U NITED S TATES
S ECURITIES A ND E XCHANGE C OMMISSION
W ASHINGTON , D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 1, 2014
O R
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-51217, 001-36693
SEARS HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
D ELAWARE
20-1920798
(State of Incorporation)
(I.R.S. Employer Identification No.)
 
 
3333 B EVERLY  R OAD , H OFFMAN  E STATES , I LLINOIS
60179
(Address of principal executive offices)
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (847) 286-2500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   x                No     ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes     x           No     ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer    x   Accelerated filer     ¨   Non-accelerated filer     ¨   Smaller reporting company     ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes     ¨             No     x
As of November 28, 2014 , the registrant had 106,507,702 common shares, $0.01 par value, outstanding.
 



SEARS HOLDINGS CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013
 
 
 
 
Page
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
Item 6.



SEARS HOLDINGS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
 
13 Weeks Ended
 
39 Weeks Ended
millions, except per share data
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
REVENUES
 
 
 
 
 
 
 
Merchandise sales and services (1)
$
7,207

 
$
8,272

 
$
23,099

 
$
25,595

COSTS AND EXPENSES
 
 
 
 
 
 
 
Cost of sales, buying and occupancy (1)
5,606

 
6,341

 
17,928

 
19,322

Selling and administrative
2,011

 
2,262

 
6,218

 
6,771

Depreciation and amortization
148

 
181

 
455

 
559

Impairment charges
—

 
6

 
25

 
14

Gain on sales of assets
(68
)
 
(21
)
 
(148
)
 
(276
)
Total costs and expenses
7,697

 
8,769

 
24,478

 
26,390

Operating loss
(490
)
 
(497
)
 
(1,379
)
 
(795
)
Interest expense
(78
)
 
(61
)
 
(221
)
 
(181
)
Interest and investment income
97

 
8

 
133

 
29

Other income
2

 
1

 
4

 
—

Loss before income taxes
(469
)
 
(549
)
 
(1,463
)
 
(947
)
Income tax (expense) benefit
(159
)
 
2

 
(188
)
 
(19
)
Net loss
(628
)
 
(547
)
 
(1,651
)
 
(966
)
(Income) loss attributable to noncontrolling interests
80

 
13

 
128

 
(41
)
NET LOSS ATTRIBUTABLE TO HOLDINGS' SHAREHOLDERS
$
(548
)
 
$
(534
)
 
$
(1,523
)
 
$
(1,007
)
NET LOSS PER COMMON SHARE ATTRIBUTABLE TO HOLDINGS' SHAREHOLDERS
 
 
 
 
 
 
 
Basic loss per share
$
(5.15
)
 
$
(5.03
)
 
$
(14.33
)
 
$
(9.49
)
Diluted loss per share
$
(5.15
)
 
$
(5.03
)
 
$
(14.33
)
 
$
(9.49
)
Basic weighted average common shares outstanding
106.4

 
106.1

 
106.3

 
106.1

Diluted weighted average common shares outstanding
106.4

 
106.1

 
106.3

 
106.1

(1) Includes merchandise sales to Sears Hometown and Outlet Stores, Inc. ("SHO") of $329 million and $364 million for the 13 weeks ended November 1, 2014 and November 2, 2013 , respectively, and $1.1 billion for both the 39 -week periods ended November 1, 2014 and November 2, 2013 . Pursuant to the terms of the separation, merchandise is sold to SHO at cost.


See accompanying notes.

1

SEARS HOLDINGS CORPORATION
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
 
13 Weeks Ended
 
39 Weeks Ended
millions
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
Net loss
$
(628
)
 
$
(547
)
 
$
(1,651
)
 
$
(966
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Pension and postretirement adjustments, net of tax
30

 
46

 
95

 
140

Deferred gain (loss) on derivatives, net of tax
—

 
2

 
(2
)
 
2

Currency translation adjustments, net of tax
(11
)
 
—

 
3

 
(27
)
Sears Canada de-consolidation
(186
)
 
—

 
(186
)
 
—

Total other comprehensive income (loss)
(167
)
 
48

 
(90
)
 
115

Comprehensive loss
(795
)
 
(499
)
 
(1,741
)
 
(851
)
Comprehensive (income) loss attributable to noncontrolling interests
401

 
11

 
438

 
(36
)
Comprehensive loss attributable to Holdings' shareholders
$
(394
)
 
$
(488
)
 
$
(1,303
)
 
$
(887
)
See accompanying notes.

2

SEARS HOLDINGS CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
millions
November 1,
2014
 
November 2,
2013
 
February 1,
2014
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
326

 
$
599

 
$
1,028

Restricted cash
—

 
8

 
10

Accounts receivable (1)
546

 
541

 
553

Merchandise inventories
6,464

 
8,912

 
7,034

Prepaid expenses and other current assets
255

 
468

 
334

Total current assets
7,591

 
10,528

 
8,959

Property and equipment, net
4,561

 
5,682

 
5,394

Goodwill
269

 
379

 
379

Trade names and other intangible assets
2,104

 
2,858

 
2,850

Other assets
644

 
762

 
679

TOTAL ASSETS
$
15,169

 
$
20,209

 
$
18,261

LIABILITIES
 
 
 
 
 
Current liabilities
 
 
 
 
 
Short-term borrowings (2)
$
2,096

 
$
1,751

 
$
1,332

Current portion of long-term debt and capitalized lease obligations
75

 
82

 
83

Merchandise payables
2,431

 
3,517

 
2,496

Other current liabilities
2,100

 
2,510

 
2,527

Unearned revenues
825

 
912

 
900

Other taxes
406

 
473

 
460

Short-term deferred tax liabilities
481

 
430

 
387

Total current liabilities
8,414

 
9,675

 
8,185

Long-term debt and capitalized lease obligations (3)
2,769

 
2,862

 
2,834

Pension and postretirement benefits
1,320

 
2,387

 
1,942

Other long-term liabilities
1,830

 
2,039

 
2,008

Long-term deferred tax liabilities
710

 
919

 
1,109

Total Liabilities
15,043

 
17,882

 
16,078

Commitments and contingencies
 
 
 
 
 
EQUITY
 
 
 
 
 
Total Equity
126

 
2,327

 
2,183

TOTAL LIABILITIES AND EQUITY
$
15,169

 
$
20,209

 
$
18,261

(1) Includes $80 million , $57 million and $68 million at November 1, 2014 , November 2, 2013 and February 1, 2014 , respectively, of net amounts receivable from SHO.
(2) Includes $85 million and $140 million , respectively, of unsecured commercial paper held by ESL and its affiliates at November 1, 2014 and November 2, 2013 . ESL and its affiliates held none of our commercial paper at February 1, 2014 . Also includes a $400 million secured short-term loan with JPP II, LLC and JPP, LLC, entities affiliated with ESL, at November 1, 2014 .
(3) Includes $205 million of senior secured notes held by ESL and its affiliates at November 1, 2014 , and $95 million at both November 2, 2013 and February 1, 2014 , and $3 million of subsidiary notes held by ESL and its affiliates at November 1, 2014 , November 2, 2013 and February 1, 2014 .
See accompanying notes.

3

SEARS HOLDINGS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
39 Weeks Ended
millions
November 1,
2014
 
November 2,
2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(1,651
)
 
$
(966
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Deferred tax valuation allowance
152

 
—

Depreciation and amortization
455

 
559

Impairment charges
25

 
14

Gain on sales of assets
(148
)
 
(276
)
Gain on sales of investments
(105
)
 
—

Pension and postretirement plan contributions
(366
)
 
(326
)
Mark-to-market adjustments of financial instruments
(9
)
 
—

Settlement of Canadian dollar hedges
8

 
—

Change in operating assets and liabilities (net of acquisitions and dispositions):
 
 
 
Deferred income taxes
(40
)
 
7

Merchandise inventories
(430
)
 
(1,392
)
Merchandise payables
282

 
774

Income and other taxes
(48
)
 
22

Other operating assets
(58
)
 
28

Other operating liabilities
(9
)
 
(116
)
Net cash used in operating activities
(1,942
)
 
(1,672
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Proceeds from sales of property and investments
316

 
300

Net decrease in investments and restricted cash
—

 
1

Purchases of property and equipment
(202
)
 
(201
)
De-consolidation of Sears Canada cash
(207
)
 
—

Proceeds from Sears Canada rights offering
169

 
—

Net cash provided by investing activities
76

 
100

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from debt issuances
400

 
994

Repayments of long-term debt
(61
)
 
(65
)
Increase in short-term borrowings, primarily 90 days or less
364

 
657

Lands' End, Inc. pre-separation funding
515

 
—

Separation of Lands' End, Inc.
(31
)
 
—

Debt issuance costs
(20
)
 
(14
)
Net cash provided by financing activities
1,167

 
1,572

Effect of exchange rate changes on cash and cash equivalents
(3
)
 
(10
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(702
)
 
(10
)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
1,028

 
609

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
326

 
$
599

Supplemental Cash Flow Data:
 
 
 
Income taxes paid, net of refunds
$
94

 
$
(4
)
Cash interest paid
193

 
173

Unpaid liability to acquire equipment and software
20

 
44

Receivable related to Sears Canada rights offering
103

 
—

See accompanying notes.

4

SEARS HOLDINGS CORPORATION
Condensed Consolidated Statements of Equity
(Unaudited)
 
Equity Attributable to Holdings’ Shareholders
 
 
millions
Number
of
Shares
Common
Stock
Treasury
Stock
Capital in
Excess of
Par Value
Retained Earnings (Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Noncontrolling
Interests
Total
Balance at February 2, 2013
106

$
1

$
(5,970
)
$
9,298

$
885

$
(1,459
)
$
417

$
3,172

Comprehensive loss
 
 
 
 
 
 
 
 
Net income (loss)
—

—

—

—

(1,007
)
—

41

(966
)
Pension and postretirement adjustments, net of tax
—

—

—

—

—

132

8

140

Deferred gain on derivatives, net of tax
—

—

—

—

—

2

—

2

Currency translation adjustments, net of tax
—

—

—

—

—

(14
)
(13
)
(27
)
Total Comprehensive Loss
 
 
 
 
 
 
 
(851
)
Stock awards
—

—

4

(1
)
—

—

—

3

Associate stock purchase
—

—

3

—

—

—

—

3

Balance at November 2, 2013
106

$
1

$
(5,963
)
$
9,297

$
(122
)
$
(1,339
)
$
453

$
2,327

Balance at February 1, 2014
106

$
1

$
(5,963
)
$
9,298

$
(480
)
$
(1,117
)
$
444

$
2,183

Comprehensive loss
 
 
 
 
 
 
 
 
Net loss
—

—

—

—

(1,523
)
—

(128
)
(1,651
)
Pension and postretirement adjustments, net of tax
—

—

—

—

—

90

5

95

Deferred loss on derivatives, net of tax
—

—

—

—

—

(2
)
—

(2
)
Currency translation adjustments, net of tax
—

—

—

—

—

4

(1
)
3

Sears Canada de-consolidation
—

—

—

—

—

128

(314
)
(186
)
Total Comprehensive Loss
 
 
 
 
 
 
 
(1,741
)
Stock awards
—

—

5

(4
)
—

—

—

1

Separation of Lands' End, Inc.
—

—

—

(323
)
—

2

—

(321
)
Associate stock purchase
—

—

4

—

—

—

—

4

Balance at November 1, 2014
106

$
1

$
(5,954
)
$
8,971

$
(2,003
)
$
(895
)
$
6

$
126








See accompanying notes.

5

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)


NOTE 1 – BASIS OF PRESENTATION
Sears Holdings Corporation ("Holdings") is the parent company of Kmart Holding Corporation ("Kmart") and Sears, Roebuck and Co. ("Sears"). Holdings (together with its subsidiaries, "we," "us," "our," or the "Company") was formed as a Delaware corporation in 2004 in connection with the merger of Kmart and Sears (the "Merger"), on March 24, 2005. We are an integrated retailer with 1,831 full-line and specialty retail stores in the United States, operating through Kmart and Sears. Through the third quarter of 2014, we conducted our operations under three reportable segments: Kmart, Sears Domestic and Sears Canada.
These interim unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full fiscal year. The retail business is seasonal in nature, and we generate a high proportion of our revenues and operating cash flows during the fourth quarter of our fiscal year, which includes the holiday season. These interim financial statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014 .
Depreciation Expense
Depreciation expense included within depreciation and amortization expense reported on the Condensed Consolidated Statements of Operations was $144 million , $441 million , $174 million , and $536 million for the 13 - and 39 - week periods ended November 1, 2014 and November 2, 2013 , respectively.
Sears Canada Rights Offering
On October 2, 2014, the Company announced that its board of directors had approved a rights offering of up to 40 million shares of Sears Canada Inc. ("Sears Canada"). The subscription rights were distributed to all stockholders of Holdings, and every stockholder had the right to participate on the same terms in accordance with its pro rata ownership of the Company's common stock. In connection with the rights offering, each holder of Holdings' common stock received one subscription right for each share of common stock held at the close of business on October 16, 2014, the record date for the rights offering. Each subscription right entitled the holder thereof to purchase their pro rata portion of the Sears Canada common shares being sold by Holdings in the rights offering at a cash subscription price of Canadian $10.60 per whole Sears Canada share, which was the closing price of Sears Canada's common shares on September 26, 2014, the last trading day before the Company requested Sears Canada's cooperation with the filing of a prospectus regarding the rights offering.
On October 16, 2014, ESL Partners, L.P. and Edward S. Lampert, our Chairman and Chief Executive Officer and Chairman and Chief Executive Officer of ESL Investments, Inc., and related entities (collectively "ESL") exercised a portion of its pro rata portion of the basic subscription rights to the offering. Accordingly, we sold a total of approximately 18 million common shares of Sears Canada to ESL, for which we received approximately $169 million in proceeds. After the sale of Sears Canada shares to ESL on October 16, 2014, the Company was the beneficial holder of approximately 34 million shares, or 34% , of the common shares of Sears Canada. As such, the Company no longer maintained control of Sears Canada resulting in the de-consolidation of Sears Canada.
We accounted for the de-consolidation of Sears Canada in accordance with accounting standards applicable to consolidation and de-recognized the assets, liabilities, accumulated other comprehensive income and non-controlling interest related to Sears Canada and recognized a gain of approximately $70 million recorded within Interest and investment income on the Condensed Consolidated Statement of Operations and within Gain on sales of investments on the Condensed Consolidated Statements of Cash Flows for the 13 - and 39 - week periods ended November 1, 2014 , of which $42 million relates to the remeasurement of our retained equity interest to its fair value.
Also, we determined that we have the ability to exercise significant influence over Sears Canada as a result of our ownership interest in Sears Canada and as a result of Mr. Lampert's role as our Chairman and Chief Executive

6

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Officer, and Chairman and Chief Executive Officer of ESL. Accordingly, we accounted for our retained investment in the common shares of Sears Canada as an equity method investment in accordance with accounting standards applicable to investments. We elected the fair value option for the equity method investment in Sears Canada in accordance with accounting standards applicable to financial instruments. The fair value of our equity method investment is disclosed in Note 4 to the Condensed Consolidated Financial Statements, and the change in fair value is recorded in Interest and investment income on the Condensed Consolidated Statement of Operations.
In addition, since the Company has retained an equity interest in Sears Canada, the operating results for Sears Canada through October 16, 2014 are presented within the condensed consolidated operations of Holdings and the Sears Canada segment in the accompanying Condensed Consolidated Financial Statements in accordance with accounting standards applicable to presentation of financial statements.
At November 1, 2014, basic subscription rights for approximately 29 million common shares of Sears Canada had been exercised with the subscription price paid in full, and the Company had received approximately $169 million of proceeds and had a receivable of approximately $103 million , included in Accounts receivable on the Condensed Consolidated Balance Sheet. This includes a total of approximately 19 million common shares of Sears Canada sold to ESL pursuant to ESL exercising its pro rata portion of basic subscription rights.
At November 1, 2014, the Company was the beneficial holder of approximately 23 million , or 23% , of the common shares of Sears Canada. At both November 2, 2013 and February 1, 2014 , Sears Holdings was the beneficial holder of approximately 52 million , or 51% , of the common shares of Sears Canada.
Rights Offering of Units Consisting of Senior Unsecured Notes and Warrants
On October 20, 2014, the Company announced its board of directors had approved a rights offering allowing its stockholders to purchase up to $625 million in aggregate principal amount of 8% senior unsecured notes due 2019 and warrants to purchase shares of its common stock.
The subscription rights were distributed to all stockholders of the Company as of October 30, 2014, the record date for this rights offering, and every stockholder will have the right to participate on the same terms in accordance with its pro rata ownership of the Company's common stock. Holders of the Company's restricted stock that is unvested as of the record date are expected to receive cash awards in lieu of subscription rights.
Separation of Lands' End, Inc.
On April 4, 2014, we completed the separation of our Lands' End business through a spin-off transaction. The separation was structured to be tax free to our U.S. shareholders for U.S. federal income tax purposes. Prior to the separation, Lands' End, Inc. ("Lands' End") entered into an asset-based senior secured revolving credit facility, which provides for maximum borrowings of approximately $175 million with a letter of credit sub-limit, and a senior secured term loan facility of approximately $515 million . The proceeds of the term loan facility were used to fund a $500 million dividend to Holdings and pay fees and expenses associated with the foregoing facilities. We accounted for this spin-off in accordance with accounting standards applicable to spin-off transactions. Accordingly, we classified the carrying value of net assets of $323 million contributed to Lands' End as a reduction of capital in excess of par value in the Condensed Consolidated Statement of Equity for the 39 -week period ended November 1, 2014 .
Additionally, as a result of Mr. Lampert's role as our Chairman and Chief Executive Officer, and Chairman and Chief Executive Officer of ESL, and the continuing arrangements between Holdings and Lands' End (as further described in Note 13), Holdings has determined that it has significant influence over Lands' End. Accordingly, the operating results for Lands' End through the date of the spin-off are presented within the consolidated continuing operations of Holdings and the Sears Domestic segment in the accompanying Condensed Consolidated Financial Statements.
In connection with the separation, Holdings and certain of its subsidiaries entered into various agreements with Lands' End under the terms described in Note 13.

