   

The Company’s reliance on Transform to provide access to certain computer systems, intellectual property and inventory used in our business pursuant to agreements between the Company and Transform, and the potential that Transform in the future may not be able or willing to continue to provide such access, intellectual property and inventory to the Company.

Likelihood of Consummation

 

   

The fact that Transform’s obligation to complete the transactions is not conditioned on Transform or Merger Subsidiary obtaining financing.

 

   

The fact that Transform agreed to take all actions necessary to cause the Merger Agreement closing condition relating to the payment in full or termination, as applicable, of all outstanding obligations and letters of credit under the Company’s credit agreements to be satisfied at or prior to closing of the Merger.

 

   

The support of the Principal Stockholders who together hold approximately 58.3% of the outstanding shares of Company Common Stock and who had agreed to deliver the Written Consent adopting the Merger Agreement and approving any Outlet Sale, which would result in the adoption of the Merger Agreement and the approval of any Outlet Sale becoming effective immediately following execution of the Merger Agreement and no further approval of the stockholders of the Company being required to adopt the Merger Agreement or approve any Outlet Sale.

 

   

The fact that the Merger Agreement requires Transform to use its reasonable best efforts to take actions necessary to satisfy the regulatory conditions set forth in the Merger Agreement, and includes a commitment by Transform to reasonably cooperate to obtain all applicable consents and approvals, as more fully described in the section entitled “The Merger Agreement—Other Covenants and Agreements—Reasonable Best Efforts” beginning on page 98 of this information statement.

Terms of the Merger Agreement

 

   

The Special Committee considered all of the terms and conditions of the Merger Agreement, including the representations, warranties, covenants and agreements of the parties, the conditions to closing, the form of the Merger Consideration and the termination rights, including:

 

   

that the terms of the Merger Agreement were the products of arm’s-length negotiations among sophisticated parties and their respective legal and financial advisors, as more fully described in “Special Factors—Background of the Transaction” beginning on page 17 of this information statement;

 

   

that the “go shop” provisions give the Company the ability to initiate, solicit and encourage inquiries, proposals and offers from third parties for a sale of the Company’s Sears Outlet and Buddy’s Home

 

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Furnishing Stores businesses to a third party on the terms and subject to the conditions of the Merger Agreement and to enter into a transaction agreement with a third party in respect of such a sale that, if consummated, could result in the Merger Consideration being greater than the Base Merger Consideration (as more fully described in the section entitled “The Merger Agreement—Other Covenants and Agreements—Sale of the Outlet Segment” beginning on page 93 of this information statement);

 

   

the fact that, subject to certain customary limitations, the Company will have sufficient operating flexibility for it to conduct its business in the ordinary course consistent with past practice during the pre-closing period; and

 

   

that the remedies of specific performance and monetary damages are available to the Company under the Merger Agreement as more fully described in the section entitled “The Merger Agreement—Specific Performance” beginning on page 102 of this information statement.

In addition to the factors above, the Special Committee identified and considered a variety of risks and potentially negative factors concerning the Merger, including:

 

   

the possibility that the Merger might not be consummated, and the risks and costs to the Company in such event, including the diversion of management and employee attention and the potential disruptive effect on business and customer relationships, vendor relationships, stock price and ability to attract and retain key management personnel and employees;

 

   

the possibility that the Company may not be able to consummate an Outlet Sale within the timeframe prescribed by, and otherwise in accordance with the applicable terms and conditions set forth in, the Merger Agreement, which would result in there being no increase in the Base Merger Consideration;

 

   

the fact that Transform is a private, newly formed entity;

 

   

the possibility that completion of the Merger might be delayed or subject to adverse conditions that may be imposed by governmental authorities that are not within the Company’s control, that, if the parties determine that a filing pursuant to the HSR Act is required, such approval may not be obtained, and the period of time the Company may be subject to the Merger Agreement without assurance that the Merger will be completed;

 

   

the fact that the Company’s obligations to provide financing cooperation to Transform are significant and the ability of the Company to provide certain financing information as required by the Merger Agreement could impact timing of completion of the Merger;

 

   

the fact that, as a result of the ESL Bylaw Amendment, the Board of Directors must approve any Outlet Sale by an affirmative vote of no less than 90% of directors then in office, which will require a unanimous vote given the present size of the Board of Directors;

 

   

the significant costs involved in connection with completing the Merger, the substantial management time and effort required to complete the Merger, and the related disruption to the Company’s operations;

 

   

the prohibition imposed on the solicitation or consideration by the Company of alternative transactions, and the absence of any ability of the Company to terminate the Merger Agreement in the event the Company were to receive a superior offer;

 

   

the interests that certain of the Company’s directors and executive officers may have with respect to the Merger in addition to their interests as the Company’s stockholders as described in “Special Factors—Interests of Directors and Executive Officers in the Merger” beginning on page 67 of this information statement; and

 

   

that any gain to be realized by the Company’s stockholders as a result of the Merger generally will be taxable to such stockholders for U.S. federal income tax purposes if they are not otherwise exempt from the payment of such taxes (as more fully described in “Special Factors—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 73 of this information statement.

 

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The foregoing discussion of the information and factors considered by the Special Committee is not intended to be exhaustive, but rather includes the principal material information, factors and analyses considered by the Special Committee in reaching its conclusions and recommendation in relation to the Merger Agreement, the Merger and the other transactions contemplated thereby. The Special Committee evaluated the various factors listed above in light of its knowledge of the business, financial condition and prospects of the Company, in consultation with the Company’s senior management and outside legal and financial advisors. The Special Committee did not provide a specific assessment of, quantify or otherwise assign any relative weights to, the factors considered in determining its recommendation. Instead, the Special Committee conducted an overall analysis of the factors and reasons described above and determined in its business judgment that, in the aggregate, the potential benefits of the merger to the stockholders of the Company outweighed the risks or potential negative consequences.

Recommendation of the Board of Directors and Reasons for Recommendation

Recommendation of the Board of Directors

Upon receipt of the recommendation of the Special Committee, at a meeting of the Board of Directors duly called and held on May 31, 2019 to act on the Special Committee’s recommendation, the Board of Directors unanimously (i) determined that the Merger Agreement and the transactions contemplated thereby are fair to, and in the best interests of, the Company and its stockholders (other than ESL), (ii) approved, adopted and declared advisable the Merger Agreement and the transactions contemplated thereby, (iii) directed that the Merger Agreement be submitted to the stockholders of the Company for their adoption and approval, and (iv) recommended that the Merger Agreement be adopted by the stockholders of the Company.

Reasons for Recommendation

In reaching its determinations, the Board of Directors considered and adopted the analyses and conclusions of the Special Committee, including the factors described above, the determination of the Special Committee that the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to and in the best interests of the Company and its stockholders (other than ESL) and the recommendation of the Special Committee that the Board of Directors adopt resolutions approving and declaring advisable the Merger Agreement and the transactions contemplated thereby and recommending that the Merger Agreement be adopted by the stockholders of the Company.

In addition to the factors described above, the Board of Directors also considered a variety of factors weighing positively in favor of the Merger Agreement and the transactions contemplated thereby, including the following (which are not intended to be exhaustive and are not presented in any order of relative importance or significance):

 

   

the fact that an active and engaged Special Committee composed of an independent and disinterested member of the Board of Directors who did not have a material interest in the potential transaction, declared the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to and in the best interests of the Company and its stockholders (other than ESL); and

 

   

the belief of the Board of Directors, based on its knowledge of the Company’s long-term strategic goals and opportunities, including in light of the terms of the ESL Bylaw Amendment, industry trends, competitive environment and performance in light of the Company’s standalone plan, including the potential impact of those factors on the trading price of the Company Common Stock (which cannot be precisely quantified numerically), and discussions with Company senior management and the Special Committee’s financial advisor, that the value offered to Company stockholders pursuant to the Merger Agreement is more favorable to Company stockholders than the potential value that might reasonably be expected to result from remaining an independent company.

The foregoing discussion of the information and factors considered by the Board of Directors is not intended to be exhaustive, but rather includes the principal material information, factors and analyses considered by the

 

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Board of Directors in reaching its conclusions and recommendation in relation to the Merger Agreement, the Merger and the other transactions contemplated thereby. The Board of Directors evaluated the various factors listed above in light of its knowledge of the business, financial condition and prospects of the Company, in consultation with the Company’s senior management and outside legal and financial advisors. The Board of Directors did not provide a specific assessment of, quantify or otherwise assign any relative weights to, the factors considered in determining its recommendation. Instead, the Board of Directors conducted an overall analysis of the factors and reasons described above and determined in its business judgment that, in the aggregate, the potential benefits of the merger to the stockholders of the Company outweighed the risks or potential negative consequences. Individual members of the Board of Directors may have given different weight to different factors. In addition, in arriving at its recommendation, the Board of Directors were aware of the interests of certain officers and directors of the Company as described in “Special Factors—Interests of Directors and Executive Officers in the Merger” beginning on page  67 of this information statement.

Opinion of PJ Solomon

Pursuant to an engagement letter dated November 13, 2018, as amended on April 4, 2019 and May 28, 2019, the Special Committee retained PJ Solomon to act as a financial and strategic advisor to the Special Committee in connection with the Merger. PJ Solomon is an internationally recognized investment banking firm which is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions. The Special Committee selected PJ Solomon to act as its financial and strategic advisor on the basis of PJ Solomon’s knowledge of the Company and its industry and business, PJ Solomon’s experience and reputation advising public companies in transactions similar to the Merger and its reputation in the investment community, among other things.

On May 31, 2019, at meetings of the Special Committee and the Board of Directors held to evaluate the Merger, PJ Solomon delivered to the Special Committee an oral opinion, which was subsequently confirmed by delivery of a written opinion dated May 31, 2019, to the effect that, as of the date of PJ Solomon’s opinion and based upon and subject to various assumptions and limitations described in its opinion, the $2.25 per share of Base Merger Consideration proposed to be paid to the holders of shares of Company Common Stock (other than ESL or Transform) pursuant to the Merger Agreement was fair from a financial point of view to such holders. PJ Solomon’s opinion was addressed to the Special Committee and to the Board of Directors and provided for the information and assistance of the Special Committee (in its capacity as such) and, at the request of the Special Committee, the Board of Directors (in its capacity as such) in connection with their consideration of the Merger.

The full text of PJ Solomon’s written opinion, which sets forth the assumptions made, procedures followed, matters considered, limitations on and scope of the review by PJ Solomon in rendering PJ Solomon’s opinion, is attached as Annex D and is incorporated herein by reference. PJ Solomon’s opinion was directed only to the fairness of the per share Base Merger Consideration proposed to be paid to the holders of shares of Company Common Stock (other than ESL or Transform) pursuant to the Merger Agreement from a financial point of view, was provided for the information of the Special Committee and the Board of Directors in connection with their evaluation of the Merger, did not address any other aspect of the Merger and did not express any opinion or view as to the relative merits of the Merger in comparison to other strategies or transactions, including any strategies or transactions that the Company is prevented from undertaking by its organizational documents, that might be available to the Company or in which the Company might engage or as to the Company’s underlying business decision to proceed with or effect the Merger. PJ Solomon did not evaluate and did not express any opinion regarding the liquidation value of any entity, asset or business. PJ Solomon assumed for purposes of its analysis that no additional consideration would become payable to the holders of shares of Company Common Stock as a result of any transaction involving the Outlet Segment pursuant to the Outlet Sale Process (as defined below). PJ Solomon’s opinion also expressed no opinion or recommendation as to how any holder of shares of Company Common Stock should act in connection with the Merger or any related matter. The summary of PJ Solomon’s opinion set forth in this information statement is qualified in its entirety by reference to the full

 

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text of such opinion. Holders of shares of Company Common Stock are urged to read PJ Solomon’s opinion carefully and in its entirety. PJ Solomon has consented to the inclusion of PJ Solomon’s opinion in this information statement.

In arriving at its opinion, PJ Solomon, among other things:

 

   

reviewed certain publicly available financial statements and other information of the Company;

 

   

reviewed certain internal financial statements and other financial and operating data concerning the Company prepared and provided to PJ Solomon by the management of the Company and approved for PJ Solomon’s use by the Company;

 

   

reviewed certain financial projections for the Company prepared and provided to PJ Solomon by the management of the Company and approved for PJ Solomon’s use by the Company;

 

   

discussed the past and current operations, financial condition and prospects of the Company with management of the Company;

 

   

reviewed the reported prices and trading activity of the Company Common Stock;

 

   

compared the financial performance and condition of the Company and the reported prices and trading activity of the Company Common Stock with that of certain other publicly traded companies that PJ Solomon deemed relevant;

 

   

reviewed publicly available information regarding the financial terms of certain transactions that PJ Solomon deemed relevant, in whole or in part, to the Merger;

 

   

participated in certain discussions among management and other representatives of each of Transform and the Company;

 

   

reviewed a draft, dated May 31, 2019, of the Merger Agreement;

 

   

reviewed the organizational documents of the Company, including the Amended and Restated Bylaws of the Company, as amended as of April 15, 2019 (the “Bylaws”); and

 

   

performed such other analyses and reviewed such other material and information as PJ Solomon deemed appropriate.

PJ Solomon assumed and relied upon the accuracy and completeness of the information reviewed by PJ Solomon for the purposes of its opinion and PJ Solomon did not assume any responsibility for independent verification of such information and relied on such information being complete and correct. PJ Solomon relied on assurances of the management of the Company that they were not aware of any facts or circumstances that would make information provided by or on behalf of the Company inaccurate or misleading in any respect material to PJ Solomon’s opinion. With respect to the financial projections prepared and provided to PJ Solomon by the management of the Company, PJ Solomon assumed that the financial projections were reasonably prepared on bases reflecting the best currently available estimates and judgments of management of the Company of the future financial performance of the Company. PJ Solomon expressed no views as to the reasonableness of any such financial projections or the assumptions on which they are based. PJ Solomon did not conduct a physical inspection of the facilities or property of the Company. PJ Solomon did not assume any responsibility for or perform any independent valuation or appraisal of the assets or liabilities of the Company, nor was PJ Solomon furnished with any such valuation or appraisal other than a plan for the liquidation of the Company’s Hometown Segment prepared by Company management as of April 8, 2019 (the “Management Liquidation Plan”). Although PJ Solomon reviewed the Management Liquidation Plan, PJ Solomon did not evaluate, and expressed no opinion, regarding the liquidation value of any entity, asset or business of the Company. Furthermore, PJ Solomon did not consider any tax, accounting or legal effects of the Merger or the transaction structure on any person or entity.

PJ Solomon assumed that the final form of the Merger Agreement would be substantially the same as the last draft reviewed by PJ Solomon and would not vary in any respect material to PJ Solomon’s analysis. PJ Solomon

 

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also assumed that the Merger would be consummated in accordance with the terms of the Merger Agreement, without waiver, modification or amendment of any material term, condition or agreement (including, without limitation, the consideration to be paid to the holders of shares of Company Common Stock in the Merger), and that, in the course of obtaining the necessary regulatory or third party approvals, consents and releases for the Merger, no delay, limitation, restriction or condition would be imposed that would have an adverse effect on the Company or the contemplated benefits of the Merger. PJ Solomon further assumed that all representations and warranties set forth in the Merger Agreement were and will be true and correct as of all the dates made or deemed made and that all parties to the Merger Agreement will comply with all covenants of such parties thereunder.

PJ Solomon noted that under the terms of the Merger Agreement, the Company is permitted to conduct a process to effect an Outlet Sale (the “Outlet Sale Process”), which may result in consideration in addition to the Base Merger Consideration becoming payable to the holders of shares of Company Common Stock. The outcome of the Outlet Sale Process, including whether an Outlet Sale will occur at all and the terms on which any such transaction may occur, is not currently known. Accordingly, at the direction of the Special Committee, PJ Solomon assumed for purposes of its analysis that no additional consideration would become payable to holders of shares of Company Common Stock as a result of any transaction involving the Outlet Segment pursuant to the Outlet Sale Process.

PJ Solomon’s opinion was necessarily based on economic, market and other conditions as in effect on, and the information made available to PJ Solomon as of, May 31, 2019. In particular, PJ Solomon did not express any opinion as to the prices at which shares of Company Common Stock may trade at any future time or as to the impact of the Merger on the solvency or viability of the Company, Transform or Merger Subsidiary or the ability of the Company, Transform or Merger Subsidiary to pay their respective obligations when they come due. Furthermore, PJ Solomon’s opinion did not address the Company’s underlying business decision to undertake the Merger, and PJ Solomon’s opinion did not address the relative merits of the Merger as compared to any alternative transactions or business strategies that might be available to the Company. PJ Solomon’s opinion did not address any other aspect or implication of the Merger or any other agreement, arrangement or understanding entered into in connection with the Merger or otherwise except as expressly identified therein.

In arriving at its opinion, PJ Solomon was not authorized to solicit, and did not solicit, interest from any third party with respect to a merger or other business combination transaction involving the Company or any of its assets. The Special Committee also directed PJ Solomon, and PJ Solomon assumed for purposes of its opinion, that the Company was prevented from undertaking any transaction contemplated by the Management Liquidation Plan or any other strategic or financial alternative that was not in accordance with the Company’s organizational documents, including, without limitation, Section 2.10 of the Bylaws. PJ Solomon expressed no opinion with respect to the values that might have been obtained for the Company or its assets in any merger or business combination with any other party or in any other strategic or financial transaction, including, without limitation, any transactions contemplated by the Management Liquidation Plan.

The following summarizes the significant financial analyses performed by PJ Solomon and provided to, and reviewed with, the Special Committee and the Board of Directors on May 31, 2019, in connection with the delivery of PJ Solomon’s opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand PJ Solomon’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of PJ Solomon’s financial analyses. The following summary, however, does not purport to be a complete description of the financial analyses performed by PJ Solomon, nor does the order of analyses described represent relative importance or weight given to those analyses by PJ Solomon. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before May 30, 2019, and is not necessarily indicative of current market

 

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conditions. Certain of the financial analyses constitute or are based upon forward-looking statements. See the section entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 78 of this information statement.

Analysis of Selected Publicly Traded Companies

In order to assess how the public market values shares of selected publicly traded companies that PJ Solomon deemed relevant in its professional judgment, PJ Solomon reviewed and compared selected financial information concerning the Company with similar information using publicly available information of the following publicly traded companies:

 

   

The Home Depot, Inc.;

 

   

Lowe’s Companies, Inc.;

 

   

Best Buy Co., Inc.;

 

   

Bed Bath & Beyond, Inc.;

 

   

Haverty Furniture Companies, Inc.; and

 

   

Kirkland’s.

These companies are referred to herein as the “selected companies.” These companies were selected by PJ Solomon based on their respective sizes, industries, growth trajectories and geographic footprint.

PJ Solomon calculated and compared various financial multiples, including, among other things, the enterprise value of the selected companies based on closing share prices on May 30, 2019, as a multiple of: (i) the last twelve months (“LTM”) earnings before interest, taxes, depreciation and amortization, excluding non-recurring items (“EBITDA”), as calculated from publicly reported data as of May 30, 2019, and (ii) estimated EBITDA for the calendar years ending December 31, 2019 and December 31, 2020, as reported by Capital IQ as of May 30, 2019, in each case for each of the selected companies.

The tables below summarize the results of these calculations:

 

EV as a Multiple of:         Selected Companies

LTM EBITDA

   Range:    0.0x – 13.2x
   Median:    5.4x
   Mean:    6.5x

2019E EBITDA

   Range:    0.1x – 13.1x
   Median:    5.7x
   Mean:    6.5x

2020E EBITDA

   Range:    0.1x – 12.4x
   Median:    5.5x
   Mean:    6.1x

Based on its professional judgment and after taking into consideration, among other things, the observed data for the selected companies as of May 30, 2019, PJ Solomon developed the following reference ranges of trading valuation multiples for the selected companies and applied them to the Company’s LTM EBITDA of $16 million and 2019E EBITDA of $8.5 million:

 

EV as a Multiple of:    Reference Range of
Multiples
   Implied Per Share Equity Value

LTM EBITDA

   4.4x – 6.4x    No value

2019E EBITDA

   4.7x – 6.7x    No value

 

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For the purposes of the selected company analysis, PJ Solomon used those historical financial results the Company reported in its most recent public filings as of February 2, 2019, and certain financial forecasts prepared by the Company management for the fiscal year ending February 1, 2020, as described in the section below entitled “Special Factors—Unaudited Projected Financial Information of the CompanySummary of the Post-ESL Bylaw Amendment Projections” beginning on page 56 of this information statement.

Based on PJ Solomon’s professional judgment and after taking into consideration, among other things, the observed data described above, PJ Solomon’s analysis based on the range of implied per share values of the financial metrics considered by PJ Solomon reflected a valuation range for the Company Common Stock that did not reflect any equity value per share taking into account the Company’s net debt of $118.7 million as of May 4, 2019, in each case compared to the $2.25 per share Base Merger Consideration to be received by holders of shares of Company Common Stock in connection with the Merger.

None of the selected companies used in this analysis are identical to the Company. Accordingly, an evaluation of the results of this analysis is not entirely mathematical. Rather, this analysis involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the public trading or other values of the selected companies to which the Company was compared.

Analysis of Selected Precedent Transactions

To analyze the valuation of the per share Base Merger Consideration to be received by holders of shares of Company Common Stock relative to the consideration received by stockholders in other similar transactions, PJ Solomon prepared an analysis of selected precedent transactions.

Using publicly available information, PJ Solomon reviewed retail transactions that were announced over the past nine years. PJ Solomon then used its professional judgment to select the relevant transactions provided in the list below:

 

Month and Year Announced

 

Acquirer

 

Target

June 2017   Monomoy Capital Partners   West Marine, Inc.
October 2016   Sycamore Partners Management, L.P.   Staples, Inc.
November 2016   Cerberus Capital Management, L.P.   Staples, Inc. (European Operations)
October 2016   Bass Pro Group, LLC (d/b/a Bass Pro Shops)   Cabela’s Inc.
August 2016   Steinhoff International Holdings N.V.   Mattress Firm Holding Corp.
July 2016   Freeman Spogli & Co.   Batteries Plus, LLC (d/b/a Batteries Plus Bulbs)
June 2016   Bed Bath & Beyond Inc.   One Kings Lane, Inc.
April 2016   Restoration Hardware Holdings, Inc.   Design Investors WW Acquisition Company, LLC (d/b/a/ Waterworks)
February 2016   Lowe’s Companies, Inc.   RONA inc.
January 2016   KKR & Co. L.P.   Mills Fleet Farm
December 2015   Icahn Enterprises L.P.   The Pep Boys—Manny, Moe & Jack
November 2015   Mattress Firm Holding Corp.   HMK Mattress Holdings LLC
June 2015   GameStop Corp.   Geeknet, Inc.
October 2014   Brentwood Associates   Z Gallerie LLC
June 2014   Sailing Capital Overseas International Fund, LP and Sanpower Group Co., Ltd.   Brookstone Holdings Corp.
February 2014   Signet Jewelers Limited   Zale Corporation

 

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Month and Year Announced

 

Acquirer

 

Target

January 2014   The Home Depot, Inc.   Global Custom Commerce Inc. (d/b/a Blinds.com)
January 2014   Freeman Spogli & Co.   Arhaus, LLC
December 2013   Bain Capital, LLC   Bob’s Discount Furniture Inc.
October 2013   Advance Auto Parts, Inc.   General Parts International, Inc.
September 2013   Jarden Corporation   Yankee Candle Investments LLC
February 2013   Office Depot Inc.   OfficeMax Inc.
November 2012   Northern Tool + Equipment Co.   The Sportsman’s Guide, Inc.
August 2012   CCMP Capital Advisors LLC   Ollie’s Holdings, Inc.
June 2012   Thomas H. Lee Partners, L.P.   Party City Holdings, Inc.
May 2012   Bed Bath & Beyond Inc.   Cost Plus, Inc.
May 2012   Madison Dearborn Partners, LLC   Things Remembered Inc.
May 2012   Golf Town USA Holdings Inc.   Golfsmith International Holdings, Inc.
September 2011   Investcorp Bank B.S.C   Sur La Table Inc.
July 2011   AEA Investors LP   Garden Ridge Corporation
May 2011   Canadian Tire Corp.   Forzani Group Ltd.
November 2010   Ares Management LLC / Freeman Spogli & Co.   Floor and Décor Outlets of America, Inc.

These transactions are referred to herein as the “selected precedent transactions.”

For each of the selected precedent transactions, PJ Solomon calculated and compared the enterprise value implied by the transaction as a multiple of the LTM EBITDA (a “EV/LTM EBITDA Multiple”) of the target company, based on amounts disclosed in public filings, company press releases and other public sources. The results of this analysis reflected a range of EV/LTM EBITDA Multiples of, where sufficient data was publicly available to calculate the multiple, 4.7x to 15.6x for the selected precedent transactions.

Based on PJ Solomon’s professional judgment and after taking into consideration, among other things, the observed data described above, PJ Solomon calculated an illustrative range of implied values per share of Company Common Stock by applying a range of EV/LTM EBITDA Multiples of 7.5x to 12.0x to the Company’s LTM EBITDA of $16 million. This analysis resulted in an illustrative range of implied equity values of $0.07 to $3.24 per share of Company Common Stock, as compared to the $2.25 per share Base Merger Consideration to be received by holders of shares of Company Common Stock in connection with the Merger.

None of the selected precedent transactions used in this analysis are identical to the Merger. Accordingly, an evaluation of the results of this analysis is not entirely mathematical. Rather, this analysis involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the implied equity values or other values of the selected precedent transactions to which the $2.25 per share Base Merger Consideration was compared.

Illustrative Discounted Cash Flow Analysis

PJ Solomon performed an illustrative discounted cash flow analysis of the Company using the Company’s financial forecasts for the period beginning on May 1, 2019 through the fiscal year ending February 4, 2023 and other information and data provided by the Company’s management to calculate the present value of the estimated unlevered after-tax free cash flows projected to be generated by the Company. For purposes of its illustrative discounted cash flow analysis, PJ Solomon utilized a range of terminal value multiples from 4.4x to 6.4x, applied to the Company’s estimated EBITDA for the fiscal year ending February 4, 2023. PJ Solomon derived these terminal values in its professional judgment based on historical trading valuation multiples for the Company and the trading valuation multiples developed by PJ Solomon in its selected companies analysis. The

 

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cash flows and terminal values were then discounted to present value as of May 30, 2019 using various discount rates ranging from 11.0% to 13.0%, which range was selected based on PJ Solomon’s professional judgment and after taking into consideration, among other things, an estimate of the weighted average cost of capital of the Company and certain other companies deemed comparable to the Company by PJ Solomon in its professional judgment.

The estimates of free cash flow for the Company for the period beginning on May 1, 2019 through the fiscal year ending February 4, 2023 were derived by PJ Solomon using the earnings before interest and taxes, or “EBIT,” set forth in the financial forecasts prepared by the Company management for the fiscal year ending February 1, 2020 and the following three fiscal years ending February 4, 2023, as described in the section below entitled “Special Factors—Unaudited Projected Financial Information of the CompanySummary of the Post-ESL Bylaw Amendment Projections” beginning on page 56 of this information statement. Using the EBIT provided in such forecasts and the Company’s projected marginal tax rate, PJ Solomon first calculated tax-effected EBIT for the remainder of 2019 and through 2022. PJ Solomon then added depreciation and amortization estimates set forth in the Company’s forecasts, and subtracted the estimated capital expenditures and changes in net working capital set forth in the Company’s forecasts.

Based on the foregoing, this analysis yielded a range of net present values from $0.00 to $0.87 per share, as compared to the $2.25 per share Base Merger Consideration to be received by holders of shares of Company Common Stock in connection with the Merger.

Other

Although not a basis of PJ Solomon’s opinion, PJ Solomon reviewed for the informational purposes of the Special Committee and the Board of Directors an illustrative supplemental analysis of the historical trading prices and volumes for the Company Common Stock for the 52-week period ended May 30, 2019, the last full trading day before the announcement of the Merger Agreement, including (i) the closing price per share of Company Common Stock as of May 30, 2019, (ii) the closing price per share of Company Common Stock on April 5, 2019, the last full trading day before Transform submitted its indication of interest to acquire the Company on April 6, 2019, (iii) the highest closing price per share of Company Common Stock for the 52-week period ended May 30, 2019, (iv) the lowest closing price per share of Company Common Stock for the 52-week period ended May 30, 2019, (v) the 30-calendar-day volume weighted average price per share of Company Common Stock for the period ended May 30, 2019, (vi) the 60-calendar-day volume weighted average price per share of Company Common Stock for the period ended May 30, 2019, and (vii) the 90-calendar-day volume weighted average price per share of Company Common Stock for the period ended May 30, 2019.

This illustrative analysis indicated that the price per share of Company Common Stock to be paid to holders of shares of Company Common Stock pursuant to the Merger Agreement represented:

 

   

a premium of 2.3% based on the closing price per share of Company Common Stock as of May 30, 2019 of $2.20;

 

   

a premium of 18.4% based on the closing price per share of Company Common Stock as of April 5, 2019 of $1.90;

 

   

a discount of 32.8% based on the closing price per share of Company Common Stock as of September 21, 2018 of $3.35, which was the highest closing price for the 52-week period ended May 30, 2019;

 

   

a premium of 42.4% based on the closing price per share of Company Common Stock as of December 27, 2018 of $1.58, which was the lowest closing price for the 52-week period ended May 30, 2019;

 

   

a premium of 10.3% based on the 30-calendar-day volume weighted average price per share of Company Common Stock for the period ended May 30, 2019 of $2.04;

 

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a premium of 4.7% based on the 60-calendar-day volume weighted average price per share of Company Common Stock for the period ended May 30, 2019 of $2.15; and

 

   

a premium of 6.1% based on the 90-calendar-day volume weighted average price per share of Company Common Stock for the period ended May 30, 2019 of $2.12.

