Sears 2006 Annual Report Download - page 20

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Company has divided its “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” (“MD&A”) into the following seven sections:
• Overview of Holdings
• Merger and Fiscal Year
• Fiscal 2006 Initiatives and Accomplishments
• Results of Operations:
Fiscal 2006 Summary
Holdings Consolidated Results
Business Segment Results
Pro Forma Reconciliation
• Analysis of Consolidated Financial Condition
• Contractual Obligations and Off-Balance-Sheet Arrangements
• Application of Critical Accounting Policies
Overview of Holdings
Holdings, the parent company of Kmart and Sears, was formed in connection with the March 24, 2005
Merger of these two companies. The Company is a broadline retailer and, at the end of fiscal 2006, had
approximately 2,300 full-line and 1,100 specialty retail stores in the United States operating through Kmart and
Sears and approximately 370 full-line and specialty retail stores in Canada operating through Sears Canada, a
70%-owned subsidiary.
The Company currently conducts its operations in three business segments: Kmart, Sears Domestic and
Sears Canada. Prior to the Merger, the Company operated a single business segment, Kmart. The nature of
operations conducted within each of these segments is discussed within the “Business Segments” section of
Item 1 in this Form 10-K.
Merger
The Merger was accounted for as a purchase business combination, with Kmart acquiring Sears.
Accordingly, the historical financial statements of Kmart serve as the historical financial statements of Holdings.
The consolidated statements of income and cash flows for fiscal 2005 include the results of operations of Sears
subsequent to the Merger date, or from March 25, 2005 forward. Therefore, Holdings’ operating results for fiscal
2005 include approximately 44 weeks of Sears’ results and 52 weeks of Kmart’s results.
Kmart shareholders received one share of Holdings common stock for each Kmart share owned. In all,
approximately 94.9 million shares of Holdings common stock were issued in exchange for all outstanding
common stock of Kmart. In aggregate, approximately 62.2 million shares of Holdings common stock were issued
to Sears shareholders at a value of approximately $6.5 billion (based on the average closing price of $104.33 of
Kmart’s common stock during the period from November 15, 2004 through November 19, 2004, two business
days before and after the date the Merger was announced). In addition, approximately $5.4 billion in cash was
paid in consideration for (i) all outstanding shares of common stock of Sears, based upon the proration provisions
of the agreement pursuant to which the Merger was effected, and (ii) all outstanding stock options of Sears.
Including transaction costs of approximately $18 million, the total consideration paid for the acquisition of Sears
was approximately $11.9 billion.
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