7

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Changes in the carrying amount of goodwill by segment, which reflects the impact related to the Lands' End spin-off, were as follows:
millions
Sears Domestic
Balance, February 1, 2014:
 
Goodwill
$
379

2014 activity:
 
Separation of Lands' End
(110
)
Balance, November 1, 2014
$
269

Changes in the carrying amount of trade names and other intangible assets by segment, which reflects the impact related to the Lands' End spin-off and de-consolidation of Sears Canada, were as follows:
millions
Kmart
 
Sears Domestic
 
Sears Canada
 
Total
Balance, February 1, 2014:
 
 
 
 
 
 
 
Trade names and intangible assets
$
3

 
$
2,651

 
$
196

 
$
2,850

2014 activity:
 
 
 
 
 
 
 
Separation of Lands' End
—

 
(531
)
 
—

 
(531
)
De-consolidation of Sears Canada
—

 
—

 
(194
)
 
(194
)
Amortization expense and other
(2
)
 
(17
)
 
(2
)
 
(21
)
Balance, November 1, 2014
$
1

 
$
2,103

 
$
—

 
$
2,104

NOTE 2 – BORROWINGS
Total borrowings were as follows:
millions
November 1,
2014
 
November 2,
2013
 
February 1,
2014
Short-term borrowings:
 
 
 
 
 
Unsecured commercial paper
$
91

 
$
160

 
$
9

Secured short-term loan
400

 
—

 
—

Secured borrowings
1,605

 
1,591

 
1,323

Long-term debt, including current portion:
 
 
 
 
 
Notes and debentures outstanding
2,564

 
2,571

 
2,571

Capitalized lease obligations
280

 
373

 
346

Total borrowings
$
4,940

 
$
4,695

 
$
4,249

The fair value of long-term debt, excluding capitalized lease obligations, was $2.3 billion at both November 1, 2014 and February 1, 2014 and $2.4 billion at November 2, 2013 . The fair value of our debt was estimated based on quoted market prices for the same or similar issues or on current rates offered to us for debt of the same remaining maturities. Our long-term debt instruments are valued using Level 2 measurements as defined in Note 4 to the Condensed Consolidated Financial Statements.
Debt Repurchase Authorization
In 2005, our Finance Committee of the Board of Directors authorized the repurchase, subject to market conditions and other factors, of up to $500 million of our outstanding indebtedness in open market or privately negotiated transactions. Our wholly owned finance subsidiary, Sears Roebuck Acceptance Corp. ("SRAC"), has repurchased

8

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

$215 million of its outstanding notes. Holdings has repurchased $10 million of senior secured notes. The unused balance of this authorization is $275 million at November 1, 2014 .
Unsecured Commercial Paper
We borrow through the commercial paper markets. At November 1, 2014 ,  November 2, 2013 and February 1, 2014 , we had outstanding commercial paper borrowings of $91 million , $160 million and $9 million , respectively. ESL held $85 million and $140 million , respectively, of our commercial paper at November 1, 2014 and November 2, 2013 , including $48 million and $88 million , respectively, held by Mr. Lampert. Neither ESL nor Mr. Lampert held any of our commercial paper at February 1, 2014 . See Note 13 for further discussion of these borrowings.
Secured Short-Term Loan
On September 15, 2014, the Company, through Sears, Sears Development Co. and Kmart Corporation ("Borrowers"), entities wholly-owned and controlled, directly or indirectly by the Company, entered into a $400 million secured short-term loan (the "Loan'") with JPP II, LLC and JPP, LLC (together, the "Lender"), entities affiliated with ESL. The first $200 million of the Loan was funded at the closing on September 15, 2014 and the remaining $200 million was funded on September 30, 2014. Proceeds of the Loan were used for general corporate purposes.
The Loan is scheduled to mature on December 31, 2014, but as long as there is no event of default, the maturity date can be extended to February 28, 2015 at the discretion of the Company upon the payment of an extension fee equal to 0.5% of the principal amount. The Loan will have an annual base interest rate of 5% . The Borrowers paid an upfront fee of 1.75% of the full principal amount.
The Loan is guaranteed by the Company and is secured by a first priority lien on certain real properties owned by the Borrowers. In certain circumstances, the Lender may exercise its reasonable determination to substitute one or more of the properties with substitute properties. The Loan includes customary representations and covenants, including with respect to the condition and maintenance of the real property collateral.
The Loan has customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, and bankruptcy or insolvency proceedings. If there is an event of default, the Lender may declare all or any portion of the outstanding indebtedness to be immediately due and payable, exercise any rights it might have under any of the Loan documents (including against the collateral), and instead of the base interest rate, the Borrowers will be required to pay a default rate equal to the greater of (i) 2.5% in excess of the base interest rate and (ii) the prime rate plus 1% . The Loan may be prepaid in whole or in part any time prior to maturity, without penalty or premium.
The Lender sold certain participating interests in the Loan during the third quarter, which may restrict the taking of certain actions with respect to the Loan, including the waiver of certain defaults under the Loan.
At November 1, 2014 , the outstanding balance of the Loan was $400 million .
Domestic Credit Agreement
During the first quarter of 2011, SRAC, Kmart Corporation (together with SRAC, the "Borrowers") and Holdings entered into an amended credit agreement (the "Domestic Credit Agreement"). The Domestic Credit Agreement provides for a $3.275 billion asset-based revolving credit facility (the "Revolving Facility") with a $1.5 billion letter of credit sub-limit. On October 2, 2013, Holdings and the Borrowers entered into a First Amendment (the "Amendment") to the Domestic Credit Agreement with a syndicate of lenders. Pursuant to the Amendment, the Borrowers borrowed $1.0 billion under a senior secured term loan facility (the "Term Loan").
Advances under the Domestic Credit Agreement bear interest at a rate equal to, at the election of the Borrowers, either the London Interbank Offered Rate ("LIBOR") or a base rate, in either case plus an applicable margin. The Domestic Credit Agreement’s interest rates for LIBOR-based borrowings vary based on leverage in the range of LIBOR plus 2.0% to 2.5% . Interest rates for base rate-based borrowings vary based on leverage in the range of the applicable base rate plus 1.0% to 1.5% . Commitment fees are in a range of 0.375% to 0.625% based on usage. The Revolving Facility is in place as a funding source for general corporate purposes and is secured by a first lien on our domestic inventory and credit card and pharmacy receivables, and is subject to a borrowing base formula to

9

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

determine availability. The Domestic Credit Agreement permits aggregate second lien indebtedness of up to $2.0 billion , of which $1.2 billion in second lien notes were outstanding at November 1, 2014 , resulting in $760 million of permitted second lien indebtedness, subject to limitations imposed by a borrowing base requirement under the indenture that governs our 6 5/8% senior secured notes due 2018. The Revolving Facility is expected to expire in April 2016.
The Term Loan bears interest at a rate equal to, at the election of the Borrowers, either (1) LIBOR (subject to a 1.00% LIBOR floor) or (2) the highest of (x) the prime rate of the bank acting as agent of the syndicate of lenders, (y) the federal funds rate plus 0.50% and (z) the one-month LIBOR rate plus 1.00% (the highest of (x), (y) and (z), the "Base Rate"), plus an applicable margin for LIBOR loans of 4.50% and for Base Rate loans of 3.50% . Beginning February 2, 2014, the Borrowers are required to repay the Term Loan in quarterly installments of $2.5 million , with the remainder of the Term Loan maturing June 30, 2018. Beginning with the fiscal year ending January 2015, the Borrowers are also required to make certain mandatory repayments of the Term Loan from excess cash flow (as defined in the Domestic Credit Agreement). The Term Loan may be prepaid in whole or part without penalty, other than a 1.00% prepayment premium if the Borrowers enter into certain repricing transactions with respect to the Term Loan prior to October 2, 2014, which did not occur. The Term Loan is secured by the same collateral as the Revolving Facility on a pari passu basis with the Revolving Facility, and is guaranteed by the same subsidiaries of the Company that guarantee the Revolving Facility.
The Domestic Credit Agreement limits our ability to make restricted payments, including dividends and share repurchases, subject to specified exceptions that are available if, in each case, no event of default under the credit facility exists immediately before or after giving effect to the restricted payment. These include exceptions that require that projected availability under the credit facility, as defined, is at least 15% and an exception that requires that the restricted payment is funded from cash on hand and not from borrowings under the credit facility or from the proceeds of certain dividends or asset sales. The Domestic Credit Agreement also imposes various other requirements, which take effect if availability falls below designated thresholds, including a cash dominion requirement and a requirement that the fixed charge ratio at the last day of any quarter be not less than 1.0 to 1.0. If availability were to fall below 10%, the Company would not comply with the springing fixed charge coverage ratio covenant, and the lenders under our domestic credit facility could demand immediate payment in full of all amounts outstanding and terminate their obligations under the facility.
We had Revolving Facility borrowings of $1.6 billion at both November 1, 2014 and November 2, 2013 and $1.3 billion at February 1, 2014 , and $671 million , $684 million and $661 million of letters of credit outstanding under the Revolving Facility at November 1, 2014 , November 2, 2013 and February 1, 2014 , respectively. At November 1, 2014 and February 1, 2014 , the amount available to borrow under the Revolving Facility was $234 million and $549 million , respectively, which reflects the effect of the springing fixed charge coverage ratio covenant and the borrowing base limitation. At November 2, 2013 , the amount available to borrow was $572 million , which reflects the effect of the springing fixed charge coverage ratio covenant, while the borrowing base requirement had no effect on availability. The majority of the letters of credit outstanding are used to provide collateral for our insurance programs. We had borrowings of $993 million at November 1, 2014 , and $1.0 billion at both November 2, 2013 and February 1, 2014 , under the Term Loan.

10

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Senior Secured Notes
In October 2010, we sold $1.0 billion aggregate principal amount of senior secured notes (the "Notes"), which bear interest at 6 5/8% per annum and mature on October 15, 2018 . Concurrent with the closing of the sale of the Notes, the Company sold $250 million aggregate principal amount of Notes to the Company's domestic pension plan in a private placement, of which approximately $110 million remains in the domestic pension plan. The Notes are guaranteed by certain subsidiaries of the Company and are secured by a security interest in certain assets consisting primarily of domestic inventory and credit card receivables (the "Collateral"). The lien that secures the Notes is junior in priority to the lien on such assets that secures obligations under the Domestic Credit Agreement, as well as certain other first priority lien obligations. The Company used the net proceeds of this offering to repay borrowings outstanding under a previous domestic credit agreement on the settlement date and to fund the working capital requirements of our retail businesses, capital expenditures and for general corporate purposes. The indenture under which the Notes were issued contains restrictive covenants that, among other things, (1) limit the ability of the Company and certain of its domestic subsidiaries to create liens and enter into sale and leaseback transactions and (2) limit the ability of the Company to consolidate with or merge into, or sell other than for cash or lease all or substantially all of its assets to, another person. The indenture also provides for certain events of default, which, if any were to occur, would permit or require the principal and accrued and unpaid interest on all the then outstanding notes to be due and payable immediately. Generally, the Company is required to offer to repurchase all outstanding Notes at a purchase price equal to 101% of the principal amount upon the occurrence of certain change of control triggering events. Moreover, if the borrowing base (as calculated pursuant to the indenture) falls below the principal amount of the Notes plus the principal amount of any other indebtedness for borrowed money that is secured by liens on the collateral for the Notes on the last day of any two consecutive quarters, it could trigger an obligation to repurchase notes in an amount equal to such deficiency. The Company may call the Notes at a premium based on the "Treasury Rate" as defined in the indenture, plus 50 basis points. On September 6, 2011, we completed our offer to exchange the Notes held by nonaffiliates for a new issue of substantially identical notes registered under the Securities Act of 1933, as amended.
Sears Canada Credit Agreement
In September 2010, Sears Canada entered into a five -year, $800 million Canadian senior secured revolving credit facility (the "Sears Canada Facility"). On May 28, 2014, Sears Canada announced that it had extended the term of the Sears Canada Facility (the "Amended Sears Canada Facility") to May 28, 2019 and reduced the total credit limit to $300 million Canadian.
The Amended Sears Canada Facility is available for Sears Canada's general corporate purposes and is secured by a first lien on inventory and credit card receivables. Availability under the Amended Sears Canada Facility is determined pursuant to a borrowing base formula based on inventory and credit card receivables, subject to certain limitations, up to a maximum availability of $300 million Canadian. We had no borrowings outstanding under the Sears Canada Facility at November 2, 2013 and February 1, 2014 . Availability under the Amended Sears Canada Facility was approximately $729 million ( $760 million Canadian) and $336 million ( $374 million Canadian), respectively, at November 2, 2013 and February 1, 2014 .
Wholly owned Insurance Subsidiary and Intercompany Securities
We have numerous types of insurable risks, including workers' compensation, product and general liability, automobile, warranty, asbestos and environmental claims and the extended service contracts we sell to our customers. In addition, we provide credit insurance to third party creditors of the Company to mitigate their credit risk with the Company. The associated risks are managed through Holdings' wholly owned insurance subsidiary, Sears Reinsurance Company Ltd. ("Sears Re"), a Bermuda Class 3 insurer.
In accordance with applicable insurance regulations, Sears Re holds marketable securities to support the insurance coverage it provides. Sears has utilized two securitization structures to issue specific securities in which Sears Re has invested its capital to fund its insurance obligations. In November 2003, Sears formed a Real Estate Mortgage Investment Conduit ("REMIC"). The real estate associated with 125 Full-line stores was contributed to indirect wholly owned subsidiaries of Sears, and then leased back to Sears. The contributed stores were mortgaged and the REMIC issued to wholly owned subsidiaries of Sears (including Sears Re) $1.3 billion (par value) of securities (the

11

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

"REMIC Securities") that are secured by the mortgages and collateral assignments of the store leases. Payments to the holders on the REMIC Securities are funded by the lease payments. In May 2006, a subsidiary of Holdings contributed the rights to use the Kenmore, Craftsman and DieHard trademarks in the U.S. and its possessions and territories to KCD IP, LLC, an indirect wholly owned subsidiary of Holdings. KCD IP, LLC has licensed the use of the trademarks to subsidiaries of Holdings, including Sears and Kmart. Asset-backed securities with a par value of $1.8 billion (the "KCD Securities") were issued by KCD IP, LLC and subsequently purchased by Sears Re, the collateral for which includes the trademark rights and royalty income. Payments to the holders on the KCD Securities are funded by the royalty payments. The issuers of the REMIC Securities and KCD Securities and the owners of these real estate and trademark assets are bankruptcy remote, special purpose entities that are indirect wholly owned subsidiaries of Holdings. Cash flows received from rental streams and licensing fee streams paid by Sears, Kmart, other affiliates and third parties, are used for the payment of fees and interest on these securities. In the fourth quarter of fiscal 2013, Holdings contributed all of the outstanding capital stock of Sears Re to SRe Holding Corporation, a direct wholly owned subsidiary of Holdings. Sears Re thereafter reduced its excess statutory capital through the distribution of all REMIC Securities held by it to SRe Holding Corporation. Since the inception of the REMIC and KCD IP, LLC, the REMIC Securities and the KCD Securities have been entirely held by our wholly owned consolidated subsidiaries. At November 1, 2014 , November 2, 2013 and February 1, 2014 , the net book value of the securitized trademark rights was approximately $1.0 billion . The net book value of the securitized real estate assets was approximately $0.7 billion at November 1, 2014 , November 2, 2013 and February 1, 2014 .
Trade Creditor Matters
We have ongoing discussions concerning our liquidity and financial position with the vendor community and third parties that offer various credit protection services to our vendors. The topics discussed have included such areas as pricing, payment terms and ongoing business arrangements. As of the date of this report, we have not experienced any significant disruption in our access to merchandise or our operations.
NOTE 3 – DERIVATIVE FINANCIAL INSTRUMENTS
We primarily use derivatives as a risk management tool to decrease our exposure to fluctuations in the foreign currency market, and do not use derivative financial instruments for trading or speculative purposes. We were exposed to fluctuations in foreign currency exchange rates as a result of our net investment in Sears Canada. We had no outstanding derivatives at November 1, 2014 . The recorded amounts and corresponding gains on the hedging activity were not material at November 2, 2013 or February 1, 2014 , or for the 13 - and 39 - week periods ended November 2, 2013 .
Hedges of Net Investment in Sears Canada
During the third quarter of 2014 , we entered into foreign currency forward contracts with a total Canadian notional value of $300 million . These contracts were originally designated and qualified as hedges of the foreign currency exposure of our net investment in Sears Canada. On October 16, 2014, we settled foreign currency forward contracts with a total Canadian notional value of $187 million and de-designated the remaining contracts with a total Canadian notional value of $113 million as hedges, which were settled on October 27, 2014.
For derivatives that were designated as hedges of our net investment in Sears Canada, we assessed effectiveness based on changes in forward currency exchange rates. Changes in forward rates on the derivatives were recorded in the currency translation adjustments line in accumulated other comprehensive loss prior to the de-consolidation of Sears Canada on October 16, 2014. Subsequent to that date, the change in forward rates on the remaining derivative contracts that were no longer designated as hedges was recorded in interest and investment income in the Condensed Consolidated Statements of Operations.
We settled foreign currency forward contracts during the 13 - and 39 - week periods ended November 1, 2014 and received a net amount of $8 million relative to these contract settlements.