PJ Solomon also analyzed, for the informational purposes of the Special Committee and the Board of Directors and not as a basis of PJ Solomon’s opinion, the enterprise value (which represents the equity value plus book values of total debt, less cash) (“EV”) calculated based on the closing price per share of Company Common Stock as of April 5, 2019. This analysis indicated that the EV of $169.4 million, calculated based on the $2.25 per share Base Merger Consideration to be received by holders of shares of Company Common Stock in connection with the Merger, represented a premium of 4.9% to the EV of $161.5 million based on the closing price per share of Company Common Stock as of April 5, 2019. The historical trading analysis and the enterprise value analysis are supplementary only and were furnished to the Special Committee and the Board of Directors for informational purposes. PJ Solomon did not explicitly estimate the value of the Company Common Stock based on the historical trading analysis or enterprise value analysis and they were not part of PJ Solomon’s financial analyses that support its opinion.

In addition, PJ Solomon also performed, for the informational purposes of the Special Committee and the Board of Directors and not as a basis of PJ Solomon’s opinion, an illustrative supplemental analysis of the premiums paid by acquirers over the public market trading prices in merger and acquisition transactions involving a change of control of the target. The transactions analyzed by PJ Solomon included transactions announced after March 2016 involving target companies with businesses deemed relevant by PJ Solomon.

PJ Solomon performed premiums paid analyses on 100 transactions that it deemed relevant. PJ Solomon calculated, for this period, the premia represented by the prices per share paid in these transactions relative to the target companies’ closing prices per share (a) one day and (b) 30 days prior to announcement (which represented undisturbed trading prices to the extent publicly available and applicable). The overall low to high acquisition premia observed for these transactions were –24.7% to 1,292.3% (with a median of 31.2%) for the one-day premia and –43.6% to 992.5% (with a median of 33.2%) for the 30-day premia.

No transaction utilized in the premiums paid analysis is identical to the Company or to the Merger. In evaluating the precedent transactions, PJ Solomon made judgments and assumptions with regard to industry performance, general business, market and financial conditions and other matters, which are beyond the control of the Company, such as the impact of competition on the business of the Company or the industry generally, industry growth and the absence of any material adverse change in the financial condition of the Company or the industry or in the financial markets in general, which could affect the enterprise value of the transactions to which they are being compared. Mathematical analysis (such as determining the mean) is not in itself a meaningful method of using premiums paid data. The premiums paid analysis is supplementary only and was furnished to the Special Committee for informational purposes. PJ Solomon did not explicitly estimate the value of Company Common Stock based on the premiums paid analysis and it was not part of PJ Solomon’s financial analyses that support its opinion.

Miscellaneous

In arriving at PJ Solomon’s opinion, PJ Solomon performed a variety of financial analyses, including the significant financial analyses summarized above. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not necessarily susceptible to a partial analysis or summary description. In arriving at its opinion, PJ Solomon did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to significance and relevance of each analysis and factor. In addition, PJ Solomon may have given various analyses

 

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and factors more or less weight than other analyses and factors, and may have deemed various assumptions more or less probable than other assumptions. As a result, the ranges of valuations resulting from any particular analysis described above should not be taken to be PJ Solomon’s view of the Company’s actual value. Accordingly, PJ Solomon believes that its analysis must be considered as a whole and that selecting portions of its analysis, without considering all such analyses, could create an incomplete view of the process underlying PJ Solomon’s opinion.

In performing its analyses, PJ Solomon relied on numerous assumptions made by the management of the Company and made judgments of its own with regard to current and future industry performance, general business and economic conditions and other matters, many of which are beyond the control of the Company. Actual values will depend upon several factors, including changes in interest rates, dividend rates, market conditions, general economic conditions and other factors that generally influence the price of securities. The analyses performed by PJ Solomon are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. Such analyses were prepared solely as a part of PJ Solomon’s analysis of the fairness from a financial point of view of the Base Merger Consideration proposed to be paid to the holders of shares of Company Common Stock in connection with the Merger and were provided to the Special Committee and the Board of Directors in connection with the delivery of PJ Solomon’s opinion. The analyses do not purport to be appraisals or necessarily reflect the prices at which businesses or securities might actually be sold, which are inherently subject to uncertainty. Because such analyses are inherently subject to uncertainty, neither the Company nor PJ Solomon, nor any other person, can guarantee that future results or actual values of the Company will not differ materially from those indicated in PJ Solomon’s analyses. With regard to the comparable public company analysis and the precedent transactions analysis summarized above, PJ Solomon selected comparable public companies and precedent transactions on the basis of various factors for reference purposes only; however, no public company or transaction utilized as a comparison is fully comparable to the Company or the Merger. Accordingly, an analysis of the foregoing was not mathematical; rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the comparable companies and other factors that could affect the acquisition or public trading value of the comparable companies and transactions to which the Company and the Merger were being compared.

The per share Base Merger Consideration was determined through negotiations between the Special Committee and Transform, and was recommended by the Special Committee and approved by the Board of Directors. PJ Solomon did not recommend any specific consideration to the Special Committee or the Board of Directors or that any given consideration constituted the only appropriate consideration for the Merger. The decision to enter into the Merger Agreement was solely that of the Special Committee and the Board of Directors. As described above, PJ Solomon’s opinion and analyses were only one of many factors considered by the Special Committee and the Board of Directors in their evaluation of the Merger and should not be viewed as determinative of the views of the Special Committee, the Board of Directors or the Company’s management with respect to the Merger or per share Base Merger Consideration. The issuance of PJ Solomon’s opinion was authorized by PJ Solomon’s fairness opinion committee.

In the past PJ Solomon or its affiliates have provided, currently are providing, and in the future may provide, investment banking and other financial services to the Company, and have received or in the future may receive compensation for the rendering of these services, including services in connection with a potential repurchase of a portion of the Company’s outstanding shares of Company Common Stock or the taking of other actions to maximize shareholder value, and has received compensation for rendering these services. During the two years preceding the date of PJ Solomon’s written opinion, PJ Solomon received or derived, directly or indirectly, approximately $133,000 in the aggregate from the Company for prior strategic advisory services to the Special Committee. Prior to the date of PJ Solomon’s written opinion, PJ Solomon also received the $500,000 in monthly advisory fees described below for services rendered to the Special Committee in connection with the Merger. During the two years preceding the date of PJ Solomon’s written opinion, PJ Solomon had not been engaged by

 

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or received any compensation from ESL, Transform, or their respective affiliates, or, in the case of ESL, its portfolio companies.

Natixis, S.A. (“Natixis”), which holds a majority of the outstanding equity of PJ Solomon, is, together with its affiliates, engaged in advisory, underwriting and financing, principal investing, sales and trading, research, investment management, insurance and other financial and non-financial activities and services for various persons and entities. Natixis and its affiliates and employees, and funds or other entities they manage or in which they invest or have other economic interests or with which they co-invest, may at any time purchase, sell, hold or vote long or short positions and investments in securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments of the Company, Transform, any of their respective affiliates and third parties, including ESL and its affiliates and portfolio companies, or any currency or commodity that may be involved in the Merger.

Under the terms of PJ Solomon’s engagement letter, dated November 13, 2018, as amended on April 4, 2019 and May 28, 2019, the Company has agreed to pay PJ Solomon for its services in connection with the Merger an aggregate fee of $2.0 million, not including any fees that PJ Solomon may earn as a result of the Outlet Sale Process, $500,000 of which has been paid on a monthly basis as an advisory fee, $500,000 of which was payable upon delivery of its opinion and the remainder of which is contingent upon the completion of the Merger. PJ Solomon is also acting as financial advisor to the Special Committee in connection with the Outlet Sale Process and may earn additional fees as a result of the Outlet Sale Process, which fees would be calculated, in the event an Outlet Sale is consummated that satisfies the criteria set forth in the Merger Agreement, based on the value of the aggregate consideration payable by the buyer of the Outlet Segment in the Outlet Sale and would exceed the aggregate fee of $2.0 million payable in connection with the Merger. The Company has also agreed to reimburse PJ Solomon for certain reasonable and out-of-pocket expenses incurred in connection with PJ Solomon’s engagement, and to indemnify PJ Solomon, its affiliates, and its and their respective directors, officers, members, partners, controlling persons, agents and employees against specified liabilities.

Position of the Company on the Fairness of the Merger

Under the SEC rules governing “going private” transactions (the “Going Private Rules”), the Company is required to express its belief as to the substantive and procedural fairness of the Merger to the Company’s “unaffiliated security holders”, as defined under Rule 13e-3 of the Exchange Act (the “Unaffiliated Stockholders”). The Company is making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act.

The Merger is not structured so that approval of a majority of Unaffiliated Stockholders is required and, since the sole member of the Special Committee is an independent and disinterested non-employee director, no unaffiliated representative was retained by or on behalf of the Company to act solely on behalf of the Unaffiliated Stockholders. However, the Company believes that the Merger is fair to the Unaffiliated Stockholders based on:

 

   

the fact that an active and engaged Special Committee composed of an independent and disinterested member of the Board of Directors who did not have a material interest in the potential transaction, determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to and in the best interests of the Company and its stockholders (other than ESL);

 

   

the analyses and conclusions of the Special Committee, including the factors described in the section above entitled “Special Factors—Recommendation of the Special Committee and Reasons for Recommendation” beginning on page 37 of this information statement in reaching that determination;

 

   

the analyses and conclusions of the Board of Directors, including the factors described in the section above entitled “Special Factors—Recommendation of the Board of Directors and Reasons for Recommendation” beginning on page 42 of this information statement and the Board of Directors’ unanimous determination that, among other things, the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to and in the best interests of the Company and its stockholders (other than ESL); and

 

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the financial analyses and opinion of PJ Solomon to the effect that, as of May 31, 2019, and based on and subject to various assumptions and limitations described in its opinion, the $2.25 per share in cash of Base Merger Consideration to be paid to the holders of shares of Company Common Stock (other than ESL or Transform) pursuant to the Merger Agreement was fair from a financial point of view to such holders, as described in the section above entitled “Special Factors—Opinion of PJ Solomon”.

As described above in the sections entitled “Special Factors—Recommendation of the Special Committee and Reasons for Recommendation” the Special Committee considered a number of factors and analyses in its evaluation of the Merger, including the opinion and financial analyses of PJ Solomon as described above in the section entitled “Special Factors—Opinion of PJ Solomon” beginning on page 43 of this information statement, and the value of the Merger Consideration in relation to current and historical market prices of Company Common Stock and in relation the Company’s net book value. In forming its belief, the Company did not consider the liquidation value of the Company given the requirements set forth in the ESL Bylaw Amendment that would need to be complied with in order to effect a liquidation. As described above in the section entitled “Special Factors—Background of the Transaction” beginning on page 17 of this information statement, the Company was considering a liquidation of Company’s Sears Hometown segment, excluding the Buddy’s Home Furnishing Stores (the “Hometown Segment”), as well as its impact on the Company’s value, but determined that proceeding with such a liquidation following the ESL Bylaw Amendment would require the Board of Directors to first comply with the requirements set forth in the ESL Bylaw Amendment, which would require a 30 business day period to elapse between the public announcement of the Board of Directors’ recommendation to liquidate the Hometown Segment and the actual commencement of the liquidation and therefore impose significant execution risk to the successful implementation and completion of the liquidation. The Company also did not consider firm offers made by unaffiliated persons during the last two years, as no such offers were made during that time.

The foregoing information and factors considered and given weight by the Company in reaching its position on the fairness of the Merger include the material factors considered by the Company but are not intended to be exhaustive. The Company did not find it practicable to, and did not, quantify or otherwise attach relative weights to the foregoing factors in reaching its position as to the fairness of the Merger. The Company made its determination after considering all of the foregoing as a whole. The Company believes these factors provide a reasonable basis upon which to form its belief that the Merger is fair to the Unaffiliated Stockholders. This belief should not, however, be construed as a recommendation to any Unaffiliated Stockholder as to whether they should, and the Company is not making any recommendation as to whether any Unaffiliated Stockholder should, exercise their appraisal rights under the DGCL.

Unaudited Projected Financial Information of the Company

The Company does not, on a routine basis, publicly disclose long-term projections as to future financial performance due to, among other reasons, the unpredictability of the underlying assumptions and estimates. However, the Company’s senior management provided certain non-public, unaudited prospective financial information (as described more fully below in the sections entitled “Summary of the Pre-ESL Bylaw Amendment Projections” and “Summary of the Post-ESL Bylaw Amendment Projections” beginning on pages 55 and 56, respectively, of this information statement) prepared by it to PJ Solomon in connection with its financial analyses. Certain information substantially similar to that contained in the Pre-ESL Bylaw Amendment Projections (as defined below) and the Post-ESL Bylaw Amendment Projections (as defined below) was also made available to Transform and its representatives in connection with its evaluation of potential transactions with the Company and pursuant to the Company’s obligations under the financing cooperation covenants in the Merger Agreement (as described more fully below in the sections entitled “Summary of the Transform Projections” and “Summary of the June 2019 Projections” beginning on pages 56 and 57, respectively, of this information statement). The projections summarized in this section are generally referred to as the “projections”.

The projections were not prepared with a view to public disclosure and are included in this information statement only because such information was made available to PJ Solomon and Transform as described above. The

 

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projections were not prepared with a view to compliance with generally accepted accounting principles as applied in the United States (which we refer to as “GAAP”), the published guidelines of the SEC regarding projections and forward-looking statements or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. The prospective financial information included in this information statement has been prepared by, and is the responsibility of, the Company’s senior management, and is subjective in many respects. The projections were, in the view of the Company’s senior management, prepared on a reasonable basis, reflected the best available estimates and judgments at the time of preparation, and presented as of the time of preparation, to the best of senior management’s knowledge and belief, the expected course of action and the expected future financial performance of the Company on a standalone basis, subject to the assumptions and limitations described in this section. Furthermore, neither the Company’s independent auditors nor any other independent accountants have audited, reviewed, examined, compiled or applied agreed-upon procedures with respect to the accompanying prospective financial information and, accordingly, assume no responsibility for, and express no opinion or other form of assurance on, such information or its achievability.

The projections are forward-looking statements. Although summaries of the projections are presented with numerical specificity, the projections reflect numerous assumptions and estimates as to future events made by the Company’s senior management, which they believe were reasonable at the time the projections were prepared, taking into account the relevant information available to management at such time. However, this information is not fact and should not be relied upon as being necessarily predictive of actual future results. Important factors may affect actual results and cause the forecasts not to be achieved. These factors include general economic conditions, accuracy of certain accounting assumptions, timing of business investments by the Company, changes in actual or projected cash flows, competitive pressures, changes in tax or other laws or regulations, and the other factors described in the section entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 78 of this information statement, the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019 and any subsequent Quarterly Reports on Form 10-Q, and the information referenced in the section entitled “Where You Can Find Additional Information” beginning on page 119 of this information statement. Generally, the further out the period to which the projections relate, the less predictable and more unreliable the information becomes. In addition, the projections do not take into account any circumstances or events occurring after the date that the projections were prepared. Furthermore, except in the case of the June 2019 Projections (as described more fully below in the section entitled “Summary of the June 2019 Projections” beginning on page 57 of this information statement), the projections were prepared on a standalone basis without giving effect to the Merger, including the impact of negotiating or executing the Merger Agreement, the expenses that may be incurred in connection with consummating the Merger, including the expenses payable pursuant to the Merger Agreement, the potential synergies that may be achieved as a result of the Merger, or the effect of any business or strategic decision or action that has been or will be taken as a result of the Merger Agreement. As a result, there can be no assurance that the projections will be realized, and actual results may be materially better or worse than those contained in the projections. The inclusion of this information in this information statement should not be regarded as an indication that the Company’s senior management, the Special Committee, the Board of Directors, PJ Solomon, Transform or any other recipient of this information considered, or now considers, the projections to be material information of the Company, or necessarily predictive of actual future results, nor should it be construed as financial guidance, and it should not be relied upon as such. The summary of the projections is not included in this information statement in order to influence any stockholder to make any investment decision with respect to the Merger, including whether or not to seek appraisal rights with respect to the shares of Company Common Stock.

The projections should be evaluated, if at all, in conjunction with the historical financial statements and other information regarding the Company contained in the Company’s public filings with the SEC. The Post-ESL Bylaw Amendment Projections were reviewed by the Company’s senior management with, and considered by, the Special Committee and the Board of Directors in connection with their evaluation and approval of the Merger and were relied upon by PJ Solomon for purposes of its financial analyses and opinion, as described more fully in the sections entitled “Special Factors—Recommendation of the Special Committee and Reasons for

 

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Recommendation” beginning on page 37 of this information statement, “Special Factors—Recommendation of the Board of Directors and Reasons for Recommendation” beginning on page 42 of this information statement and “Special Factors—Opinion of PJ Solomon” beginning on page 43 of this information statement.

Except to the extent required by applicable federal securities laws, we do not intend, and expressly disclaim any responsibility to update or otherwise revise the forecasts to reflect circumstances existing after the date when we prepared the projections or to reflect the occurrence of future events or changes in general economic or industry conditions, even in the event that any of the assumptions underlying the projections are shown to be in error. We can give no assurance that, had our projections been prepared either as of the date of the Merger Agreement or as of the date of this information statement, similar estimates and assumptions would be used. Neither the Company nor any of its affiliates, directors, officers, advisors or other representatives has made or makes any representation to any of our stockholders or any other person regarding the ultimate performance of the Company compared to the information contained in our projections or that our projections will be achieved.

In light of the foregoing factors and the uncertainties inherent in the projections, stockholders are cautioned not to rely on the projections included in this information statement.

Certain of the measures included in the projections may be considered non-GAAP financial measures. These non-GAAP financial measures are useful to investors and management in understanding current profitability levels and liquidity that may serve as a basis for evaluating future performance and facilitating comparability of results. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-GAAP financial measures as used by the Company may not be comparable to similarly titled amounts used by other companies. The non-GAAP financial measures used in the projections were relied upon by PJ Solomon for purposes of its financial analyses and, in the case of the Post-ESL Bylaw Amendment Projections, its opinion.

Summary of the Pre-ESL Bylaw Amendment Projections

Subject to the foregoing qualifications, the following is a summary of the projections (the “Pre-ESL Bylaw Amendment Projections”) prepared by senior management of the Company prior to the ESL Bylaw Amendment to reflect a liquidation of the Hometown Segment and continued operation of the Outlet Segment by the Company and provided to PS Solomon for the three fiscal years ending January 31, 2019, January 31, 2020 and January 31, 2021:

 

     Pro-Forma
Hometown
Segment
Liquidation
     Pro-Forma Outlet
Segment Only
 
($ in millions)    2019      2020     2021  

Net Sales

     716.3        476.6       478.8  

EBITDA(1)

     (37.3      26.3       27.1  

EBIT(2)

     (56.4      21.8 (4)      22.3  

Net Income

     (65.4      19.7 (5)      21.2  

Adjusted EBITDA(3) (4)

     29.3        26.3 (6)      27.1  

Cash

     4.3        4.4       16.3  

Total Debt

     18.7        6.2       —    

Capital Expenditures

     (1.5      (5.6     (5.6

Change in Net Working Capital

     (148.5      6.0       2.3  

 

(1)

EBITDA is net (loss) income from continuing operations adjusted for interest, taxes, depreciation and amortization.

(2)

EBIT is net (loss) income from continuing operations adjusted for interest and taxes.

 

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(3)

Adjusted EBITDA is EBITDA adjusted to exclude certain significant items, including information technology transformation investments and the accelerated closure of underperforming stores.

(4)

Adjusted EBITDA was referred to as “Pro Forma EBITDA” in the Pre-ESL Bylaw Amendment Projections.

Summary of the Transform Projections

Certain information substantially similar to that contained in the Pre-ESL Bylaw Amendment Projections was also provided or made available to Transform on April 1, 2019 (“Version 1”) and on April 11, 2019 (“Version 2” and, together with Version 1, the “Transform Projections”) to reflect a liquidation of the Hometown Segment and continued operation of the Outlet Segment for the fiscal years ending January 31, 2019, January 31, 2020 and January 31, 2021. The Transform Projections can be summarized as follows:

 

     Version 1      Version 2  
($ in millions)    2019     2020      2020     2021  

Net Sales

     NP (3)      515.2        476.6 (4)      480.0  

EBITDA(1)

     NP       26.3        26.3       26.8  

Adjusted EBITDA(2)

     NP       26.3        26.3       26.8  

Net Income

     NP       20.2        19.6       20.9  

Cash

     4.3       4.3        NP       NP  

Debt

     18.7       2.7        NP       NP  

 

(1)

EBITDA is net (loss) income from continuing operations adjusted for interest, taxes, depreciation and amortization.

(2)

Adjusted EBITDA is EBITDA adjusted to exclude certain significant items, including information technology transformation investments and the accelerated closure of underperforming stores.

(3)

“NP” is used here to note that a particular line item was not included in the applicable projections.

(4)

The $38.6 million difference in 2020 Net Sales between Version 1 and Version 2 is primarily due to an external presentation of sales in Version 1 compared to an internal presentation of sales in Version 2. Internal sales only include merchandise sales. External sales also include non-merchandise revenues for items such as protection agreements and delivery. The gross margins on these non-merchandise revenues are included in both versions of the Transform Projections resulting in similar Adjusted EBITDA.

Summary of the Post-ESL Bylaw Amendment Projections

Subject to the foregoing qualifications, the following is a summary of the projections (the “Post-ESL Bylaw Amendment Projections”) prepared by senior management of the Company following the ESL Bylaw Amendment and provided to PJ Solomon prior to the execution of the Merger Agreement for the four fiscal years ending January 31, 2019, January 31, 2020, January 31, 2021 and January 31, 2022, representing the continued operation of the Company’s Outlet Segment and Hometown Segment:

 

($ in millions)    2019      2020      2021     2022  

Net Sales

     1,087.1        960.6        849.3       746.8  

Adjusted EBITDA(1)

     8.5        11.1        13.1       14.6  

EBIT(2)

     (15.9      (3.9      1.0       3.1  

Net Income

     (29.5      (14.7      (8.7     (5.7

Cash

     8.6        9.9        8.8       7.8  

Total Debt

     116.9        104.2        92.3       78.6  

Capital Expenditures

     (6.7      (5.7      (5.5     (5.2

Change in Net Working Capital

     (22.2      (24.8      (17.0     (16.2

 

(1)

Adjusted EBITDA is EBITDA adjusted to exclude certain significant items, including information technology transformation investments and the accelerated closure of underperforming stores.

(2)

EBIT is net (loss) income from continuing operations adjusted for interest and taxes.

 

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Summary of the June 2019 Projections

In connection with the Company’s obligations under the financing cooperation covenants in the Merger Agreement, Transform requested and the Company provided certain updated projected financial information from the Company in June 2019 after execution of the Merger Agreement. Subject to the foregoing qualifications, the following is a summary of the projections (the “June 2019 Projections”) prepared by senior management of the Company pursuant to such request for the three fiscal years ending January 31, 2019, January 31, 2020 and January 31, 2021, representing the continued operation of the Company’s Outlet Segment and Hometown Segment:

 

($ in millions)    2019      2020     2021  

Sales

     1,049.6        939.6       855.6  

Gross Margin

     338.3        326.7       311.6  

EBITDA(1)

     (11.9      22.2       24.3  

Adjusted EBITDA(2)

     9.1        23.5 (3)      25.5 (4) 

Net Income

     (34.5      3.0       7.3  

Cash

     8.6        8.0       7.7  

Debt

     100.6        79.4       57.1  

 

(1)

EBITDA is net (loss) income from continuing operations adjusted for interest, taxes, depreciation and amortization.

(2)

Adjusted EBITDA is EBITDA adjusted to exclude certain significant items, including information technology transformation investments and the accelerated closure of underperforming stores.

(3)

The difference in 2020 Adjusted EBITDA between the Post-ESL Bylaw Amendment Projections and the June 2019 Projections was due in part to the following changes in assumptions: a $5.3 million reduction in corporate overhead resulting from the Company no longer being a public reporting company; the expected receipt of $3.3 million in additional cash discounts from Transform following announcement of the Merger; and $3.4 million in freight and service provider savings identified based on requests for proposals received following execution of the Merger Agreement.

(4)

The difference in 2021 Adjusted EBITDA between the Post-ESL Bylaw Amendment Projections and the June 2019 Projections was due in part to the following changes in assumptions: a $5.3 million reduction in corporate overhead resulting from the Company no longer being a public reporting company; the expected receipt of $3.5 million in additional cash discounts from Transform following announcement of the Merger; and $3.5 million in freight and service provider savings identified based on requests for proposals received following execution of the Merger Agreement.

Position of ESL on the Fairness of the Merger

Under the Going Private Rules, each of Edward S. Lampert, ESL Partners, L.P. (“Partners”), RBS Partners, L.P. (“RBS”), ESL Investments, Inc. (“ESL Investments”), Merger Subsidiary and Transform (together the “ESL Filing Parties”) is an affiliate of the Company and, therefore, is required to express its belief as to the substantive and procedural fairness of the Merger to the Unaffiliated Stockholders. Each of the ESL Filing Parties is making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act.

The ESL Filing Parties believe that the Merger is fair to the Unaffiliated Stockholders on the basis of the factors described in the sections entitled “Special Factors—Recommendation of the Special Committee and Reasons for Recommendation,” “Special Factors—Recommendation of the Board of Directors and Reasons for Recommendation and Special Factors—Position of the Company on the Fairness of the Merger” beginning on pages 37, 42 and 52, respectively, of this information statement, which factors, other than any factors to the extent related to the Special Committee’s and Board of Directors’ belief that a liquidation of the Company’s Hometown Segment and continued operation of the Company’s Outlet Segment as an independent, standalone public company constituted the best strategic alternative for the Company and its stockholders or that the ESL Bylaw

 

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Amendment resulted in a reduction in the standalone value of the Company, which factors the ESL Filing Parties disagree with, the ESL Filing Parties agree with and adopt, and the additional factors described below.

The ESL Filing Parties also believe that the interests of the Unaffiliated Stockholders were represented by the Special Committee, which negotiated the terms and conditions of the Merger Agreement on behalf of the Unaffiliated Stockholders with the assistance of its independent legal and financial advisors. None of the ESL Filing Parties participated in the deliberations of the Special Committee regarding, or received advice from the Special Committee’s independent legal or financial advisors as to, the substantive or procedural fairness of the Merger. The ESL Filing Parties have not performed, or engaged a financial advisor to perform, any valuation or other analysis for the purpose of assessing the fairness of the Merger to the Unaffiliated Stockholders. No ESL Filing Party received any report, opinion or appraisal from any outside party materially related to the Merger, including any report, opinion or appraisal relating to the fairness of the Merger Consideration to the Unaffiliated Stockholders or to the ESL Filing Parties.

Based on the ESL Filing Parties’ knowledge and analysis of available information regarding the Company, as well as discussions with members of the Company’s senior management regarding the Company and its business and the factors considered by, and findings of, the Board of Directors and the Special Committee described in the sections entitled “Special Factors—Recommendation of the Special Committee and Reasons for Recommendation,” “Special Factors—Recommendation of the Board of Directors and Reasons for Recommendation and Special Factors—Position of the Company on the Fairness of the Merger” beginning on pages 37, 42 and 52, respectively, of this information statement (which findings, other than any findings to the extent related to the Special Committee’s and Board of Directors’ belief that a liquidation of the Company’s Hometown Segment and continued operation of the Company’s Outlet Segment as an independent, standalone public company constituted the best strategic alternative for the Company and its stockholders or that the ESL Bylaw Amendment resulted in a reduction in the standalone value of the Company, which findings the ESL Filing Parties disagree with, the ESL Filing Parties agree with and adopt), the ESL Filing Parties believe that the Merger is substantively fair to the Unaffiliated Stockholders. In particular, the ESL Filing Parties considered the following:

 

   

the fact that the Board of Directors determined, after careful consideration and acknowledging the interest of ESL in the Merger, by the unanimous vote of all members of the Board of Directors, based in part on the unanimous recommendation of the Special Committee, that the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to and in the best interests of the Company and its stockholders (other than ESL);

 

   

the fact that the Base Merger Consideration of $2.25 per share of Company Common Stock represents a premium of approximately 23.6% to the volume weighed average price of the Company Common Stock for the five trading days through April 5, 2019, the last trading day prior to ESL making a proposal to acquire all of the outstanding Company Common Stock not already owned by ESL;

 

   

the fact that by making a public offer contemplating merger consideration of $2.25 per share, ESL effectively created a market for the Company that would have allowed a third party that believed the Company was undervalued at this price to make a bid at a higher valuation, yet no third party did so;

 

   

the fact that the Board of Directors was seriously considering the possibility of liquidating the Hometown Segment prior to adoption of the ESL Bylaw Amendment, which liquidation the ESL Filing Parties believe would have significantly diminished the Company’s value and prospects and created significant risks should the recent operational profit improvements of the Company’s Outlet Segment prove ephemeral;

 

   

the fact that the ESL Filing Parties do not believe the Company was likely to realize the value from a liquidation of the Hometown Segment contemplated to be realized in the Transform Projections and believe the Merger provides greater value for the Hometown Segment than the Company would have been likely to realize through a liquidation of that business;

 

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the ESL Filing Parties’ belief that the Merger Agreement permits the Company to obtain the highest value available for the Outlet Segment through an Outlet Sale and the fact that, if an Outlet Sale is consummated prior to the closing of the Merger, the Company’s Unaffiliated Stockholders will receive their pro rata share of any Net Proceeds of the Outlet Sale in excess of $97,500,000;

 

   

the fact that the consideration to be paid in the Merger is all cash, providing the Unaffiliated Stockholders with certainty of value and liquidity for their Company Common Stock, eliminating any uncertainty in valuing the consideration to be received by such stockholders and allowing such stockholders to avoid exposure to the risks and uncertainties relating to the prospects of the Company;

 

   

the ESL Filing Parties’ view that there are no unusual requirements or conditions to the Merger, and the fact that ESL Investments entered into a commitment letter pursuant to which it committed, subject to the terms and conditions set forth therein, to contribute approximately $21,000,000 to Transform to be used by Transform to pay the Merger Consideration, each increasing the likelihood that the Merger will be consummated and that the Merger Consideration to be paid to the Unaffiliated Stockholders in the Merger will be received; and

 

   

the fact that the transaction will provide value to Unaffiliated Stockholders in excess of the ESL Filing Parties’ calculation of the Company’s historic trading price to book value ratio (which the ESL Filing Parties’ calculated to be approximately 12% to 45% over the four fiscal years ending February 2, 2019) based on the ESL Filing Parties’ calculation of the Merger Consideration to book value ratio of approximately 48% measuring the Company’s book value per share as of May 4, 2019.

Other than in connection with evaluating the potential impact of a liquidation of the Company’s Hometown Segment, the ESL Filing Parties did not consider liquidation value as a factor because they consider the Company to be a viable going concern business and the trading history of the Company Common Stock to generally be an indication of its value as such and they have no present intention to liquidate the Company.

The ESL Filing Parties believe that the Merger is procedurally fair to the Unaffiliated Stockholders based upon the following:

 

   

other than their receipt of board and Special Committee fees (which are not contingent upon the consummation of the Merger or the Special Committee’s or the Board of Directors’ recommendation or approval of the Merger) and their interests described in the section entitled “Special Factors—Interests of Directors and Executive Officers in the Merger” beginning on page 67 of this information statement, no member of the Special Committee or the Board of Directors has a financial interest in the Merger that is different from, or in addition to, the interests of the Unaffiliated Stockholders generally, although the Merger Agreement does include customary provisions for the right to continued indemnification and directors’ and officers’ liability insurance for the Company’s directors and officers by the surviving corporation for events occurring prior to the effective time of the Merger;

 

   

the interests of the Company’s Unaffiliated Stockholder were represented by the Special Committee, currently consisting solely of a director who is not an officer or employee of the Company and who is not affiliated with the ESL Filing Parties, and the Special Committee was given exclusive authority, among other things, to review, consider, evaluate, negotiate, reject or recommend or not recommend to the Board of Directors a potential negotiated transaction involving the Company and Transform, or any alternative potential transactions;

 

   

the Special Committee retained its own independent legal and financial advisors;

 

   

the Special Committee was deliberate in its process, concluding that a transaction on the terms contemplated by Transform’s April 5, 2019 proposal would not have been in the best interests of the Unaffiliated Stockholders and communicating that conclusion to representatives of Transform, and subsequently extensively negotiating the terms of the Merger Agreement with Transform, including negotiating for the right of the Company to have the opportunity to pursue the Outlet Sale prior to the consummation of the Merger and the Merger Consideration to be subject to an upward adjustment in

 

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the event that an Outlet Sale that satisfies certain criteria specified in the Merger Agreement is completed prior to the closing of the Merger;

 

   

the Special Committee and the Board of Directors received the opinion of PJ Solomon to the effect that, and based upon and subject to the factors and assumptions and limitations set forth therein, as of May 31, 2019, the Base Merger Consideration to be paid to the Unaffiliated Stockholders pursuant to the Merger Agreement is fair from a financial point of view to such holders;

 

   

the Company’s entry into the Merger Agreement was approved by the unanimous vote of the Board of Directors, after careful consideration and acknowledging the interest of ESL in the Merger, based in part on the unanimous recommendation of the Special Committee; and

 

   

the fact that appraisal rights are available to the Unaffiliated Stockholder who comply with all of the required procedures under the DGCL for exercising appraisal rights, which allows such stockholders to seek appraisal of the “fair value” of their Company Common Stock in lieu of receiving the Merger Consideration.

The foregoing discussion of the information and factors considered and given weight by the ESL Filing Parties in connection with the fairness of the Merger is not intended to be exhaustive but is believed to include the material factors considered by them. The ESL Filing Parties did not find it practicable to, and did not, quantify or otherwise attach relative weights to the foregoing factors in reaching their position as to the fairness of the Merger. Rather, the ESL Filing Parties made the fairness determinations after considering all of the foregoing as a whole. The ESL Filing Parties believe these factors provide a reasonable basis upon which to form their belief that the Merger is fair to the Unaffiliated Stockholders. This belief should not, however, be construed as a recommendation to any Unaffiliated Stockholder as to whether they should, and the ESL Filing Parties do not make any recommendation as to whether any Unaffiliated Stockholder should, exercise their appraisal rights under the DGCL.

Purposes and Reasons of the Company in Connection With the Merger

Under the Going Private Rules, the Company is required to express to the Unaffiliated Stockholders its purposes and reasons for entering into a “going private” transaction as well as the reasons for the structure of such transaction and benefits and detriments of such transaction to the Company, its affiliates and the Unaffiliated Stockholders. The Company is making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act.

The Company’s purpose for engaging in the Merger is to provide certain value and liquidity to the Unaffiliated Stockholders in the form of the Merger Consideration which, if equal to the Base Merger Consideration of $2.25 per share of Company Common Stock, will represent a premium of 2.3% to the closing price per share of Company Common Stock as of May 30, 2019 of $2.20, a premium of 18.4% to the closing price per share of Company Common Stock as of April 5, 2019 (the last trading day prior to the Company’s announcement that it had received a proposal from Transform to acquire the Company) of $1.90, a discount of 32.8% to the closing price per share of Company Common Stock as of September 21, 2018 of $3.35 (the highest closing price per share of Company Common Stock for the 52-week period ended May 30, 2019), a premium of 42.4% to the closing price per share of Company Common Stock as of December 27, 2018 of $1.58 (the lowest closing price per share of Company Common Stock for the 52-week period ended May 30, 2019), a premium of 10.3% to the 30-day volume weighted average price per share of Company Common Stock for the period ended May 30, 2019 of $2.04, a premium of 4.7% to the 60-day volume weighted average price share of Company Common Stock for the period ended May 30, 2019 of $2.15 and a premium of 6.1% to the 90-day volume weighted average price per share of Company Common Stock for the period ended May 30, 2019 of $2.12. In addition, the Base Merger Consideration of $2.25 per share of Company Common Stock will be increased if an Outlet Sale satisfying the criteria specified in the Merger Agreement is completed prior to the closing of the Merger and such Outlet Sale results in Net Proceeds in excess of $97,500,000.

 

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The Company has determined to engage in the Merger based on the conclusions, determinations and reasons of the Special Committee, the Board of Directors and the Company as described in detail above in the sections entitled “Special Factors—Recommendation of the Special Committee and Reasons for Recommendation”, “Special Factors—Recommendation of the Board of Directors and Reasons for Recommendation” and “Special Factors—Position of the Company on the Fairness of the Merger” beginning on pages 37, 42 and 52, respectively, of this information statement. In addition, the Company believes that structuring the transaction as a one-step merger transaction that has been approved by the Principal Stockholders by the Written Consent will provide certain timing and deal certainty advantages to allow the Unaffiliated Stockholders to receive cash for their Company Common Stock in the form of the Merger Consideration.

Purposes and Reasons of the ESL Filing Parties in Connection With the Merger

Under the Going Private Rules, each of the ESL Filing Parties is an affiliate of the Company and, therefore, is required to express to the Unaffiliated Stockholders their purposes and reasons for entering into a “going private” transaction as well as the reasons for the structure of such transaction and benefits and detriments of such transaction to the Company, its affiliates and the Unaffiliated Stockholders. Each of the ESL Filing Parties is making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act.

Purposes of and Reasons for the Merger

For the ESL Filing Parties, the purpose of the Merger is to reunite Sears and Kmart, which Transform operates through its subsidiaries, with the Company, which was spun off from Sears Holdings Corporation, the former parent company of Sears and Kmart, in 2012. Having these businesses under common ownership will accelerate Transform’s strategy of growing its smaller store format by adding Sears Hometown stores. It will also expand Transform’s footprint as a multi-channel business that can serve customers through a variety of shopping experiences to meet their needs, provide growth for Transform’s marquee brands, including KENMORE® and DIEHARD®, and increase opportunities for Sears Home Services and Financial Services businesses, as well as the Shop Your Way® social shopping destination and rewards program. The ESL Filing Parties also believe the Merger will provide certain value and liquidity to the Unaffiliated Stockholders, as well as a considerable premium to the market price of the Company Common Stock prior to the Company’s announcement that it had received an acquisition proposal from Transform, and will also provide the Unaffiliated Stockholders with an overall outcome that is superior to either the continuation of the Company as a standalone basis or the liquidation of the Hometown Segment, which was contemplated by the Board of Directors prior to the ESL Bylaw Amendment (see the section entitled “Special Factors—Background of the Transaction” beginning on page 17 of this information statement). In addition, by delisting the Company Common Stock from the NASDAQ and de-registering the Company Common Stock under the Exchange Act, the Company will be relieved of many of the burdens and constraints imposed on public companies. Most importantly, the Company and its management will be able to focus on long-term operational and growth objectives, rather than meeting the short-term results expectations of the public equity markets and the investment community. In addition, the Company will no longer have the competitive disadvantage of being obligated to publicly disclose its business strategies. Moreover, by eliminating publicly held equity, the Company will be able to reduce its regulatory and compliance costs and expenses.

Reasons for the Structure of the Merger

The ESL Filing Parties believe that structuring the transaction as a one-step merger transaction is preferable to other transaction structures because (i) it will enable Transform to acquire all of the outstanding Company Common Stock held by the Unaffiliated Stockholders at the same time and (ii) it represents an opportunity for the Unaffiliated Stockholders to receive cash for their shares of Company Common Stock in the form of the Merger Consideration. Additionally, the Principal Stockholders own a sufficient number of shares of Company Common Stock to have approved the Merger Agreement and the Merger on behalf of the holders of shares of Company Common Stock by executing the Written Consent without the need to solicit the approval of the

 

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Unaffiliated Stockholders, which provides greater deal certainty. Further, the ESL Filing Parties believe that structuring the transaction as a tender offer followed by a second-step merger transaction would not provide any timing or other benefits given the Company’s pursuit of the Outlet Sale prior to the consummation of the Merger. In addition, the ESL Filing Parties did not ultimately pursue an acquisition of the assets of the Company’s Hometown Segment by Transform as the ESL Filing Parties believed that the continued operation of the Company as a public company owning only the Outlet Segment to be risky, based on the scale of the Outlet Segment, the cost structure of the remaining company and fluctuations in the operating performance that the Outlet Segment had experienced over its history.

Plans for the Company in Connection with the Merger

Under the Going Private Rules, the Company and the ESL Filing Parties are also required to disclose to the Unaffiliated Stockholders any plans, proposals or negotiations that relate to or would result in the occurrence of certain events in connection the “going private” transaction, including extraordinary transactions, sales of material amounts of the assets of the Company, material changes to dividend policy of the Company, any changes to the present Board of Directors of the Company and other material changes in the corporate structure or business of the Company.

As a result of the Merger, the Company Common Stock will be delisted from the NASDAQ Stock Market (and no longer be publicly traded) and will be de-registered under the Exchange Act, with the result that the Company will no longer file periodic and other reports with the SEC. Prior to the consummation of the Merger, the ESL Filing Parties expect the Principal Stockholders to contribute their shares of Company Common Stock to Transform in exchange for equity of Transform so that, following the consummation of the Merger, the Company will become a wholly owned subsidiary of Transform. Following the consummation of the Merger, the Board of Directors will be replaced in its entirety. In addition, subject to compliance with certain requirements under Transform’s existing credit facilities, the ESL Filing Parties expect Transform’s existing subsidiaries and the Company to leverage each other’s commercial and other relationships for their mutual benefit following the consummation of the Merger. Additionally, the ESL Filing Parties expect Transform to review the Company and its assets, corporate structure, capitalization, operations, properties, policies, management and personnel to determine what changes, if any, would be desirable following the Merger in order to best organize and realize synergies from the ongoing activities of Transform’s existing subsidiaries and the Company. The ESL Filing Parties expressly reserve the right to make any changes that they deem necessary or appropriate in light of Transform’s review of the Company or in light of future developments. In addition, the ESL Filing Parties regularly review acquisition and other opportunities and may pursue such opportunities when appropriate.

Except for the delisting and de-registration of the Company Common Stock, the potential sale of the Outlet Segment, the potential business changes described in the preceding paragraph and other matters described in this information statement, neither the Company nor the ESL Filing Parties have, and are not aware of, any current plans, proposals or negotiations that relate to or would result in any extraordinary transactions, sales of material amounts of assets of the Company, material changes to dividend policy of the Company, any changes to the present board of directors of the Company, and other material changes in the corporate structure or business of the Company.

Alternatives to the Merger

As described above in the section entitled “Special Factors—Background of the Transaction” beginning on page 17 of this information statement, prior to transaction discussions with Mr. Lampert and Transform, the Board of Directors was in the process of reviewing and considering various strategic alternatives to address the declining operating performance and deteriorating financial condition of the Company’s Hometown Segment, including via a liquidation of the Company’s Hometown Segment.

In response to the April 5, 2019 proposal from Transform to acquire the Company, the Special Committee continued to review, consider and prepare for potential alternative transactions (including a Company

 

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Transaction that would include a contingent value right feature, and a Hometown Transaction) and strategic alternatives (including a liquidation of the Hometown Segment, which Company senior management had concluded would be the best alternative for the Company and its stockholders in the absence of a transaction with Mr. Lampert on terms approved by the Special Committee). The Special Committee considered the risks and potential likelihood of achieving greater value for the Unaffiliated Stockholders by pursuing such strategic alternatives, relative to the benefits of a Company Transaction or a Hometown Transaction and, eventually, the Merger. In this regard, the Special Committee took into account the requirements imposed with respect to the Company’s ability to pursue certain strategic alternatives, including a liquidation of its Hometown Segment, as a result of the ESL Bylaw Amendment. The Special Committee also considered the fact that no third party approached or made any contact with the Company or its representatives regarding a potential acquisition of the Company from April 8, 2019 (the date the Company publicly announced that it had received an acquisition proposal from Transform) until May 31, 2019 (the date the Special Committee approved the Merger Agreement). For more information on the process behind the Special Committee’s determination, see the sections entitled “Special Factors—Background of the Transaction”, “Special Factors—Recommendation of the Special Committee and Reasons for Recommendation” and “Special Factors—Recommendation of the Board of Directors and Reasons for Recommendation” beginning on pages 17, 37 and 42, respectively, of this information statement.

As discussed above under the sections entitled “Special Factors—Background of the Transaction” and “Special Factors—Recommendation of the Special Committee and Reasons for Recommendation” beginning on pages 17 and 37, respectively, of this information statement, the April 5, 2019 proposal from Transform constituted the only firm offer to acquire the Company that the Company received during the last two years.

Relationships and Transactions with Related Persons

Description of Relationships and Transactions

As described in more detail in the Company’s Definitive Proxy Statement for the Company’s 2019 annual meeting of stockholders, the Company has significant business relationships with Transform resulting from a number of commercial agreements that were initially executed between the Company and certain Sears Holdings Companies in connection with the separation of the Company from Sears Holdings Corporation in 2012 and subsequently assigned by such Sears Holdings Companies to, and assumed by, Transform (the “Operative Agreements”). The descriptions and summaries of the Operative Agreements contained in this section are qualified in their entirety by the actual text of the underlying agreements and amendments that are included as exhibits to the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2019. References below to Transform are to Transform in its capacity as assignee of the applicable Sears Holding Companies under the Operative Agreements.

Pursuant to the Operative Agreements, and subject to certain requirements and restrictions as are detailed therein, the Company and Transform have agreed, among other things, to the following:

 

   

the grant to the Company of (1) an exclusive, royalty-free, non-transferable and terminable license to operate, and to authorize Company dealers and franchisees to operate, retail stores and stores-within-a-store using the “Sears Outlet Store,” “Sears Authorized Hometown Store,” “Sears Home Appliance Showroom” and “Sears Hardware Store” store names through which the products provided by Transform may be sold, (2) an exclusive, royalty-free, non-transferable and terminable license to use the store names to promote the Company’s products, and services, which services were in existence as of the effective date, related to the Company’s products provided by Transform, by all future electronic means, channels, processes and methods, including via the internet, (3) a non-exclusive, royalty-free, non-transferable and terminable license to use, and to authorize Company dealers and franchisees to use, other trademarks and sell services related to the Company’s products under those trademarks, (4) an exclusive, royalty-free, non-transferable and terminable license to use certain domain names owned by Transform in connection with the promotion of the Company’s stores, the marketing, distribution and sale of the Company’s products, and the marketing

 

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and offering of services, which services were in existence as of the effective date, related to the Company’s products, (5) the right to use the store names to sell the Company’s branded products by all digital methods that are owned or operated by Transform and Kmart Corporation including the website for the Outlet Segment, (6) an exclusive license to use certain domain names and (7) a “springing” license upon termination of the underlying agreement to operate searsoutlet.com on web properties other than those owned or operated by Transform to promote and sell certain products in the United States, its incorporated territories and Bermuda until February 1, 2020;

 

   

the grant to the Company of (1) a royalty-free license to use the Sears trademark as part of the Company’s corporate name in the United States and to promote the Company’s businesses and (2) a fully paid-up license to use the searshometownandoutlet.com and ownasearsstore.com domain names solely to promote the Company’s businesses;

 

   

the sale by Transform to the Company of Sears-branded products and vendor-branded products obtained from Transform’s vendors and suppliers and the grant by Transform to the Company of licenses to use the trademarks owned by Transform in connection with the marketing and sale of products sold under such trademarks and the payment of fees and weekly royalties by the Company to Transform in connection therewith;

 

   

the provision by Transform to the Company of, and the payment of fees by the Company to Transform for, certain specified tax, accounting, procurement, risk management and insurance, advertising (including online services), loss prevention, logistics and distribution, information technology (including point-of-sale systems for all of the Company’s stores), payment clearing, and other financial, real estate management, merchandise-related and other support services;

 

   

the Company’s participation in the Shop Your Way Rewards Retail program under which Transform issues rewards points to program members when they purchase program-eligible merchandise and services from the Company’s stores and, for each qualifying purchase, the Company will pay the program a fee equal to an agreed percentage of the qualifying purchase for base points issued and for bonus points issued, if any, Transform will (1) authorize the Company to redeem points for program members as part or all of the purchase prices paid by program members when they make qualifying purchases from Company stores and (2) reimburse the Company for the dollar value of the points redeemed;

 

   

the provision by Transform to the Company of transitional administrative services with respect to the Company’s employees including payroll, benefits, and other human-resource support services (which services, as of the date of this information statement, have been terminated) and the payment of fees by the Company to Transform in respect of such services, based on a combination of Transform’s costs to provide the services plus a specified profit margin;

 

   

the leasing or subleasing of store locations by Transform to the Company;

 

   

the continued provision by Transform of services to the Company in connection with a realization on the lenders’ collateral after default under the Company’s asset-based, senior secured revolving credit facility and the provision of notices and services to the agent of such facility for so long as any obligations remain outstanding under the facility; and

 

   

the purchase by the Company of damaged, returned or distressed merchandise that Transform receives in the course of its operations as a third party logistics services company.

 

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Payments from the Company to Sears Holdings Corporation and from Sears Holding Corporation to the Company

In connection with the foregoing, the following table summarizes the payments received by the Company from Sears Holdings Corporation and payments made by the Company to Sears Holdings Corporation during the Company’s last two fiscal years.

 

     For the Year
Ended
February 3,
2018
     For the Year
Ended
February 2,
2019
 

Net commissions received by the Company from Sears Holdings Corporation

   $ 66,347,000      $ 50,964,000  

Payments made by the Company to Sears Holdings Corporation related to cost of sales and for occupancy

   $ 958,560,000      $ 689,599,000  

Payments made by the Company to Sears Holdings Corporation for services performed by Sears Holdings Corporation

   $ 60,764,000      $ 40,027,000  

Seritage Growth Properties

In addition to the foregoing, during the Company’s 2019 fiscal year to date, the Company paid approximately $1.1 million for the year ended February 3, 2018 and $0.6 million for the year ended February 2, 2019 in occupancy charges for properties the Company leases from Seritage Growth Properties. Mr. Lampert is the Chairman of the Board of Trustees of Seritage Growth Properties.

Record Dates

On June 1, 2019, the record date for determining stockholders of the Company entitled to act by written consent with respect to the adoption of the Merger Agreement, there were 22,702,132 shares of Company Common Stock outstanding and entitled to vote.

As of June 1, 2019, the Company received a written consent adopting and approving the Merger Agreement and the transactions contemplated thereby, including the Merger, and approving any Outlet Sale to the extent such Outlet Sale would constitute a sale of substantially all of the Company’s property and assets and be subject to the stockholder approval requirements of Section 271(a) of the DGCL, executed by the holders of the requisite number of shares of Company Common Stock of the Company in accordance with Sections 228, 251 and 271(a) of the DGCL.

The Board of Directors has not set a record date for determining stockholders entitled to receive notice that appraisal rights are available in connection with the Merger. Accordingly, pursuant to Section 262(d)(2) of the DGCL, the record date for determining stockholders entitled to receive notice that appraisal rights are available in connection with the Merger is the close of business on the day next preceding the date on which this information statement and accompanying notice is mailed to holders of Company Common Stock, which record date is [                     ], 2019.

Certain Effects of the Merger

General Effects

If the Merger is completed, Merger Subsidiary will merge with and into the Company, the separate corporate existence of Merger Subsidiary will cease, and the Company will continue as the surviving company in the Merger and be wholly owned by Transform and/or ESL.

 

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At the effective time of the Merger, holders of shares of Company Common Stock will cease to have ownership interests in the Company or rights as stockholders of the Company, except as provided in the Merger Agreement or by applicable law.

The Company Common Stock is currently registered under the Exchange Act and is listed on NASDAQ under the symbol “SHOS”. As a result of the Merger, the Company will cease to be a publicly traded company and is expected to be wholly owned by Transform and/or ESL. Following the consummation of the Merger, the Company Common Stock will be de-listed from NASDAQ and de-registered under the Exchange Act, in each case in accordance with applicable law, rules and regulations.

If the Merger Agreement is terminated, or if the Merger is not completed for any other reason, Company stockholders will not receive any payment for their shares of Company Common Stock in connection with the Merger. The Company will remain a public company, and shares of Company Common Stock will continue to be registered under the Exchange Act, as well as listed and traded on NASDAQ.

Effects of the Merger on the ESL Filing Parties’ Interests in the Net Book Value and Net Earnings of the Company

The table below sets forth the direct and indirect interests in the Company’s net book value and net earnings of each of the ESL Filing Parties prior to and immediately after the consummation of the Merger based upon the Company’s net book value as of February 2, 2019 and the Company’s net earnings for the fiscal year ended February 2, 2019 (as furnished by the Company to the SEC on March 29, 2019).

 

     ESL Filing Parties’ Direct and Indirect
Interests in the Company Prior to
the Consummation of the Merger(1)
    ESL Filing Parties’ Direct and Indirect
Interests in the Company After
the Consummation of the Merger(1)
 
     %
Ownership
    Net book
value as of
February 2,
2019
     Net
earnings
for the
fiscal year
ended
February 2,
2019
    %
Ownership(1)
    Net book
value as of
February 2,
2019
     Net
earnings
for the
fiscal year
ended
February 2,
2019
 
     ($ in thousands)  

Transform

     —       $ —        $ —         100.0   $ 120,000      $ (53,464

ESL Partners L.P.

     20.51 %(2)    $ 24,612      $ (10,965     0   $ 0      $ 0  

Edward S. Lampert

     34.75 %(3)    $ 41,700      $ (18,578     0   $ 0      $ 0  

 

(1)

This table does not include the following ESL Filing Parties: (i) Merger Subsidiary, because it will not own any shares of the Company Common Stock prior to the consummation of Merger and will cease to exist as an independent entity after the consummation of the Merger; (ii) ESL Investments, because it does not directly hold any shares of the Company Common Stock; and (iii) RBS, because it does not directly hold any shares of the Company Common Stock. ESL Investments is the general partner of RBS, which is the general partner of Partners. This table assumes that Partners and Mr. Lampert will contribute all of their respective shares of the Company Common Stock to Transform prior to the consummation of the Merger such that the Company will become a wholly owned subsidiary of Transform upon the consummation of the Merger.

(2)

This number is calculated based on 22,702,132 shares of the Company Common Stock outstanding and 4,656,725 shares of the Company Common Stock held by Partners, in each case, as of July 24, 2019.

(3)

This number is calculated based on 22,702,132 shares of the Company Common Stock outstanding and 8,569,873 shares of the Company Common Stock held by Mr. Lampert, in each case, as of July 24, 2019.

Source and Amount of Funds

Transform has committed to having sufficient cash to enable Transform to make the payments contemplated to be made by Transform at the closing of the Merger pursuant to the Merger Agreement. Transform expects to

 

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finance the payments contemplated to be made by Transform at the closing of the Merger pursuant to the Merger Agreement using a combination of the financial resources of Transform, debt financing and, potentially, equity financing from ESL. Transform has not obtained any commitments in respect of such debt financing and does not expect to seek any such debt financing prior to the earlier to occur of (i) the Company’s entry into an Outlet Purchase Agreement or (ii) the Outlet Sale End Date. The consummation of the Merger is not conditioned upon Transform’s or Merger Subsidiary’s receipt of financing. Transform expects any debt financing obtained by Transform in connection with its payment obligations under the Merger Agreement will be repaid by its cash flows in the ordinary course of business.

Concurrently with the execution of the Merger Agreement, ESL Investments executed a commitment letter (the “Equity Commitment Letter”) with Transform pursuant to which ESL Investments committed to contribute, or cause to be contributed, approximately $21,000,000 to Transform (subject to the terms and conditions set forth in the Equity Commitment Letter, including the satisfaction or waiver of each of the conditions to the closing of the Merger in the Merger Agreement and the substantially concurrent occurrence of the effective time of the Merger) to be used by Transform to pay the Merger Consideration. A copy of the Equity Commitment Letter is provided as Exhibit (d)(2) to the Schedule 13E-3 filed by the Company and the ESL Filing Parties concurrently with this information statement.

Interests of Directors and Executive Officers in the Merger

You should be aware that the directors and executive officers of the Company have certain interests in the Merger and the other transactions contemplated by the Merger Agreement that may be different from, or in addition to, the interests of Company stockholders generally. The members of the Board of Directors were aware of these interests in evaluating the Merger Agreement and the transactions contemplated thereby and in recommending that Company stockholders adopt the Merger Agreement. These interests may present such directors and executive officers with actual or potential conflicts of interest and these interests are described below.

For the numerical disclosure in this section of this information statement, we have assumed a closing date of October 1, 2019. This is an illustrative date used solely for purposes of this specified disclosure and is not intended to indicate that the closing of the Merger will or will not occur on such date. This description and the tables below assume that the Company grants no new equity awards prior to the closing of the Merger to the Company’s directors or executive officers.

Treatment of Restricted Stock Unit Awards

At the effective time of the Merger, except as provided below in respect to the consummation of an Outlet Sale or as otherwise required by the terms of an applicable outstanding restricted stock unit award of the Company (in which case the terms of such award will govern, except that any payment will be made solely in cash and be based on the Merger Consideration), each restricted stock unit of the Company (“Company RSU”) will be cancelled and converted into the right to receive an amount (subject to any applicable withholding tax) in cash, without interest, equal to the Merger Consideration, and such amount will be paid, to the extent such Company RSU has not been forfeited, as follows:

 

   

With respect to a Company RSU scheduled to vest in January 2020 and held by any individual other than Mr. Powell or Mr. Bird, at the effective time of the Merger;

 

   

With respect to a Company RSU scheduled to vest in January 2020 and held by Mr. Powell or Mr. Bird, on the date such Company RSU would otherwise have been paid in accordance with its terms (including by reason of death, disability, termination without “Cause” or resignation for “Good Reason”, as those terms are defined, and solely to the extent provided, in the applicable Company RSU award);

 

   

With respect to a Company RSU scheduled to vest after January 2020 and held by any individual, including Mr. Powell or Mr. Bird, on the earlier of the date such Company RSU would otherwise have

 

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been paid in accordance with its terms (including by reason of death, disability, termination without “Cause” or resignation for “Good Reason”, as those terms are defined, and solely to the extent provided, in the applicable Company RSU award) or no later than 60 days following the first anniversary of the closing of the Merger.

In the event an Outlet Sale is consummated at or prior to the closing of the Merger, then, at the effective time of the Merger, except as otherwise required by the terms of a particular restricted stock unit award (in which case the terms of such award will govern, except that any payment will be made solely in cash and be based on the Merger Consideration) each unvested Company RSU will be cancelled and converted into the right to receive at the effective time of the Merger an amount (subject to any applicable withholding tax) in cash, without interest, equal to the Merger Consideration.