12

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

NOTE 4 – FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
We determine fair value of financial assets and liabilities based on the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels:
Level 1 inputs – unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occur with sufficient frequency and volume to provide ongoing pricing information.
Level 2 inputs – inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted market prices that are observable for the asset or liability, such as interest rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risk and default rates.
Level 3 inputs – unobservable inputs for the asset or liability.
Accounts receivable, merchandise payables, short-term borrowings, accrued liabilities, cash and domestic cash equivalents are reflected in the Condensed Consolidated Balance Sheets at cost, which approximates fair value due to the short-term nature of these instruments. The fair value of our long-term debt is disclosed in Note 2 to the Condensed Consolidated Financial Statements. The following tables provide the fair value measurement amounts for other financial assets and liabilities recorded in our Condensed Consolidated Balance Sheets at fair value at November 1, 2014 ,  November 2, 2013 and February 1, 2014 :
millions
Total Fair Value Amounts at November 1, 2014
 
Level 1
 
Level 2
 
Level 3
Equity method investments (4)
$
225

 
$
225

 
$
—

 
$
—

Total
$
225

 
$
225

 
$
—

 
$
—

millions
Total Fair Value Amounts at November 2, 2013
 
Level 1
 
Level 2
 
Level 3
Cash equivalents (1)
$
154

 
$
154

 
$
—

 
$
—

Restricted cash (2)
8

 
8

 
—

 
—

Foreign currency derivative assets (3)
4

 
—

 
4

 
—

Total
$
166

 
$
162

 
$
4

 
$
—

millions
Total Fair Value Amounts at February 1, 2014
 
Level 1
 
Level 2
 
Level 3
Cash equivalents (1)
$
346

 
$
346

 
$
—

 
$
—

Restricted cash (2)
10

 
10

 
—

 
—

Foreign currency derivative assets (3)
8

 
—

 
8

 
—

Total
$
364

 
$
356

 
$
8

 
$
—

(1)  
Included within Cash and cash equivalents in our Condensed Consolidated Balance Sheets.
(2)  
Included within Restricted cash in our Condensed Consolidated Balance Sheets.
(3)  
Included within Prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets.
(4)  
Included within Other assets in our Condensed Consolidated Balance Sheets.

13

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

The fair values of derivative assets and liabilities traded in the over-the-counter market are determined using quantitative models that require the use of multiple inputs including interest rates, prices and indices to generate pricing and volatility factors. The predominance of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. Our derivative instruments are valued using Level 2 measurements.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to our tangible fixed assets, goodwill and other intangible assets, which are remeasured when the derived fair value is below carrying value on our Condensed Consolidated Balance Sheets. For these assets, we do not periodically adjust carrying value to fair value except in the event of impairment. When we determine that impairment has occurred, we measure the impairment and adjust the carrying value. With the exception of the fixed asset impairments described in Note 5, we had no significant remeasurements of such assets or liabilities to fair value during the 13 - and 39 - week periods ended November 1, 2014 and November 2, 2013 .
All of the fair value remeasurements were based on significant unobservable inputs (Level 3). Fixed asset fair values were derived based on discussions with real estate brokers, review of comparable properties, if available, and internal expertise related to the current marketplace conditions.
NOTE 5 – STORE CLOSING CHARGES, IMPAIRMENTS AND REAL ESTATE TRANSACTIONS
In accordance with accounting standards governing costs associated with exit or disposal activities, expenses related to future rent payments for which we no longer intend to receive any economic benefit are accrued for when we cease to use the leased space and have been reduced for any income that we believe can be realized through sub-leasing the leased space. During the third quarter of 2014 , we closed 27 stores in our Kmart segment and six stores in our Sears Domestic segment we previously announced would close, and recorded charges for the related lease obligations of $3 million for 17 of these stores in our Kmart segment and $2 million for two of these stores in our Sears Domestic segment. During the first nine months of 2014 , we closed 102 stores in our Kmart segment and 27 stores in our Sears Domestic segment we previously announced would close, and recorded charges for the related lease obligations of $14 million for 68 of these stores in our Kmart segment and $5 million for 14 of these stores in our Sears Domestic segment.
We expect to record additional charges of approximately $50 million during the remainder of 2014 related to stores we had previously made the decision to close.
During the third quarter of 2013 , we closed 12 stores in our Kmart segment and 6 stores in our Sears Domestic segment we previously announced would close. During the first nine months of 2013 , we closed 39 stores in our Kmart segment and 16 stores in our Sears Domestic segment we previously announced would close, and recorded charges for the related lease obligations of $1 million for four of these stores in our Kmart segment.
We made the decision to close 73 stores in our Kmart segment and 37 stores in our Sears Domestic segment during the third quarter of 2014 , and 113 stores in our Kmart segment and 43 stores in our Sears Domestic segment during the first nine months of 2014 .
We made the decision to close 27 stores in our Kmart segment and four stores in our Sears Domestic segment during the third quarter of 2013 , and 52 stores in our Kmart segment and 16 stores in our Sears Domestic segment during the first nine months of 2013 .

14

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Store closing costs and severance recorded for the 13 - and 39 - week periods ended November 1, 2014 and November 2, 2013 were as follows:
millions
Markdowns (1)
 
Severance Costs (2)
 
Lease Termination Costs (2)
 
Other Charges (2)
 
Impairment and Accelerated Depreciation (3)
 
Total Store Closing Costs
Kmart
$
31

 
$
6

 
$
—

 
$
11

 
$
2

 
$
50

Sears Domestic
10

 
3

 
1

 
6

 
4

 
24

Sears Canada
—

 
1

 
—

 
—

 
—

 
1

Total for the 13-week period ended November 1, 2014
$
41

 
$
10

 
$
1

 
$
17

 
$
6

 
$
75

 
 
 
 
 
 
 
 
 
 
 
 
Kmart
$
12

 
$
3

 
$
(2
)
 
$
4

 
$
6

 
$
23

Sears Domestic
1

 
—

 
(34
)
 
1

 
2

 
(30
)
Sears Canada
—

 
15

 
—

 
—

 
—

 
15

Total for the 13-week period ended November 2, 2013
$
13

 
$
18

 
$
(36
)
 
$
5

 
$
8

 
$
8

 
 
 
 
 
 
 
 
 
 
 
 
Kmart
$
46

 
$
10

 
$
11

 
$
17

 
$
5

 
$
89

Sears Domestic
12

 
5

 
3

 
7

 
12

 
39

Sears Canada
1

 
10

 
5

 
—

 
—

 
16

Total for the 39-week period ended November 1, 2014
$
59

 
$
25

 
$
19

 
$
24

 
$
17

 
$
144

 
 
 
 
 
 
 
 
 
 
 
 
Kmart
$
21

 
$
5

 
$
(3
)
 
$
10

 
$
7

 
$
40

Sears Domestic
7

 
2

 
(40
)
 
4

 
11

 
(16
)
Sears Canada
—

 
17

 
—

 
—

 
—

 
17

Total for the 39-week period ended November 2, 2013
$
28

 
$
24

 
$
(43
)
 
$
14

 
$
18

 
$
41

_____________
(1)  
Recorded within Cost of sales, buying and occupancy on the Condensed Consolidated Statements of Operations.
(2)  
Recorded within Selling and administrative on the Condensed Consolidated Statements of Operations. Lease termination costs are net of estimated sublease income, and include the reversal of closed store reserves for which the lease agreement has been terminated and the reversal of deferred rent balances related to closed stores.
(3)  
Costs for the 13 -week period ended November 1, 2014 are recorded within Depreciation and amortization on the Condensed Consolidated Statement of Operations. Costs for the 13-week period ended November 2, 2013 include $5 million recorded within Impairment charges and $3 million recorded within Depreciation and amortization on the Condensed Consolidated Statement of Operations. Costs for the 39-week periods ended November 1, 2014 and November 2, 2013 include $10 million and $13 million recorded within Impairment charges, respectively, and $7 million and $5 million recorded within Depreciation and amortization, respectively, on the Condensed Consolidated Statements of Operations.

15

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Store closing cost accruals of $153 million , $149 million and $199 million at November 1, 2014 , November 2, 2013 and February 1, 2014 , respectively, were as follows:
millions
Severance
Costs
 
Lease
Termination
Costs
 
Other
Charges
 
Total
Balance at November 2, 2013
$
37

 
$
96

 
$
16

 
$
149

Store closing costs
35

 
27

 
6

 
68

Store closing capital lease obligations
—

 
2

 
—

 
2

Payments/utilizations
(9
)
 
(6
)
 
(5
)
 
(20
)
Balance at February 1, 2014
63

 
119

 
17

 
199

Store closing costs
25

 
21

 
24

 
70

Payments/utilizations
(66
)
 
(28
)
 
(22
)
 
(116
)
Balance at November 1, 2014
$
22

 
$
112

 
$
19

 
$
153

Long-Lived Assets
In accordance with accounting standards governing the impairment or disposal of long-lived assets, we performed an impairment test of certain of our long-lived assets (principally the value of buildings and other fixed assets associated with our stores) due to events and changes in circumstances during the 13 -week period ended August 2, 2014 that indicated an impairment might have occurred. The impairment review was triggered by a decline in operating performance at certain locations within the Sears Canada segment. As a result of this impairment testing, the Company recorded impairment charges of $15 million during the 39 - week period ended November 1, 2014 at Sears Canada.
Real Estate Transactions
During the first nine months of 2014 , we recorded gains on the sales of assets of $148 million in connection with real estate transactions, which included a gain of $42 million recognized on the sale of two Sears Full-line stores for which we received $64 million of cash proceeds, $13 million recognized on the sale of a distribution facility in our Sears Domestic segment for which we received $16 million of cash proceeds and a gain of $10 million recognized on the sale of a Kmart store for which we received $10 million of cash proceeds.
Also, during the third quarter of 2014, we entered into an agreement for the sale of a Sears Full-line store for which we received $90 million of cash proceeds, and will receive an additional $12 million of cash proceeds. The gain will be deferred until we have surrendered substantially all of our rights and obligations.
Additionally, during the first nine months of 2014 , we recorded investment income of $35 million related to the sale of joint venture interests for which Sears Canada received $65 million ( $71 million Canadian) in cash proceeds.
During the first nine months of 2013, we recorded gains on the sales of assets of $276 million in connection with real estate transactions which included a gain of $180 million recognized in the second quarter on the amendment and early termination of the leases on two properties operated by Sears Canada for which Sears Canada received $184 million ( $191 million Canadian) in cash proceeds. Gains on sales of assets recorded in the first nine months of 2013 also included gains of $55 million related to the sale of a store previously operated under The Great Indoors format, two Sears Full-line stores and one Kmart store for which the Company received $86 million of cash proceeds.

16

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

NOTE 6 – EQUITY
Accumulated Other Comprehensive Loss
The following table displays the components of accumulated other comprehensive loss:
millions
November 1,
2014
 
November 2,
2013
 
February 1,
2014
Pension and postretirement adjustments (net of tax of $(296), $(441) and $(328), respectively)
$
(893
)
 
$
(1,276
)
 
$
(1,036
)
Cumulative unrealized derivative gain (net of tax of $0 for all periods presented)
—

 
2

 
2

Currency translation adjustments (net of tax of $(0), $(39) and $(38), respectively)
(2
)
 
(65
)
 
(83
)
Accumulated other comprehensive loss
$
(895
)
 
$
(1,339
)
 
$
(1,117
)
Pension and postretirement adjustments relate to the net actuarial loss on our pension and postretirement plans recognized as a component of accumulated other comprehensive loss.
Accumulated other comprehensive loss attributable to noncontrolling interests at  November 2, 2013 and February 1, 2014 was $69 million and $53 million , respectively.
Income Tax Expense Allocated to Each Component of Other Comprehensive Income
Income tax expense allocated to each component of other comprehensive income was as follows:
 
13 Weeks Ended November 1, 2014
 
13 Weeks Ended November 2, 2013
millions
Before
Tax
Amount
 
Tax
Expense
 
Net of
Tax
Amount
 
Before
Tax
Amount
 
Tax Expense
 
Net of
Tax
Amount
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
Pension and postretirement adjustments (1)
$
30

 
$
—

 
$
30

 
$
48

 
$
(2
)
 
$
46

Deferred loss on derivatives
—

 
—

 
—

 
2

 
—

 
2

Currency translation adjustments
(11
)
 
—

 
(11
)
 
1

 
(1
)
 
—

Sears Canada de-consolidation
(186
)
 
—

 
(186
)
 
—

 
—

 
—

Total other comprehensive income
$
(167
)
 
$
—

 
$
(167
)
 
$
51

 
$
(3
)
 
$
48

 
39 Weeks Ended November 1, 2014
 
39 Weeks Ended November 2, 2013
millions
Before
Tax
Amount
 
Tax
Expense
 
Net of
Tax
Amount
 
Before
Tax
Amount
 
Tax (Expense) Benefit
 
Net of
Tax
Amount
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
Pension and postretirement adjustments (1)
$
98

 
$
(3
)
 
$
95

 
$
145

 
$
(5
)
 
$
140

Deferred loss on derivatives
(2
)
 
—

 
(2
)
 
2

 
—

 
2

Currency translation adjustments
4

 
(1
)
 
3

 
(27
)
 
—

 
(27
)
Sears Canada de-consolidation
(186
)
 
—

 
(186
)
 
—

 
—

 
—

Total other comprehensive income
$
(86
)
 
$
(4
)
 
$
(90
)
 
$
120

 
$
(5
)
 
$
115

(1)  
Included in the computation of net periodic benefit expense. See Note 7 to the Condensed Consolidated Financial Statements.
Common Share Repurchase Program
During the 13 - and 39 - week periods ended November 1, 2014 and November 2, 2013 , we did not repurchase any shares of our common stock under our common share repurchase program. At November 1, 2014 , we had approximately $504 million of remaining authorization under our common share repurchase program.

17

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

The share repurchase program has no stated expiration date and share repurchases may be implemented using a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, the purchase of call options, the sale of put options or otherwise, or by any combination of such methods.
NOTE 7 – BENEFIT PLANS
Pension and Postretirement Benefit Plans
We provide benefits to certain associates who are eligible under various defined benefit pension plans, contributory defined benefit pension plans and other postretirement plans, primarily retiree medical benefits. For purposes of determining the periodic expense of our defined benefit plans, we use the fair value of plan assets as the market related value. The following table summarizes the components of total net periodic benefit expense, recorded within Selling and administrative on the Condensed Consolidated Statements of Operations, for our retirement plans:
 
13 Weeks Ended
 
39 Weeks Ended
millions
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
Components of net periodic expense:
 
 
 
 
 
 
 
Interest cost
$
68

 
$
75

 
$
219

 
$
225

Expected return on plan assets
(75
)
 
(75
)
 
(244
)
 
(229
)
Amortization of experience losses
30

 
48

 
92

 
145

Net periodic expense
$
23

 
$
48

 
$
67

 
$
141

Contributions
During the 13 - and 39 - week periods ended November 1, 2014 , we made total contributions of $161 million and $366 million , respectively, to our pension and postretirement plans. During the 13 - and 39 - week periods ended November 2, 2013 , we made total contributions of $150 million and $326 million , respectively, to our pension and postretirement plans. We anticipate making aggregate contributions to our domestic defined benefit and postretirement plans of approximately $92 million over the remainder of 2014, which is lower than previously anticipated due to new legislation which was recently enacted that amends existing funding requirements for our domestic pension plans.
NOTE 8 – INCOME TAXES
We had gross unrecognized tax benefits of $120 million at November 1, 2014 , $142 million at November 2, 2013 and $150 million at February 1, 2014 . Of the amount at November 1, 2014 , $78 million , would, if recognized, impact our effective tax rate, with the remaining amount being comprised of unrecognized tax benefits related to gross temporary differences or any other indirect benefits. During the 13 -week period ended November 1, 2014 , gross unrecognized tax benefits decreased by $21 million . During the 39 -week period ended November 1, 2014 , gross unrecognized tax benefits decreased by $29 million due to the Lands' End spin-off and Sears Canada's de-consolidation. During the 13 -week period ended November 2, 2013 , we made no changes to gross unrecognized tax benefits. During the 39 -week period ended November 2, 2013 , gross unrecognized tax benefits decreased by $19 million due to federal, foreign and state audit activity. We expect that our unrecognized tax benefits could decrease by as much as $6 million over the next 12 months for tax audit settlements and the expiration of the statute of limitations for certain jurisdictions.
We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of income tax expense. At November 1, 2014 , November 2, 2013 and February 1, 2014 , the total amount of interest and penalties included in our tax accounts in our Condensed Consolidated Balance Sheet was $48 million ( $31 million net of federal benefit), $53 million ( $36 million net of federal benefit), and $53 million ( $36 million net of federal benefit), respectively. We recognized a negligible net interest benefit (net of federal benefit) for the 13-week period and $3 million net interest expense (net of federal benefit) for the 39 -week period ended November 1, 2014 , in our Condensed Consolidated Statements of Operations.

18

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

On April 4, 2014, Holdings and Lands' End entered into a tax sharing agreement in connection with the spin-off. Pursuant to this agreement, Holdings is responsible for all pre-separation U.S. federal, state and local income taxes attributable to the Lands’ End business, and Lands’ End is responsible for all other income taxes attributable to its business, including all foreign taxes.
We file income tax returns in the United States, as well as various foreign jurisdictions. The IRS has completed its examination of all federal income tax returns of Holdings through the 2009 return, and all matters arising from such examinations have been resolved. In addition, Holdings and Sears are under examination by various state, local and foreign income tax jurisdictions for the years 2002 through 2012, and Kmart is under examination by such jurisdictions for the years 2003 through 2012.
At the end of 2013, we had a federal and state net operating loss ("NOL") deferred tax asset of $1.2 billion , which will expire predominately between 2019 and 2034 . We have credit carryforwards of $721 million , which will expire between 2015 and 2034 .
In connection with the Sears Canada Rights Offering in the third quarter of 2014, the Company incurred a taxable gain of approximately $72 million on the subscription rights exercised and common shares sold during the quarter. There was no income tax payable balance resulting from the taxable gain due to the utilization of NOL attributes of approximately $21 million and a valuation allowance release of the same amount.
At February 1, 2014 , we had a valuation allowance of $3.4 billion to record only the portion of the deferred tax asset that more likely than not will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted in the future if estimates of future taxable income during the carryforward period are reduced or increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth. We will continue to evaluate our valuation allowance as the year progresses for any change in circumstances that causes a change in judgment about the realizability of the deferred tax asset.
During the third quarter of 2014, management evaluated the continued realizability of Sears Canada’s deferred tax assets. Management assessed the available positive evidence and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of negative evidence evaluated was the recent and anticipated profitability were lower than previously anticipated. The Company also considered the impact on the timing of the implementation of strategic initiatives at Sears Canada to improve profitability due to their recent senior management changes and realization that certain strategies would not achieve previously expected targets.
In assessing the realizability of Sears Canada's deferred tax assets, management considered the four sources of taxable income included in the accounting standards applicable for income taxes. Of these four sources of taxable income, Sears Canada was only able to avail itself of future reversals of existing taxable differences and taxable income in prior carryback years to realize a tax benefit of an existing deductible temporary difference.
On the basis of this analysis and the significant negative evidence that it was no longer probable that sufficient future taxable income would be available to allow the deferred tax assets to be realizable at the end of September 2014, a valuation allowance of $152 million was added to record only the portion of the deferred tax asset that more likely than not will be realized. We recognized the full $152 million valuation allowance charge during the third quarter of 2014 in continuing operations.
The application of the requirements for accounting for income taxes in interim periods, after consideration of our valuation allowance, causes a significant variation in the typical relationship between income tax expense and pretax accounting income. For the third quarter of 2014 , our effective income tax rate was an expense of 33.9% . Our tax rate continues to reflect the effect of not recognizing the benefit of current period losses in certain domestic jurisdictions where it is not more likely than not that such benefits would be realized. In addition, the first nine months of 2014 was negatively impacted by a valuation allowance established on Sears Canada's deferred tax assets in the third quarter, prior to de-consolidation, and increased foreign taxes in Puerto Rico resulting from a new tax law change which became effective during the second quarter of 2014. These were partially offset by state audit settlements.

19

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

NOTE 9 – SUMMARY OF SEGMENT DATA
These reportable segment classifications are based on our business formats, as described in Note 1. The Kmart and Sears Canada formats each represent both an operating and reportable segment. As a result of the de-consolidation of Sears Canada as described in Note 1, Sears Canada is no longer an operating or reportable segment, and the segment results presented below reflect the operating results for Sears Canada through October 16, 2014. The Sears Domestic reportable segment consists of the aggregation of several business formats. These formats are evaluated by our Chief Operating Decision Maker ("CODM") to make decisions about resource allocation and to assess performance.
Each of these segments derives its revenues from the sale of merchandise and related services to customers, primarily in the United States and Canada. The merchandise and service categories are as follows:
(i)
Hardlines—consists of home appliances, consumer electronics, lawn & garden, tools & hardware, automotive parts, household goods, toys, housewares and sporting goods;
(ii)
Apparel and Soft Home—includes women's, men's, kids', footwear, jewelry, accessories and soft home;
(iii)
Food and Drug—consists of grocery & household, pharmacy and drugstore;
(iv)
Service—includes repair, installation and automotive service and extended contract revenue; and
(v)
Other—includes revenues earned in connection with our agreements with SHO and Lands' End, as well as credit revenues and licensed business revenues.
 
13 Weeks Ended November 1, 2014
millions
Kmart
 
Sears
Domestic
 
Sears
Canada
 
Sears
Holdings
Merchandise sales and services
 
 
 
 
 
 
 
Hardlines
$
793

 
$
2,029

 
$
327

 
$
3,149

Apparel and Soft Home
842

 
770

 
255

 
1,867

Food and Drug
1,050

 
2

 
—

 
1,052

Service
5

 
574

 
20

 
599

Other
17

 
514

 
9

 
540

Total merchandise sales and services
2,707

 
3,889

 
611

 
7,207

Costs and expenses
 
 
 
 
 
 
 
Cost of sales, buying and occupancy
2,147

 
3,002

 
457

 
5,606

Selling and administrative
708

 
1,131

 
172

 
2,011

Depreciation and amortization
25

 
110

 
13

 
148

Gain on sales of assets
(24
)
 
(44
)
 
—

 
(68
)
Total costs and expenses
2,856

 
4,199

 
642

 
7,697

Operating loss
$
(149
)
 
$
(310
)
 
$
(31
)
 
$
(490
)
Total assets
$
4,259

 
$
10,910

 
$
—

 
$
15,169

Capital expenditures
$
11

 
$
52

 
$
13

 
$
76


20

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

 
13 Weeks Ended November 2, 2013
millions
Kmart
 
Sears
Domestic
 
Sears
Canada
 
Sears
Holdings
Merchandise sales and services
 
 
 
 
 
 
 
Hardlines
$
822

 
$
2,084

 
$
472

 
$
3,378

Apparel and Soft Home
913

 
1,174

 
421

 
2,508

Food and Drug
1,162

 
2

 
—

 
1,164

Service
4

 
631

 
32

 
667

Other
15

 
528

 
12

 
555

Total merchandise sales and services
2,916

 
4,419

 
937

 
8,272

Costs and expenses
 
 
 
 
 
 
 
Cost of sales, buying and occupancy
2,327

 
3,326

 
688

 
6,341

Selling and administrative
745

 
1,244

 
273

 
2,262

Depreciation and amortization
31

 
128

 
22

 
181

Impairment charges
3

 
2

 
1

 
6

Gain on sales of assets
(19
)
 
(2
)
 
—

 
(21
)
Total costs and expenses
3,087

 
4,698

 
984

 
8,769

Operating loss
$
(171
)
 
$
(279
)
 
$
(47
)
 
$
(497
)
Total assets
$
4,780

 
$
13,013

 
$
2,416

 
$
20,209

Capital expenditures
$
17

 
$
55

 
$
13

 
$
85



 
39 Weeks Ended November 1, 2014
millions
Kmart
 
Sears
Domestic
 
Sears
Canada
 
Sears
Holdings
Merchandise sales and services
 
 
 
 
 
 
 
Hardlines
$
2,502

 
$
6,542

 
$
1,100

 
$
10,144

Apparel and Soft Home
2,728

 
2,562

 
880

 
6,170

Food and Drug
3,234

 
6

 
—

 
3,240

Service
13

 
1,770

 
77

 
1,860

Other
50

 
1,604

 
31

 
1,685

Total merchandise sales and services
8,527

 
12,484

 
2,088

 
23,099

Costs and expenses
 
 
 
 
 
 
 
Cost of sales, buying and occupancy
6,790

 
9,552

 
1,586

 
17,928

Selling and administrative
2,128

 
3,487

 
603

 
6,218

Depreciation and amortization
72

 
334

 
49

 
455

Impairment charges
2

 
8

 
15

 
25

(Gain) loss on sales of assets
(76
)
 
(73
)
 
1

 
(148
)
Total costs and expenses
8,916

 
13,308

 
2,254

 
24,478

Operating loss
$
(389
)
 
$
(824
)
 
$
(166
)
 
$
(1,379
)
Total assets
$
4,259

 
$
10,910

 
$
—

 
$
15,169

Capital expenditures
$
31

 
$
139

 
$
32

 
$
202


21

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

 
39 Weeks Ended November 2, 2013
millions
Kmart
 
Sears
Domestic
 
Sears
Canada
 
Sears
Holdings
Merchandise sales and services
 
 
 
 
 
 
 
Hardlines
$
2,697

 
$
6,725

 
$
1,397

 
$
10,819

Apparel and Soft Home
2,909

 
3,459

 
1,162

 
7,530

Food and Drug
3,521

 
8

 
—

 
3,529

Service
13

 
1,902

 
100

 
2,015

Other
47

 
1,615

 
40

 
1,702

Total merchandise sales and services
9,187

 
13,709

 
2,699

 
25,595

Costs and expenses
 
 
 
 
 
 
 
Cost of sales, buying and occupancy
7,184

 
10,163

 
1,975

 
19,322

Selling and administrative
2,205

 
3,800

 
766

 
6,771

Depreciation and amortization
97

 
390

 
72

 
559

Impairment charges
3

 
10

 
1

 
14

Gain on sales of assets
(47
)
 
(48
)
 
(181
)
 
(276
)
Total costs and expenses
9,442

 
14,315

 
2,633

 
26,390

Operating income (loss)
$
(255
)
 
$
(606
)
 
$
66

 
$
(795
)
Total assets
$
4,780

 
$
13,013

 
$
2,416

 
$
20,209

Capital expenditures
$
42

 
$
131

 
$
28

 
$
201

 
 
 
 
 
 
 
 

22

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

NOTE 10 – SUPPLEMENTAL FINANCIAL INFORMATION
Other long-term liabilities at November 1, 2014 ,  November 2, 2013 and February 1, 2014 consisted of the following:
millions
November 1,
2014
 
November 2,
2013
 
February 1,
2014
Unearned revenues
$
754

 
$
849

 
$
836

Self-insurance reserves
688

 
697

 
686

Other
388

 
493

 
486

Total
$
1,830

 
$
2,039

 
$
2,008

NOTE 11 – LEGAL PROCEEDINGS
We are a defendant in several lawsuits containing class or collective action allegations in which the plaintiffs are current and former hourly and salaried associates who allege violations of various wage and hour laws, rules and regulations pertaining to alleged misclassification of certain of our employees and the failure to pay overtime and/or the failure to pay for missed meal and rest periods. The complaints generally seek unspecified monetary damages, injunctive relief, or both. Further, certain of these proceedings are in jurisdictions with reputations for aggressive application of laws and procedures against corporate defendants. We also are a defendant in several putative or certified class action lawsuits in California relating to alleged failure to comply with California laws pertaining to certain operational, marketing and payroll practices. The California laws alleged to have been violated in each of these lawsuits provide the potential for significant statutory penalties. At this time, the Company is not able to either predict the outcome of these lawsuits or reasonably estimate a potential range of loss with respect to the lawsuits.
We are subject to various other legal and governmental proceedings and investigations, including some involving the practices and procedures in our more highly regulated businesses. Some matters contain class action allegations, environmental and asbestos exposure allegations and other consumer-based, regulatory or qui tam claims, each of which may seek compensatory, punitive or treble damage claims (potentially in large amounts), as well as other types of relief. Additionally, some of these claims or actions, such as the qui tam claims, have the potential for significant statutory penalties.
In accordance with accounting standards regarding loss contingencies, we accrue an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. We do not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote.
Because litigation outcomes are inherently unpredictable, our evaluation of legal proceedings often involves a series of complex assessments by management about future events and can rely heavily on estimates and assumptions. If the assessments indicate that loss contingencies that could be material to any one of our financial statements are not probable, but are reasonably possible, or are probable, but cannot be estimated, then we disclose the nature of the loss contingencies, together with an estimate of the range of possible loss or a statement that such loss is not reasonably estimable. While the consequences of certain unresolved proceedings are not presently determinable, and an estimate of the probable and reasonably possible loss or range of loss in excess of amounts accrued for such proceedings cannot be reasonably made, an adverse outcome from such proceedings could have a material effect on our earnings in any given reporting period. However, in the opinion of our management, after consulting with legal counsel, and taking into account insurance and reserves, the ultimate liability related to current outstanding matters is not expected to have a material effect on our financial position, liquidity or capital resources.
NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS
Presentation of Financial Statements - Going Concern
In August 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update which requires management to assess whether there are conditions or events, considered in the aggregate, that raise

23

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued. If substantial doubt exists, additional disclosures are required. This update will be effective for the Company in the fourth quarter of 2016. The adoption of the new standard is not expected to have a material impact on the Company’s consolidated financial position, results of operations, cash flows or disclosures.
Revenue from Contracts with Customers
In May 2014, the FASB issued an accounting standards update which replaces the current revenue recognition standards. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update will be effective for the Company in the first quarter of 2017 and may be applied retrospectively for each period presented or as a cumulative-effect adjustment at the date of adoption. The Company is evaluating the effect of adopting this new standard.
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
In April 2014, the FASB issued an accounting standards update which modifies the requirements for disposals to qualify as discontinued operations and expands related disclosure requirements. The update will be effective for the Company in the first quarter of 2015, and early adoption of the update is permitted. The adoption of the update may impact whether future disposals qualify as discontinued operations and therefore could impact the Company's financial statement presentation and disclosures.
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
In July 2013, the FASB issued an accounting standards update which requires an unrecognized tax benefit to be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward that the entity intends to use and is available for settlement at the reporting date. The update was effective and adopted by the Company in the first quarter of 2014 and impacted the Company's disclosures, but otherwise did not have a material impact on the Company's condensed consolidated financial position, results of operations or cash flows.
NOTE 13 – RELATED PARTY DISCLOSURE
Investment of Surplus Cash
Our Board has delegated authority to direct investment of our surplus cash to Mr. Lampert, subject to various limitations that have been or may be from time to time adopted by the Board of Directors and/or the Finance Committee of the Board of Directors. Mr. Lampert is Chairman of our Board of Directors and its Finance Committee and is the Chairman and Chief Executive Officer of ESL. Additionally, on February 1, 2013, Mr. Lampert became our Chief Executive Officer, in addition to his role as Chairman of the Board. Neither Mr. Lampert nor ESL will receive compensation for any such investment activities undertaken on our behalf, other than Mr. Lampert's compensation as our Chief Executive Officer. ESL beneficially owned approximately 49% of our outstanding common stock at November 1, 2014 .
Further, to clarify the expectations that the Board of Directors has with respect to the investment of our surplus cash, the Board has renounced, in accordance with Delaware law, any interest or expectancy of the Company associated with any investment opportunities in securities that may come to the attention of Mr. Lampert or any employee, officer, director or advisor to ESL and its affiliated investment entities (each, a "Covered Party") who also serves as an officer or director of the Company other than (a) investment opportunities that come to such Covered Party's attention directly and exclusively in such Covered Party's capacity as a director, officer or employee of the Company, (b) control investments in companies in the mass merchandising, retailing, commercial appliance distribution, product protection agreements, residential and commercial product installation and repair services and automotive repair and maintenance industries and (c) investment opportunities in companies or assets with a significant role in our retailing business, including investment in real estate currently leased by the Company or in suppliers for which the Company is a substantial customer representing over 10% of such companies' revenues, but excluding investments of ESL that were existing as of May 23, 2005.

24

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Unsecured Commercial Paper
During the first nine months of 2014 and 2013 , ESL and its affiliates held unsecured commercial paper issued by SRAC, an indirect wholly owned subsidiary of Sears Holdings. For the commercial paper outstanding to ESL, the weighted average of each of maturity, annual interest rate and principal amount outstanding was 18.8 days, 3.68% and $33 million and 29.2 days, 2.77% and $237 million , respectively, in the first nine months of 2014 and 2013 . The largest aggregate amount of principal outstanding to ESL at any time since the beginning of 2014 was $150 million and $0.8 million interest was paid by SRAC to ESL during the first nine months of 2014 . ESL held $85 million and $140 million , respectively, of our commercial paper at November 1, 2014 and November 2, 2013 , including $48 million and $88 million , respectively, held by Mr. Lampert. Neither ESL nor Mr. Lampert held any of our commercial paper at February 1, 2014 . The commercial paper purchases were made in the ordinary course of business on substantially the same terms, including interest rates, as terms prevailing for comparable transactions with other persons, and did not present features unfavorable to the Company.
Secured Short-Term Loan
In September 2014, the Company, through Sears, Sears Development Co., and Kmart Corporation ("Borrowers"), entities wholly-owned and controlled, directly or indirectly by the Company, entered into a $400 million secured short-term loan (the "Loan") with JPP II, LLC and JPP, LLC (together, the "Lender"), entities affiliated with ESL. The Loan is scheduled to mature on December 31, 2014, but as long as there is no event of default, the maturity date can be extended to February 28, 2015 at the discretion of the Company upon the payment of an extension fee equal to 0.5% of the principal amount. The Loan will have an annual base interest rate of 5% . The Loan is guaranteed by the Company and is secured by a first priority lien on certain real properties owned by the Borrowers. At November 1, 2014, the outstanding balance of the Loan was $400 million . During the 13- and 39- weeks ended November 1, 2014, the Borrowers paid an upfront fee of $7 million and interest of $0.5 million to the Lender. See Note 2 for additional information regarding the Loan.
The Lender sold certain participating interests in the Loan during the third quarter, which may restrict the taking of certain actions with respect to the Loan, including the waiver of certain defaults under the Loan.
Senior Secured Notes and Subsidiary Notes
At November 1, 2014 , Mr. Lampert and ESL held an aggregate of $205 million of principal amount of the Company's 6 5/8% Senior Secured Notes due 2018 (the "6 5/8%" Notes") and $3 million of principal amount of unsecured notes issued by SRAC (the "Subsidiary Notes"). At both November 2, 2013 and February 1, 2014 , Mr. Lampert and ESL held an aggregate of $95 million of principal amount of 6 5/8% Notes and $3 million of principal amount of Subsidiary Notes.
Trade Receivable Put Agreements
On January 26, 2012, ESL entered into an agreement with a financial institution to acquire from the financial institution an undivided participating interest in a certain percentage of its rights and obligations under trade receivable put agreements that were entered into with certain vendors of the Company. These agreements generally provide that, in the event of a bankruptcy filing by the Company, the financial institution will purchase such vendors’ accounts receivable arising from the sale of goods or services to the Company. ESL may from time to time choose to purchase an 80% undivided participating interest in the rights and obligations primarily arising under future trade receivable put agreements that the financial institution enters into with our vendors during the term of its agreement. The Company is neither a party nor will it become a party to any of these agreements. At February 1, 2014 , and November 2, 2013 ESL held a participation interest totaling $80 million and $90 million , respectively, in the financial institution’s agreements relating to the Company. At November 1, 2014 , ESL held no participating interest.
Sears Canada
ESL owns approximately 50% of the outstanding common shares of Sears Canada (based on publicly available information as of November 13, 2014).