The following table shows, with respect to Will Powell, E.J. Bird and Michael A. Gray each of whom served as a director or an executive officer of the Company on and following February 3, 2018 (each, a “Named Executive Officer”) and who, as of the close of business on June 1, 2019, held restricted stock unit awards: (i) the number of shares of Company Common stock underlying unvested restricted stock unit awards and (ii) the total expected value of such restricted stock unit awards as of the effective time of the Merger, based on the Base Merger Consideration of $2.25 per share.

 

Name    Shares
Underlying
Unvested
Restricted Stock
Unit Awards
(#)(1)
     Total Expected
Value of
Restricted Stock Unit
Awards
($)(1)
 

Executive Officers

     

Will Powell

     210,298        473,170  

E.J. Bird

     125,209        281,720  

Michael A. Gray

     92,692        208,557  

 

(1)

The values of the Company restricted stock unit awards shown in the table above are based on an illustrative closing date for the transactions of October 1, 2019, and assumes that the Merger Consideration is equal to the Base Merger Consideration. If an Outlet Sale is completed prior to the closing of the Merger, the per share Merger Consideration could be significantly higher than the Base Merger Consideration.

Treatment of the Company’s Long-Term Incentive Plan Awards

At the effective time of the Merger, except as provided below in respect to the consummation of an Outlet Sale or as otherwise required by the terms of an applicable outstanding award under the Company’s long-term incentive plan (in which case the terms of such award will govern), the outstanding portion of any such award will be cancelled and converted into the right to receive at the effective time of the Merger an amount (subject to any applicable withholding tax) in cash, based on target level of achievement and prorated based on the number of completed months of the applicable performance period as of the effective time of the Merger.

In the event an Outlet Sale is consummated at or prior to the closing of the Merger, then, at the effective time of the Merger, except as required by the terms of an applicable outstanding award under the Company’s long-term incentive plan (in which case the terms of such award will govern) the unvested portion of any such award will be cancelled and converted into the right to receive at the effective time of the Merger an amount (subject to any applicable withholding tax) in cash, based on actual level of achievement as of the date of the Merger Agreement and prorated based on the number of completed months of the applicable performance period as of the effective time of the Merger.

 

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The following table shows, with respect to each Named Executive Officer who, as of the close of business on June 1, 2019, had an outstanding portion of any long-term incentive plan award, the value of such long-term incentive plan award that would be payable, assuming a closing date of October 1, 2019.

 

Name    Total Expected
Value of
Outstanding
Long-Term Incentive
Awards (No  Outlet
Sale)
($)(1)
     Total Estimated
Value of
Unvested Long-Term
Incentive
Awards  (Outlet Sale)
($)(1)
 

Executive Officers

     

Will Powell

     656,250        984,375  

E.J. Bird

     379,167        568,750  

Michael A. Gray

     290,000        435,000  

 

(1)

Expected values vary between these two columns because, if an Outlet Sale is not consummated, the outstanding portion of the awards are cancelled and converted into cash payments based on the target level of achievement, whereas if an Outlet Sale is consummated, the unvested portion of the awards are cancelled and converted into cash payments based on the actual level of achievement. The cash payments based on actual achievement have been estimated based on performance through the end of the Company’s first fiscal quarter on May 4, 2019.

Guaranteed Minimum Bonuses

Each participant in the Company’s annual incentive plan who has a guaranteed minimum bonus provided in such participant’s retention agreement will be paid on or as soon as practicable following the effective time of the Merger an amount equal to such participant’s guaranteed minimum bonus (subject to any applicable withholding tax). In connection with this payment, at the effective time of the Merger, any then unpaid installments of the special retention or incentive award to which such participant was entitled under his retention agreement, incentive/retention agreement or promotion agreement, as applicable and as described in the section entitled “Special Factors—Interests of Directors and Executive Officers in the Merger—Prior Retention Agreements” beginning on page 70 of this information statement, will be reduced to $0 and the participant will cease to have any further right to payment under such agreement.

In the event an Outlet Sale is consummated at or prior to the closing of the Merger, then, at or as soon as practicable following the effective time of the Merger, each participant in the annual incentive plan, whether or not that participant has a guaranteed minimum bonus provided in such participant’s retention agreement, will be paid a bonus for the portion of fiscal year 2019 that has been completed as of the effective time of the Merger in an amount equal to the greater of (i) the amount determined under the annual incentive plan using actual performance as of the date of the Merger Agreement (which was zero), prorated based on the number of completed days in the fiscal year as of the effective time of the Merger, and (ii) if applicable, the guaranteed minimum bonus provided in such annual incentive plan participant’s retention agreement.

The retention agreement for each of Mr. Powell, Mr. Bird and Mr. Gray provides that payment with respect to the 2019 annual incentive plan will not be less than 50% of the executive’s percentage incentive opportunity. This means that:

 

   

Mr. Powell’s guaranteed bonus in his retention agreement is the greater of (a) $375,000 and (b) the amount determined pursuant to the terms of the 2019 annual incentive plan;

 

   

Mr. Bird’s guaranteed bonus in his retention agreement is the sum of (a) the greater of (i) $68,750 and (ii) the amount determined pursuant to the terms of the 2019 annual incentive plan and (b) $175,000; and

 

   

Mr. Gray’s guaranteed bonus in his retention agreement is the greater of (a) 191,250 and (b) the amount determined pursuant to the terms of the 2019 annual incentive plan.

 

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The following table shows for individuals who served as an executive officer of the Company at any point in time on or following February 3, 2018, the value of the guaranteed minimum bonus provided in such individual’s retention agreement that will be paid on or as soon as practicable following the effective time of the Merger.

 

Name    Total Expected Value
of Guaranteed
Minimum Bonus

($)(1)
 

Executive Officers

  

Will Powell

     375,000  

E.J. Bird

     243,750  

Michael A. Gray

     191,250  

 

(1)

The guaranteed bonus amount provided in the executive’s retention agreement exceeds the amount that would be determined pursuant to the terms of the 2019 annual incentive plan based on actual performance, which was zero.

Prior Retention Agreements

The Company has entered into a “retention agreement” with Mr. Powell. Under this agreement, Mr. Powell is entitled to a $750,000 cash retention bonus, payable in three equal annual installments, all of which have been paid except for the third and final installment of $250,000 due April 15, 2020. In connection with the payment of a guaranteed minimum bonus to Mr. Powell following the effective time of the Merger, his third and final installment under this “retention agreement” will be reduced to $0 and he will cease to have any further right to payment thereunder.

The Company has entered into an “incentive/retention agreement” with Mr. Bird. Under this agreement, Mr. Bird is entitled to a cash incentive/retention award of $400,000, payable in three annual installments, all of which have been paid except for the third and final installment of $175,000 due April 15, 2020. In connection with the payment of a guaranteed minimum bonus to Mr. Bird following the effective time of the Merger, his third and final installment under this “incentive/retention agreement” will be reduced to $0 and he will cease to have any further right to payment thereunder.

The Company has entered into a “promotion agreement” with Mr. Gray. Under this agreement, Mr. Gray is entitled to a cash promotion award of $310,000, payable in three annual installments, all of which have been paid except for the third and final installment of $120,000 due April 15, 2020. In connection with the payment of a guaranteed minimum bonus to Mr. Gray following the effective time of the Merger, his third and final installment under this “promotion agreement” will be reduced to $0 and he will cease to have any further right to payment thereunder.

Employment Agreements

Offer Letters

The Company has entered into offer letters with Messrs. Powell, Bird, and Gray. The offer letters, among other things, provide for salary and benefit eligibility, but do not provide the covered executive with any additional benefits upon a termination of employment or a change in control.

Executive Officer Severance Agreements

The Company has entered into severance agreements with Messrs. Powell, Bird, and Gray. Each of these agreements provides for severance payable to the named executive officer upon a qualifying termination, which is a termination without “cause” or resignation for “good reason”, as defined in the agreement, without regard to whether or not that termination follows or is otherwise in connection with a change in control.

 

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Generally, in the event of a qualifying termination, each of the named executive officers would be entitled under his severance agreement to an amount equal to one times the executive’s base salary and continued medical and dental coverage in the plans the executive was eligible to participate in immediately prior to termination, with the executive’s percentage share of the cost of COBRA premiums remaining the same as the percentage share the executive paid for medical and dental plan coverage immediately prior to termination if at termination COBRA coverage is the only coverage available under the Company’s then current plans. Mr. Powell would also be entitled to the amount he actually earned under the Company’s annual incentive plan for the year in which the termination occurred, prorated through the date of termination, and reasonable outplacement services for a period of up to 6 months. The severance agreements do not provide these payments and benefits to the named executive officers upon a change in control. Instead, they provide these payments and benefits upon a qualifying termination, whether or not that termination follows or is otherwise in connection with a change in control.

Golden Parachute Compensation

This section sets forth the information required by Item 402(t) of the SEC’s Regulation S-K regarding certain compensation that may be paid to the Company’s named executive officers in connection with the Merger under existing arrangements between the Company and the named executive officers. This compensation is referred to as “golden parachute” compensation by the applicable SEC disclosure rules. These potential payments consist of:

 

   

payments in connection with the Company’s restricted stock unit awards, the treatment of which is described in the section entitled “Special Factors—Interests of Directors and Executive Officers—Treatment of Restricted Stock Unit Awards” beginning on page 67 of this information statement;

 

   

payments in connection with the Company’s long-term incentive plan awards, the treatment of which is described in the section entitled “Special Factors—Interests of Directors and Executive Officers—Treatment of the Company’s Long-Term Incentive Plan Awards” beginning on page 68 of this information statement; and

 

   

payments in respect of guaranteed minimum bonus amounts provided in the named executive officer’s retention agreement, as described in the section entitled “Special Factors—Interests of Directors and Executive Officers—Guaranteed Minimum Bonuses” beginning on page 69 of this information statement.

Further details on these potential payments are provided in the footnote to the table below and in the section entitled “Special Factors—Interests of Directors and Executive Officers in the Merger” beginning on page 67 of this information statement. The golden parachute compensation does not include amounts that are already vested at the effective time of the Merger.

For purposes of quantifying these potential payments for the table below, the following assumptions were used.

 

   

The closing date is October 1, 2019, which, solely for purposes of this golden parachute compensation disclosure, is the assumed date of the closing of the Merger and to be used only for illustrative purposes.

 

   

The value of a share of the Company Common Stock is $2.25, which is the Base Merger Consideration. Therefore, for purposes of quantifying the potential payments for the table below, it is assumed that the Merger Consideration is equal to the Base Merger Consideration. If an Outlet Sale is consummated prior to the closing of the Merger, the per share Merger Consideration could be significantly higher than the Base Merger Consideration.

The amounts shown are estimates based on multiple assumptions and do not reflect compensation actions that could occur after the date of this information statement and before the effective time of the Merger. As a result, the actual amounts received by a Named Executive Officer may differ materially from the amounts shown in the following table, including in the event the effective time of the Merger occurs on a different date, or if, as a result of a consummation of an Outlet Sale, the Merger Consideration exceeds the Base Merger Consideration. In addition, the amounts shown do not reflect any payments or benefits the named executive officer would be

 

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entitled to receive following a qualifying termination under his severance agreement, as the severance agreements (described in the section entitled “Special Factors—Interests of Directors and Executive Officers in the Merger—Employment Agreements—Executive Officer Severance Agreements” beginning on page 70 of this information statement) do not provide payments and benefits upon a change in control but instead provide payments and benefits upon a qualifying termination, whether or not that termination follows or is otherwise in connection with a change in control. October 1, 2019 is an illustrative date used solely for purposes of this golden parachute compensation disclosure and is not intended to indicate that the closing will or will not occur on that date. For purposes of this discussion, “single-trigger” refers to payments that are payable solely as a result of the closing and “double-trigger” refers to benefits that require a qualifying termination to have occurred in order to become payable.

 

Name    Cash
(No Outlet Sale)
($)(1)
     Cash
(Outlet Sale)
($)(2)
     Equity ($)(3)      Total Expected
(No Outlet Sale) ($)
     Total Expected
(Outlet Sale) ($)
 

Will Powell

     1,031,250        1,359,375        473,170        1,504,420        1,832,545  

E.J. Bird

     622,917        812,500        281,720        904,637        1,094,220  

Michael A. Gray

     481,250        626,250        208,557        689,807        834,807  

 

(1)

The information in this column is based on the assumption that an Outlet Sale is not consummated at or prior to the closing of the Merger. The amounts reflected in the table reflect the “single trigger” value of the cancellation, pursuant to the Merger Agreement, of the outstanding portion of any Company long-term incentive plan award and conversion of such award into the right to receive at the effective time of the Merger an amount in cash equal to an amount based on the target level of achievement, and the “single trigger” value of the minimum bonus payment provided in each named executive officer’s retention agreement, to be made on or as soon as practicable following the effective time of the Merger pursuant to the Merger Agreement. The amounts reflected in this column represent: for Mr. Powell: $656,250 in connection with the cancellation and conversion into cash of long-term incentive awards held by Mr. Powell and $375,000 in connection with the payment of the guaranteed minimum bonus under Mr. Powell’s retention agreement; for Mr. Bird: $379,167 in connection with the cancellation and conversion into cash of long-term incentive awards held by Mr. Bird and $243,750 in connection with the payment of the guaranteed minimum bonus under Mr. Bird’s retention agreement; and for Mr. Gray: $290,000 in connection with the cancellation and conversion into cash of long-term incentive awards held by Mr. Gray and $191,250 in connection with the payment of the guaranteed minimum bonus under Mr. Gray’s retention agreement.

(2)

The information in this column is based on the assumption that an Outlet Sale is consummated at or prior to the closing of the Merger. The amounts reflected in the table reflect the “single trigger” value of the cancellation, pursuant to the Merger Agreement, of the unvested portion of any Company long-term incentive plan award and conversion of such award into the right to receive at the effective time of the Merger an amount in cash equal to an amount based on the actual level of achievement, and the “single trigger” value of the minimum bonus payment provided in each named executive officer’s retention agreement, to be made on or as soon as practicable following the effective time of the Merger pursuant to the Merger Agreement. The amounts reflected in this column represent: for Mr. Powell: $984,375 in connection with the cancellation and conversion into cash of long-term incentive awards held by Mr. Powell and $375,000 in connection with the payment of the guaranteed minimum bonus under Mr. Powell’s retention agreement; for Mr. Bird: $568,750 in connection with the cancellation and conversion into cash of long-term incentive awards held by Mr. Bird and $243,750 in connection with the payment of the guaranteed minimum bonus under Mr. Bird’s retention agreement; and for Mr. Gray: $435,000 in connection with the cancellation and conversion into cash of long-term incentive awards held by Mr. Gray and $191,250 in connection with the payment of the guaranteed minimum bonus under Mr. Gray’s retention agreement.

(3)

The amounts reflected in the table reflect the “single-trigger” value of the accelerated vesting of the Company’s restricted stock units held by each named executive officer upon the occurrence of the effective time of the Merger pursuant to the Merger Agreement. For Mr. Powell, the $473,170 expected value reflected in the table is in respect to 210,298 shares of Company Common Stock underlying unvested

 

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  restricted stock units held by Mr. Powell; for Mr. Bird, the $281,720 expected value reflected in the table is in respect to 125,209 shares of Company Common Stock underlying unvested restricted stock units held by Mr. Bird; and for Mr. Gray, the $208,557 expected value is in respect to 92,692 shares of Company Common Stock underlying unvested restricted stock units held by Mr. Bird. The assumed per-share value of the Company Common Stock for purposes of determining the values in this table is $2.25, which is the Base Merger Consideration. Therefore, these values assume that the Merger Consideration is not adjusted, following the consummation of an Outlet Sale, if any, to exceed the Base Merger Consideration. The amounts reported here will be paid, to the extent such restricted stock units have not been forfeited, at the effective time of the Merger (with respect to Company restricted stock units scheduled to vest in January 2020 and held by Mr. Gray), on the date the Company restricted stock unit would otherwise have been paid in accordance with its terms, including terms providing for payment upon termination of employment (with respect to Company restricted stock units scheduled to vest in January 2020 and held by Mr. Powell or Mr. Bird), and on the earlier of the date the Company restricted stock unit would otherwise have been paid in accordance with its terms, including terms providing for payment upon termination of employment, or no later than 60 days following the first anniversary of the closing of the Merger (with respect to Company restricted stock units scheduled to vest after January 2020 and held by any of the named executive officers).

Insurance and Indemnification of Directors and Executive Officers

See the section entitled “The Merger Agreement—Other Covenants and Agreements—Director and Officer Liability” beginning on page 96 of this information statement, for a summary of the obligations of the surviving company with respect to insurance indemnification of directors and executive officers after the effective time of the Merger.

Material U.S. Federal Income Tax Consequences of the Merger

General

The following summary discusses certain material U.S. federal income tax consequences of the Merger to holders of shares of Company Common Stock. This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), applicable Treasury regulations promulgated under the Code, administrative interpretations, judicial decisions and administrative rulings as in effect as of the date of this information statement, all of which may change, possibly with retroactive effect. This summary is for the general information of the holders of shares of Company Common Stock only and does not purport to be a complete analysis of all potential tax effects of the Merger.

This discussion addresses only the consequences of the exchange of shares of Company Common Stock held as capital assets within the meaning of Section 1221 of the Code (generally, property held for investment). It does not address all aspects of U.S. federal income taxation that may be important to a Company stockholder in light of the Company stockholder’s particular circumstances, or to a Company stockholder that is subject to special rules, such as:

 

   

a bank, insurance company, or other financial institution;

 

   

a tax-exempt organization;

 

   

a dealer or broker in securities or non-U.S. currencies;

 

   

a trader in securities who elects the mark-to-market method of accounting;

 

   

an individual subject to the alternative minimum tax provisions of the Code;

 

   

a mutual fund;

 

   

a U.S. expatriate or former citizen or long-term resident of the United States;

 

   

a foreign pension fund and its affiliates;

 

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a person whose functional currency is not the U.S. dollar;

 

   

a former citizen or former long-term resident of the United States;

 

   

a real estate investment trust or regulated investment company;

 

   

a Company stockholder that holds its shares of Company Common Stock through individual retirement or other tax-deferred accounts;

 

   

a Company stockholder that exercises appraisal rights;

 

   

a Company stockholder that holds shares of Company Common Stock as part of a hedge, appreciated financial position, straddle, or conversion or integrated transaction;

 

   

a Company stockholder that acquired shares of Company Common Stock through the exercise of compensatory options or stock purchase plans or otherwise as compensation; or

 

   

a Company stockholder that is required to accelerate the recognition of any item of gross income with respect to the Merger as a result of such income being recognized on an applicable financial statement.

For purposes of this discussion, a “U.S. holder” is a beneficial owner of shares of Company Common Stock that is for U.S. federal income tax purposes:

 

   

an individual who is a citizen or resident of the United States;

 

   

a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any state therein or the District of Columbia;

 

   

an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

 

   

a trust (i) that is subject to the primary supervision of a court within the United States and all the substantial decisions of which are controlled by one or more U.S. persons or (ii) that has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person.

A “non-U.S. holder” is a beneficial owner of shares of Company Common Stock that is neither a U.S. holder nor a partnership (nor an entity treated as a partnership) for U.S. federal income tax purposes.

If a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds shares of Company Common Stock, the U.S. federal income tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A partner in a partnership holding shares of Company Common Stock should consult its tax advisors.

This discussion of certain material U.S. federal income tax consequences of the Merger is not a complete description of all potential U.S. federal income tax consequences of the Merger. This discussion does not address tax consequences that may vary with, or are contingent on, individual circumstances. In addition, it does not address any U.S. state or local or any non-U.S. tax consequences of the Merger or the potential application of the Medicare contribution tax on net investment income. Accordingly, each Company stockholder should consult its tax advisor to determine the particular U.S. federal, state or local or non-U.S. income or other tax consequences to it of the Merger.

U.S. Federal Income Tax Consequences to U.S. Holders

The receipt of the Merger Consideration by U.S. holders pursuant to the Merger will be a taxable transaction for U.S. federal income tax purposes. In general, for U.S. federal income tax purposes, a U.S. holder will recognize taxable capital gain or loss in an amount equal to the difference, if any, between (i) the Merger Consideration received in the Merger and (ii) such U.S. holder’s adjusted tax basis in its shares of Company Common Stock exchanged therefor. A U.S. holder’s adjusted tax basis in a particular share of Company Common Stock generally will equal the price the U.S. holder paid for such share of Company Common Stock.

 

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If a U.S. holder’s holding period in the shares of Company Common Stock surrendered in the Merger is greater than one year as of the date of the Merger, the capital gain or loss will generally be long-term capital gain or loss. Long-term capital gains of certain non-corporate holders, including individuals, are generally subject to U.S. federal income tax at preferential rates. The deductibility of a capital loss recognized in connection with the Merger is subject to limitations under the Code. If a U.S. holder acquired different blocks of shares of Company Common Stock at different times or different prices, such U.S. holder must determine its adjusted tax basis and holding period separately with respect to each block of shares of Company Common Stock that it holds.

U.S. Federal Income Tax Consequences to Non-U.S. Holders

The receipt of the Merger Consideration by a non-U.S. holder pursuant to the Merger will generally not be subject to U.S. federal income tax unless:

 

   

the gain, if any, recognized by the non-U.S. holder is effectively connected with a trade or business of the non-U.S. holder in the United States (and, if required by an applicable income tax treaty, is attributable to the non-U.S. holder’s permanent establishment in the United States);

 

   

the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of the Merger and certain other conditions are met; or

 

   

the non-U.S. holder owned, directly or under certain constructive ownership rules of the Code, more than 5% of Company Common Stock at any time during the five year period preceding the Merger, and the Company is or has been a “United States real property holding corporation” within the meaning of Section 897(c)(2) of the Code for U.S. federal income tax purposes at any time during the shorter of the five year period preceding the Merger or the period that the non-U.S. holder held the shares of Company Common Stock.

Gain described in the first bullet point above will be subject to tax on a net income basis in the same manner as if the non-U.S. holder were a U.S. holder (unless an applicable income tax treaty provides otherwise). Additionally, any gain described in the first bullet point above of a non-U.S. holder that is a corporation also may be subject to an additional “branch profits tax” at a 30% rate (or lower rate provided by an applicable income tax treaty). A non-U.S. holder described in the second bullet point above will be subject to tax at a rate of 30% (or a lower rate provided by an applicable income tax treaty) on any capital gain realized, which may be offset by U.S.-source capital losses recognized in the same taxable year. If the third bullet point above applies to a non-U.S. holder, capital gain recognized by such holder will be subject to tax at generally applicable U.S. federal income tax rates. We believe that we are not, and we do not anticipate becoming, a “United States real property holding corporation”. However, because the determination of whether we are a “United States real property holding corporation” depends on the fair market value of our United States real property interests relative to the fair market value of our global real property interests and other business assets, there can be no assurance that we do not currently constitute or will not become a “United States real property holding corporation”. Non-U.S. holders owning (actually or constructively) more than 5% of Company Common Stock should consult their own tax advisors regarding the U.S. federal income tax consequences of the Merger.

Backup Withholding and Information Reporting

Payments of the Merger Consideration made in exchange for shares of Company Common Stock pursuant to the Merger may be subject, under certain circumstances, to information reporting and backup withholding (currently at a rate of 24%). To avoid backup withholding, a U.S. holder that does not otherwise establish an exemption should complete and return an IRS Form W-9, certifying under penalties of perjury that such U.S. holder is a “United States person” (within the meaning of the Code), that the taxpayer identification number provided is correct and that such U.S. holder is not subject to backup withholding. To avoid backup withholding, a non-U.S. holder is required to establish an exemption, for example, by completing and providing to the applicable withholding agent the appropriate IRS Form W-8 for the non-U.S. holder, in accordance with the instructions thereto.

 

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Any amount withheld under the backup withholding rules will be allowed as a refund or credit against the U.S. federal income tax liability of a Company stockholder, provided the required information is timely furnished to the IRS. The IRS may impose a penalty upon a Company stockholder that fails to provide the correct taxpayer identification number.

Regulatory Approvals

The Company and Transform have agreed to use (and cause their respective subsidiaries to use) their reasonable best efforts to take all actions reasonably necessary under applicable law to consummate the transactions contemplated by the Merger Agreement including filing as promptly as practicable all necessary filings with any governmental authority or third party and obtaining all approvals and consents required to be obtained from any governmental authority or third party.

If the parties make a good faith determination that a filing pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), is required, each party has agreed to prepare and file, as promptly as practicable after such determination, a notification and report form pursuant to the HSR Act. Each party agrees to, as promptly as reasonably practicable, provide to each federal or state governmental authority with jurisdiction over enforcement of an applicable antitrust law, non-privileged information and documents requested by such governmental authority that are necessary to consummate the Merger and the other transactions contemplated by the Merger Agreement

Under the Merger Agreement, if a notification and report form pursuant to the HSR Act is required to be filed in connection with the Merger, the Merger cannot be completed until any applicable waiting period (and any extension thereof) under the HSR Act has expired or been terminated.

Even after any applicable waiting period under the HSR Act expires or is terminated, or if no filing under the HSR Act is required, the FTC and the Antitrust Division of the DOJ retain the authority to challenge the Merger on antitrust grounds before or after the Merger is completed. Likewise, at any time before or after the consummation of the Merger, a U.S. state or a foreign governmental authority with jurisdiction over the parties could take such action under antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the consummation of the Merger, to rescind the Merger or to seek divestiture of particular assets. Private parties also may seek to take legal action under the antitrust laws under certain circumstances. Neither the Company nor Transform can provide assurance that any action under antitrust laws will not result in the delay or abandonment of the Merger.

De-listing and De-registration of Company Common Stock

If the Merger is completed, the Company Common Stock will be de-listed from NASDAQ and de-registered under the Exchange Act. As such, following completion of the Merger and such de-registration, the Company will no longer file periodic and other reports with the SEC on account of Company Common Stock

Fees and Expenses

Whether or not the Merger is consummated, all costs and expenses incurred in connection with the Merger Agreement will be paid by the party incurring such cost or expense.

The Company will pay the fees and expenses of the arbiter in the event one is appointed pursuant to the procedures set forth in the Merger Agreement to determine any dispute between the parties related to the calculation of the Merger Consideration in the event that an Outlet Sale occurs.

 

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The following is an estimate of the fees and expenses incurred or to be incurred by the Company in connection with the Merger and the Merger Agreement:

 

     Amount to be Paid
($)
 

Financial advisory fees and expenses

  

Legal, accounting and other professional fees

  

SEC filing fees

     2,797.13  

Printing and mailing costs

  

Paying agent fees and expenses

  

Miscellaneous

  

The ESL Filing Parties are expected to incur and pay fees and expenses of approximately $[●] in connection with the Merger and the Merger Agreement.

Anticipated Accounting Treatment of the Merger

The Merger will be accounted for in accordance with GAAP. The Merger will constitute a reorganization of companies under common control and will be accounted for in a manner similar to a pooling of interests.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This information statement, and certain of the documents to which we refer you in this information statement, contains “forward-looking statements”. Such statements include statements concerning anticipated future events and expectations that are not historical facts. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Forward-looking statements are typically identified by words such as “believe”, “expect”, “anticipate”, “intend”, “target”, “estimate”, “continue”, “positions”, “plan”, “predict”, “project”, “forecast”, “guidance”, “goal”, “objective”, “prospects”, “possible” or “potential”, by future conditional verbs such as “assume”, “will”, “would”, “should”, “could” or “may”, or by variations of such words or by similar expressions or the negative thereof. All forward-looking statements included in this information statement are based upon information available to us as of the filing date of this information statement, and, except to the extent required by applicable law, we undertake no obligation to update any of these forward-looking statements for any reason. You should not place undue reliance on forward-looking statements. The forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements. Important factors that could cause actual results to differ materially from those contained in any forward-looking statement include the factors identified in the Company’s annual report on Form 10-K for the year ended February 2, 2019, under the heading “Risk Factors”, as updated from time to time by the Company’s quarterly reports on Form 10-Q, including the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 4, 2019, and other documents of the Company on file with the SEC or in this information statement filed with the SEC by the Company, and the following factors:

 

   

risks related to the consummation of the Merger, including the risks that (i) the Merger may not be consummated within the anticipated time period, or at all, (ii) if applicable, the parties may fail to secure the termination or expiration of any waiting period applicable under the HSR Act and (iii) other conditions to the consummation of the Merger under the Merger Agreement may not be satisfied;

 

   

the effects that any termination of the Merger Agreement may have on the Company or its business, including the risks that the Company’s stock price may decline significantly if the Merger is not completed, which may have a chilling effect on alternatives to the Merger;

 

   

the effects that the announcement or pendency of the Merger may have on the Company and its business, including the risks that as a result (i) the Company’s business, operating results or stock price may suffer, (ii) the Company’s current plans and operations may be disrupted, (iii) the Company’s ability to retain or recruit key employees may be adversely affected, (iv) the Company’s business relationships (including customers and suppliers) may be adversely affected, or (v) the Company’s management’s or employees’ attention may be diverted from other important matters;

 

   

the effect of limitations that the Merger Agreement places on the Company’s ability to operate its business, return capital to stockholders or engage in alternative transactions;

 

   

the nature, cost and outcome of pending and future litigation and other legal proceedings, including any such proceedings related to the Merger and instituted against the Company and others;

 

   

the risk that the Merger and related transactions may involve unexpected costs, liabilities or delays; and

 

   

other economic, business, competitive, legal, regulatory, and/or tax factors.