25

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Lands' End
ESL owns approximately 49% of the outstanding common stock of Lands' End (based on publicly available information as of April 4, 2014). Holdings, and certain of its subsidiaries, entered into a transition services agreement in connection with the spin-off pursuant to which Lands' End and Holdings will provide to each other, on an interim, transitional basis, various services, which may include, but are not limited to, tax services, logistics services, auditing and compliance services, inventory management services, information technology services and continued participation in certain contracts shared with Holdings and its subsidiaries, as well as agreements related to Lands' End Shops at Sears and participation in the Shop Your Way program.
Amounts due to or from Lands’ End are non-interest bearing, and generally settled on a net basis. Holdings invoices Lands' End on at least a monthly basis. At November 1, 2014 , Holdings reported a net amount receivable from Lands' End of $5 million in the Accounts receivable line of the Condensed Consolidated Balance Sheets. Amounts related to revenue from retail services and rent for Lands' End Shops at Sears, participation in the Shop Your Way program, and corporate shared services were $20 million and $44 million , respectively, for the 13 - and 39 - week periods ended November 1, 2014 . The amounts Lands' End earned related to call center services and commissions were $2 million and $6 million , respectively, for the 13 - and 39 - week periods ended November 1, 2014 .
SHO
Holdings, and certain of its subsidiaries, engage in transactions with SHO pursuant to various agreements with SHO which, among other things, (1) govern the principal transactions relating to the rights offering and certain aspects of our relationship with SHO following the separation, (2) establish terms under which Holdings and certain of its subsidiaries will provide SHO with services, and (3) establish terms pursuant to which Holdings and certain of its subsidiaries will obtain merchandise for SHO. ESL owns approximately 47% of the outstanding common stock of SHO (based on publicly available information as of July 31, 2014).
These agreements were made in the context of a parent-subsidiary relationship and were negotiated in the overall context of the separation. The Company believes that the methods by which costs are allocated are reasonable and are based on prorated estimates of costs expected to be incurred by the Company. A summary of the nature of related party transactions involving SHO is as follows:
•
SHO obtains a significant amount of its merchandise from the Company. We have also entered into certain agreements with SHO to provide logistics, handling, warehouse and transportation services. SHO also pays a royalty related to the sale of Kenmore, Craftsman and DieHard products and fees for participation in the SHOP YOUR WAY program.
•
SHO receives commissions from the Company for the sale of merchandise made through www.sears.com, extended service agreements, delivery and handling services and credit revenues.
•
The Company provides SHO with shared corporate services. These services include accounting and finance, legal, human resources, information technology and real estate.
Amounts due to or from SHO are non-interest bearing, settled on a net basis, and have payment terms of 10 days after the invoice date. The Company invoices SHO on a weekly basis. At November 1, 2014 , November 2, 2013 and February 1, 2014 , Holdings reported a net amount receivable from SHO of $80 million , $57 million and $68 million , respectively, in the Accounts receivable line of the Condensed Consolidated Balance Sheets. Amounts related to the sale of inventory and related services, royalties, and corporate shared services were $376 million and $1.2 billion , respectively, for the 13 - and 39 - week periods ended November 1, 2014 , and $425 million and $1.3 billion , respectively, for the 13 - and 39 - week periods ended November 2, 2013 . The net amounts SHO earned related to commissions were $22 million and $77 million , respectively, for the 13 - and 39 - week periods ended November 1, 2014 , and $21 million and $84 million , respectively, for the 13 - and 39 - week periods ended November 2, 2013 . Additionally, the Company has guaranteed lease obligations for certain SHO store leases that were assigned as a result of the separation. See Note 4 of our Annual Report on Form 10-K for the fiscal year ended February 1, 2014 for further information related to these guarantees.
Also in connection with the separation, the Company entered into an agreement with SHO and the agent under SHO's secured credit facility, whereby the Company committed to continue to provide services to SHO in connection with a realization on the lender's collateral after default under the secured credit facility, notwithstanding

26

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

SHO's default under the underlying agreement with us, and to provide certain notices and services to the agent, for so long as any obligations remain outstanding under the secured credit facility.
NOTE 14 – GUARANTOR/NON-GUARANTOR SUBSIDIARY FINANCIAL INFORMATION
At November 1, 2014 , the principal amount outstanding of the Company's 6   5/8% senior secured notes due 2018 was $1.24 billion . These notes were issued in 2010 by Sears Holdings Corporation ("Parent"). The notes are guaranteed by certain of our 100% owned domestic subsidiaries that own the collateral for the notes, as well as by SRAC (the "guarantor subsidiaries"). The following condensed consolidated financial information presents the Condensed Consolidating Balance Sheets at November 1, 2014 , November 2, 2013 and February 1, 2014 , the Condensed Consolidating Statements of Operations and the Condensed Consolidating Statements of Comprehensive Income (Loss) for the 13 - and 39 - week periods ended November 1, 2014 and November 2, 2013 , and the Condensed Consolidating Statements of Cash flows for the 13 - and 39 - week periods ended November 1, 2014 and November 2, 2013 of (i) Parent; (ii) the guarantor subsidiaries; (iii) the non-guarantor subsidiaries; (iv) eliminations and (v) the Company on a consolidated basis.
On April 4, 2014, we completed the separation of our Lands' End business through a spin-off transaction. The following condensed consolidated financial statements had total assets and liabilities of approximately $1.2 billion and $415 million , respectively, at November 2, 2013 and total assets and liabilities of approximately $1.1 billion and $385 million , respectively, at February 1, 2014 , attributable to the Lands' End domestic business. Merchandise sales and services included revenues of approximately $185 million from the Lands' End domestic business for the 39 - week period ended November 1, 2014 , and approximately $325 million and $870 million , respectively, for the 13 - and 39 - week periods ended November 2, 2013 . Net loss attributable to Holdings' shareholders included net income of approximately $5 million from the Lands' End domestic business for the 39 - week period ended November 1, 2014 , and approximately $10 million and $25 million , respectively, for the 13 - and 39 - week periods ended November 2, 2013 . The financial information for the domestic portion of Lands' End business is reflected within the guarantor subsidiaries balances for these periods, while the international portion is reflected within the non-guarantor subsidiaries balances for these periods.
On October 16, 2014, we de-consolidated Sears Canada pursuant to a rights offering transaction. The following condensed consolidated financial statements had total assets and liabilities of approximately $2.4 billion and $1.5 billion , respectively, at November 2, 2013 and total assets and liabilities of approximately $2.2 billion and $1.3 billion , respectively, at February 1, 2014 attributable to Sears Canada. Merchandise sales and services included revenues of approximately $611 million and $2.1 billion for the 13 - and 39 - week periods ended November 1, 2014 , respectively, and approximately $937 million and $2.7 billion for the 13 - and 39 - week periods ended November 2, 2013 , respectively. Net loss attributable to Holdings' shareholders included net loss of approximately $86 million and $137 million , respectively, from Sears Canada for the 13 - and 39 - week periods ended November 1, 2014 , and net loss of approximately $13 million for the 13 -week period ended November 2, 2013 and net income of approximately $44 million for the 39 -week period ended November 2, 2013 . The financial information for Sears Canada is reflected within the non-guarantor subsidiaries balances for these periods.
The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions including transactions with our wholly-owned non-guarantor insurance subsidiary. The Company has accounted for investments in subsidiaries under the equity method. The guarantor subsidiaries are 100% owned directly or indirectly by the Parent and all guarantees are joint, several and unconditional. Additionally, the notes are secured by a security interest in certain assets consisting primarily of domestic inventory and credit card receivables of the guarantor subsidiaries, and consequently may not be available to satisfy the claims of the Company's general creditors. Certain investments primarily held by non-guarantor subsidiaries are recorded by the issuers at historical cost and are recorded at fair value by the holder.

27

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Condensed Consolidating Balance Sheet
November 1, 2014
millions
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
296

 
$
30

 
$
—

 
$
326

Intercompany receivables
—

 
—

 
26,681

 
(26,681
)
 
—

Accounts receivable
103

 
409

 
34

 
—

 
546

Merchandise inventories
—

 
6,464

 
—

 
—

 
6,464

Prepaid expenses and other current assets
43

 
796

 
288

 
(872
)
 
255

Total current assets
146

 
7,965

 
27,033

 
(27,553
)
 
7,591

Total property and equipment, net
—

 
3,610

 
951

 
—

 
4,561

Goodwill and intangible assets
—

 
284

 
2,089

 
—

 
2,373

Other assets
117

 
433

 
2,535

 
(2,441
)
 
644

Investment in subsidiaries
13,013

 
25,589

 
—

 
(38,602
)
 
—

TOTAL ASSETS
$
13,276

 
$
37,881

 
$
32,608

 
$
(68,596
)
 
$
15,169

Current liabilities
 
 
 
 
 
 
 
 
 
Short-term borrowings
$
—

 
$
2,096

 
$
—

 
$
—

 
$
2,096

Current portion of long-term debt and capitalized lease obligations
—

 
71

 
4

 
—

 
75

Merchandise payables
—

 
2,431

 
—

 
—

 
2,431

Intercompany payables
12,101

 
14,579

 
—

 
(26,680
)
 
—

Short-term deferred tax liabilities
1

 
501

 
—

 
(21
)
 
481

Other current liabilities
4

 
2,355

 
1,823

 
(851
)
 
3,331

Total current liabilities
12,106

 
22,033

 
1,827

 
(27,552
)
 
8,414

Long-term debt and capitalized lease obligations
1,238

 
3,668

 
36

 
(2,173
)
 
2,769

Pension and postretirement benefits
—

 
1,316

 
4

 
—

 
1,320

Long-term deferred tax liabilities
—

 
—

 
917

 
(207
)
 
710

Other long-term liabilities
—

 
774

 
1,305

 
(249
)
 
1,830

Total Liabilities
13,344

 
27,791

 
4,089

 
(30,181
)
 
15,043

EQUITY
 
 
 
 
 
 
 
 
 
Shareholder’s equity
(68
)
 
10,090

 
28,519

 
(38,421
)
 
120

Noncontrolling interest
—

 
—

 
—

 
6

 
6

Total Equity
(68
)
 
10,090

 
28,519

 
(38,415
)
 
126

TOTAL LIABILITIES AND EQUITY
$
13,276

 
$
37,881

 
$
32,608

 
$
(68,596
)
 
$
15,169



28

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Condensed Consolidating Balance Sheet
November 2, 2013
millions
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
354

 
$
245

 
$
—

 
$
599

Intercompany receivables
—

 
—

 
26,052

 
(26,052
)
 
—

Accounts receivable
—

 
412

 
129

 
—

 
541

Merchandise inventories
—

 
7,938

 
974

 
—

 
8,912

Prepaid expenses and other current assets
94

 
877

 
471

 
(966
)
 
476

Total current assets
94

 
9,581

 
27,871

 
(27,018
)
 
10,528

Total property and equipment, net
—

 
4,164

 
1,518

 
—

 
5,682

Goodwill and intangible assets
—

 
951

 
2,286

 
—

 
3,237

Other assets
15

 
278

 
2,840

 
(2,371
)
 
762

Investment in subsidiaries
15,257

 
25,443

 
—

 
(40,700
)
 
—

TOTAL ASSETS
$
15,366

 
$
40,417

 
$
34,515

 
$
(70,089
)
 
$
20,209

Current liabilities
 
 
 
 
 
 
 
 
 
Short-term borrowings
$
—

 
$
1,751

 
$
—

 
$
—

 
$
1,751

Current portion of long-term debt and capitalized lease obligations
—

 
67

 
15

 
—

 
82

Merchandise payables
—

 
3,067

 
450

 
—

 
3,517

Intercompany payables
12,355

 
13,697

 
—

 
(26,052
)
 
—

Short-term deferred tax liabilities
3

 
460

 
—

 
(33
)
 
430

Other current liabilities
5

 
2,473

 
2,350

 
(933
)
 
3,895

Total current liabilities
12,363

 
21,515

 
2,815

 
(27,018
)
 
9,675

Long-term debt and capitalized lease obligations
1,238

 
3,785

 
85

 
(2,246
)
 
2,862

Pension and postretirement benefits
—

 
2,008

 
379

 
—

 
2,387

Long-term deferred tax liabilities
—

 
—

 
904

 
15

 
919

Other long-term liabilities
—

 
798

 
1,491

 
(250
)
 
2,039

Total Liabilities
13,601

 
28,106

 
5,674

 
(29,499
)
 
17,882

EQUITY
 
 
 
 
 
 
 
 
 
Shareholder’s equity
1,765

 
12,311

 
28,841

 
(41,043
)
 
1,874

Noncontrolling interest
—

 
—

 
—

 
453

 
453

Total Equity
1,765

 
12,311

 
28,841

 
(40,590
)
 
2,327

TOTAL LIABILITIES AND EQUITY
$
15,366

 
$
40,417

 
$
34,515

 
$
(70,089
)
 
$
20,209









29

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Condensed Consolidating Balance Sheet
February 1, 2014
millions
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Current assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
—

 
$
537

 
$
491

 
$
—

 
$
1,028

Intercompany receivables
 
—

 
—

 
25,884

 
(25,884
)
 
—

Accounts receivable
 
—

 
425

 
128

 
—

 
553

Merchandise inventories
 
—

 
6,356

 
678

 
—

 
7,034

Prepaid expenses and other current assets
 
44

 
873

 
375

 
(948
)
 
344

Total current assets
 
44

 
8,191

 
27,556

 
(26,832
)
 
8,959

Total property and equipment, net
 
—

 
3,906

 
1,488

 
—

 
5,394

Goodwill and intangible assets
 
—

 
944

 
2,285

 
—

 
3,229

Other assets
 
13

 
240

 
2,603

 
(2,177
)
 
679

Investment in subsidiaries
 
14,743

 
25,303

 
—

 
(40,046
)
 
—

TOTAL ASSETS
 
$
14,800

 
$
38,584

 
$
33,932

 
$
(69,055
)
 
$
18,261

Current liabilities
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
 
$
—

 
$
1,332

 
$
—

 
$
—

 
$
1,332

Current portion of long-term debt and capitalized lease obligations
 
—

 
70

 
13

 
—

 
83

Merchandise payables
 
—

 
2,213

 
283

 
—

 
2,496

Intercompany payables
 
12,103

 
13,781

 
—

 
(25,884
)
 
—

Short-term deferred tax liabilities
 
2

 
408

 
—

 
(23
)
 
387

Other current liabilities
 
26

 
2,412

 
2,374

 
(925
)
 
3,887

Total current liabilities
 
12,131

 
20,216

 
2,670

 
(26,832
)
 
8,185

Long-term debt and capitalized lease obligations
 
1,238

 
3,781

 
76

 
(2,261
)
 
2,834

Pension and postretirement benefits
 
—

 
1,681

 
261

 
—

 
1,942

Long-term deferred tax liabilities
 
—

 
128

 
955

 
26

 
1,109

Other long-term liabilities
 
—

 
805

 
1,453

 
(250
)
 
2,008

Total Liabilities
 
13,369

 
26,611

 
5,415

 
(29,317
)
 
16,078

EQUITY
 
 
 
 
 
 
 
 
 
 
Shareholder’s equity
 
1,431

 
11,973

 
28,517

 
(40,182
)
 
1,739

Noncontrolling interest
 
—

 
—

 
—

 
444

 
444

Total Equity
 
1,431

 
11,973

 
28,517

 
(39,738
)
 
2,183

TOTAL LIABILITIES AND EQUITY
 
$
14,800

 
$
38,584

 
$
33,932

 
$
(69,055
)
 
$
18,261




30

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Condensed Consolidating Statement of Operations
For the 13 Weeks Ended November 1, 2014
millions
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Merchandise sales and services
 
$
—

 
$
6,638

 
$
1,186

 
$
(617
)
 
$
7,207

Cost of sales, buying and occupancy
 
—

 
5,272

 
767

 
(433
)
 
5,606

Selling and administrative
 
—

 
1,958

 
237

 
(184
)
 
2,011

Depreciation and amortization
 
—

 
116

 
32

 
—

 
148

Gain on sales of assets
 
—

 
(66
)
 
(2
)
 
—

 
(68
)
Total costs and expenses
 
—

 
7,280

 
1,034

 
(617
)
 
7,697

Operating income (loss)
 
—

 
(642
)
 
152

 
—

 
(490
)
Interest expense
 
(52
)
 
(123
)
 
(23
)
 
120

 
(78
)
Interest and investment income
 
91

 
—

 
126

 
(120
)
 
97

Other income
 
—

 
—

 
2

 
—

 
2

Income (loss) before income taxes
 
39

 
(765
)
 
257

 
—

 
(469
)
Income tax (expense) benefit
 
—

 
31

 
(190
)
 
—

 
(159
)
Equity (deficit) in earnings in subsidiaries
 
(667
)
 
(29
)
 
—

 
696

 
—

Net income (loss)
 
(628
)
 
(763
)
 
67

 
696

 
(628
)
Loss attributable to noncontrolling interests
 
—

 
—

 
—

 
80

 
80

NET INCOME (LOSS) ATTRIBUTABLE TO HOLDINGS’ SHAREHOLDERS
 
$
(628
)
 
$
(763
)
 
$
67

 
$
776

 
$
(548
)




31

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Condensed Consolidating Statement of Operations
For the 13 Weeks Ended November 2, 2013
millions
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Merchandise sales and services
 
$
—

 
$
7,322

 
$
1,788

 
$
(838
)
 
$
8,272

Cost of sales, buying and occupancy
 
—

 
5,758

 
1,024

 
(441
)
 
6,341

Selling and administrative
 
—

 
2,087

 
572

 
(397
)
 
2,262

Depreciation and amortization
 
—

 
138

 
43

 
—

 
181

Impairment charges
 
—

 
5

 
1

 
—

 
6

Gain on sales of assets
 
—

 
(21
)
 
—

 
—

 
(21
)
Total costs and expenses
 
—

 
7,967

 
1,640

 
(838
)
 
8,769

Operating income (loss)
 
—

 
(645
)
 
148

 
—

 
(497
)
Interest expense
 
(54
)
 
(101
)
 
(17
)
 
111

 
(61
)
Interest and investment income
 
—

 
9

 
110

 
(111
)
 
8

Other income
 
—

 
—

 
1

 
—

 
1

Income (loss) before income taxes
 
(54
)
 
(737
)
 
242

 
—

 
(549
)
Income tax (expense) benefit
 
—

 
41

 
(39
)
 