Consequently, all of the forward-looking statements we make in this information statement are qualified by the information contained or incorporated by reference herein, including, but not limited to, (i) the information contained under this heading and (ii) the information contained under the heading “Risk Factors” and information in our consolidated financial statements and notes thereto included in our most recent filing on Form 10-K and subsequent periodic and interim report filings (see the section entitled “Where You Can Find Additional Information” beginning on page 119 of this information statement). No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements.

 

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The forward-looking statements contained in this information statement, including forward-looking statements included in the documents referred to or incorporated by reference in this information statement, are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, each as amended.

 

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PARTIES INVOLVED IN THE MERGER

Sears Hometown and Outlet Stores, Inc.

The Company is a national retailer primarily focused on selling home appliances, lawn and garden equipment, tools and hardware. In addition to merchandise, we provide our customers with access to a full suite of related services, including home delivery, installation and extended-service plans. As of July 6, 2019, the Company and its independent dealers and franchisees operated a total of 601 stores across 49 states, Puerto Rico and Bermuda.

The Company’s principal executive offices are located at 5500 Trillium Boulevard, Suite 501, Hoffman Estates, Illinois 60192, and its telephone number is (847) 286-7000. The Company’s website is www.shos.com.

The Company Common Stock is listed with, and trades on, NASDAQ under the symbol “SHOS”.

As of July 24, 2019, the most recent practicable date before the filing of this information statement, there were 22,702,132 shares of Company Common Stock issued and outstanding.

Additional information about the Company is contained in our public filings which are incorporated by reference herein. See the section entitled “Where You Can Find Additional Information” beginning on page 119 of this information statement.

Transform Holdco LLC

Transform is a privately held company that acquired most of the operating assets of Sears Holdings Corporation out of bankruptcy. Transform is organized as a Delaware limited liability company and is a leading integrated retailer focused on seamlessly connecting the digital and physical shopping experiences to serve its members. Transform is home to Shop Your Way®, a social shopping platform offering members rewards for shopping at Sears, Kmart, the Company and other retail partners. Transform operates through its subsidiaries with full-line and specialty retail stores across the United States. Transform is owned by ESL.

Transform’s principal executive offices are located at 3333 Beverly Road, Hoffman Estates, Illinois 60179, and its telephone number is (847) 286-2500.

Transform Merger Corporation

Merger Subsidiary is a Delaware corporation formed for the purpose of entering into the Merger Agreement and completing the merger with the Company. Merger Subsidiary is a wholly owned subsidiary of Transform. Merger Subsidiary has not engaged in any business to date except for activities incidental to its incorporation and activities undertaken in furtherance of the transactions contemplated by the Merger Agreement. Upon completion of the Merger, Merger Subsidiary will merge with and into the Company and will cease to exist.

Merger Subsidiary’s principal executive offices are located at 3333 Beverly Road, Hoffman Estates Illinois 60192, and its telephone number is (847) 286-2500.

For more information on the ESL Filing Parties who are affiliates under and filing persons pursuant to the Going Private Rules, see the section entitled “Important Additional Information Regarding the ESL Filing Persons” beginning on page 110 of this information statement.

 

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THE MERGER AGREEMENT

Below is a summary of the material provisions of the Merger Agreement, a copy of which is attached to this information statement as Annex A and which is incorporated by reference into this information statement. This summary does not purport to be complete and may not contain all of the information about the Merger Agreement that is important to you. We encourage you to read the Merger Agreement in its entirety carefully, as the rights and obligations of the parties thereto are governed by the express terms of the Merger Agreement and not by this summary or any other information contained in this information statement.

Explanatory Note Regarding the Merger Agreement

The following summary of the Merger Agreement and the copy of the Merger Agreement attached to this information statement as Annex A are intended only to provide information regarding the terms of the Merger Agreement. The Merger Agreement and the related summary are not intended to be a source of factual, business or operational information about the Company, Transform or Merger Subsidiary, and the following summary of the Merger Agreement and the copy thereof included as Annex A are not intended to modify or supplement any factual disclosure about the Company in any documents the Company has or will publicly file with the SEC. The Merger Agreement contains representations and warranties by, and covenants of, the Company, Transform and Merger Subsidiary that were made only for purposes of the Merger Agreement and as of specified dates. The representations, warranties and covenants in the Merger Agreement were made solely for the benefit of the parties to the Merger Agreement, may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties to the Merger Agreement instead of establishing these matters as facts, and may be subject to contractual standards of materiality or material adverse effect applicable to the contracting parties that generally differ from those applicable to investors. In addition, information concerning the subject matter of the representations, warranties and covenants contained in the Merger Agreement may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures. Until the effective time of the Merger, stockholders are not third-party beneficiaries under the Merger Agreement (and after the effective time of the Merger, stockholders will be third-party beneficiaries under the Merger Agreement solely to the extent necessary to receive the Merger Consideration due to such persons under the Merger Agreement).

Additional information about the Company may be found elsewhere in this information statement and in the Company’s other public filings. See the section entitled “Where You Can Find Additional Information” beginning on page 119 of this information statement.

The Merger

The Merger Agreement provides that at the effective time of the Merger, Merger Subsidiary will be merged with and into the Company in accordance with Delaware law and the separate existence of Merger Subsidiary will cease, and the Company will continue as the surviving corporation. At the effective time of the Merger, the Company as the surviving corporation will possess all the rights, powers, privileges and franchises and be subject to all of the obligations, liabilities, restrictions and disabilities of the Company and Merger Subsidiary, all as provided under Delaware law.

Merger Consideration

Upon completion of the Merger, each issued and outstanding share of our Common Stock (except for shares (i) owned by the Company as treasury stock or by any subsidiary of either the Company or Transform, (ii) owned by Transform or ESL or (iii) held by stockholders who are entitled to demand and who properly demand appraisal under Section 262 of the DGCL for such shares) will automatically be cancelled and will cease to exist and will be converted into the right to receive the Merger Consideration, consisting of the Base Merger

 

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Consideration subject to an upward adjustment (as described in more detail below) in the event that a sale of the Outlet Segment that satisfies certain criteria specified in the Merger Agreement is completed prior to the closing of the Merger.

The Base Merger Consideration will be increased if an Outlet Sale satisfying the criteria specified in the Merger Agreement is completed prior to the closing of the Merger and such Outlet Sale results in Net Proceeds in excess of $97,500,000. In that case, the Base Merger Consideration will be increased by an amount equal to the quotient of (i) the excess of the Net Proceeds over $97,500,000 divided by (ii) the sum of the aggregate number of shares of Company Common Stock and unvested Company restricted stock units issued and outstanding as of the closing date of the Merger.

Net Proceeds exclude the sum, without duplication, of (i) all fees and expenses paid or payable by the Company in connection with any Outlet Sale, (ii) any taxes paid or payable by the Company in connection with the Outlet Sale (as such taxes may be reduced by any net operating losses or other applicable tax attributes of the Company), (iii) the amount, if any, by which the net working capital transferred to the buyer of the Outlet Segment exceeds $75,000,000, (iv) the amount of any waiver, amendment or consent fees paid in connection with certain waivers under, and amendments of, the Company’s credit agreements related to an Outlet Sale and (v) certain other deductions agreed between the parties.

If an Outlet Sale is not consummated prior to the closing of the Merger or if an Outlet Sale is consummated prior to the closing of the Merger but the Net Proceeds are less than or equal to $97,500,000, the Base Merger Consideration will not be increased.

Certificate of Incorporation; Bylaws; Directors and Officers

At the effective time of the Merger, the certificate of incorporation of the Company will be amended and restated in its entirety to be in the form of an exhibit to the Merger Agreement and, as so amended and restated, such certificate of incorporation will be the certificate of incorporation of the surviving corporation and the bylaws of Merger Subsidiary as in effect immediately prior to the effective time of the Merger will be the bylaws of the surviving corporation, in each case, until subsequently amended. The name of the surviving corporation will be Sears Hometown and Outlet Stores, Inc. unless an Outlet Sale has been consummated prior to the closing in accordance with the terms of the Merger Agreement in which case, the name of the surviving corporation will be Sears Hometown Stores, Inc.

The directors of Merger Subsidiary immediately prior to the effective time of the Merger will be the initial directors of the surviving corporation and the officers of the Company immediately prior to the effective time of the Merger will be the initial officers of the surviving corporation. The initial directors and officers will hold office until successors are duly elected or appointed and qualified in accordance with Delaware law.

Closing and Effective Time of the Merger

The closing of the Merger will take place on a date to be mutually agreed by the Company and Transform, which date will be no later than the second business day after the date on which the conditions to the Merger (other than conditions that by their nature are to be satisfied by actions to be taken at closing, but subject to the satisfaction or, to the extent permissible under applicable law, waiver of those conditions at closing) have been satisfied or waived by the party or parties entitled to the benefit of such conditions or on such other date as the Company and Transform may mutually agree.

The timing of the closing of the Merger is subject to the following provisions:

 

   

If the period designated in the Merger Agreement for the Company to enter into a definitive agreement for an Outlet Sale has expired and no definitive agreement has been entered into for an Outlet Sale, the closing

 

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of the Merger will occur no earlier than the later of (i) 45 days after the last day of such period and (ii) three business days following the date on which Transform receives certain financing information from the Company as further described in the Merger Agreement.

 

   

If a definitive agreement for an Outlet Sale is entered into during the period designated in the Merger Agreement, the closing of the Merger will occur no earlier than the latest of (i) seven business days after the closing of the Outlet Sale, (ii) three business days following the date on which Transform receives from the Company certain financing information as further described in the Merger Agreement and (iii) 45 days after Transform is notified by the Company of the Company’s entry into the definitive agreement for the Outlet Sale.

 

   

If a definitive agreement for an Outlet Sale is entered into during the period designated therefor but is then later terminated, the closing of the Merger will occur no earlier than the later of (i) 45 days after Transform is notified of such termination and (ii) three business days following the date on which Transform receives certain financing information from the Company as further described in the Merger Agreement.

At the closing of the Merger, Transform and the Company will cause a certificate of merger to be executed and filed with the Secretary of State of the State of Delaware in accordance with the relevant provisions of the DGCL and will make all other filings or recordings required under the DGCL. The merger will become effective at the time the certificate of merger is duly filed with the Secretary of State of the State of Delaware or on such later date and time as may be agreed upon by the parties and specified in the certificate of merger.

Effect of the Merger on Company Common Stock

At the effective time of the Merger, each share of Company Common Stock (except for shares (i) owned by ESL or Transform, (ii) held in treasury by the Company or owned by any subsidiary of either the Company or Transform or (iii) held by stockholders who have demanded properly in writing appraisal for such shares in accordance with Section 262 of the DGCL) will be converted into the right to receive the Merger Consideration. As of the effective time of the Merger, all such shares will no longer be outstanding and will automatically be cancelled and retired and cease to exist, and will thereafter represent only the right to receive the Merger Consideration. Shares referred to in clause (i) above will be converted into one one-thousandth of a share of common stock of the surviving corporation. Shares referred to in clause (ii) will be cancelled and no payment will be made with respect thereto. Shares of the Company’s Common Stock described in clause (iii) will also be cancelled at the effective time of the Merger, and the holders of such shares will be entitled to the rights granted to them under Section 262 of the DGCL (as further described in the section entitled “Appraisal Rights” beginning on page 112 of this information statement).

At the effective time of the Merger, each share of Merger Subsidiary common stock outstanding immediately prior to the effective time of the Merger will be converted into and become a number of shares of common stock of the surviving corporation (rounded to the nearest one one-thousandth of a share of common stock of the surviving corporation) equal to (i) one one-thousandth of the total number of outstanding shares of Company Common Stock of the Company and any shares of Company Common Stock of the Company held as treasury stock or by any subsidiary of the Company or Transform cancelled pursuant to the Merger divided by (ii) the total number of shares of common stock of Merger Subsidiary outstanding immediately prior to the effective time of the Merger. Such shares, together with the shares of common stock of the surviving corporation into which shares of Company Common Stock owned by ESL or Transform are converted as described in the prior paragraph, will constitute the only outstanding shares of capital stock of the surviving corporation immediately following the effective time of the Merger.

Payment Procedures

Prior to the effective time of the Merger, Transform will appoint (pursuant to an agreement in form reasonably acceptable to the Company) the Company’s paying agent or other agent reasonably acceptable to the Company

 

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for the purpose of exchanging for the Merger Consideration (i) certificates representing shares of Company Common Stock or (ii) uncertificated shares of Company Common Stock represented by book entry. At or prior to the effective time of the Merger, Transform or one of its affiliates will deposit with the paying agent the aggregate Merger Consideration to be paid in respect of the certificates or uncertificated shares referenced in (i) and (ii) above (and in the event that the amount deposited is not sufficient to make the payments of the Merger Consideration, Transform or one of its affiliates will promptly deposit additional funds in an amount sufficient to make such payments). Any portion of the Merger Consideration deposited with the paying agent to pay for shares for which appraisal rights have been perfected will be returned to Transform or one of its affiliates upon demand.

Promptly after the effective time of the Merger (and in no event later than three business days after the closing date), Transform will cause the paying agent to send to each holder of shares of Company Common Stock a letter of transmittal and instructions (which will specify that the delivery will be effected, and risk of loss and title will pass, only upon proper delivery of the certificates or transfer of the uncertificated shares to the paying agent) for use in such exchange. Upon either (i) surrender of the certificates to the paying agent together with a properly completed letter of transmittal (and any applicable attachments) or (ii) receipts of an “agent’s message” by the paying agent in the case of a book-entry transfer of uncertificated shares, such holder will receive the Merger Consideration payable for each share of Company Common Stock represented by a certificate or for each uncertificated share.

If any portion of the Merger Consideration is to be paid to a person other than a person in whose name the surrendered certificate or the transferred uncertificated share is registered, then (i) either such certificate must be properly endorsed or otherwise be in proper form for transfer or such uncertificated share must be transferred and (ii) the person requesting payment must pay to the paying agent any transfer or other taxes required.

No interest will be paid or accrue on any cash payable to holders upon surrender of shares of Company Common Stock. Until shares are surrendered or transferred pursuant to the Merger Agreement, each certificated or uncertificated share will represent, after the effective time of the Merger, only the right to receive the Merger Consideration.

Any portion of the Merger Consideration deposited with the paying agent (and any interest or other income earned thereon) that remains unclaimed by the former holders of shares of the Company’s Common Stock twelve months after the effective time of the Merger will be returned to Transform or one of its affiliates, upon demand, and any such holder who has not exchanged its shares of Company Common Stock for the Merger Consideration prior to that time will thereafter look only to Transform for payment of the Merger Consideration in respect of such shares. Any amount remaining unclaimed by holders of shares of Company Common Stock two years after the effective time of the Merger will become, to the extent permitted by applicable law, the property of Transform, free and clear of any claims or interest of any person previously entitled thereto.

Treatment of the Company’s Equity Awards and Other Incentive Compensation

Treatment of Restricted Stock Unit Awards

At the effective time of the Merger, except as provided below in respect to the consummation of an Outlet Sale or as otherwise required by the terms of an applicable outstanding restricted stock unit award of the Company (in which case the terms of such award will govern, except that any payment will be made solely in cash and be based on the Merger Consideration), each restricted stock unit of the Company (“Company RSU”) will be cancelled and converted into the right to receive an amount (subject to any applicable withholding tax) in cash, without interest, equal to the Merger Consideration, and such amount will be paid, to the extent such Company RSU has not been forfeited, as follows:

 

   

with respect to a Company RSU scheduled to vest in January 2020 and held by any individual other than Mr. Powell or Mr. Bird, at the effective time of the Merger;

 

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with respect to a Company RSU scheduled to vest in January 2020 and held by Mr. Powell or Mr. Bird, on the date such Company RSU would otherwise have been paid in accordance with its terms (including by reason of death, disability, termination without “Cause” or resignation for “Good Reason”, as those terms are defined, and solely to the extent provided, in the applicable Company RSU award); and

 

   

with respect to a Company RSU scheduled to vest after January 2020 and held by any individual, including Mr. Powell or Mr. Bird, on the earlier of the date such Company RSU would otherwise have been paid in accordance with its terms (including by reason of death, disability, termination without “Cause” or resignation for “Good Reason”, as those terms are defined, and solely to the extent provided, in the applicable Company RSU award) or no later than 60 days following the first anniversary of the closing of the Merger.

In the event an Outlet Sale is consummated at or prior to the closing of the Merger, then, at the effective time of the Merger, except as otherwise required by the terms of a particular restricted stock unit award (in which case the terms of such award will govern, except that any payment will be made solely in cash and be based on the Merger Consideration) each unvested Company RSU will be cancelled and converted into the right to receive at the effective time of the Merger an amount (subject to any applicable withholding tax) in cash, without interest, equal to the Merger Consideration.

Treatment of the Company’s Long-Term Incentive Plan Awards

At the effective time of the Merger, except as provided below in respect to the consummation of an Outlet Sale or as otherwise required by the terms of an applicable outstanding award under the Company’s long-term incentive plan (in which case the terms of such award will govern), the outstanding portion of any such award will be cancelled and converted into the right to receive at the effective time of the Merger an amount (subject to any applicable withholding tax) in cash, based on target level of achievement and prorated based on the number of completed months of the applicable performance period as of the effective time of the Merger.

In the event an Outlet Sale is consummated at or prior to the closing of the Merger, then, at the effective time of the Merger, except as required by the terms of an applicable outstanding award under the Company’s long-term incentive plan (in which case the terms of such award will govern) the unvested portion of any such award will be cancelled and converted into the right to receive at the effective time of the Merger an amount (subject to any applicable withholding tax) in cash, based on actual level of achievement as of the date of the Merger Agreement and prorated based on the number of completed months of the applicable performance period as of the effective time of the Merger.

Treatment of Annual Incentive Plan Awards

Each participant in the Company’s annual incentive plan who has a guaranteed minimum bonus provided in such participant’s retention agreement will be paid on or as soon as practicable following the effective time of the Merger an amount equal to such participant’s guaranteed minimum bonus (subject to any applicable withholding tax). In connection with this payment, at the effective time of the Merger, any then unpaid installments of the special retention or incentive award to which such participant was entitled under his retention agreement, incentive/retention agreement or promotion agreement, as applicable and as described in the section entitled “Special Factors—Interests of Directors and Executive Officers in the Merger—Guaranteed Minimum Bonus—Prior Retention Agreements” beginning on page 70 of this information statement, will be reduced to $0 and the participant will cease to have any further right to payment under such agreement.

In the event an Outlet Sale is consummated at or prior to the closing of the Merger, then, at or as soon as practicable following the effective time of the Merger, each participant in the annual incentive plan, whether or not that participant has a guaranteed minimum bonus provided in such participant’s retention agreement, will be paid a bonus for the portion of fiscal year 2019 that has been completed as of the effective time of the Merger in

 

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an amount equal to the greater of (i) the amount determined under the annual incentive plan using actual performance as of the date of the Merger Agreement (which was zero), prorated based on the number of completed days in the fiscal year as of the effective time of the Merger, and (ii) if applicable, the guaranteed minimum bonus provided in such annual incentive plan participant’s retention agreement. In connection with this payment, at the effective time of the Merger, any then unpaid installments of the special retention or incentive award to which such participant was entitled under his retention agreement, incentive/retention agreement or promotion agreement, as applicable and as described in the section entitled “Special Factors—Interests of Directors and Executive Officers in the Merger—Guaranteed Minimum Bonuses—Prior Retention Agreements” beginning on page [    ] of this information statement, will be reduced to $0 and the participant will cease to have any further right to payment under such agreement.

Appraisal Rights

Shares of Company Common Stock that are outstanding immediately prior to the effective time of the Merger and that are held by a holder of Company Common Stock who has neither voted for the Merger nor consented to the Merger in writing and who has properly demanded appraisal for its shares in accordance with Section 262 of the DGCL and who has otherwise complied with all of the applicable provisions thereof (collectively, we refer to such shares as the “dissenting shares”) will not be converted into the right to receive the Merger Consideration, but will only be entitled to such rights as are granted by Section 262 of the DGCL, unless and until such holder fails to perfect, effectively withdraws or otherwise loses the right to appraisal under the Section 262 of the DGCL.

At the effective time of the Merger, all dissenting shares will no longer be outstanding and automatically will be cancelled and will cease to exist, and, except as otherwise provided by applicable laws, each holder of dissenting shares will cease to have any rights with respect to the dissenting shares, other than such rights as are granted under Section 262 of the DGCL. Such stockholders will be entitled to receive payment of the appraised value of such shares held by them in accordance with the provisions of Section 262 of the DGCL, except that all dissenting shares held by stockholders who have failed to perfect or who effectively have withdrawn or lost their rights to appraisal of such shares under such Section 262 of the DGCL will thereupon be deemed to have been converted into, and to have become exchangeable for, as of the effective time of the Merger, the right to receive the Merger Consideration, without interest, in the manner provided in the Merger Agreement.

The Company is required to give Transform (i) prompt notice of any demands for appraisal received by the Company, withdrawals of such demands and any other related instruments served pursuant to the DGCL and received by the Company and (ii) the opportunity to direct all negotiations and proceedings with respect to such notices and demands for appraisal under the DGCL. The Company will not, except with the prior written consent of Transform or as required by law, make any payment with respect to any demands for appraisal, settle, compromise, or offer to settle or compromise any such demands.

Representations and Warranties; Material Adverse Effect

The Merger Agreement contains representations and warranties of the Company and of Transform and Merger Subsidiary.

Subject to certain exceptions (i) in the Merger Agreement, (ii) in the disclosure schedule delivered by the Company to Transform and Merger Subsidiary in connection with the Merger Agreement and (iii) as disclosed in the certain of the Company’s public filings with the SEC (subject to certain specified exceptions), the Merger Agreement contains certain customary representations and warranties of the Company as to, among other things:

 

   

organization and valid existence, good standing and qualification to do business of the Company and its subsidiaries;

 

   

effectiveness of organizational documents and absence of violation of such organizational documents;

 

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corporate authority to the execution, delivery and performance of the Merger Agreement, and the enforceability of the Merger Agreement against the Company;

 

   

receipt of stockholder consent to the Merger Agreement and the transactions contemplated thereby;

 

   

due authorization and constitution of the Special Committee and approval therefrom of the Merger Agreement and the transactions contemplated thereby and recommendation thereby that the Board of Directors approve and declare advisable the Merger Agreement and the transactions contemplated thereby;

 

   

unanimous approval and recommendation by the Board of Directors in favor of the Merger Agreement and the transactions contemplated thereby;

 

   

absence of (i) a requirement for any governmental filings other than those specified in the Merger Agreement, (ii) any conflict with or violation of the organizational documents of the Company, (iii) any conflict with or violation of applicable laws, (iii) any breach or default under, or any right of termination, cancellation, acceleration or other change of any right or obligation or loss of any benefit to which the Company or its subsidiaries is entitled, of any material contract of the Company or its subsidiaries, and (iv) any lien on any asset of the Company or its subsidiaries, in each case, as a result of the execution, delivery and performance by the Company of the Merger Agreement and its consummation of the transactions thereunder;

 

   

authorized capital stock of the Company, issued and outstanding equity of the Company and other matters regarding capitalization;

 

   

the Company’s subsidiaries;

 

   

timely filing of the Company’s SEC filings, compliance with SEC filing requirements, establishment and maintenance of certain disclosure controls and procedures, and the disclosure of any significant deficiencies or material weaknesses in internal controls over financial reporting to the Company’s auditors and audit committee;

 

   

compliance with applicable accounting requirements and fair presentation in conformity with GAAP by the audited consolidated financial statements of the Company and absence of any material complaint to the Company or any subsidiary pertaining to accounting principles or practices since February 2, 2019;

 

   

compliance of documents required to be filed with the SEC or disseminated to stockholders of the Company with applicable law;

 

   

the fact that the Company has conducted its business in the ordinary course of business in all material respects and that there has not been a “material adverse effect” (as defined below);

 

   

no undisclosed material liabilities or obligations of the Company or any subsidiary;

 

   

compliance with applicable laws, permits and absence of any judgment, injunction or order that would prevent or materially delay the Merger;

 

   

the absence of certain material litigation, suit, claim, action or proceeding against or involving the Company or its subsidiaries;

 

   

real property of the Company and its subsidiaries;

 

   

intellectual property, privacy and data protection matters;

 

   

the Company’s tax returns, payment of taxes and other tax matters;

 

   

employee benefit plans;

 

   

labor and employment matters;

 

   

environmental matters, including compliance with applicable environmental laws;

 

   

the Company’s material contracts, their validity, enforceability and the absence of breach or default under such material contracts;

 

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absence of certain brokers’ fees and expenses;

 

   

the opinion of PJ Solomon, the Company’s financial advisor;

 

   

absence of “rights plan”, “rights agreements”, and “poison pills” and inapplicability of anti-takeover laws;

 

   

absence of certain transactions with interested parties;

 

   

the Company’s credit agreements, and the absence of any defaults thereunder; and

 

   

absence of any additional representations and warranties.

Subject to certain exceptions in the Merger Agreement, the Merger Agreement also contains certain customary representations and warranties of Transform and Merger Subsidiary as to, among other things:

 

   

due formation, valid existence and good standing;

 

   

corporate authority relative to the Merger Agreement, consents and approvals relating to the execution, delivery and performance of the Merger Agreement, and consummation of the transaction contemplated thereby, by Transform and Merger Subsidiary and the enforceability of the Merger Agreement against Transform and Merger Subsidiary;

 

   

absence of any filings with any other governmental authority other than those filings required by the Merger Agreement;

 

   

absence of (i) any conflict with or violation of the organizational documents of Transform or Merger Subsidiary, (ii) any conflict with or violation of applicable laws, (iii) any requirement for payment or consent, breach or default under, or any right of termination, amendment, acceleration or cancellation of, any contract of Transform or Merger Subsidiary and (iv) any lien on any asset of Transform or its affiliates, in each case, as a result of the execution, delivery and performance by Transform and Merger Subsidiary of the Merger Agreement and the consummation by them of the transactions thereunder;

 

   

the truth and completeness of any information supplied by Transform to the Company for use in this information statement or other required filings;

 

   

broker’s fees and expenses;

 

   

delivery, legality and enforceability of the Equity Commitment Letter and the sufficiency of such funds together with Transform’s financial resources to satisfy Transform’s payments obligations under the Merger Agreement;

 

   

absence of any litigation, suit, claim, action or proceeding against or involving Transform that would prevent or materially delay Transform or Merger Subsidiary’s ability to consummate the Merger and the other transactions contemplated by the Merger Agreement; and

 

   

ownership by ESL of a certain number of shares of Company Common Stock.

Some of the representations and warranties in the Merger Agreement are qualified by knowledge or materiality qualifications including, in certain instances, a “material adverse effect” qualification with respect to the Company and Transform.

For purposes of this summary of the Merger Agreement, a “material adverse effect” with respect to the Company means a material adverse effect on (i) the Company’s ability to consummate the transactions contemplated by the Merger Agreement or (ii) the financial condition, business, assets or results of operations of the Company and its subsidiaries as a whole, excluding any such effect to the extent resulting from:

 

   

changes in general economic or political conditions or the financial or capital markets in the United States or elsewhere in the world;

 

   

changes generally affecting the industry in which the Company and its subsidiaries operate;

 

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acts of war, sabotage or terrorism or natural or man-made disasters;

 

   

for certain purposes of the Merger Agreement, the announcement, pendency or performance of the transactions contemplated by the Merger Agreement or any definitive agreement for the sale of the Outlet Segment, including the impact on relationships, contractual or otherwise, with customers, suppliers, distributors, licensors, licensees, partners, lenders or employees of the Company or any of its subsidiaries;

 

   

the identity of Transform as the investor in the Company or of Transform or one of its affiliates as party to the Merger Agreement or any facts or circumstances concerning Transform or any of its affiliates, including their respective relationships with the Company (including with respect to the supply of merchandise) or any customers, suppliers, distributors, licensors, licensees or partners of the Company or any of its subsidiaries;

 

   

changes or prospective changes in GAAP or applicable law (or interpretation or enforcement thereof);

 

   

changes in the market price or trading volume of the shares of the Company’s Common Stock;

 

   

the failure of the Company and its subsidiaries to meet internal or analysts’ expectations or projections, performance measures, operating statistics or revenue or earnings predictions;

 

   

the petition for relief under Chapter 11 of Title 11 of the United States Code filed by Sears Holdings Corporation and certain of its subsidiaries on October 15, 2018, and related events;

 

   

any action taken by the Company or any of its subsidiaries at the written direction or request of Transform, or in accordance with the express terms of this Agreement; or

 

   

certain other matters agreed upon by the Company and Transform.

Conduct of Business Pending the Merger

The Merger Agreement provides that, subject to certain exceptions, during the period commencing on the date of the Merger Agreement and ending upon the closing of the Merger, the Company must conduct its business and the business of its subsidiaries in the ordinary course of business consistent with past practice, and use commercially reasonable efforts to preserve substantially intact the business organization of the Company and its subsidiaries, to maintain its permits, to keep available the services of its directors, officers, employees and key consultants, and to maintain satisfactory relationships with customers, lenders, suppliers and others having significant business relationships with the Company or its subsidiaries. Further, the Merger Agreement also provides that during the period from the date of the Merger Agreement until the closing of the Merger, subject to certain exceptions, the Company must not, and must cause each of its subsidiaries not to, do any of the following:

 

   

amend its organizational documents (whether by merger, consolidation or otherwise);

 

   

split, combine or reclassify any shares of its capital stock; declare, set aside or pay any dividend or other distribution in respect of its capital stock or redeem, repurchase or otherwise acquire any the Company securities or one of its subsidiary’s securities except in connection with the formation of any subsidiary organized under the laws of any state of the United States;

 

   

issue, sell or otherwise deliver any securities of the Company or any of its subsidiaries, except for:

 

   

any issuance upon settlement of any restricted stock unit award of the Company that is outstanding on the date of the Merger Agreement in accordance with its terms; or

 

   

any issuance or sale to the Company or a wholly owned subsidiary of any securities of a subsidiary of the Company;

 

   

amend any term of any security of the Company or its subsidiaries or issue any award or amend the terms of any outstanding award under any stock plan or long-term incentive plan or accelerate the vesting of any restricted stock unit of a long-term incentive plan award except as required by such award’s terms;

 

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incur any capital expenditures or related obligations or liabilities in excess of the amount contemplated by the Company’s capital expenditure budget;

 

   

merge or consolidate with another person, adopt a plan of complete or partial liquidation, recapitalization or restructuring of any line of the Company’s business or acquire any assets, securities or interests in entities or businesses other than acquisitions among wholly owned subsidiaries of the Company and supplies, equipment or inventory in the ordinary course of business;

 

   

sell, lease, transfer or dispose of, create or incur any lien on, or otherwise abandon or fail to maintain any of the Company or its subsidiaries assets, securities, properties or interests in entities or businesses, except for:

 

   

transactions among wholly owned subsidiaries of the Company;

 

   

any sale of the Outlet Segment in accordance with the terms of the Merger Agreement; and

 

   

sale of products, services, inventory or obsolete equipment or non-exclusive licenses granted by the Company in the ordinary course of business consistent with past practice;

 

   

make any loans, advances or capital contributions to, or investments in, any other person other than in wholly owned subsidiaries of the Company or advances to its employees in respect of travel or other related business expenses, in each case, in the ordinary course of business consistent with past practice;

 

   

incur any indebtedness for borrowed money or guarantees thereof or issue or sell any debt securities or options, warrants, calls or other rights to acquire any debt securities of the Company or its subsidiaries, except for:

 

   

any indebtedness under the credit agreements of the Company outstanding as of the date of the Merger Agreement and any indebtedness for borrowed money incurred under the credit agreements to finance working capital needs incurred in the ordinary course; and

 

   

any indebtedness for borrowed money among the Company and its wholly owned subsidiaries;

 

   

establish or amend any stock plan or the long-term incentive plan, except for any amendments required under applicable law or any grant of awards under such plans;

 

   

enter into, amend or renew any material contract except in the ordinary course, waive, release or assign any material rights, claims or benefits of the Company or its subsidiaries under any material contract or voluntarily accelerate, terminate or cancel, a renewal option for any material contract;

 

   

except as required by applicable law or the terms of a Company employee plan in effect on the date of the Merger Agreement:

 

   

grant or increase any severance, retention or termination pay (or amend any existing severance pay, retention or termination arrangement);

 

   

enter into any employment, consulting, bonus, change in control, deferred compensation or other similar agreement;

 

   

establish, adopt or amend, or otherwise increase benefits payable under any Company employee plan or collective bargaining agreement;

 

   

increase compensation, bonus or other benefits payable, except for increases in annual base compensation in connection with a promotion or retention related adjustment of not more than 3% to employees with base compensation of less than $100,000;

 

   

establish, adopt or enter into any plan, agreement or arrangement, or otherwise commit to gross-up, indemnify or otherwise reimburse any current or former service provider for any tax incurred by such provider;

 

   

hire any employees other than (i) to fill vacancies arising due to terminations of employment of employees with base compensation of less than $150,000 or (ii) as set forth in the Company’s business plan, or terminate the employment of any employees other than for cause or performance related reasons;

 

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change the Company’s methods of accounting, except as required by concurrent changes in GAAP or in Regulation S-X under the Exchange Act;

 

   

change the policies or practices regarding accounts receivables or accounts payable or fail to manage working capital in accordance with past practices;

 

   

commence any proceeding other than for routine collection of invoices, the routine enforcement of the Company’s rights under existing contracts or as expressly contemplated by the Merger Agreement;

 

   

pay, discharge, compromise, settle or satisfy:

 

   

any stockholder litigation or dispute against the Company or any of its subsidiaries;

 

   

any proceeding or any other liability or obligation other than (i) liabilities or obligations incurred in the ordinary course and (ii) proceedings, liabilities and obligations in amount not to exceed $200,000 individually or in the aggregate;

 

   

(i) make, rescind or change any tax election, (ii) change any annual tax accounting period, (iii) adopt or change any method of tax accounting (or make any change in accounting principles or practices used), (iv) amend any material tax return or file a claim for a material tax refund, (v) obtain or enter into any tax ruling or closing agreement, (vi) extend or waive the statute of limitations with respect to any tax or tax return, (vii) settle any material tax claim, audit or assessment or (viii) surrender any right or claim to a material refund, offset or other reduction in tax liability;

 

   

withdraw or modify any of the Company’s compensation committee approvals of the Company employee plans;

 

   

terminate, let lapse or materially amend or modify any insurance policy;

 

   

enter into any contract with any stockholder, director or officer of the Company or any of its subsidiaries or enter into any other material transaction with any other person that would be required to be reported pursuant to Item 404 of Regulation S-K;

 

   

take any action that would reasonably be expected to amount to an event of default under the Company’s credit agreements;

 

   

amend or modify in any respect the Company’s credit agreements other than in connection with seeking certain waivers of default or events of default under the Company’s credit agreements and certain waivers and amendments under or to the Company’s credit agreements related to any Outlet Sale, in each case subject to certain restrictions as set forth in the Merger Agreement; and

 

   

agree, authorize or commit to do any of the foregoing actions.

Other Covenants and Agreements

Access to Information

From the date of the Merger Agreement until the closing and subject to certain exceptions, the Company will (i) give Transform, its counsel, financial advisors, auditors and other authorized representatives reasonable access to the offices, properties, assets, books and records of the Company and its subsidiaries, upon reasonable prior notice and during normal business hours, (ii) furnish to Transform, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information as such persons may reasonably request and (iii) instruct the employees, counsel, financial advisors, auditors and other authorized representatives of the Company and its subsidiaries to cooperate with Transform and its authorized representatives in its investigation of the Company and its subsidiaries. The Company may restrict the foregoing access and disclosure requirements to the extent that any applicable law requires the Company or its subsidiaries to restrict or prohibit access to such properties or information, such disclosure would result in the Company losing attorney-client privilege or such information relates to the process of selling the Outlet Segment of the

 

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Company pursuant to the terms of the Merger Agreement. Any such investigation made pursuant to this section will be conducted in such a manner as not to unreasonably interfere with the sale of the Outlet Segment or the conduct of the business of the Company or its subsidiaries. The Company is also required to provide prompt notice to Transform upon the occurrence of any default or event of default under the Company’s credit agreements.

Additionally, the Company must provide Transform, within 21 days following the end of each month, an internal management reporting package including, for each of the Outlet Segment and the Hometown Segment:

 

   

profit and loss statements for such month;

 

   

profit and loss statements to date for the financial quarter in which such month falls; and

 

   

profit and loss statements to date for the fiscal year in which such month falls;

in each case, along with variances from the same period in the prior year and the annual operating plan. However, the Company only needs to provide such information to the extent such information is prepared by the Company in the ordinary course of business.

No Solicitation; No Change in Recommendation

Pursuant to the Merger Agreement, the Company has agreed to, and cause each of its subsidiaries and their respective representatives to immediately cease and terminate any solicitation, discussions or negotiations with any persons with respect to any acquisition proposal (as defined below), or any potential acquisition proposal. The Company has further agreed to not, and to cause each of its subsidiaries and their respective representatives not to, solicit, initiate, facilitate or encourage any inquiries regarding, or the making or announcement of any proposal or offer that constitutes, or would reasonably be expected to lead to, an acquisition proposal, participate in any discussions or negotiations with or furnish any information to, any person that is making or is considering making an acquisition proposal, approve or recommend any acquisition proposal or enter into any definitive agreement with respect to any acquisition proposal, in each case, other than in connection with any inquiries or proposals solely in connection with any inquiries or proposals in connection with an Outlet Sale that complies with certain requirements set forth in the Merger Agreement.

Under the Merger Agreement, neither the Board of Directors nor any committee thereof (including the Special Committee) will (i)(A) fail to include the Company board of directors’ recommendation to stockholders of the Company that they approve of the Merger Agreement and the transactions contemplated thereby (such recommendation we refer to as the “company board recommendation”) in this information statement, (B) change or publicly propose to change, in a manner adverse to Transform, the company board recommendation, (C) take any formal action or make any public statement in connection with a tender offer or exchange offer, (D) fail to recommend against the acceptance of any tender offer or exchange offer and reaffirm the company board recommendation within 10 business days following the commencement of such an offer, (E) adopt or recommend or publicly propose to adopt or recommend to the stockholders of the Company any acquisition proposal or (F) agree to take any of the foregoing actions, (ii) permit the Company or any of its subsidiaries to enter into any agreement relating to or providing for any acquisition proposal or (iii) grant any waiver, amendment or standstill with respect to any class of equity interests of the Company or any of its subsidiaries, any confidentiality agreement or antitakeover statute or similar law. The Company will not engage in any discussions or negotiations regarding acquisition proposals or changes to the terms of any such acquisition proposals.

The foregoing restrictions will not prevent the Company, the Company Board of Directors or the Special Committee from complying, in the good faith judgment of the Company Board of Directors or the Special Committee, after consultation with its outside legal counsel, any applicable laws or their fiduciary duties to the stockholders of the Company.

 

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Under the Merger Agreement, “acquisition proposal” means any third party proposal or offer relating to (i) an acquisition, purchase or exclusive license of 15% or more of the consolidated assets of the Company and its subsidiaries or 15% or more of any class of equity or voting securities or any of its subsidiaries whose assets constitute 15% or more of the consolidated assets of the company, (ii) any tender offer or exchange offer that, if consummated, would result in such third party beneficially owning 15% or more of any class of equity or voting securities of the Company or any of its subsidiaries whose assets constitute 15% or more of the consolidated assets of the Company or (iii) a merger, reorganization, consolidation, share exchange, business combination or similar transaction involving the Company or any of its subsidiaries whose assets constitute 15% or more of the consolidated assets of the Company. An acquisition proposal does not include any inquiry, proposal or offer from a third party solely in connection with an Outlet Sale.

Sale of the Outlet Segment

Under the terms of the Merger Agreement, the Company may, from the date of the Merger Agreement until the Outlet Sale End Date:

 

   

solicit offers from third parties solely in connection with an Outlet Sale that complies with the requirements set forth in the Merger Agreement, and facilitate any attempt by any third party to consummate such sale including by way of (i) not enforcing existing standstill provisions, (ii) providing access to non-public information relating to the Outlet Segment to such third party, so long as such third party has executed a confidentiality agreement with the Company on terms no less favorable than those provided in the confidentiality agreement between the Company and Transform and provided that the Company substantially concurrently makes available to Transform and Merger Subsidiary any non-public information concerning the Outlet Segment that is generally made available to such third parties;

 

   

initiate, engage in or otherwise participate in discussions or negotiations with any third party solely regarding an Outlet Sale;

 

   

cooperate, assist with or facilitate any such inquires, proposals, discussion or negotiations with any such third party solely in connection with an Outlet Sale;

 

   

enter into a confidentiality agreement and an Outlet Purchase Agreement with such third party in accordance with the requirements of the Merger Agreement;

 

   

consummate an Outlet Sale in accordance with the terms of the Merger Agreement.

The Company has further agreed that:

 

   

it will not execute any agreement that legally obligates the Company to effect an Outlet Sale other than an Outlet Purchase Agreement;

 

   

it will provide Transform and its representatives with periodic updates on the status of the outlet sale process, provided the Company will not be required to disclose to Transform or its representatives the economic terms of any Outlet Sale or the identity of a prospective purchaser, other than as required by the Merger Agreement;

 

   

it will provide certain competitively sensitive information to no more than three final bidders for the Outlet Segment and, in the case of any final bidder that is a strategic bidder, only pursuant to a customary “clean team” agreement that limits access to representatives of such bidder that are not involved in the pricing, procurement or strategy related matters for the bidder or any competitor of the Company;

 

   

it will (i) provide Transform with the auction draft of the Outlet Purchase Agreement at least 24 hours before it is first sent to a prospective purchaser, (ii) provide Transform with periodic updates with regard to any material changes in the outlet purchase agreement proposed by the final bidders that the Company is reasonably likely to agree to, (iii) provide Transform with a copy of a substantially final draft of the outlet purchase agreement to be entered into at least 24 hours prior to its execution and (iv) consider in good faith any reasonable comments of Transform and its counsel on any draft of the outlet purchase agreement provided to Transform; and

 

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any Outlet Purchase Agreement the Company enters into must be in accordance with certain requirements detailed in the Merger Agreement (as described below).

Under the terms of the Merger Agreement, any Outlet Purchase Agreement the Company enters into must include certain terms, including that:

 

   

the Net Proceeds of the Outlet Sale must be at least $97,500,000;

 

   

the buyer of the Outlet Segment must assume all obligations and liabilities primarily arising out of or relating to the Outlet Segment without further recourse to the Company;

 

   

consideration for the Outlet Sale must be payable to the Company in full at the closing of the Outlet Sale exclusively in cash in U.S. dollars, and the maximum liability of the Company with respect to any post-closing working capital adjustment may not exceed $2,500,000;

 

   

the buyer of the Outlet Segment must agree to offer comparable employment to the Company employees dedicated to the Outlet Segment such that the Company will have no severance obligations to such employees;

 

   

certain equity, bonus and incentive payments to certain executives and employees and 50% of the aggregate premiums paid by the Company for any “tail” policy for directors’ and officers’ liability insurance and fiduciary liability insurance as required by the Merger Agreement must either be borne by the buyer of the Outlet Segment or deducted from the Net Proceeds of the Outlet Sale;

 

   

the Company and the buyer of the Outlet Segment may enter into a transition services agreement for the Company to provide customary transition services to the buyer for no more than 180 days following the closing of the Outlet Sale;

 

   

other than with respect to the post-closing working capital adjustment described above, mutual indemnification by the buyer of the Outlet Segment for assumed liabilities and by the Company for excluded liabilities, and customary “wrong pockets” obligations, the Company must have no obligations under the Outlet Purchase Agreement that survive the closing of the Outlet Sale;

 

   

no condition to the Company’s obligation to close the Outlet Sale may be waived without the consent of Transform; and

 

   

the Outlet Purchase Agreement must be terminable by the Company without any further liability or obligation to the Company from and after the Outlet Closing Deadline.

Transform will inform the Company promptly after Transform makes any determination that any draft of the Outlet Purchase Agreement provided by the Company to Transform does not comply with the requirements detailed in the Merger Agreement.

If the Board of Directors, acting on the recommendation of the Special Committee determines that a proposed Outlet Sale would reasonably be expected to result in net proceeds of less than $120,000,000, the Company will not enter into an Outlet Purchase Agreement for such sale unless the following conditions are satisfied:

 

   

the Company will provide prior written notice to Transform five business days in advance to the effect that the Company intends to effect such a sale and specifying the Company’s good faith estimate of the net proceeds of such sale;

 

   

the Company will be, and will cause its financial and legal advisors to be, available for negotiations with Transform and its representatives to amend the Merger Agreement to adjust the Merger Consideration payable in the event an Outlet Sale is not consummated prior to closing of the Merger that would result in such adjusted Merger Consideration equaling or exceeding the Merger Consideration that would be payable if such proposed Outlet Sale were consummated; and

 

   

at or following the end of such five business day period, the Board of Directors, acting on the recommendation of the Special Committee will have determined in good faith that the Merger Consideration

 

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that would be payable under the Merger Agreement if the proposed Outlet Sale were consummated would exceed the Merger Consideration that would be payable in the event that the proposed Outlet Sale is not consummated, the Board of Directors may cause the Company to enter into an Outlet Purchase Agreement and consummate the proposed Outlet Sale.

In the event that no Outlet Sale is agreed to and no Outlet Purchase Agreement is executed by the Outlet Sale End Date, the Company must cease all discussions with all third parties regarding any Outlet Sale. In the event that an Outlet Purchase Agreement has been executed by the Outlet Sale End Date, but such Outlet Sale does not close prior to the Outlet Closing Deadline, the Company must terminate such Outlet Purchase Agreement without any further liability or obligation to the Company other than any liability for the Company’s breach of such Outlet Purchase Agreement prior to its termination.

If an Outlet Sale is consummated prior to closing of the Merger, the Company will cause the net proceeds of such sale to be applied or reserved to pay down any debt outstanding under the Company’s credit agreements.

Proposals Regarding the Hometown Segment

Transform has the right to propose actions or changes regarding the operations of the Hometown Segment, including actions and or changes reasonably designed to implement cost savings initiatives in anticipation of the common ownership of the Company and Transform’s existing operation, and the Company must approve and implement such changes as long as such changes would not (i) materially negatively impact the Company’s liquidity, (ii) otherwise have a significant adverse impact on the Company or (iii) violate applicable law. Transform may not propose any actions or changes relating to prices to customers of the Hometown Segment. Transform has the right to discuss with the Company’s management on a regular basis, at Transform’s sole discretion, the operations of the Hometown Segment and the Company as a whole insofar as the Hometown Segment is materially impacted. The Company must designate two senior members of its management team to be available to respond to inquiries from Transform and provide information or other assistance to Transform in connection with the foregoing rights of Transform.

Financing Cooperation

Prior to the closing of the Merger, the Company will furnish financial and other information customary in bank or other term loan or revolving financings and reasonably required in connection with any debt financing regarding the Company and its subsidiaries, as further detailed in the Merger Agreement, as promptly as reasonably practicable following such request by Transform. The Company will also, and will cause its subsidiaries and their respective representatives and senior employees to, use their commercially reasonable efforts, at Transform’s sole expense, to provide such assistance in connection with the arrangement of the debt financing as is necessary or customary and as may be reasonably requested by Transform. Such assistance will include but not be limited to using commercially reasonable efforts to:

 

   

upon reasonable advance notice, have senior management assist in preparation for and participate in a reasonable number of lender marketing meetings and calls and a reasonable number of other due diligence sessions with prospective lenders and rating agencies, in each case in connection with obtaining the debt financing;

 

   

assist with the preparation of, and provide all such customary information on the Company for, customary rating agency presentations, confidential information memoranda and bank syndication materials and similar documents customarily required in connection with debt financing including the marketing and syndication thereof;

 

   

deliver customary information regarding the Company and its subsidiaries necessary for schedules and certificates to be delivered in connection with the debt financing;

 

   

cooperate with Transform in connection with delivery of any payoff letters as required by the Merger Agreement;

 

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take such actions as are reasonably requested by Transform and reasonably within the Company’s control to facilitate the satisfaction on a timely basis of all conditions precedent to obtaining the debt financing;

 

   

assist Transform in obtaining a corporate family rating from Moody’s Investor Services, a public corporate credit rating of the Company from Standard & Poor’s Ratings Group and facilities ratings for any of the debt facilities in connection with the debt financing;

 

   

reasonably cooperate with the marketing efforts of Transform and any source of the debt financing, including using commercially reasonable efforts to ensure that the syndication efforts benefit from the existing banking relationships of the Company and its subsidiaries;

 

   

assist in making arrangements for (i) the pledge, grant, recordation and perfection of liens in share certificates, securities and other collateral and (ii) the provision of guarantees supporting the debt financing that are required for closing and disbursement of the debt financing, including assisting with the preparation of perfection certificates and other customary documents;

 

   

cause senior management to assist in the preparation of a business plan as requested or required by Transform or prospective lenders in connection with obtaining the debt financing; and

 

   

subject to the occurrence of the closing and the provision of the necessary funds by Transform, take all corporate actions (i) reasonably requested by Transform necessary for each of the Company’s credit agreements to be satisfied and discharged and/or to fund the debt financing, (ii) as may be reasonably requested by Transform to effect the termination on the closing date of all guarantees and liens in connection therewith and the delivery of any required payoff letters and (iii) as may be reasonably requested by Transform to effect the execution and/or delivery of lien releases, termination documentation and other instruments of discharge with respect to the foregoing;

provided that, in each case of the actions in the bulleted list above, (i) none of the Company, its subsidiaries or any of their respective officers, directors, managers, employees, accountants, consultants, legal counsel, agents or other representatives will be required to pay any commitment or other fee or incur any liability with respect to any matters relating to the debt financing or enter into any agreement in connection with the debt financing prior to closing of the Merger, (ii) the Company and its subsidiaries and their respective officers and employees will not be required to take any action that would materially and unreasonably interfere with the operation of the business of the Company and its subsidiaries, (iii) no such cooperation will be required to the extent that it would cause any condition to the Merger Agreement or any other breach of the Merger Agreement to occur, reasonably cause any director, officer or employee of the Company or its subsidiaries to incur personal liability or cause any breach of any applicable law or material contract to which the Company or its subsidiaries are a party; (iv) the Company and its subsidiaries will not be required to enter into, execute or approve any agreement or other documentation or agree to any change or modification of any existing agreement or documentation, in each case, that would be effective at the closing of the Merger.

Transform will (i) promptly upon request by the Company, reimburse the Company and its subsidiaries for all reasonable, documented and invoiced out-of-pocket costs and expenses incurred by them in connection with the cooperation of the Company and its subsidiaries in connection with this financing cooperation and (ii) indemnify the Company, its subsidiaries and their respective representatives from and against any and all damages or expenses suffered or incurred by any of them in connection with the arrangement of the debt financing and any written information used in connection therewith.

Director and Officer Liability

For six years from and after the effective time of the Merger, Transform must cause the surviving corporation to indemnify the present and former officers, managers and directors of the Company and any of its subsidiaries against all costs and expenses incurred in connection with any actual or threatened proceeding arising out of the fact that such person was an officer, manager or director of the Company or any of its subsidiaries or serving at

 

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the request of the Company in such capacity whether asserted or claimed prior to, at or after the effective time of the Merger. In the event of such a proceeding, the indemnified person will be entitled to advancement of expenses incurred in the defense of such proceeding from the surviving corporation, provided the indemnified person undertakes to repay such advances if it is ultimately determined that they were not entitled to such indemnification. Neither Transform nor the surviving corporation will settle any such proceeding in which indemnification could be sought unless such settlement includes an unconditional release of the indemnified person from all liability arising out of such proceeding or the indemnified person consents to such settlement in writing. The surviving corporation will cooperate in the defense of any such proceeding to the fullest extent provided by law and the Company’s organizational documents. If any such proceeding is commenced prior to the sixth anniversary of the effective time of the Merger, the provisions of this section will continue until the final disposition of such proceeding.

For six years following the effective time of the Merger, Transform will cause the provisions in the surviving corporation’s certificate of incorporation and bylaws regarding elimination of liability of directors, indemnification of officers, directors and employees and advancement of expenses to be maintained that are no less advantageous to the intended beneficiaries than the corresponding provisions of the Company’s certificate of incorporation and bylaws in effect as of the date of the Merger Agreement.

Prior to the effective time of the Merger, the Company will be permitted to obtain and pay for a six-year prepaid “tail” insurance policy on terms and conditions (in both amount and scope) providing substantially equivalent benefits as the current policies of directors’ and officers’ liability insurance and fiduciary liability insurance maintained by the Company and its subsidiaries with respect to matters arising on or before the effective time of the Merger, covering, without limitation, the transactions contemplated by the Merger Agreement. However, the Company may not expend a premium amount in excess of 300% of the last annual premium paid by the Company for such current policies for the premium of such tail coverage. If the aggregate premiums for such tail policy exceed such amount, the Company is only permitted to obtain tail coverage with the greatest coverage available for a cost not exceeding such amount. If the prepaid policy is obtained before the effective time of the Merger, Transform will cause such policy to be maintained in full force and effect, for its full term, and cause all obligations thereunder to be honored by the surviving corporation.

If Transform, the surviving corporation or any of their successors or assigns consolidates with or merges into any other person and is not the surviving corporation of such merger, or transfers or conveys all or substantially all of their assets, then, in each case, the successors and assigns of Transform or the surviving corporation will assume the obligations relating to director and officer liability set forth in the Merger Agreement.

Employee Matters

For one year following the effective time of the Merger, Transform will provide each employee of Transform, the surviving corporation or any of their respective subsidiaries who were also an employee of the Company or any of its subsidiaries immediately before the effective time of the Merger (such employee referred to as a “continuing employee”), with compensation and benefits that are no less favorable in the aggregate to either the compensation and benefits in effect immediately prior to the effective time of the Merger or the compensation and benefits provided to similarly situated employees of Transform’s other subsidiaries. Also, Transform will provide each continuing employee who participated in the annual incentive plan of the Company with a cash bonus incentive opportunity for fiscal year 2019 that, together with any payment pursuant to such annual incentive plan such continuing employee is entitled to under the terms of the Merger Agreement, if any, will be no less favorable than such continuing employee’s original full year cash bonus opportunity under the annual incentive plan.

Following the effective time of the Merger, Transform will give each continuing employee full credit for prior service with the Company and its subsidiaries for purposes of waiting periods to participate and vesting under any employee benefit plans (other than defined benefit pension plans and equity or other long-term incentive

 

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plans) and determination of benefit levels relating solely to vacation, sick, personal time off or severance plans and policies. In addition, Transform will use commercially reasonable efforts to waive any limitations on benefits relating to pre-existing conditions to the same extent waived under any comparable plan of the Company or its subsidiaries applicable to such continuing employee and recognize for purposes of annual deductible and out-of-pocket limits under its medical and dental plans, deductible and out-of-pocket expenses paid by continuing employees in the calendar year in which the effective time of the Merger occurs.

From and after the effective time of the Merger, Transform will cause the surviving corporation and its subsidiaries to honor, in accordance with its terms, (i) each existing employment, change in control, retention, severance and termination protection plan or agreement of or between the Company or its subsidiaries and any current or former officer, director or employee of that company, (ii) its obligations to pay annual bonuses with respect to the fiscal year in which the effective time of the Merger occurs and (iii) all vested and accrued benefits under any employee plan.

If requested by Transform, the Company will terminate any employee plan intended to qualify as a cash or deferred arrangement under Section 401(k) of the Internal Revenue Code of 1986.

Equity Financing

Transform will take all actions necessary to obtain the equity financing from ESL including (i) maintaining the equity commitment letter, (ii) using reasonable best efforts to ensure the accuracy of all representations and warranties of Transform in the equity commitment letter, (iii) complying with its obligations thereunder, (iv) satisfying all conditions applicable to Transform in the equity commitment letter, (v) using its reasonable best efforts to enforce its rights under the equity commitment letter and (vi) consummating the equity financing at or prior to the closing.

Debt Financing

If Transform elects to pursue the debt financing, Transform will provide the Company with fully executed copies of any related engagement, commitment or fee letter promptly following their execution and in any event no later than 45 days following any of (i) the date that any definitive agreement for the sale of the Outlet Segment is executed, (ii) the date that Transform is notified of the termination of any such definitive agreement and (iii) the expiration of the sale period for the sale of the Outlet Segment with no definitive agreement being entered into. Transform will not agree to, permit or enter into any amendment or waiver to the terms of the letters relating to the debt financing without the prior written consent of the Company (such consent not to be unreasonably withheld, delayed or conditioned) if any such amendment or waiver would reasonably be expected to impose any new conditions precedent or expand any existing condition to the funding of the debt financing contained in such letters or otherwise materially modify any of the financing information required to be delivered by the Company. Transform will promptly deliver to the Company any amendments or waivers that require the Company’s consent.

Reasonable Best Efforts

The Company and Transform must use (and cause their respective subsidiaries to use) their reasonable best efforts to take all actions reasonably necessary under applicable law to consummate the transactions contemplated by the Merger Agreement including filing as promptly as reasonably practicable all necessary filings with any governmental authority or third party and obtaining all approvals and consents required to be obtained from any governmental authority or third party.

In connection with any of the transactions contemplated by the Merger Agreement, the Company and Transform will use their reasonable best efforts to (i) cooperate in all reasonable respects with each other in connection with any filing, investigation or other inquiry, (ii) promptly inform the other party of any filing or communication

 

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received from any governmental authority or received in connection with any proceeding by a private party, and allow the other party to review such filing or communication and consider in good faith the comments of the other party in connection with such filing or communication and (iii) consult with each other in advance of any meeting with any such governmental authority or in connection with any proceeding by a private party and give the other party the opportunity to attend and participate in such meetings to the extent reasonably practicable.

If the parties make a good faith determination that a filing pursuant to the HSR Act is required, each party has agreed to prepare and file, as promptly as practicable after such determination, a notification and report form pursuant to the HSR Act. Each party agrees to, as promptly as reasonably practicable, provide to each federal or state governmental authority with jurisdiction over enforcement of an applicable antitrust law, non-privileged information and documents requested by such governmental authority that are necessary to consummate the Merger and the other transactions contemplated by the Merger Agreement.

Information Statement Filing; Schedule 13E-3

As promptly as reasonably practicable following the date of the Merger Agreement, the Company will prepare and file with the SEC this information statement and the Company and Transform will jointly prepare and file with the SEC the Schedule 13E-3. The Company will use reasonable best efforts (and after consultation with Transform) to respond to any comments or requests for additional information made by the SEC with respect to this information statement and the Company and Transform will use reasonable best efforts to jointly respond to any comments or requests for additional information made by the SEC with respect to the Schedule 13E-3.