—

 
2

Equity (deficit) in earnings in subsidiaries
 
(493
)
 
125

 
—

 
368

 
—

Net income (loss)
 
(547
)
 
(571
)
 
203

 
368

 
(547
)
Loss attributable to noncontrolling interests
 
—

 
—

 
—

 
13

 
13

NET INCOME (LOSS) ATTRIBUTABLE TO HOLDINGS’ SHAREHOLDERS
 
$
(547
)
 
$
(571
)
 
$
203

 
$
381

 
$
(534
)


 

32

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Condensed Consolidating Statement of Operations
For the 39 Weeks Ended November 1, 2014
millions
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Merchandise sales and services
 
$
—

 
$
21,154

 
$
4,238

 
$
(2,293
)
 
$
23,099

Cost of sales, buying and occupancy
 
—

 
16,679

 
2,527

 
(1,278
)
 
17,928

Selling and administrative
 
1

 
6,028

 
1,204

 
(1,015
)
 
6,218

Depreciation and amortization
 
—

 
347

 
108

 
—

 
455

Impairment charges
 
—

 
10

 
15

 
—

 
25

Gain on sales of assets
 
—

 
(133
)
 
(15
)
 
—

 
(148
)
Total costs and expenses
 
1

 
22,931

 
3,839

 
(2,293
)
 
24,478

Operating income (loss)
 
(1
)
 
(1,777
)
 
399

 
—

 
(1,379
)
Interest expense
 
(156
)
 
(344
)
 
(70
)
 
349

 
(221
)
Interest and investment income
 
91

 
18

 
373

 
(349
)
 
133

Other income
 
—

 
—

 
4

 
—

 
4

Income (loss) before income taxes
 
(66
)
 
(2,103
)
 
706

 
—

 
(1,463
)
Income tax (expense) benefit
 
—

 
78

 
(266
)
 
—

 
(188
)
Equity (deficit) in earnings in subsidiaries
 
(1,585
)
 
145

 
—

 
1,440

 
—

Net income (loss)
 
(1,651
)
 
(1,880
)
 
440

 
1,440

 
(1,651
)
Loss attributable to noncontrolling interests
 
—

 
—

 
—

 
128

 
128

NET INCOME (LOSS) ATTRIBUTABLE TO HOLDINGS’ SHAREHOLDERS
 
$
(1,651
)
 
$
(1,880
)
 
$
440

 
$
1,568

 
$
(1,523
)


33

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Condensed Consolidating Statement of Operations
For the 39 Weeks Ended November 2, 2013
millions
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Merchandise sales and services
 
$
—

 
$
22,930

 
$
5,263

 
$
(2,598
)
 
$
25,595

Cost of sales, buying and occupancy
 
—

 
17,646

 
2,973

 
(1,297
)
 
19,322

Selling and administrative
 
1

 
6,393

 
1,678

 
(1,301
)
 
6,771

Depreciation and amortization
 
—

 
424

 
135

 
—

 
559

Impairment charges
 
—

 
13

 
1

 
—

 
14

Gain on sales of assets
 
—

 
(95
)
 
(181
)
 
—

 
(276
)
Total costs and expenses
 
1

 
24,381

 
4,606

 
(2,598
)
 
26,390

Operating income (loss)
 
(1
)
 
(1,451
)
 
657

 
—

 
(795
)
Interest expense
 
(164
)
 
(285
)
 
(65
)
 
333

 
(181
)
Interest and investment income
 
—

 
28

 
334

 
(333
)
 
29

Income (loss) before income taxes
 
(165
)
 
(1,708
)
 
926

 
—

 
(947
)
Income tax (expense) benefit
 
—

 
127

 
(146
)
 
—

 
(19
)
Equity (deficit) in earnings in subsidiaries
 
(801
)
 
533

 
—

 
268

 
—

Net income (loss)
 
(966
)
 
(1,048
)
 
780

 
268

 
(966
)
Income attributable to noncontrolling interests
 
—

 
—

 
—

 
(41
)
 
(41
)
NET INCOME (LOSS) ATTRIBUTABLE TO HOLDINGS’ SHAREHOLDERS
 
$
(966
)
 
$
(1,048
)
 
$
780

 
$
227

 
$
(1,007
)


34

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Condensed Consolidating Statement of Comprehensive Income (Loss)
For the 13 Weeks Ended November 1, 2014
millions
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
 
$
(628
)
 
$
(763
)
 
$
67

 
$
696

 
$
(628
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
Pension and postretirement adjustments, net of tax
 
—

 
28

 
2

 
—

 
30

Currency translation adjustments, net of tax
 
5

 
—

 
(16
)
 
—

 
(11
)
Sears Canada de-consolidation
 
54

 
10

 
(250
)
 
—

 
(186
)
Unrealized net gain, net of tax
 
—

 
—

 
8

 
(8
)
 
—

Total other comprehensive income (loss)
 
59

 
38

 
(256
)
 
(8
)
 
(167
)
Comprehensive income (loss)
 
(569
)
 
(725
)
 
(189
)
 
688

 
(795
)
Comprehensive loss attributable to noncontrolling interests
 
—

 
—

 
—

 
401

 
401

Comprehensive income (loss) attributable to Holdings’ shareholders
 
$
(569
)
 
$
(725
)
 
$
(189
)
 
$
1,089

 
$
(394
)


35

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Condensed Consolidating Statement of Comprehensive Income (Loss)
For the 13 Weeks Ended November 2, 2013
millions
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
 
$
(547
)
 
$
(571
)
 
$
203

 
$
368

 
$
(547
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
Pension and postretirement adjustments, net of tax
 
—

 
42

 
4

 
—

 
46

Deferred gain on derivatives, net of tax
 
2

 
—

 
—

 
—

 
2

Unrealized net gain (loss), net of tax
 
—

 
1

 
28

 
(29
)
 
—

Total other comprehensive income (loss)
 
2

 
43

 
32

 
(29
)
 
48

Comprehensive income (loss)
 
(545
)
 
(528
)
 
235

 
339

 
(499
)
Comprehensive loss attributable to noncontrolling interests
 
—

 
—

 
—

 
11

 
11

Comprehensive income (loss) attributable to Holdings’ shareholders
 
$
(545
)
 
$
(528
)
 
$
235

 
$
350

 
$
(488
)


 

 

 

36

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Condensed Consolidating Statement of Comprehensive Income (Loss)
For the 39 Weeks Ended November 1, 2014
millions
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
 
$
(1,651
)
 
$
(1,880
)
 
$
440

 
$
1,440

 
$
(1,651
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
Pension and postretirement adjustments, net of tax
 
—

 
85

 
10

 
—

 
95

Deferred loss on derivatives, net of tax
 
(2
)
 
—

 
—

 
—

 
(2
)
Currency translation adjustments, net of tax
 
5

 
—

 
(2
)
 
—

 
3

Sears Canada de-consolidation
 
54

 
10

 
(250
)
 
—

 
(186
)
Unrealized net gain, net of tax
 
—

 
—

 
120

 
(120
)
 
—

Total other comprehensive income
 
57

 
95

 
(122
)
 
(120
)
 
(90
)
Comprehensive income (loss)
 
(1,594
)
 
(1,785
)
 
318

 
1,320

 
(1,741
)
Comprehensive loss attributable to noncontrolling interests
 
—

 
—

 
—

 
438

 
438

Comprehensive income (loss) attributable to Holdings’ shareholders
 
$
(1,594
)
 
$
(1,785
)
 
$
318

 
$
1,758

 
$
(1,303
)


37

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Condensed Consolidating Statement of Comprehensive Income (Loss)
For the 39 Weeks Ended November 2, 2013
millions
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
 
$
(966
)
 
$
(1,048
)
 
$
780

 
$
268

 
$
(966
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
Pension and postretirement adjustments, net of tax
 
—

 
126

 
14

 
—

 
140

Deferred gain on derivatives, net of tax
 
2

 
—

 
—

 
—

 
2

Currency translation adjustments, net of tax
 
—

 
—

 
(27
)
 
—

 
(27
)
Unrealized net loss, net of tax
 
—

 
(1
)
 
(16
)
 
17

 
—

Total other comprehensive income (loss)
 
2

 
125

 
(29
)
 
17

 
115

Comprehensive income (loss)
 
(964
)
 
(923
)
 
751

 
285

 
(851
)
Comprehensive income attributable to noncontrolling interests
 
—

 
—

 
—

 
(36
)
 
(36
)
Comprehensive income (loss) attributable to Holdings’ shareholders
 
$
(964
)
 
$
(923
)
 
$
751

 
$
249

 
$
(887
)

38

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Condensed Consolidating Statement of Cash Flows
For the 39 Weeks Ended November 1, 2014
millions
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
233

 
$
(2,473
)
 
$
539

 
$
(241
)
 
$
(1,942
)
Proceeds from sales of property and investments
—

 
250

 
66

 
—

 
316

Purchases of property and equipment
—

 
(170
)
 
(32
)
 
—

 
(202
)
Sears Canada de-consolidation
—

 
—

 
(207
)
 
—

 
(207
)
Proceeds from Sears Canada rights offering
169

 
—

 
—

 
—

 
169

Net investing with Affiliates
(402
)
 
—

 
(573
)
 
975

 
—

Net cash provided by (used in) investing activities
(233
)
 
80

 
(746
)
 
975

 
76

Proceeds from debt issuances
—

 
400

 
—

 
—

 
400

Repayments of long-term debt
—

 
(51
)
 
(10
)
 
—

 
(61
)
Increase in short-term borrowings, primarily 90 days or less
—

 
364

 
—

 
—

 
364

Lands' End, Inc. pre-separation funding
—

 
515

 
—

 
—

 
515

Separation of Lands' End, Inc.
—

 
(31
)
 
—

 
—

 
(31
)
Debt issuance costs
—

 
(20
)
 
—

 
—

 
(20
)
Intercompany dividend
—

 
—

 
(241
)
 
241

 
—

Net borrowing with Affiliates
—

 
975

 
—

 
(975
)
 
—

Net cash provided by (used in) financing activities
—

 
2,152

 
(251
)
 
(734
)
 
1,167

Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
(3
)
 
—

 
(3
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
—

 
(241
)
 
(461
)
 
—

 
(702
)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
—

 
537

 
491

 
—

 
1,028

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
—

 
$
296

 
$
30

 
$
—

 
$
326



39

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Condensed Consolidating Statement of Cash Flows
For the 39 Weeks Ended November 2, 2013
millions
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
—

 
$
(2,348
)
 
$
676

 
$
—

 
$
(1,672
)
Proceeds from sales of property and investments
—

 
112

 
188

 
—

 
300

Net increase in investments and restricted cash
—

 
—

 
1

 
—

 
1

Purchases of property and equipment
—

 
(173
)
 
(28
)
 
—

 
(201
)
Net investing with Affiliates
—

 
—

 
191

 
(191
)
 
—

Net cash provided by (used in) investing activities
—

 
(61
)
 
352

 
(191
)
 
100

Proceeds from debt issuances
—

 
990

 
4

 
—

 
994

Repayments of long-term debt
—

 
(55
)
 
(10
)
 
—

 
(65
)
Increase in short-term borrowings, primarily 90 days or less
—

 
657

 
—

 
—

 
657

Debt issuance costs
—

 
(14
)
 
—

 
—

 
(14
)
Intercompany dividend
416

 
22

 
(438
)
 
—

 
—

Net borrowing with Affiliates
(416
)
 
843

 
(618
)
 
191

 
—

Net cash provided by (used in) financing activities
—

 
2,443

 
(1,062
)
 
191

 
1,572

Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
(10
)
 
—

 
(10
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
—

 
34

 
(44
)
 
—

 
(10
)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
—

 
320

 
289

 
—

 
609

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
—

 
$
354

 
$
245

 
$
—

 
$
599


 

40

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

NOTE 15 – SUBSEQUENT EVENTS
Sears Canada Rights Offering
The Sears Canada rights offering closed on November 7, 2014 and was oversubscribed. Accordingly, the Company received total aggregate proceeds of $380 million for the rights offering by the closing date, which includes the $169 million of proceeds the Company had received by November 1, 2014 and the $103 million the Company had recorded as a receivable at November 1, 2014. Proceeds from the rights offering will provide additional liquidity to Holdings as it enters into the holiday period and will be used for general corporate purposes.
Upon closing of the rights offering on November 7, 2014, the Company was the beneficial holder of approximately 12 million , or 12% , of the common shares of Sears Canada.
Rights Offering of Units Consisting of Senior Unsecured Notes and Warrants
This rights offering for up to $625 million in aggregate principal amount of 8% senior unsecured notes due 2019 and warrants closed on November 19, 2014 and was oversubscribed. Accordingly, the Company received proceeds of $625 million by the closing date, which will be used for general corporate purposes.
The subscription rights were distributed to all stockholders of the Company as of October 30, 2014, the record date for this rights offering, and every stockholder had the right to participate on the same terms in accordance with its pro rata ownership of the Company's common stock, except that holders of the Company's restricted stock that is unvested as of the record date received cash awards in lieu of subscription rights.

41

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with Part II, Item 7 of our Annual Report on Form 10-K for the year ended February 1, 2014 .
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. We are an integrated retailer with significant physical and intangible assets, as well as virtual capabilities enabled through technology. We currently operate a national network of stores with 1,831 full-line and specialty retail stores across the United States, operating through Kmart and Sears. Further, we operate a number of websites under the Sears.com and Kmart.com banners which offer more than 132 million products and provide the capability for our members and customers to engage in cross-channel transactions such as free store pickup; buy in store/ship to home; and buy online, return in store. We are also the home of Shop Your Way®, a free member-based social shopping platform that offers rewards, personalized services and a unique experience. Shop Your Way connects all of the ways members shop - in store, at home, online and by phone.
Through the third quarter of 2014, we conducted our operations in three business segments: Kmart, Sears Domestic and Sears Canada. The nature of operations conducted within each of these segments is discussed within the "Business Segments" section of Part I, Item 1 of our Annual Report on Form 10-K for the year ended February 1, 2014 .
Sears Canada Rights Offering
On October 2, 2014, the Company announced that its board of directors had approved a rights offering of up to 40 million shares of Sears Canada Inc. ("Sears Canada"). The subscription rights were distributed to all stockholders of Holdings, and every stockholder had the right to participate on the same terms in accordance with its pro rata ownership of the Company's common stock. In connection with the rights offering, each holder of Holdings' common stock received one subscription right for each share of common stock held at the close of business on October 16, 2014, the record date for the rights offering. Each subscription right entitled the holder thereof to purchase their pro rata portion of the Sears Canada common shares being sold by Holdings in the rights offering at a cash subscription price of Canadian $10.60 per whole Sears Canada share, which was the closing price of Sears Canada’s common shares on September 26, 2014, the last trading day before the Company requested Sears Canada's cooperation with the filing of a prospectus regarding the rights offering. The rights offering closed on November 7, 2014 and was oversubscribed. Accordingly, the Company received aggregate proceeds of $380 million by the closing date. Proceeds from the rights offering will provide additional liquidity to Holdings as it enters into the holiday period and will be used for general corporate purposes.
On October 16, 2014, ESL Partners, L.P. and Edward S. Lampert, our Chairman and Chief Executive Officer and Chairman and Chief Executive Officer of ESL Investments, Inc. and related entities (collectively "ESL") exercised a portion of its pro rata portion of the basic subscription rights to the offering. At that time, we sold a total of approximately 18 million common shares of Sears Canada to ESL, for which we received approximately $169 million of proceeds. After the sale of Sears Canada shares to ESL on October 16, 2014, the Company was the beneficial holder of approximately 34 million shares, or 34%, of the common shares of Sears Canada. As such, the Company no longer maintained control of Sears Canada resulting in the de-consolidation of Sears Canada.
At November 1, 2014, basic subscription rights for approximately 29 million common shares of Sears Canada had been exercised with the subscription price paid in full, and the Company had received approximately $169 million of proceeds and had a receivable of approximately $103 million. This includes a total of approximately 19 million common shares of Sears Canada sold to ESL pursuant to ESL exercising its pro rata portion of basic subscription rights.

42

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

Rights Offering of Units Consisting of Senior Unsecured Notes and Warrants
On October 20, 2014, the Company announced that its board of directors had approved a rights offering allowing its stockholders to purchase up to $625 million in aggregate principal amount of 8% senior unsecured notes due 2019 and warrants to purchase shares of its common stock. This rights offering closed on November 19, 2014 and was oversubscribed. Accordingly, the Company received proceeds of $625 million by the closing date, which will be used for general corporate purposes.
Lands' End Separation
On April 4, 2014, we completed the separation of our Lands' End business through a spin-off transaction. The separation was structured to be tax free to our U.S. shareholders for U.S. federal income tax purposes. Prior to the separation, Lands' End, Inc. ("Lands' End") entered into an asset-based senior secured revolving credit facility, which provides for maximum borrowings of approximately $175 million with a letter of credit sub-limit, and a senior secured term loan facility of approximately $515 million. The proceeds of the term loan facility were used to fund a $500 million dividend to Holdings and pay fees and expenses associated with the foregoing facilities. We accounted for this spin-off in accordance with accounting standards applicable to spin-off transactions. Accordingly, we classified the carrying value of net assets contributed to Lands' End as a reduction of capital in excess of par value in the Condensed Consolidated Statement of Equity for the period ended November 1, 2014 .
Additionally, as a result of Mr. Lampert's role as our Chairman and Chief Executive Officer, and Chairman and Chief Executive Officer of ESL, and the continuing arrangements between Holdings and Lands' End (as further described in Note 13 of the Notes to Condensed Consolidated Financial Statements), Holdings has determined that it has significant influence over Lands' End. Accordingly, the operating results for Lands' End through the date of the spin-off are presented within the consolidated continuing operations of Holdings and the Sears Domestic segment in the accompanying Condensed Consolidated Financial Statements.
In connection with the separation, Holdings and certain of its subsidiaries entered into various agreements with Lands' End under the terms described in Note 13 of the Notes to Condensed Consolidated Financial Statements.