Transform and Merger Subsidiary agree to cooperate with the Company in the preparation of this information statement including furnishing to the Company the required information relating to it and its affiliates to be included in this information statement or other such information that is customarily required to be included in information statements prepared in connection with transactions of the type contemplated in the Merger Agreement or any information reasonably requested by the Company. Prior to the filing with the SEC or the mailing to the stockholders of the Company of this information statement, the Company will provide Transform with a reasonable opportunity to review and comment on this information statement and the Company will reasonably consider such comments proposed by Transform. The Company will promptly notify Transform upon the receipt of any comments or requests by the SEC related to this information statement and provide Transform with copies of all such correspondence.

Transform and the Company will cooperate in the preparation and filing of the Schedule 13E-3, including furnishing to the other party the required information regarding itself and its affiliates, information that is customarily included in transaction statements on Schedule 13E-3 prepared in connection with transactions of the type contemplated by the Merger Agreement or that is reasonably requested by the other party. Transform and the Company will promptly notify the other party upon the receipt of any comments or requests from the SEC and its staff related to the Schedule 13E-3 and provide the other party with copies of all such correspondence.

Stock Exchange De-listing

The Company will cooperate with Transform and use its reasonable best efforts to cause the Company securities to be de-listed from NASDAQ and de-registered under the Exchange Act as promptly as practicable after the effective time of the Merger.

Transaction Litigation

In the event that any litigation related to the Merger Agreement, the Merger or the transactions contemplated by the Merger Agreement is brought, or threatened against the Company or any of its directors or executive officers following the date of the Merger Agreement, the Company must promptly notify Transform orally and in writing and will keep Transform reasonably informed of its status. The Company will give Transform the opportunity to

 

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participate in the defense or settlement of any such proceeding and will give due consideration to Transform’s views with respect thereto. The Company agrees will not agree to any settlement of any proceeding without Transform’s prior written consent (such consent not to be unreasonably withheld, conditioned or delayed).

Takeover Laws

The Company will (i) take all actions necessary so that no “control share acquisition”, “fair price”, “moratorium” or other antitakeover or similar statute or regulation becomes applicable to the transactions contemplated or permitted by the Merger Agreement and (ii) if any such antitakeover or similar statute or regulation becomes applicable to such transactions, take all actions necessary so that such transactions may be consummated as promptly as practicable and to take all such other actions as are reasonably necessary to eliminate or minimize the effects of any such statute or regulation on the transactions.

Conditions to the Merger

The obligation of the Company, Transform and Merger Subsidiary to effect the Merger are subject to the satisfaction or, if permissible by applicable law and the Merger Agreement, waiver of the following conditions as of the closing of the Merger:

 

   

the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of Company Common Stock entitled to vote on such matters, which condition was satisfied upon the Principal Stockholders’ delivery of the Written Consent;

 

   

the absence of any law or injunction by any governmental authority which renders illegal or otherwise restrains or prohibits the Merger, and the absence of any proceeding by any governmental authority that seeks to render illegal or otherwise restrain or prohibit the Merger;

 

   

either (i) an Outlet Sale has been consummated and the procedure set forth in the Merger Agreement for determining the Merger Consideration in such a circumstance has been satisfied, (ii) the period designated for an Outlet Sale has expired and no definitive agreement with respect thereto has been entered into, or (iii) the period designated for the closing of an Outlet Sale has expired and any definitive agreement entered into with respect thereto has been terminated and neither the Company nor any of its subsidiaries is subject to any material liability for any breaches thereof by the Company;

 

   

if a notification and report form pursuant to the HSR Act is required to be filed in connection with the transactions contemplated by the Merger Agreement, the applicable waiting period (and any extension thereof) applicable to the Merger under the HSR Act will have expired or been terminated;

 

   

this information statement has been mailed to the Company’s stockholders at least 20 days prior to the closing date and the Merger is permitted under Regulation 14C of the Exchange Act; and

 

   

all obligations, letters of credit and commitments under the Company’s credit agreements have been paid in full or terminated, except, in each case, as waived by the applicable counterparties.

The obligation of Transform and Merger Subsidiary to consummate the Merger are subject to the satisfaction or, if permissible by applicable law and the Merger Agreement, waiver of the following additional conditions as of the closing of the Merger:

 

   

the representations and warranties of the Company in the Merger Agreement being true and correct subject to a material adverse effect standard, with exceptions for certain representations and warranties (including in relation to the Company’s capitalization, existence, good standing and authority to act), which are instead subject to a de minimis or materiality standard or which in certain cases must be true and correct as written, with certain of the Company’s representations and warranties being disregarded for purposes of this condition (i) to the extent related to the Outlet Segment, if an Outlet Sale has been consummated, and (ii) where any failure of a representation or warranty of the Company to be true and correct as of the closing results from any action or change regarding the operations of the Hometown Segment proposed by Transform as permitted by the Merger Agreement;

 

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the absence of any event of default under the Company’s credit agreements other than any event of default arising solely from actions taken by Transform in violation of the Merger Agreement or the ESL Letter Agreement;

 

   

the Company having performed in all material respects each of the obligations under the Merger Agreement at or prior to the closing date, provided that the Company’s obligation to provide finance cooperation to Transform will not constitute a failure of this condition except where the Company has acted with bad faith or gross negligence or has willfully breached such obligations and, if capable of being cured, is not cured by the Company within five business days of delivery of written notice of such breach or failure to perform from Transform;

 

   

since the date of the Merger Agreement, a Company material adverse effect has not occurred, provided that no Company material adverse effect will be deemed to have occurred as a result of any action or change by the Company regarding the operations of the Hometown Segment proposed by Transform in accordance with the Merger Agreement; and

 

   

Transform having received a certificate from the Company certifying that the above closing conditions of the Company have been satisfied.

The obligation of the Company to consummate the Merger are subject to the satisfaction or, if permissible by applicable law and the Merger Agreement, waiver of the following additional conditions as of the closing of the Merger:

 

   

the representations and warranties of Transform and Merger Subsidiary being true and correct on the date of the Merger Agreement and on the closing date, except where the failure of such representations and warranties to be so true and correct (disregarding all qualifications or limitations as to “materiality” or words of similar import) would not, individually or in the aggregate, prevent, materially delay or materially impair Transform’s or Merger Subsidiary’s ability to consummate the transactions contemplated by the Merger Agreement;

 

   

each of Transform and Merger Subsidiary having performed in all material respects each of its obligations, and complied in all material respects with each of its agreements and covenants under the Merger Agreement at or prior to the closing date; and

 

   

the Company having received a certificate from Transform certifying that the foregoing conditions have been satisfied.

Termination; Effect of Termination

The Merger Agreement may be terminated and the transactions may be abandoned at any time prior to the effective time of the Merger:

 

   

by mutual written agreement of Transform and the Company (provided that any such termination has been approved by the Special Committee);

 

   

by either Transform or the Company (provided that any such termination by the Company has been approved by the Special Committee), if:

 

   

the Merger has not occurred on or before 5:00 p.m. (New York City time) on the End Date (as defined in the Merger Agreement), except this termination right is not available to any party whose breach of any provision of the Merger Agreement results in the failure of the Merger to be consummated by such time;

 

   

any applicable law or order by a governmental authority (which has become final and nonappealable) makes consummation of the Merger illegal or otherwise prohibits the consummation of the Merger, except this termination right is not available to a party whose breach of the Merger Agreement results in the existence of any such law or order;

 

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by the Company if:

 

   

the Principal Stockholders did not deliver the Written Consent to the Company within four hours after the execution and delivery of the Merger Agreement, which termination right expired upon the delivery of the Written Consent immediately following the execution of the Merger Agreement;

 

   

there is a breach or failure by Transform or Merger Subsidiary of any of their respective representations, warranties, covenants or agreements under the Merger Agreement that would cause the related condition to fail and such breach or failure is incapable of being cured by the End Date or, if curable by the End Date, Transform does not cure such breach or failure within 30 days after receipt of written notice from the Company of such breach or failure (or, if sooner, the End Date), except this termination right is not available if the Company is in material breach of any of its representations, warranties, covenants or agreements in the Merger Agreement;

 

   

by Transform if:

 

   

there is a breach or failure by the Company of any of its representations, warranties, covenants or agreements in the Merger Agreement that would cause the related condition to fail and such breach or failure is incapable of being cured by the End Date or, if curable by the End Date, the Company does not cure such breach or failure within 30 days after receipt of written notice from Transform of such breach or failure (or, if sooner, the End Date), except this termination right is not available if Transform is in material breach of any of its representations, warranties, covenants or agreements in the Merger Agreement or if failure of the Company’s condition related to the absence of any event of default under a credit agreement is solely a result of actions taken by Transform in violation of the Merger Agreement or ESL in violation of the ESL Letter Agreement.

If the Merger Agreement is validly terminated pursuant to the termination rights described above in this section, with Merger Agreement will become void and of no effect without liability of any party (or any stockholder or representative of such party) to the other party except for liability for damages resulting from such party’s fraud or willful and material breach of the Merger Agreement prior to its termination and except for the provision regarding public announcements, provisions relating to the effect of termination and certain other specified general provisions of the Merger Agreement, each of which will survive the termination of the Merger Agreement.

Specific Performance

The Company and Transform have agreed that the parties will be entitled to an injunction or injunctions to prevent breaches of the Merger Agreement or to enforce specifically the performance of the terms and provisions thereof in the Delaware Court of Chancery or any federal court located in the State of Delaware or any other Delaware state court, in addition to any other remedy to which they are entitled at law or in equity.

Amendment; Extension; Waivers

Any provision of the Merger Agreement may be amended or waived if such amendment or waiver is in writing and is signed, in the case of an amendment, by each party to the Merger Agreement or, in the case of a waiver, by each party against whom the waiver is to be effective.

However:

 

   

any such amendment or waiver by the Company will be at the direction of and approved by the Special Committee;

 

   

there will be no amendment or waiver that would require the approval of the stockholders of the Company without first obtaining such approval; and

 

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the closing condition requiring all obligations, letters of credit and commitments under the Company’s credit agreements have been paid in full or terminated may not be modified, waived or otherwise amended without the prior written consent of the agents under each of the Company’s credit agreements.

The failure or delay of any party to assert any of its rights under the Merger Agreement will not constitute a waiver of those rights.

Expenses

Except as otherwise provided in the Merger Agreement, each of the parties has agreed to bear its own expenses in connection with the Merger Agreement.

Governing Law; Jurisdiction

All claims and causes of action arising out of or relating to the Merger Agreement will be governed by and construed in accordance with Delaware law.

Any proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, the Merger Agreement or the transactions contemplated thereby, other than any matters with respect to the determination of the final amount of the Merger Consideration or matters with respect to debt financing sources, must be brought in the Delaware Court of Chancery or, if such court does not have jurisdiction, any federal court located in the State of Delaware or other Delaware state court and the parties consent to the jurisdiction of such courts (and of the appropriate appellate courts therefrom) and waive any objection to the laying of the venue of such proceeding in any such court.

The parties agree that, with respect to any claim or proceeding involving any debt financing incurred by Transform or the Company in connection with the transactions contemplated by the Merger Agreement or any source thereof, such claims will be subject to the exclusive jurisdiction of the United States District Court for the Southern District of New York or any New York State court sitting in the Borough of Manhattan and any appellate court therefore and they will not bring or permit any of their respective affiliates to bring any such claim or proceeding in any other courts.

The parties have also agreed to waive all rights to a jury trial arising out of the Merger Agreement.

 

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IMPORTANT ADDITIONAL INFORMATION REGARDING THE COMPANY

About the Company and its Business

The Company is a national retailer primarily focused on selling home appliances, lawn and garden equipment, tools and hardware. In addition to merchandise, we provide our customers with access to a full suite of related services, including home delivery, installation and extended-service plans. As of July 6, 2019, the Company and its independent dealers and franchisees operated a total of 601 stores across 49 states, Puerto Rico and Bermuda.

The Company’s principal executive offices are located at 5500 Trillium Boulevard, Suite 501, Hoffman Estates, Illinois 60192, and its telephone number is (847) 286-7000. The Company’s website is www.shos.com.

The Company Common Stock is listed with, and trades on, NASDAQ under the symbol “SHOS”.

Additional information about the Company and its business is contained in our public filings which are incorporated by reference herein. See the section entitled “Where You Can Find Additional Information” beginning on page 119 of this information statement.

Directors and Executive Officers

Set forth below are the names, material occupations, positions, offices and employment during the last five years of the directors and executive officers of the Company.

Neither the Company nor any of these persons has been convicted in a criminal proceeding during the past five years (excluding traffic violations or similar misdemeanors), and neither the Company nor any of these persons has been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws or a finding of any violation of federal or state securities laws. All the directors and executive officers of the Company can be reached c/o Sears Hometown and Outlet Stores, Inc., 5500 Trillium Boulevard, Suite 501, Hoffman Estates, Illinois 60192 and the telephone number for each person listed below is (847) 286-7000.

E.J. Bird has served as the Company’s Senior Vice President and Chief Financial Officer since August 2017 and has been a director of the Company since its 2012 separation (the “Separation”) from Sears Holdings Corporation, a retailer holding company that has filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code (“Sears Holdings”). He served as the Company’s Chairman of the Board of Directors from July 2015 to June 2017 and served as the Company’s Interim Chief Financial Officer from June 1, 2017 to August 15, 2017. From March 2013 until his resignation in June 2016 he served as Executive Vice President and Chief Financial Officer of Sears Canada Inc., during that period a Canadian retailer. Mr. Bird served as a member of the board of directors of Sears Canada Inc. from May 2006 until September 2013. Commencing at the time of the Separation, Sears Canada Inc. may have been an affiliate of the Company during the period that Mr. Bird served on the board of directors of, and thereafter was employed by, Sears Canada Inc. In June 2017 Sears Canada Inc. obtained protection under the Companies’ Creditors Arrangement Act (the “CCAA”), which stayed all proceedings (later lifted in part) against Sears Canada Inc. and its former directors and officers, among others. The CCAA is a statute of the Parliament of Canada that allows insolvent corporations owing their creditors in excess of $5,000,000 to seek to restructure their businesses and financial affairs. In January 2019 a receivership order of the Ontario Superior Court of Justice became effective with respect to receivership property of Sears Canada Inc., which has liquidated its assets and ceased operations. Prior to his Sears Canada Inc. employment Mr. Bird was a private investor. He served as an analyst for Levine Investments, an investment partnership with public and private investments, from July 2002 to February 2010 and as Chief Financial Officer of ESL Investments, Inc., an investment manager, from September 1991 to June 2002. Mr. Bird is a United States citizen.

 

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Alberto Franco has been a director of the Company since April 15, 2019. He is the founder and principal of Franco Partners, Inc., a private investment firm that has focused primarily on aircraft leasing and real estate investments since 2000. He has also served as a Senior Advisor to Cyrus Capital Partners L.P. since April 2016. Prior to 2000, Mr. Franco was engaged for fifteen years in the proprietary trading operations of several investment banks. Mr. Franco is a United States citizen.

James F. Gooch has been a director of the Company since March 2013. Since January 2016 he has served as Chief Operating Officer and Chief Financial Officer of Lands’ End, Inc., a retailer, and from September 2016 to March 2017 he served as Interim Co-Chief Executive Officer of Lands’ End, Inc. Lands’ End, Inc. may be an affiliate of the Company. He served as Co-Chief Executive Officer and Chief Administrative Officer of DeMoulas Supermarkets, Inc., a retailer, from March 2014 until December 2014. From December 2014 to January 2016 he served as a retail consultant. He served as President and Chief Executive Officer and a director of RadioShack Corporation, an electronics retailer, from May 2011 to October 2012, as President and Chief Financial Officer of RadioShack Corporation from January 2011 to May 2011, and as Chief Financial Officer of RadioShack Corporation from August 2006 to January 2011. Earlier in his career he was employed by Helene Curtis (a personal-care and beauty-products company), The Quaker Oats Company (a food-products company), Kmart Corporation (a retailer), and Sears Holdings. Mr. Gooch is a United States citizen.

Josephine Linden has been a director of the Company since the Separation. She founded and has been the managing member and principal of Linden Global Strategies LLC, a New York-based, SEC-registered investment management firm, since September 2011. From September 2010 to July 2011, she taught as an Adjunct Professor in the Finance department of Columbia Business School. In November 2008, Mrs. Linden retired from Goldman, Sachs & Co., as a Partner and Managing Director after having been with the firm for more than 25 years, where she held a variety of roles. She has served as a director of Lands’ End, Inc. since March 2014 and as its Chairman of the Board since October 2014. She served as a director of Bally Technologies, Inc., a diversified, worldwide gaming company, from April 2011 to November 2014. She is currently a trustee, and serves on the Executive Committee, of The Collegiate School in New York, New York and acts as financial advisor to The Prince of Wales Foundation, a not-for-profit organization. Ms. Linden is a United States citizen.

Kevin Longino has been a director of the Company since October 2016. He was appointed the Chief Executive Officer of the National Kidney Foundation in September 2015 after having served as Interim CEO beginning in March 2015. Prior to that Mr. Longino was an entrepreneur and a private investor in several start-up tech companies. From 1987 to 2000, he was an executive with Compaq Computer Corporation. Mr. Longino is a United States citizen.

Will Powell has served as the Company’s Chief Executive Officer and President and a director since July 2015. From the time of the Separation until July 2015 he served as the Company’s Senior Vice President and Chief Operating Officer. Prior to his employment with the Company he served as Sears Holdings’ Senior Vice President and President, Hometown Stores (at that time a division of Sears Holdings), positions he held from November 2008 to October 2012. From November 2007 until November 2008 Mr. Powell served as Sears Holdings’ Vice President and General Manager, Outlet Stores (at that time a division of Sears Holdings), and from January 2006 to November 2007 he served as Sears Holdings’ Divisional Vice President, Stores/Sales-Dealer Stores. He joined Sears Holdings in August 2003. Mr. Powell is a United States citizen.

John E. Tober has been a director of the Company since April 15, 2019. Since September 2015 he has served as the Chief Executive Officer and Chairman of the Board, and is the co-founder, of CertaTech, LLC d/b/a CertaTech Solutions. He currently also serves as a director at CCS Medical Holdings, Inc., where he serves as its Audit Committee Chairman. Prior to founding CertaTech Solutions, he was a partner at the New York law firm of Boies, Schiller & Flexner LLP from 2002 to 2013. Prior to joining the Boies firm, from 1999 to 2002 he was the managing partner of the Miami law firm of Zack Kosnitzky, P.A, which was acquired by the Boies firm. From 1988 to 1999 Mr. Tober headed his own law firm, John E. Tober, P.A. which specialized in defending SEC enforcement actions and private business transactions. He has taught Corporate Finance as an adjunct professor

 

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at the St. Thomas School of Law. He has been actively involved in Big Brothers Big Sisters of Miami and served as its Chairman of the Board from 2001 to 2002. Mr. Tober is a United States citizen.

Michael A. Gray has been Senior Vice President and Chief Operating Officer of the Company since December 2017. Prior to that he served as Senior Vice President, Store Operations and in other capacities beginning prior to the Separation. Prior to his employment with the Company he served as Sears Holdings’ Vice President and General Manager, Sears Hometown Stores, a position he held from March 2009 to shortly before the Separation. He joined Sears Holdings in October 2003 and served in various leadership roles. Prior to joining Sears Holdings, Mr. Gray served in a variety of leadership positions with other national retail chains including OfficeMax, PetSmart, and Things Remembered. Mr. Gray is a United States citizen.

Market Prices and Dividend Data

The Company Common Stock is listed with, and trades on, the NASDAQ Stock Market under the symbol “SHOS”. The closing sale price of Company Common Stock on April 5, 2019, the last trading day prior to the Company’s announcement that it had received an acquisition proposal from Transform, was $1.90. The closing sale price of Company Common Stock on May 31, 2019, the last trading day prior to the execution of the Merger Agreement, was $2.18 per share. The closing sale price of Company Common Stock on July 24, 2019, the most recent practicable date before the filing of this information statement, was $2.61 per share. You are encouraged to obtain current market quotations for our Common Stock.

The following table sets forth the intraday high and low sale prices of Company Common Stock as reported on NASDAQ for the periods indicated.

 

     Market Price  
Quarter    High      Low  

Second Fiscal Quarter 2017

   $ 3.50      $ 2.15  

Third Fiscal Quarter 2017

   $ 2.60      $ 1.65  

Fourth Fiscal Quarter 2017

   $ 2.95      $ 1.38  

First Fiscal Quarter 2018

   $ 3.95      $ 1.70  

Second Fiscal Quarter 2018

   $ 2.67      $ 1.75  

Third Fiscal Quarter 2018

   $ 3.35      $ 2.25  

Fourth Fiscal Quarter 2018

   $ 2.66      $ 1.57  

First Fiscal Quarter 2019

   $ 2.50      $ 1.62  

Second Fiscal Quarter 2019(1)

   $ 2.76      $ 2.17  

 

(1)

Provided through July 24, 2019.

We have never paid dividends on outstanding Company Common Stock. Pursuant to the Merger Agreement, during the pre-closing period, the Company is not permitted to authorize, declare, set aside or pay any dividends on, or make any other distributions in respect of, any of its capital stock except as specified in the Merger Agreement (as further described in the section entitled “The Merger AgreementConduct of Business Pending the Merger” beginning on page 89 of this information statement)

Following completion of the Merger, there will be no further market for Company Common Stock, and our Common Stock will be de-listed from NASDAQ and de-registered under the Exchange Act. As a result, following completion of the Merger and such de-registration, we will no longer file periodic and other reports with the SEC.

Security Ownership of Certain Beneficial Owners and Management

The following tables set forth information as of the close of business on June 1, 2019 (except as otherwise indicated by footnote), regarding the beneficial ownership of shares of Company Common Stock by each

 

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director, named executive officer, by all directors and executive officers as a group, and by each person known by the Company to own 5% or more of Company Common Stock.

We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the tables below have sole voting and investment power with respect to all shares of Company Common Stock that they beneficially own, subject to applicable community property laws.

For purposes of the table below, the beneficial ownership amounts and percentages are based on a total of 22,702,132 shares of Company Common Stock outstanding as of the close of business on June 1, 2019.

Security Ownership of Directors and Management(1)

 

Name of Beneficial Owner(2)    Shares of
Company
Common Stock(3)
     Percent of
Class
 

Directors and Named Executive Officers

     

E. J. Bird

     29,000        *  

Alberto Franco

     —          *  

James F. Gooch

     2,000        *  

Michael A. Gray

     4,600        *  

Josephine Linden

     2,000        *  

Kevin Longino

     20,000        *  

Will Powell

     55,000        *  

John E. Tober

     —          *  

Directors and executive officers as a group (11 persons)

     120,600     

 

*

Represents less than one (1) percent.

(1)

The table reports beneficial ownership in accordance with Rule 13d-3 under the Exchange Act.

(2)

The address of each beneficial owner is c/o Sears Hometown and Outlet Stores, Inc., 5500 Trillium Boulevard, Suite 501, Hoffman Estates, Illinois 60192.

(3)

Except as indicated in the next sentence, the persons listed in the table have sole voting and investment power with respect to the Company Common Stock listed next to their names. Mr. Bird shares beneficial ownership of his shares of Company Common Stock with his wife. Information is provided for reporting purposes only and should not be construed as an admission of actual beneficial ownership.

Beneficial Owners of More Than 5% of Company Common Stock

The table below shows information for persons known to us to beneficially own more than 5% of our Common Stock based on their filings with the SEC through June 3, 2019.

 

Name

   Total Beneficial
Ownership
     Percentage of
Issued and
Outstanding
 

ESL Investments, Inc. and investment affiliates(1)

1170 Kane Concourse, Suite 200

Bay Harbor Islands, FL 33154

     13,226,598        58.3

Nantahala Capital Management, LLC and investment affiliates(2)

19 Old Kings Highway S, Suite 200

Darien, CT 06820

     2,136,251        9.4

Chou Associates Management Inc. and investment affiliates(3)

110 Sheppard Avenue East, Suite 301, Box 18

Toronto, ON M2N 6Y8 Canada

     1,519,222        6.7

 

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(1)

Beneficial ownership is based on the amended Schedule 13D filed on June 3, 2019 (the “Schedule 13D/A”) by Edward S. Lampert, Partners, RBS, and ESL Investments. According to the Schedule 13D/A, (1) Mr. Lampert is Chairman, Chief Executive Officer, and Director of, and may be deemed to beneficially own securities owned by, ESL Investments and is a limited partner of, and may be deemed to beneficially own securities owned by, RBS, (2) RBS is the general partner of, and may be deemed to beneficially own securities owned by, Partners, and (3) ESL Investments is the general partner of, and may be deemed to beneficially own securities owned by, RBS. The principal business of each of these persons is purchasing, holding, and selling securities for investment purposes. The Schedule 13D/A disclosed the following: ESL Investments’ sole voting power and sole dispositive power as to 4,656,725 shares and shared dispositive power as to 8,569,873 shares; Mr. Lampert’s sole voting power as to 13,226,598 shares, sole dispositive power as to 4,656,725 shares, and shared dispositive power as to 8,569,873 shares; Partners’ sole voting power and sole dispositive power as to 4,656,725 shares and shared dispositive power as to 8,569,873 shares; and RBS’s sole voting power and sole dispositive power as to 4,656,725 shares and shared dispositive power as to 8,569,873 shares. Based on Mr. Lampert’s sole voting power as to 13,226,598 shares of the Company’s Common Stock, Mr. Lampert may be deemed to be the “parent” of the Company as that term is defined by the rules of the Securities and Exchange Commission.

(2)

Beneficial ownership is based on the amended Schedule 13G filed on February 14, 2019 by Nantahala Capital Management, LLC, Wilmot B. Harkey, and Daniel Mack (the “Nantahala 13G”). According to the Nantahala 13G, (1) Nantahala Capital Management, LLC is an investment adviser that may be deemed to be the beneficial owner of 2,136,251 shares held by funds and separately managed accounts under its control and (2) Wilmot B. Harkey and Daniel Mack, as the managing members of Nantahala Capital Management, LLC, each may be deemed to be a beneficial owner of these shares. Nantahala Capital Management, LLC, Wilmot B. Harkey, and Daniel Mack each disclosed shared voting power and shared dispositive power with respect to these shares.

(3)

Beneficial ownership is based on the Schedule 13G filed on February 16, 2016 by Chou Associates Fund, Chou Associates Management Inc., Chou Asia Fund, Chou Bond Fund, Chou RRSP Fund, Chou Opportunity Fund, Chou Income Fund, Chou America Management, Inc. and Francis S. M. Chou (the “Chou 13G”). According to the Chou 13G, Chou Associates Management Inc. is the investment advisor of Chou Associates Fund and other investment funds and, through investment advisory contracts or otherwise, may be deemed to beneficially own securities owned by other persons, including Chou Associates Fund, Chou Asia Fund, Chou Bond Fund, and Chou RRSP Fund. Chou America Management, Inc. is the investment adviser to the Chou Opportunity Fund and the Chou Income Fund. Francis S. M. Chou is the Chief Executive Officer and Portfolio Manager of Chou Associates Management Inc. and the Portfolio Manager of Chou Associates Fund, Chou Asia Fund, Chou Bond Fund, and the Chou RRSP Fund. Mr. Chou is the Chief Executive Officer of Chou America Management Inc. and the portfolio manager of the Chou Opportunity Fund and the Chou Income Fund. Chou Associates Management Inc., Mr. Chou, and Chou Associates Fund each disclosed sole voting power and sole dispositive power as to 1,519,222 shares. The Chou 13G has not been amended to date.

Historical Consolidated Financial Information

The Company’s audited consolidated financial statements for the fiscal years ended February 2, 2019 and February 3, 2018, and the notes thereto, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2019, and the Company’s unaudited financial statements for the three-month period ended May 4, 2019, and the notes thereto, contained in the Company’s Quarterly Report on Form 10-Q for the three months ended May 4, 2019, are incorporated by reference in this information statement.

For additional information, see the section entitled “Where You Can Find Additional Information” beginning on page 119 of this information statement. Historical results are not necessarily indicative of results to be expected in any future period.

The following summary consolidated financial information was derived from, and should be read in conjunction with, the Company’s audited consolidated financial statements and notes thereto included in the Company’s

 

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Annual Report on Form 10-K for the fiscal year ended February 2, 2019, and from the Company’s unaudited consolidated financial statements and notes thereto included in the Company’s Quarterly Report on Form 10-Q for the three-month period ended May 4, 2019, each of which are incorporated herein by reference, and are not necessarily indicative of the results to be expected for the full year or for any other period.

Sears Hometown and Outlet Stores, Inc.

 

     For the Year Ended     For the Quarter Ended  
     February 2,
2019
    February 3,
2018
    May 4,
2019
    May 5,
2018
 

Income Statement Data:

        
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Sales

   $ 1,449,948     $ 1,719,951     $ 291,072     $ 381,281  
  

 

 

   

 

 

   

 

 

   

 

 

 

COSTS AND EXPENSES

        

Costs of sales and occupancy

     1,126,752       1,371,408       229,042       293,803  

Selling and administrative

     349,082       419,567       67,543       90,479  

Impairment of property and equipment

     2,089       3,357       —         —    

Depreciation and amortization

     12,374       13,039       2,260       2,608  

(Gain)/loss on the sale of assets

     (1,358     —         52       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     1,488,939       1,807,371       298,597       386,890  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (38,991     (87,420     (7,825     (5,609

Interest expense

     (14,676     (8,058     (3,970     (3,452

Other income

     367       925       9       100  

Loss before income taxes

     (53,300     (94,553     (11,786     (8,961

Income tax expense

     (164     (504     (268     (408
  

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS

     (53,464     (95,057     (12,054     (9,369
  

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS PER SHARE OF COMPANY COMMON STOCK ATTRIBUTABLE TO STOCKHOLDERS

        

Basic

   $ (2.36   $ (4.19   $ (0.53   $ (0.41

Diluted

     (2.36     (4.19     (0.53     (0.41

Balance Sheet Data:

 

Current Assets

   $ 313,763     $ 368,499     $ 295,447     $ 367,622  

Noncurrent Assets

     30,008       44,189       139,693       43,072  

Current Liabilities

     221,976       234,865       244,306       206,120  

Noncurrent Liabilities

     1,839       2,284       85,373       40,523  

Redeemable Preferred Stock

     —         —         —         —    

Other Financial Data:

        

BOOK VALUE PER SHARE

        

Basic

   $ 5.28     $ 7.73     $ 4.65     $ 7.23  

Diluted

   $ 5.28     $ 7.73     $ 4.65     $ 7.23  

Prior Public Offerings; Prior Stock Purchases

During the past three years, the Company has not made an underwritten public offering of its Common Stock for cash that was registered under the Securities Act, or exempt from registration. During the past two years, the Company has not purchased any shares of its Common Stock.

 

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IMPORTANT ADDITIONAL INFORMATION REGARDING THE ESL FILING PARTIES

Information on Entities

Transform Holdco LLC is a privately held company that acquired most of the operating assets of Sears Holdings Corporation out of bankruptcy. Transform is organized as a Delaware limited liability company and is a leading integrated retailer focused on seamlessly connecting the digital and physical shopping experiences to serve its members. Transform is home to Shop Your Way®, a social shopping platform offering members rewards for shopping at Sears, Kmart and other retail partners. Transform operates through its subsidiaries with full-line and specialty retail stores across the United States.

Transform Merger Corporation is a Delaware corporation formed for the sole purpose of completing the Merger with the Company. Merger Subsidiary is a wholly owned subsidiary of Transform. Merger Subsidiary has not engaged in any business to date except for activities incidental to its incorporation and activities undertaken in furtherance of the transactions contemplated by the Merger Agreement.

ESL Partners, L.P. is a private investment fund, managed by ESL Investments, engaged in the business of acquiring, holding and disposing of investments in various companies. Partners is organized as a Delaware limited partnership and is a direct holder, along with Edward S. Lampert, of shares of Company Common Stock.

RBS Partners, L.P. is a private investment fund engaged in the business of acquiring, holding and disposing of investments in various companies. RBS is organized as a Delaware limited partnership and is the general partner of Partners.

ESL Investments, Inc. is a Delaware corporation engaged in the business of acquiring, holding and disposing of investments in various companies. Investments is organized as a Delaware corporation, is a registered investment advisor and is the general partner of RBS.

Information on Natural Persons

Set forth below are the names, material occupations, positions, offices and employment during the last five years of Edward S. Lampert, one of the ESL Filing Parties, and the directors and executive officers of the other ESL Filing Parties listed above, which are not natural persons.

Neither the ESL Filing Parties nor any of the persons listed below has been convicted in a criminal proceeding during the past five years (excluding traffic violations or similar misdemeanors), and neither the ESL Filing Parties nor any of these persons has been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws or a finding of any violation of federal or state securities laws. Both Mr. Lampert and all of the directors and officers of the ESL Filing Persons can be reached c/o Transform Holdco LLC, 3333 Beverly Road, Hoffman Estates, Illinois 60179, and the telephone number for each person listed below is (847) 286-2500.

ESL Filing Parties

Edward S. Lampert is the Chairman and CEO of Transform and a member of Transform’s Board of Managers. He has occupied both positions since Transform was organized in 2018. He was formerly the CEO of Sears Holdings Corporation from 2013 to 2018. He has also been the Chairman and Chief Executive Officer of ESL Investments since its foundation in 1988, and is the Chief Executive Officer of Partners and RBS since they were each established in 1988. Since July 2015, Mr. Lampert has also served as Chairman of the Board of Trustees of Seritage Growth Properties. He is a United States citizen.

Directors and Executive Officers

Kunal S. Kamlani is the President of ESL Investments and has served in this position since March 2016. He is also a member of the Board of Managers of Transform, a role he has occupied since 2018, and the sole member of the

 

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Board of Directors of Merger Subsidiary, and the President of Merger Subsidiary, each of which roles he has occupied since 2019. From 2015 to 2016, he was Chief Executive Officer of CASP Advisors, an independent advisory firm. Mr. Kamlani served on the Board of Directors of Sears Holdings Corporation from 2014 to 2019 and the Board of Directors of Staples Inc. from 2015 until 2017. He is a United States citizen.

Romain Mulliez is a member of the Board of Managers of Transform and has served in this position since 2019. Since 2014 he has been the chairman of Luderix, a toy retailer, and since 2005 he has been the president of La Vignery, a wine retailer. Since 2010 he has also been a board member of Association Familiale Mulliez. From 2014 to 2018 he was a board member of Decathlon, a sporting goods retailer, and from 2008 to 2014 he was a board member of ATAK, a super market chain. He is a French citizen.

Harold Talisman is the Chief Financial Officer of ESL Investments and has served in this position since 2014. He is also the Secretary and Chief Financial Officer of Merger Subsidiary, which positions he has occupied since 2019. He is a United States citizen.

Robert Breyer is the Chief Compliance Officer of ESL Investments and has served in this position since 2015. He is also the Treasurer of Merger Subsidiary, which position he has occupied since 2019. He is a United States citizen.

Securities Transactions

On May 10, 2019, Partners distributed a total of 906,836 shares of Company Common Stock on a pro rata basis to certain limited partners that elected in 2018 to redeem all or a portion of their interest in Partners. In connection with such distributions, in lieu of withholding a reasonable reserve from such distributions with respect to those limited partners that elected to redeem all of their interest in Partners (the “Redeeming Limited Partners”) for the purpose of satisfying the relevant Redeeming Limited Partner’s share of any contingent liabilities of or claims against Partners, a separate account controlled by Partners or its designee was established on behalf of, and for the benefit of, such Redeeming Limited Partners (collectively, the “Liability Accounts”) pursuant to the limited partnership agreement of Partners. From the shares of Company Common Stock distributed by Partners to the Redeeming Limited Partners, an aggregate of 792,209 shares of Company Common Stock were contributed into the Liability Accounts of such Redeeming Limited Partners. These contributions of shares of Company Common Stock into the Liability Accounts were effected pursuant to the terms of the limited partnership agreement of Partners and no other consideration was paid in connection with such contributions.

 

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APPRAISAL RIGHTS

Under the DGCL, holders of shares of Company Common Stock issued and outstanding immediately prior to the effective date of the Merger have the right to demand appraisal of, and receive payment in cash for the “fair value” of, their shares of Company Common Stock, as determined by the Court of Chancery of the State of Delaware (the “Court”), together with interest, if any, as determined by the Court, in lieu of the consideration they would otherwise be entitled to pursuant to the Merger Agreement. This right is known as an appraisal right. Stockholders electing to exercise appraisal rights must comply precisely with the requirements of Section 262 of the DGCL in order to demand and perfect their rights. Strict compliance with the statutory procedures is required to demand and perfect appraisal rights under Section 262 of the DGCL.

The following is intended as a brief summary of the material provisions of the Delaware statutory procedures required to be followed by the Company’s stockholders in order to demand and perfect appraisal rights. All references in this summary to a “stockholder” are to the record holder of shares of Company Common Stock immediately prior to the effective date of the Merger unless otherwise indicated.

This summary, however, is not a complete statement of all applicable requirements and is qualified in its entirety by reference to Section 262 of the DGCL, a copy of which is included as Annex E to this information statement. Failure to follow precisely any of the statutory procedures set forth in Section 262 may result in the loss of your appraisal rights. Moreover, due to the complexity of the procedures for exercising the right to demand appraisal, stockholders who are considering exercising such rights are encouraged to seek the advice of legal counsel.

This summary does not constitute any legal or other advice, nor does it constitute a recommendation that you exercise your rights to demand appraisal under Section 262.

Under Section 262, any stockholder who holds his, her or its shares of Company Common Stock immediately prior to the effective date of the Merger and who (i) did not submit to the Company a written consent adopting the Merger Agreement; (ii) follow the procedures set forth in Section 262 and (iii) do not thereafter withdraw their demand for appraisal of such shares or otherwise lose their appraisal rights, in each case in accordance with the DGCL, and who otherwise complies with the requirements of Section 262 will be entitled to have his, her or its shares of Company Common Stock appraised by the Delaware Court of Chancery and to receive payment of the “fair value” of such shares, exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with interest, if any, to be paid upon the amount determined to be “fair value.”.

Under Section 262, where a merger is adopted by stockholders by written consent in lieu of a meeting of stockholders, either the constituent corporation before the effective date of the merger or the surviving corporation, within 10 days after the effective date of the merger, must notify each stockholder of the constituent corporation entitled to appraisal rights of the merger and that appraisal rights are available for any or all shares of such class or series of stock of such constituent corporation, and must include in such notice a copy of Section 262. This information statement constitutes notice to holders of Company Common Stock concerning the availability of appraisal rights under Section 262, and the applicable statutory provisions are attached to this Notice as Exhibit A. Any holder of Common Stock who wishes to exercise such appraisal rights or who wishes to preserve his, her or its right to do so should review the following discussion and Exhibit A carefully because failure to timely and properly comply with the procedures specified will result in the loss of appraisal rights under the DGCL.

Holders of shares of Company Common Stock who desire to exercise their appraisal rights must demand in writing an appraisal of such shares no later than 20 days after the mailing of this information statement, which 20th day is [    ], 2019. All demands for appraisal pursuant to Section 262 should be addressed to Sears Hometown and Outlet Stores, Inc., Attention: General Counsel and Secretary, 5500 Trillium Boulevard, Suite 501, Hoffman Estates, Illinois 60192. A demand for appraisal must be must reasonably inform the Company of

 

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the identity of the stockholder of record and that such stockholder intends thereby to demand appraisal of Company Common Stock.

Only a holder of record of Company Common Stock issued and outstanding immediately prior to the effective date of the Merger is entitled to demand appraisal rights for the shares of Company Common Stock registered in that holder’s name. A demand for appraisal in respect of shares of Company Common Stock issued and outstanding immediately prior to the effective date of the Merger should be executed by or on behalf of the holder of record, fully and correctly, as his, her or its name appears on his, her or its stock certificates, and must state that such person intends thereby to demand appraisal of his, her or its shares of Company Common Stock issued and outstanding immediately prior to the effective date of the Merger in connection with the Merger. If the shares of Company Common Stock are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, the demand must be executed by the fiduciary in such capacity. If the shares of Company Common Stock are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or for all joint owners. An authorized agent, including an agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in exercising the demand, he is acting as agent for the record owner or owners.

A record holder, such as a broker, fiduciary, depositary or other nominee, who holds shares of Company Common Stock as a nominee for several beneficial owners, may exercise appraisal rights with respect to the shares of Company Common Stock issued and outstanding immediately prior to the effective date of the Merger held for one or more beneficial owners while not exercising such rights with respect to the shares of Company Common Stock held for other beneficial owners. In such case, the written demand should set forth the number of shares of Company Common Stock issued and outstanding immediately prior to the effective date of the Merger as to which appraisal is sought. Where the number of shares is not expressly stated, the demand will be presumed to cover all shares of Company Common Stock which are held in the name of such record owner.

A beneficial owner of shares of Company Common Stock held in “street name” who desires appraisal should take such actions as may be necessary to ensure that a timely and proper demand for appraisal is made by the record holder of such shares. Shares held through brokerage firms, banks and other financial institutions are frequently deposited with and held of record in the name of a nominee of a central security depository, such as Cede & Co. Any beneficial holder desiring appraisal who holds shares through a brokerage firm, bank or other financial institution is responsible for ensuring that the demand for appraisal is made by the record holder. The beneficial holder of such shares should instruct such firm, bank or institution that the demand for appraisal be made by the record holder of the shares, which may be the nominee of a central security depository if the shares have been so deposited. As required by Section 262, a demand for appraisal must reasonably inform the Company of the identity of the holder(s) of record (which may be a nominee as described above) and of such holder’s intention to seek appraisal of such shares.

A person having a beneficial interest in Company Common Stock held of record in the name of another person, such as a broker, depositary or other nominee, must act promptly to cause the record holder to follow the procedures set forth in Section 262 in a timely manner to perfect any appraisal rights. Stockholders who hold their shares of Company Common Stock in brokerage accounts or other nominee forms and who wish to exercise appraisal rights are urged to consult with their brokers or other nominees to determine the appropriate procedures for the making of a demand for appraisal by such brokers or nominees.

All written demands for appraisal pursuant to Section 262 should be sent or delivered to the Company at Sears Hometown and Outlet Stores, Inc., 5500 Trillium Boulevard, Suite 501, Hoffman Estates, Illinois 60192, Attention: General Counsel and Secretary

Within 10 days after the effective date of the Merger, the Company must provide notice that the Merger has become effective to all of our stockholders who have complied with Section 262 and who have not voted in favor

 

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of or consented to the Merger that the Merger has become effective; provided, however, that if such notice is sent more than 20 days after the sending of this information statement, such notice need only be sent to each stockholder who is entitled to appraisal rights and who has perfected and not withdrawn a demand for appraisal in accordance with Section 262.

Within 120 days after the effective date of the Merger, any stockholder who has satisfied the requirements of Section 262 will be entitled, upon written request, for a statement listing the aggregate number of shares not voted in favor of the adoption of the Merger Agreement and with respect to which demands for appraisal have been received and not withdrawn and the aggregate number of holders of such shares. The surviving corporation must mail any such written statement to the stockholder within 10 days after the stockholders’ written request is received by the surviving corporation or within 10 days after the latest date for delivery of a demand for appraisal under Section 262, whichever is later. A beneficial owner of shares of such stock may, in such person’s own name, file a petition for appraisal with the Court or request from the surviving corporation such written statement.

Within 120 days after the effective date of the Merger, but not thereafter, either the surviving corporation or any stockholder who has complied with the required conditions of Section 262 and who is otherwise entitled to appraisal rights may commence an appraisal proceeding by filing a petition (with a copy thereof served upon the surviving corporation in the case of a petition filed by a stockholder) in the Delaware Court of Chancery demanding a determination of the “fair value” of the shares of Company Common Stock. The surviving corporation has no obligation, and the Company has no present intention, to file such a petition. Accordingly, it is the obligation of the holders of Company Common Stock to initiate all necessary action to demand and perfect their appraisal rights, and to file any petitions in the Court relating to an appraisal, in respect of such shares of Company Common Stock within the time prescribed in Section 262.

Upon the timely filing of a petition for appraisal by a stockholder in accordance with Section 262, a copy thereof must be served upon the Company. Within 20 days after service, the surviving corporation must file with the Delaware Register in Chancery a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached. After notice to such stockholders as required by the Court, the Delaware Court of Chancery is empowered to conduct a hearing on such petition to determine those stockholders who have complied with Section 262 and who have become entitled to appraisal rights thereunder. The Delaware Court of Chancery may require the stockholders who have demanded an appraisal for their shares (and who hold stock represented by certificates) to submit their stock certificates to the Delaware Register in Chancery for notation of the pendency of the appraisal proceedings, and the Court may dismiss the proceedings as to any stockholder that fails to comply with such direction. In addition, if immediately before the Merger the Company Common Stock is listed on a national securities exchange, (as it is presently expected to be) the Delaware Court of Chancery will dismiss the proceedings as to all holders of such shares who are otherwise entitled to appraisal rights unless (1) the total number of shares of Company Common Stock entitled to appraisal exceeds 1% of the outstanding shares of Company Common Stock, or (2) the value of the consideration provided in the merger for such total number of shares of Company Common Stock exceeds $1 million.

If a petition for an appraisal is filed in a timely fashion, after a hearing on the petition, the Delaware Court of Chancery will determine which stockholders are entitled to appraisal rights and will determine the “fair value” of such shares of Company Common Stock, exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with interest, if any, to be paid upon the amount determined to be the “fair value”. When the “fair value” is so determined, the Court will direct the payment by the surviving corporation of such value, with interest thereon to be paid in accordance with Section 262 and as the Court so determines, to the stockholders entitled thereto, upon the surrender to the surviving corporation by such stockholders of such shares of Company Common Stock. Unless the Court, in its discretion, determines otherwise for good cause shown, interest from the effective date of the Merger through the date on which the judgment is paid will be compounded quarterly and will accrue at 5% over the Federal Reserve discount rate (including any surcharge) as

 

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established from time to time during the period between the effective date of the Merger and the date of payment of the judgment.

In determining the “fair value” of shares, the Court will take into account all relevant factors. In Weinberger v. UOP, Inc., the Delaware Supreme Court has stated that such factors include “market value, asset value, dividends, earning prospects, the nature of the enterprise and any other facts which were known or which could be ascertained as of the date of the merger and which throw any light on future prospects of the merged corporation”. In Weinberger, the Delaware Supreme Court stated, among other things, that “proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court” should be considered in an appraisal proceeding and that “[f]air price obviously requires consideration of all relevant factors involving the company”. Section 262 provides that “fair value” is to be “exclusive of any element of value arising from the accomplishment or expectation of the merger”. In Cede & Co. v. Technicolor, Inc., the Delaware Supreme Court stated that such exclusion is a “narrow exclusion [that] does not encompass known elements of value”, but which rather applies only to the speculative elements of value arising from such accomplishment or expectation. In Weinberger, the Delaware Supreme Court construed Section 262 to mean that “elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered”.

The Company’s stockholders considering seeking appraisal of their shares should note that the “fair value” of their shares determined under Section 262 could be more than, the same as or less than the consideration they would have received pursuant to the Merger Agreement if they had not sought appraisal of their shares and that opinions of investment banking firms as to the fairness of the consideration, from a financial point of view, payable in a sale transaction, such as the Merger, are not opinions as to, and do not otherwise address, the “fair value” of the shares to be determined by the Court under Section 262. Moreover, the Company does not anticipate offering more than the Merger Consideration to any stockholder exercising appraisal rights and reserves the right to assert, in any appraisal proceeding, that, for purposes of Section 262, the “fair value” of a share of Company Common Stock is less than the Merger Consideration. The costs of the appraisal proceeding may be determined by the Court and assessed against the parties as the Court deems equitable under the circumstances. However, costs do not include attorney and expert witness fees. Upon application of a stockholder seeking appraisal, the Court may order that all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorneys’ fees and the fees and expenses of experts, be charged pro rata against the value of all shares entitled to appraisal. In the absence of an assessment, each party must bear his, her or its own expenses.

Any stockholder who duly demanded appraisal in compliance with Section 262 will not, after the effective time of the Merger, be entitled to vote for any purpose the shares subject to appraisal or to receive payment of dividends or other distributions on such shares, except for dividends or distributions payable to stockholders of record at a date prior to the effective time of the Merger.

If any stockholder who demands appraisal of his, her or its shares of Company Common Stock under Section 262 fails to perfect, or effectively withdraws or loses, his, her or its right to appraisal, as provided in the DGCL, the shares of Company Common Stock of such stockholder will be converted into the right to receive the consideration in respect thereof provided for in the Merger Agreement in accordance with the Merger Agreement, but without interest. A stockholder will fail to perfect, or effectively lose or withdraw, his, her or its right to appraisal if no petition for appraisal is filed within 120 days after the effective date of the Merger, or if the stockholder delivers to the Company a written withdrawal of his, her or its demand for appraisal and an acceptance of the Merger, except that any such attempt to withdraw made more than 60 days after the effective date of the Merger will require the written approval of the Company. Once a petition for appraisal is filed, the appraisal proceeding may not be dismissed as to any stockholder absent court approval, provided, however, that the foregoing shall not affect the right of any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party to withdraw such stockholder’s demand for appraisal and to accept the terms offered upon the Merger within 60 days after the effective date of the Merger.

 

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Failure by any stockholder to comply fully with the procedures described above and set forth in Section 262 of the DGCL (a copy of which is included as Annex E to this information statement) may result in loss of the stockholder’s appraisal rights. If you properly demand appraisal of your shares of Company Common Stock under Section 262 and you fail to perfect, or effectively withdraw or lose, your right to appraisal, as provided in the DGCL, your shares of Company Common Stock will be converted into the right to receive the Merger Consideration if the Merger is completed.

If you are considering whether to demand appraisal of the “fair value” of your shares of Company Common Stock, you are urged to consult your own legal counsel. No provisions have been made to grant any of the Unaffiliated Stockholders access to the corporate files of the Company or to obtain counsel or appraisal services at the expense of the Company or any of the ESL Filing Persons.

To the extent there are any inconsistencies between the foregoing summary and Section 262 of the DGCL, Section 262 will govern.

 

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HOUSEHOLDING

As permitted under the Exchange Act, in those instances where we are mailing a printed copy of this information statement, only one copy of this information statement is being delivered to stockholders that reside at the same address and share the same last name, unless such stockholders have notified the Company of their desire to receive multiple copies of this information statement. This practice, known as “householding”, is designed to reduce duplicate mailings and save significant printing and postage costs as well as natural resources.

The Company will promptly deliver, upon oral or written request, a separate copy of this information statement to any stockholder residing at an address to which only one copy was mailed. Requests for additional copies should be directed to the Company by phone at (847) 286-7000 or by mail to Sears Hometown and Outlet Stores, Inc., 5500 Trillium Boulevard, Suite 501, Hoffman Estates, Illinois 60192, Attention: General Counsel and Secretary. Stockholders residing at the same address and currently receiving multiple copies of this information statement may contact the Company at the address or phone number above to request that only a single copy of an information statement be mailed in the future.

 

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FUTURE STOCKHOLDER PROPOSALS

If the Merger is completed, the Company will have no public stockholders, and there will be no public participation in any of our future stockholder meetings. However, if the Merger is not completed, stockholders will continue to be entitled to attend and participate in meetings of stockholders.

If the Merger is completed, the Company does not expect to hold the 2020 Annual Meeting of Stockholders, and there will be no public participation in any future meetings of the Company’s stockholders because, following completion of the Merger, the Company Common Stock will be de-listed from NASDAQ and de-registered under the Exchange Act, and the Company will no longer be a publicly traded company. However, if the Merger is not completed, or if the Company is otherwise required to do so under applicable law, the Company will take such further action as it deems necessary or appropriate to call and convene future meetings of Company stockholders, and stockholder proposals will be eligible for consideration for inclusion in the proxy statement and form of proxy for such future annual meetings of Company stockholders in accordance with Rule 14a-8 of the Exchange Act and the amended and restated bylaws of the Company, as described below.

Our amended and restated bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders or to nominate candidates for election as directors at an annual meeting of stockholders must provide timely notice of such proposed business in writing in order to be considered by the stockholders of the Company at the annual meeting. To be timely, a stockholder’s notice must be delivered to, or mailed and received at, our principal executive office at Sears Hometown and Outlet Stores, Inc., 5500 Trillium Boulevard, Suite 501, Hoffman Estates, Illinois 60192, Attention: General Counsel and Secretary, not later than the close of business on the 90th day, nor earlier than the 120th day, prior to the first anniversary of the date on which the Company held the preceding year’s annual meeting. In the event that the date of the annual meeting is more than 30 days before or more than 70 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Company. Public announcement of an adjournment or postponement of an annual meeting will not commence a new time period (or extend any time period) for the giving of a stockholder’s notice as described above. The notice must include the information required by the Company’s amended and restated bylaws. A copy of the Company’s amended and restated bylaws is available upon request without charge from the General Counsel and Secretary of the Company at the address set forth above.

 

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WHERE YOU CAN FIND ADDITIONAL INFORMATION

We file annual, quarterly and current reports, proxy statements and other information with the SEC under the Exchange Act. The SEC maintains a website that contains reports, proxy statements and other information that we file electronically with the SEC. The address of that website is www.sec.gov.

Company filings referred to above are also available on our Internet website, https://www.shos.com, under “Investor Information”, without charge. Information contained on our Internet website does not constitute a part of this information statement.

The SEC allows us to “incorporate by reference” into this information statement documents we file with the SEC. This means that we can disclose important information to you by referring you to those documents. The information incorporated by reference in this information statement is considered to be a part of this information statement, and later information that we file with the SEC will update and supersede that information. Information in documents that is deemed, in accordance with SEC rules, to be furnished and not filed will not be deemed to be incorporated by reference into this information statement. We incorporate by reference the documents listed below and any documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of the initial filing of this information statement and before the effective time of the Merger:

 

   

Annual Report on Form 10-K for the fiscal year ended February 2, 2019;

 

   

Quarterly Report on Form 10-Q for the fiscal quarter ended May 4, 2019;

 

   

Definitive Proxy Statement for the Company’s 2019 annual meeting of stockholders; and

 

   

Current Reports on Form  8-K, filed on April 8, 2019 and June 1, 2019.

You may obtain a copy of the reports, without charge, upon written request to: Sears Hometown and Outlet Stores, Inc., 5500 Trillium Boulevard, Suite 501, Hoffman Estates, Illinois 60192, Attention: General Counsel and Secretary.

The ESL Filing Parties have supplied, and the Company has not independently verified, the information in this information statement relating to the ESL Filing Parties.

No persons have been authorized to give any information or to make any representations other than those contained in this information statement, and, if given or made, such information or representations must not be relied upon as having been authorized by us or any other person. This information statement is dated [    ], 2019. You should not assume that the information contained in this information statement is accurate as of any date other than that date, and the mailing of this information statement to Company stockholders does not and will not create any implication to the contrary.

 

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Annex A

AGREEMENT AND PLAN OF MERGER

dated as of

June 1, 2019

among

SEARS HOMETOWN AND OUTLET STORES, INC.,

TRANSFORM HOLDCO LLC

and

TRANSFORM MERGER CORPORATION

 


Table of Contents

TABLE OF CONTENTS

 

     PAGE  

Article 1 Definitions

     A-2  

Section 1.01.   Definitions

     A-2  

Section 1.02.   Other Definitional and Interpretative Provisions

     A-12  

Article 2 The Merger

     A-13  

Section 2.01.   The Merger

     A-13  

Section 2.02.   Conversion of Shares

     A-13  

Section 2.03.   Surrender and Payment

     A-14  

Section 2.04.   Dissenting Shares

     A-15  

Section 2.05.   Restricted Stock Units; Company LTIP

     A-15  

Section 2.06.   Adjustments

     A-17  

Section 2.07.   Withholding Rights

     A-17  

Section 2.08.   Lost Certificates

     A-17  

Section 2.09.   Calculation of the Merger Consideration; Dispute Resolution

     A-17  

Article 3 The Surviving Corporation

     A-19  

Section 3.01.   Certificate of Incorporation

     A-19  

Section 3.02.   Bylaws

     A-19  

Section 3.03.   Directors and Officers

     A-19  

Article 4 Representations And Warranties Of The Company

     A-19  

Section 4.01.   Corporate Existence and Power

     A-19  

Section 4.02.   Corporate Authorization

     A-20  

Section 4.03.   Governmental Authorization

     A-20  

Section 4.04.   Non-contravention

     A-20  

Section 4.05.   Capitalization

     A-21  

Section 4.06.   Subsidiaries

     A-22  

Section 4.07.   SEC Filings and the Sarbanes-Oxley Act

     A-22  

Section 4.08.   Financial Statements

     A-23  

Section 4.09.   Disclosure Documents

     A-24  

Section 4.10.   Absence of Certain Changes

     A-24  

Section 4.11.   No Undisclosed Material Liabilities

     A-24  

Section 4.12.   Compliance with Laws and Court Orders

     A-24  

Section 4.13.   Litigation

     A-25  

Section 4.14.   [Reserved]

     A-25  

Section 4.15.   Properties

     A-25  

 

A-i


Table of Contents

Section 4.16.   Intellectual Property

     A-25  

Section 4.17.   Taxes

     A-26  

Section 4.18.   Employee Benefit Plans

     A-28  

Section 4.19.   Labor Matters

     A-29  

Section 4.20.   Environmental Matters

     A-30  

Section 4.21.   Material Contracts

     A-30  

Section 4.22.   [Reserved]

     A-32  

Section 4.23.   Finders’ Fees

     A-32  

Section 4.24.   Opinion of Financial Advisor

     A-32  

Section 4.25.   Antitakeover Statutes and Rights Agreement

     A-32  

Section 4.26.   Interested Party Transactions

     A-32  

Section 4.27.   Credit Agreements

     A-32  

Section 4.28.   No Other Representations and Warranties

     A-32  

Article 5 Representations and Warranties of Parent

     A-33  

Section 5.01.   Existence and Power

     A-33  

Section 5.02.   Authorization

     A-33  

Section 5.03.   Governmental Authorization

     A-33  

Section 5.04.   Non-contravention

     A-33  

Section 5.05.   Disclosure Documents

     A-34  

Section 5.06.   Finders’ Fees

     A-34  

Section 5.07.   Financing

     A-34  

Section 5.08.   Litigation

     A-34  

Section 5.09.   Ownership of Shares

     A-34  

Article 6 Covenants of the Company

     A-34  

Section 6.01.   Conduct of the Company

     A-34  

Section 6.02.   Access to Information

     A-38  

Section 6.03.   No Solicitation; No Change in Recommendation; Sale of the Outlet Segment

     A-38  

Section 6.04.   Section 16 Matters

     A-42