43

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

CONSOLIDATED RESULTS OF OPERATIONS
 
13 Weeks Ended
 
39 Weeks Ended
millions, except per share data
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
REVENUES
 
 
 
 
 
 
 
Merchandise sales and services
$
7,207

 
$
8,272

 
$
23,099

 
$
25,595

COSTS AND EXPENSES
 
 
 
 
 
 
 
Cost of sales, buying and occupancy
5,606

 
6,341

 
17,928

 
19,322

Gross margin dollars
1,601

 
1,931

 
5,171

 
6,273

Gross margin rate
22.2
%
 
23.3
%
 
22.4
%
 
24.5
%
Selling and administrative
2,011

 
2,262

 
6,218

 
6,771

Selling and administrative expense as a percentage of total revenues
27.9
%
 
27.3
%
 
26.9
%
 
26.5
%
Depreciation and amortization
148

 
181

 
455

 
559

Impairment charges
—

 
6

 
25

 
14

Gain on sales of assets
(68
)
 
(21
)
 
(148
)
 
(276
)
Total costs and expenses
7,697

 
8,769

 
24,478

 
26,390

Operating loss
(490
)
 
(497
)
 
(1,379
)
 
(795
)
Interest expense
(78
)
 
(61
)
 
(221
)
 
(181
)
Interest and investment income
97

 
8

 
133

 
29

Other income
2

 
1

 
4

 
—

Loss before income taxes
(469
)
 
(549
)
 
(1,463
)
 
(947
)
Income tax (expense) benefit
(159
)
 
2

 
(188
)
 
(19
)
Net loss
(628
)
 
(547
)
 
(1,651
)
 
(966
)
(Income) loss attributable to noncontrolling interests
80

 
13

 
128

 
(41
)
NET LOSS ATTRIBUTABLE TO HOLDINGS' SHAREHOLDERS
$
(548
)
 
$
(534
)
 
$
(1,523
)
 
$
(1,007
)
NET LOSS PER COMMON SHARE ATTRIBUTABLE TO HOLDINGS' SHAREHOLDERS
 
 
 
 
 
 
 
Basic loss per share
$
(5.15
)
 
$
(5.03
)
 
$
(14.33
)
 
$
(9.49
)
Diluted loss per share
$
(5.15
)
 
$
(5.03
)
 
$
(14.33
)
 
$
(9.49
)
Basic weighted average common shares outstanding
106.4

 
106.1

 
106.3

 
106.1

Diluted weighted average common shares outstanding
106.4

 
106.1

 
106.3

 
106.1


44

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

References to comparable store sales amounts within the following discussion include sales for all stores operating for a period of at least 12 full months, including remodeled and expanded stores, but excluding store relocations and stores that have undergone format changes. Domestic comparable store sales amounts include sales from sears.com and kmart.com shipped directly to customers. These online sales resulted in a benefit to domestic comparable store sales of approximately 80 basis points and 150 basis points, respectively, for the 13 - and 39 - week periods ended November 1, 2014 , and approximately 50 basis points and 70 basis points, respectively, for the 13 - and 39 - week periods ended November 2, 2013 . In addition, domestic comparable store sales have been adjusted for the change in the unshipped sales reserves recorded at the end of each reporting period, which resulted in a benefit of approximately 80 basis points and 10 basis points for the 13 - and 39 - week period ended November 1, 2014 , respectively, and a negative impact of approximately 60 basis points and a benefit of approximately 10 basis points for the 13 - week and 39 - week periods ended November 2, 2013 , respectively.
Net Loss Attributable to Holdings' Shareholders, Adjusted EBITDA and Adjusted Loss per Share
We recorded a net loss attributable to Holdings' shareholders for the third quarter of $548 million , or $5.15 loss per diluted share, and $534 million , or $5.03 loss per diluted share, for 2014 and 2013 , respectively. We recorded a net loss attributable to Holdings' shareholders of $1.5 billion , or $14.33 loss per diluted share, and $1.0 billion , or $9.49 loss per diluted share, for the first nine months of 2014 and 2013 , respectively.
In addition to our net loss determined in accordance with GAAP, for purposes of evaluating operating performance, we use an Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") measurement, as well as Adjusted Earnings per Share ("Adjusted EPS").
Adjusted EBITDA is computed as net loss attributable to Sears Holdings Corporation appearing on the Condensed Consolidated Statements of Operations excluding (income) loss attributable to noncontrolling interests, income tax (expense) benefit, interest expense, interest and investment income, other income, depreciation and amortization and gain on sales of assets. In addition, it is adjusted to exclude certain significant items as set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our businesses, as well as executive compensation metrics, for comparable periods. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items.
While Adjusted EBITDA and Domestic Adjusted EBITDA are non-GAAP measurements, management believes that they are an important indicator of operating performance because:
•
EBITDA excludes the effects of financings and investing activities by eliminating the effects of interest and depreciation costs;
•
Management considers gains/(losses) on the sale of assets to result from investing decisions rather than ongoing operations; and
•
Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results. Adjustments to EBITDA include impairment charges related to fixed assets and intangible assets, closed store and severance charges, domestic pension expense, transaction costs associated with strategic initiatives and other expenses, the Lands' End separation and the Sears Canada de-consolidation. We have adjusted our results for these items to make our statements more comparable and therefore more useful to investors as the items are not representative of our ongoing operations and reflect past investment decisions.

45

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

Adjusted EBITDA was determined as follows:
 
13 Weeks Ended
 
39 Weeks Ended
millions
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
Net loss attributable to Holdings per statement of operations
$
(548
)
 
$
(534
)
 
$
(1,523
)
 
$
(1,007
)
Income (loss) attributable to noncontrolling interests
(80
)
 
(13
)
 
(128
)
 
41

Income tax expense (benefit)
159

 
(2
)
 
188

 
19

Interest expense
78

 
61

 
221

 
181

Interest and investment income
(97
)
 
(8
)
 
(133
)
 
(29
)
Other income
(2
)
 
(1
)
 
(4
)
 
—

Operating loss
(490
)
 
(497
)
 
(1,379
)
 
(795
)
Depreciation and amortization
148

 
181

 
455

 
559

Gain on sales of assets
(68
)
 
(21
)
 
(148
)
 
(276
)
Before excluded items
(410
)
 
(337
)
 
(1,072
)
 
(512
)
 
 
 
 
 
 
 
 
Closed store reserve and severance
70

 
4

 
138

 
27

Domestic pension expense
22

 
41

 
67

 
122

Other expenses  (1)
9

 
—

 
9

 
—

Impairment charges
—

 
6

 
25

 
14

Adjusted EBITDA
(309
)
 
(286
)
 
(833
)
 
(349
)
 
 
 
 
 
 
 
 
Lands' End separation
—

 
(29
)
 
(10
)
 
(70
)
Adjusted EBITDA as defined (2)
$
(309
)
 
$
(315
)
 
$
(843
)
 
$
(419
)
 
 
 
 
 
 
 
 
Sears Canada segment
13

 
5

 
71

 
21

Domestic Adjusted EBITDA as defined (2)
$
(296
)
 
$
(310
)
 
$
(772
)
 
$
(398
)
(1) Consists of transaction costs associated with strategic initiatives and other expenses.
(2) Adjusted to reflect the results of the Lands' End business which were included in our results of operations prior to the separation.


46

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

Adjusted EBITDA for our segments was as follows:
 
13 Weeks Ended
 
November 1, 2014
 
November 2, 2013
millions
Kmart
Sears Domestic
Sears Canada
Sears Holdings
 
Kmart
Sears Domestic
Sears Canada
Sears Holdings
Operating loss per statement of operations
$
(149
)
$
(310
)
$
(31
)
$
(490
)
 
$
(171
)
$
(279
)
$
(47
)
$
(497
)
Depreciation and amortization
25

110

13

148

 
31

128

22

181

Gain on sales of assets
(24
)
(44
)
—

(68
)
 
(19
)
(2
)
—

(21
)
Before excluded items
(148
)
(244
)
(18
)
(410
)
 
(159
)
(153
)
(25
)
(337
)
 
 
 
 
 
 
 
 
 
 
Closed store reserve and severance
48

20

2

70

 
17

(32
)
19

4

Domestic pension expense
—

22

—

22

 
—

41

—

41

Other expenses (1)
3

3

3

9

 
—

—

—

—

Impairment charges
—

—

—

—

 
3

2

1

6

Adjusted EBITDA
(97
)
(199
)
(13
)
(309
)
 
(139
)
(142
)
(5
)
(286
)
 
 
 
 
 
 
 
 
 
 
Lands' End separation
—

—

—

—

 
—

(29
)
—

(29
)
Adjusted EBITDA as defined (2)
$
(97
)
$
(199
)
$
(13
)
$
(309
)
 
$
(139
)
$
(171
)
$
(5
)
$
(315
)
% to revenues (3)
(3.6
)%
(5.1
)%
(2.1
)%
(4.3
)%
 
(4.8
)%
(4.2
)%
(0.5
)%
(4.0
)%
 
39 Weeks Ended
 
November 1, 2014
 
November 2, 2013
millions
Kmart
Sears Domestic
Sears Canada
Sears Holdings
 
Kmart
Sears Domestic
Sears Canada
Sears Holdings
Operating income (loss) per statement of operations
$
(389
)
$
(824
)
$
(166
)
$
(1,379
)
 
$
(255
)
$
(606
)
$
66

$
(795
)
Depreciation and amortization
72

334

49

455

 
97

390

72

559

(Gain) loss on sales of assets
(76
)
(73
)
1

(148
)
 
(47
)
(48
)
(181
)
(276
)
Before excluded items
(393
)
(563
)
(116
)
(1,072
)
 
(205
)
(264
)
(43
)
(512
)
 
 
 
 
 
 
 
 
 
 
Closed store reserve and severance
84

27

27

138

 
33

(27
)
21

27

Domestic pension expense
—

67

—

67

 
—

122

—

122

Other expenses (1)
3

3

3

9

 
—

—

—

—

Impairment charges
2

8

15

25

 
3

10

1

14

Adjusted EBITDA
(304
)
(458
)
(71
)
(833
)
 
(169
)
(159
)
(21
)
(349
)
 
 
 
 
 
 
 
 
 
 
Lands' End separation
—

(10
)
—

(10
)
 
—

(70
)
—

(70
)
Adjusted EBITDA as defined (2)
$
(304
)
$
(468
)
$
(71
)
$
(843
)
 
$
(169
)
$
(229
)
$
(21
)
$
(419
)
% to revenues (3)
(3.6
)%
(3.8
)%
(3.4
)%
(3.7
)%
 
(1.8
)%
(1.8
)%
(0.8
)%
(1.7
)%
(1) Consists of transaction costs associated with strategic initiatives and other expenses.
(2) Adjusted for the results of the Lands' End business which were included in our results of operations prior to the separation.
(3) Excludes revenues of the Lands' End business which were included in our results of operations prior to the separation.


47

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

These other significant items included in Adjusted EBITDA are further explained as follows:
•
Impairment charges – Accounting standards require the Company to evaluate the carrying value of fixed assets, goodwill and intangible assets for impairment. As a result of the Company’s analysis, we have recorded impairment charges related to certain fixed asset balances.
•
Closed store reserve and severance – We are transforming our Company to a less asset-intensive business model. Throughout this transformation, we continue to make choices related to our stores, which could result in sales, closures, lease terminations or a variety of other decisions.
•
Domestic pension expense – Contributions to our pension plans remain a significant use of our cash on an annual basis. Cash contributions to our pension and postretirement plans are separately disclosed on the cash flow statement. While the Company's pension plan is frozen, and thus associates do not currently earn pension benefits, we have a legacy pension obligation for past service performed by Kmart and Sears associates. The annual pension expense included in our statement of operations related to these legacy domestic pension plans was relatively minimal in years prior to 2009. However, due to the severe decline in the capital markets that occurred in the latter part of 2008, our domestic pension expense was $162 million in 2013, $165 million in 2012 and $74 million in 2011. Pension expense is comprised of interest cost, expected return on plan assets and amortization of experience losses. This adjustment eliminates the entire pension expense from the statement of operations to improve comparability. Pension expense is included in the determination of Net Income. The components of the adjustments to EBITDA related to domestic pension expense were as follows:
 
13 Weeks Ended
 
39 Weeks Ended
millions
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
Components of net periodic expense:
 
 
 
 
 
 
 
Interest cost
$
55

 
$
55

 
$
166

 
$
164

Expected return on plan assets
(62
)
 
(56
)
 
(185
)
 
(168
)
Amortization of experience losses
29

 
42

 
86

 
126

Net periodic expense
$
22

 
$
41

 
$
67

 
$
122

In accordance with U.S. GAAP, we recognize on the balance sheet actuarial gains and losses for defined benefit pension plans annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement during a fiscal year. For income statement purposes, these actuarial gains and losses are recognized throughout the year through an amortization process. The Company recognizes in its results of operations, as a corridor adjustment, any unrecognized actuarial net gains or losses that exceed 10% of the larger of projected benefit obligations or plan assets. Accumulated gains/losses that are inside the 10% corridor are not recognized, while accumulated actuarial gains/losses that are outside the 10% corridor are amortized over the "average future service" of the population and are included in the amortization of experience losses line item above.
Actuarial gains and losses occur when actual experience differs from the estimates used to allocate the change in value of pension plans to expense throughout the year or when assumptions change, as they may each year. Significant factors that can contribute to the recognition of actuarial gains and losses include changes in discount rates used to remeasure pension obligations on an annual basis or upon a qualifying remeasurement, differences between actual and expected returns on plan assets and other changes in actuarial assumptions. Management believes these actuarial gains and losses are primarily financing activities that are more reflective of changes in current conditions in global financial markets (and in particular interest rates) that are not directly related to the underlying business and that do not have an immediate, corresponding impact on the benefits provided to eligible retirees. For further information on the actuarial assumptions and plan assets referenced above, see Management's Discussion & Analysis - Application of Critical Accounting Policies and Estimates - Defined Benefit Pension Plans and Note 7 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014.


48

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

•
Lands' End separation – The results of the Lands' End business that were included in our results of operations prior to the separation.
The following tables set forth results of operations on a GAAP and "As Adjusted" basis, as well as the impact each significant item used in calculating Adjusted EBITDA had on specific income and expense amounts reported in our Condensed Consolidated Statements of Operations during the third quarter and first nine months of 2014 and 2013 .
 
13 Weeks Ended November 1, 2014
 
 
Adjustments
 
millions, except per share data
GAAP
Domestic
Pension
Expense
Domestic Closed Store Reserve and Severance
Domestic Gain on Sales of Assets
Other Expenses
Gain on Sears Canada Disposition
Domestic Tax Matters
Sears Canada Segment
As Adjusted (1)
Gross margin impact
$
1,601

$
—

$
41

$
—

$
—

$
—

$
—

$
(154
)
$
1,488

Selling and administrative impact
2,011

(22
)
(27
)
—

(6
)
—

—

(172
)
1,784

Depreciation and amortization impact
148

—

(6
)
—

—

—

—

(13
)
129

Gain on sales of assets impact
(68
)
—

—

42

—

—

—

—

(26
)
Operating loss impact
(490
)
22

74

(42
)
6

—

—

31

(399
)
Interest expense impact
(78
)
—

—

—

—

—

—

1

(77
)
Interest and investment income impact
97

—

—

—

—

(70
)
—

(12
)
15

Other income impact
2

—

—

—

—

—

—

(2
)
—

Income tax expense impact
(159
)
(8
)
(28
)
16

(2
)
26

180

148

173

Loss attributable to noncontrolling interest impact
80

—

—

—

—

—

—

(80
)
—

After tax and noncontrolling interest impact
(548
)
14

46

(26
)
4

(44
)
180

86

(288
)
Diluted loss per share impact
$
(5.15
)
$
0.13

$
0.43

$
(0.25
)
$
0.04

$
(0.41
)
$
1.69

$
0.81

$
(2.71
)
(1) Adjusted for the results of the Sears Canada business which were included in our results prior to the disposition.
 
13 Weeks Ended November 2, 2013
 
 
Adjustments
 
millions, except per share data
GAAP
Domestic Pension Expense
Domestic Closed Store Reserve, Store Impairments and Severance
Domestic Tax Matters
Sears Canada Segment
Lands' End Separation
As Adjusted (2)
Gross margin impact
$
1,931

$
—

$
13

$
—

$
(249
)
$
(150
)
$
1,545

Selling and administrative impact
2,262

(41
)
28

—

(273
)
(121
)
1,855

Depreciation and amortization impact
181

—

(3
)
—

(22
)
(5
)
151

Impairment charges impact
6

—

(5
)
—

(1
)
—

—

Operating loss impact
(497
)
41

(7
)
—

47

(24
)
(440
)
Interest expense impact
(61
)
—

—

—

(4
)
—

(65
)
Interest and investment income impact
8

—

—

—

(6
)
—

2

Income tax benefit impact
2

(15
)
3

200

(11
)
9

188

Loss attributable to noncontrolling interest impact
13

—

—

—

(13
)
—

—

After tax and noncontrolling interest impact
(534
)
26

(4
)
200

13

(15
)
(314
)
Diluted loss per share impact
$
(5.03
)
$
0.25

$
(0.04
)
$
1.88

$
0.12

$
(0.14
)
$
(2.96
)
(2) Adjusted for the results of the Lands' End and Sears Canada businesses which were included in our results prior to the separation/disposition.

49

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

 
39 Weeks Ended November 1, 2014
 
 
Adjustments
 
millions, except per share data
GAAP
Domestic
Pension
Expense
Domestic Closed Store Reserve, Store Impairments and Severance
Domestic Gain on Sales of Assets
Other Expenses
Gain on Sears Canada Disposition
Domestic Tax Matters
Sears Canada Segment
Lands' End Separation
As Adjusted (1)
Gross margin impact
$
5,171

$
—

$
58

$
—

$
—

$
—

$
—

$
(502
)
$
(87
)
$
4,640

Selling and administrative impact
6,218

(67
)
(53
)
—

(6
)
—

—

(603
)
(77
)
5,412

Depreciation and amortization impact
455

—

(7
)
—

—

—

—

(49
)
(3
)
396

Impairment charges impact
25

—

(10
)
—

—

—

—

(15
)
—

—

Gain on sales of assets impact
(148
)
—

—

65

—

—

—

(1
)
—

(84
)
Operating loss impact
(1,379
)
67

128

(65
)
6

—

—

166

(7
)
(1,084
)
Interest expense impact
(221
)
—

—

—

—

—

—

5

—

(216
)
Interest and investment income impact
133

—

—

—

—

(70
)
—

(38
)
—

25

Other income impact
4

—

—

—

—

—

—

(4
)
—

—

Income tax expense impact
(188
)
(25
)
(48
)
25

(2
)
26

554

136

3

481

Loss attributable to noncontrolling interest impact
128

—

—

—

—

—

—

(128
)
—

—

After tax and noncontrolling interest impact
(1,523
)
42

80

(40
)
4

(44
)
554

137

(4
)
(794
)
Diluted loss per share impact
$
(14.33
)
$
0.40

$
0.75

$
(0.38
)
$
0.04

$
(0.41
)
$
5.21

$
1.29

$
(0.04
)
$
(7.47
)
 
39 Weeks Ended November 2, 2013
 
 
Adjustments
 
millions, except per share data
GAAP
Domestic Pension Expense
Domestic Closed Store Reserve, Store Impairments and Severance
Domestic Gain on Sales of Assets
Domestic Tax Matters
Sears Canada Segment
Lands' End Separation
As Adjusted (1)
Gross margin impact
$
6,273

$
—

$
28

$
—

$
—

$
(724
)
$
(408
)
$
5,169

Selling and administrative impact
6,771

(122
)
22

—

—

(766
)
(338
)
5,567

Depreciation and amortization impact
559

—

(5
)
—

—

(72
)
(16
)
466

Impairment charges impact
14

—

(13
)
—

—

(1
)
—

—

Gain on sales of assets impact
(276
)
—

—

55

—

181

—

(40
)
Operating loss impact
(795
)
122

24

(55
)
—

(66
)
(54
)
(824
)
Interest expense impact
(181
)
—

—

—

—

(2
)
—

(183
)
Interest and investment income impact
29

—

—

—

—

(17
)
—

12

Other income impact
—

—

—

—

—

1

—

1

Income tax expense impact
(19
)
(45
)
(10
)
21

406

(1
)
21

373

Income attributable to noncontrolling interest impact
(41
)
—

—

—

—

41

—

—

After tax and noncontrolling interest impact
(1,007
)
77

14

(34
)
406

(44
)
(33
)
(621
)
Diluted loss per share impact
$
(9.49
)
$
0.73

$
0.13

$
(0.32
)
$
3.82

$
(0.41
)
$
(0.31
)
$
(5.85
)
(1) Adjusted for the results of the Lands' End and Sears Canada businesses which were included in our results prior to the separation/disposition.
.

50

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

We also believe that our use of Adjusted EPS provides an appropriate measure for investors to use in assessing our performance across periods, given that this measure provides an adjustment for certain significant items which may vary significantly from period to period, improving the comparability of year-to-year results and is therefore representative of our ongoing performance. Therefore, we have adjusted our results for them to make our statements more useful and comparable. However, we do not, and do not recommend that you, solely use Adjusted EPS to assess our financial and earnings performance. We also use, and recommend that you use, diluted earnings per share in addition to Adjusted EPS in assessing our earnings performance.
In addition to the significant items included in the Adjusted EBITDA calculation, Adjusted EPS includes the following other significant items which, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, and affects comparability of results.
•
Domestic gains on sales of assets - We have recorded significant gains on sales of assets, as well as gains on sales of joint venture interests, which were primarily attributable to several real estate transactions. Management considers these gains on sale of assets to result from investing decisions rather than ongoing operations.
•
Domestic Tax Matters - In 2011, and again in 2013, we recorded a non-cash charge to establish a valuation allowance against substantially all of our domestic deferred tax assets. Accounting rules generally require that a valuation reserve be established when income has not been generated over a three-year cumulative period to support the deferred tax asset. While an accounting loss was recorded, we believe no economic loss has occurred as these net operating losses and tax benefits remain available to reduce future taxes as income is generated in subsequent periods. As this valuation allowance has a significant impact on the effective tax rate, we have adjusted our results to reflect a standard effective tax rate for the Company beginning in fiscal 2011 when the valuation allowance was first established.
•
Sears Canada Segment - The results of the Sears Canada business that were included in our results of operations prior to the disposition. This adjustment also includes the valuation allowance that was recorded in the third quarter prior to the de-consolidation of Sears Canada.
13-week period ended November 1, 2014 compared to the 13-week period ended November 2, 2013
Revenues and Comparable Store Sales
Revenues decreased $1.1 billion to $7.2 billion for the quarter ended November 1, 2014 , as compared to revenues of $8.3 billion for the quarter ended November 2, 2013 . The revenue decrease included the separation of the Lands' End business, which was completed in the first quarter of 2014 and accounted for $384 million of the decline. The revenue decrease also included the effect of having fewer Kmart and Sears Full-line stores in operation, which accounted for $340 million of the decline, as well as a decrease of $326 million at Sears Canada. Finally, revenues for the quarter also declined as a result of lower domestic comparable store sales, which accounted for $5 million of the decline.
Sears Canada's revenue decline of $326 million was driven by the de-consolidation of Sears Canada which occurred on October 16, 2014 and accounted for approximately $161 million of the revenue decline. Revenues also declined due to a 9.5% decline in comparable store sales, which accounted for $68 million of the decline, as well as the effect of having fewer stores in operation, which accounted for $38 million of the decline. Revenues also included a decrease of $29 million due to foreign currency exchange rates.
For the quarter, domestic comparable store sales declined 0.1% , comprised of an increase of 0.5% at Kmart and a decrease of 0.7% at Sears Domestic. The increase at Kmart primarily reflects improvements in most categories, most notably apparel, outdoor living and toys, partially offset by declines in the grocery & household and consumer electronics categories. The decrease at Sears Domestic is primarily attributable to decreases in consumer electronics, apparel and Sears Auto Centers, partially offset by increases in home appliances and mattresses. Excluding the impact of consumer electronics on both formats and grocery & household on the Kmart format, domestic comparable store sales would have increased 1.8%.

51

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

Gross Margin
Gross margin decreased $330 million to $1.6 billion in the third quarter of 2014 due to the above noted decline in sales, as well as a decline in gross margin rate. Gross margin for the quarter included charges of $41 million and $13 million in 2014 and 2013 , respectively, related to store closures. Gross margin also included gross margin of $154 million and $249 million in 2014 and 2013, respectively, from the Sears Canada segment, while the third quarter of 2013 included gross margin of $150 million from the Lands' End business.
As compared to the prior year, Kmart's gross margin rate for the third quarter increased 50 basis points primarily driven by an increase in the apparel category due to lower promotional activity. Sears Domestic's gross margin rate declined 190 basis points for the quarter with decreases experienced in a majority of categories, most notably consumer electronics, home appliances (partially due to free delivery), tools and home. Sears Canada's gross margin rate declined 140 basis points for the third quarter.
Selling and Administrative Expenses
Consolidated selling and administrative expenses decreased $251 million in the third quarter of 2014 compared to the prior year quarter. Domestic selling and administrative expenses decreased $150 million in the third quarter of 2014 and included significant items such as expenses related to our domestic pension plan, store closings and severance of $49 million and $13 million for 2014 and 2013 , respectively, as well as expense of $6 million in 2014 for transaction costs associated with strategic initiatives and other expenses. In addition, the third quarter of 2013 included expenses of $121 million from the Lands' End business. Excluding these items, domestic selling and administrative expenses declined $71 million primarily due to a decrease in advertising expenses.
Our selling and administrative expenses as a percentage of total revenues ("selling and administrative expense rate") was 27.9% for the third quarter of 2014 , compared to 27.3% in the prior year, as the decrease in overall selling and administrative expenses were more than offset by the above noted decline in revenues.
Gain on Sales of Assets
We recorded total gains on sales of assets for the third quarter of $68 million in 2014 and $21 million in 2013 . The gains recorded during the third quarter of 2014 included a gain of $42 million related to the sale of two Sears Full-Line stores for which we received $64 million cash proceeds.
Operating Loss
The Company reported an operating loss of $490 million and $497 million in the third quarter of 2014 and 2013 , respectively. Operating loss for the third quarter of 2014 included expenses related to our domestic pension plan, store closings, severance and transaction costs and other expenses, as well as gains on the sales of assets and an operating loss from Sears Canada, which aggregated to operating expense of $91 million . Operating loss for the third quarter of 2013 included expenses related to our domestic pension plan, store closings, store impairments and severance, as well as operating income from the Lands' End business, an operating loss from Sears Canada and gains on the sales of assets, which aggregated to operating expense of $57 million . Excluding these items, we would have reported an operating loss of $399 million and $440 million in the third quarter of 2014 and 2013 , respectively. The decrease in operating loss in 2014 was primarily driven by a decline in selling and administrative expenses that were partially offset by the above noted declines in sales and gross margin.
Interest and Investment Income
The Company reported interest and investment income of $97 million and $8 million in the third quarter of 2014 and 2013 , respectively. The third quarter of 2014 , included a gain of $70 million on the de-consolidation of Sears Canada as a result of the rights offering, as well as a $12 million gain related to the sale the sale of joint venture interests, for which Sears Canada received $35 million ($38 million Canadian) in cash proceeds.
Income Taxes
Our effective tax rate for the third quarter of 2014 was an expense rate of 33.9% , compared to a benefit of 0.4% in the prior year quarter. The application of the requirements for accounting for income taxes in interim periods, after

52

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

consideration of our valuation allowance, causes a significant variation in the typical relationship between income tax expense and pretax income. The tax rate in 2014 and 2013 reflect the effect of not recognizing the benefit of current period losses in certain domestic jurisdictions in which it is not more likely than not that such benefits would be realized. The third quarter of 2014 was negatively impacted by a valuation allowance established on Sears Canada’s deferred tax assets in the third quarter, prior to de-consolidation, and increased foreign taxes in Puerto Rico resulting from a new tax law change, which became effective during the second quarter of 2014. These items were partially offset by state audit settlements.
39-week period ended November 1, 2014 compared to the 39-week period ended November 2, 2013
Revenues and Comparable Store Sales
For the first nine months of 2014 , revenues decreased $2.5 billion to $23.1 billion , as compared to revenues of $25.6 billion for the first nine months of 2013 . The revenue decrease included a decrease of $811 million due to the separation of the Lands' End business, which was completed on April 4, 2014. In addition, the revenue decrease included a decrease of $784 million due to the effect of having fewer Kmart and Sears Full-line stores in operation, as well as a $611 million decline at Sears Canada. Revenues for the first nine months of 2014 also declined as a result of lower domestic comparable store sales, which accounted for $108 million of the decline. Finally, we also experienced a revenue decline in our Home Services business during the first nine months of 2014 , as well as a decline in delivery revenues, which when combined, accounted for $131 million of the decline.
Sears Canada's revenue decline of $611 million was driven by the de-consolidation of Sears Canada, which occurred on October 16, 2014 and accounted for $161 million of the revenue decline. Revenues also declined due to an 8.0% decline in comparable store sales, which accounted for an additional $161 million of the decline, as well as the effect of having fewer stores in operation, which accounted for $97 million of the decline. Sears Canada also experienced declines in the Home Services business which accounted for $27 million of the decline. Revenues also included a decrease of $125 million due to foreign currency exchange rates.
Domestic comparable store sales declined 0.6% , comprised of decreases of 1.2% at Kmart and 0.1% at Sears Domestic. The decline at Kmart was driven by declines in the grocery & household and consumer electronics categories, partially offset by an increase in the apparel category. Excluding the grocery & household and consumer electronics categories, Kmart's comparable store sales would have increased 0.4%. The decline at Sears Domestic primarily reflects decreases in the consumer electronics and lawn & garden categories, as well as a decline in Sears Auto Centers, partially offset by increases in the home appliance and mattress categories. Excluding the impact of consumer electronics on both formats and grocery & household on the Kmart format, domestic comparable store sales would have increased 0.8%.
Gross Margin
For the first nine months of the year, our gross margin decreased $1.1 billion to $5.2 billion in 2014 due to the above noted decline in sales, as well as a decline in gross margin rate. Gross margin for the first nine months included charges of $58 million and $28 million in 2014 and 2013 , respectively, related to store closures. Gross margin for the first nine months of 2014 also included gross margin of $87 million from the Lands' End business prior to the separation as compared to $408 million in the first nine months of 2013 , as well as gross margin of $502 million and $724 million from the Sears Canada segment in the first nine months of 2014 and 2013, respectively.
The gross margin rate for both Kmart and Sears Domestic continued to be impacted by transactions that offer both traditional promotional marketing discounts and Shop Your Way points. As compared to the prior year, Kmart's gross margin rate for the first nine months of 2014 declined 140 basis points, with decreases experienced in a majority of categories, particularly home, grocery & household and consumer electronics. Sears Domestic's gross margin rate declined 240 basis points for the first nine months of the year with decreases experienced in the apparel, home appliances (partially due to free delivery), consumer electronics and tools categories. Sears Canada's gross margin rate declined 280 basis points for the first nine months of 2014 .

53

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

Selling and Administrative Expenses
Selling and administrative expenses decreased $553 million in the first nine months of 2014 compared to the first nine months of 2013 . Domestic selling and administrative expenses decreased $390 million in the first nine months of 2014 and included significant items such as expenses related to our domestic pension plan, store closings and severance of $120 million and $100 million for 2014 and 2013 , respectively, as well as expense of $6 million in 2014 for transaction costs associated with strategic initiatives and other expenses. In addition, the first nine months of 2014 included expenses of $77 million from the Lands' End business prior to the separation as compared to $338 million in the first nine months of 2013 . Excluding these items, domestic selling and administrative expenses declined $155 million primarily due to a decrease in payroll and advertising expenses.
Our selling and administrative rate was 26.9% for the first nine months of 2014 , compared to 26.5% in the prior year, as the decreases in overall selling and administrative expenses were more than offset by the above noted decline in revenues.
Gain on Sales of Assets
We recorded total gains on sales of assets of $148 million and $276 million for the first nine months of 2014 and 2013 , respectively. The gains recorded during the first nine months of 2014 included a gain of $42 million recognized on the sale of two Sears Full-line stores for which we received $64 million of cash proceeds, a gain of $13 million recognized on the sale of a distribution facility in our Sears Domestic segment for which we received $16 million of cash proceeds and a gain of $10 million recognized on the sale of a Kmart store for which we received $10 million of cash proceeds. The gains recorded during the first nine months of 2013 included a gain of $180 million recognized on the amendment and early termination of the leases on two properties operated by Sears Canada for which Sears Canada received $184 million ($191 million Canadian) in cash proceeds. Gain on sales of assets recorded for the first nine months of 2013 also included a gain of $55 million related to the sale of a store previously operated under The Great Indoors format, two Sears Full-line stores and one Kmart store for which the Company received $86 million in cash proceeds.
Operating Loss
We reported an operating loss of $1.4 billion and $795 million for the first nine months of 2014 and 2013 , respectively. Operating loss for the first nine months of 2014 included expenses related to our domestic pension plan, store closings, store impairments, severance and transactions costs and other expenses, as well as gains on the sales of assets, operating loss from Sears Canada and operating income from the Lands' End business, which aggregated to expense of $295 million . Operating loss for the first nine months of 2013 included expenses related to our domestic pension plan, store closings, store impairments and severance, as well as operating income from Sears Canada, operating income from the Lands' End business and gains on the sales of assets, which aggregated to operating income of $29 million . Excluding these items, we would have reported an operating loss of $1.1 billion and $824 million in the first nine months of 2014 and 2013 , respectively. The increase in operating loss in 2014 was primarily driven by the above noted declines in sales and gross margin, partially offset by a decline in selling and administrative expenses.
Interest and Investment Income
The Company reported interest and investment income of $133 million and $29 million in the first nine months of 2014 and 2013 , respectively. During 2014 , investment income included a gain of $70 million on the de-consolidation of Sears Canada as a result of the rights offering, as well as a gains of $35 million related to the sale of joint venture interests for which Sears Canada received $65 million ( $71 million Canadian) in cash proceeds.
Income Taxes
Our effective tax rate for the first nine months of 2014 was an expense rate of 12.9% , compared to an expense rate of 2.0% for the first nine months of 2013 . The application of the requirements for accounting for income taxes in interim periods, after consideration of our valuation allowance, causes a significant variation in the typical relationship between income tax expense and pretax income/loss. Our tax rate continues to reflect the effect of not recognizing the benefit of current period losses in certain domestic jurisdictions where it is not more likely than not

54

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

that such benefits would be realized. In addition, the first nine months of 2014 were negatively impacted by a valuation allowance established on Sears’s Canada’s deferred tax assets in the third quarter, prior to de-consolidation, and increased foreign taxes in Puerto Rico resulting from a new tax law change, which became effective during the second quarter of 2014. These items were partially offset by state audit settlements.
SEGMENT OPERATIONS
The following discussion of our business segment results is organized into three reportable segments: Kmart, Sears Domestic and Sears Canada.
Kmart
Kmart results and key statistics were as follows:
 
13 Weeks Ended
 
39 Weeks Ended
millions, except number of stores
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
Merchandise sales and services
$
2,707

 
$
2,916

 
$
8,527

 
$
9,187

 
 
 
 
 
 
 
 
Cost of sales, buying and occupancy
2,147

 
2,327

 
6,790

 
7,184

Gross margin dollars
560

 
589

 
1,737

 
2,003

Gross margin rate
20.7
%
 
20.2
%
 
20.4
%
 
21.8
%
 
 
 
 
 
 
 
 
Selling and administrative
708

 
745

 
2,128

 
2,205

Selling and administrative expense as a percentage of total revenues
26.2
%
 
25.5
%
 
25.0
%
 
24.0
%
Depreciation and amortization
25

 
31

 
72

 
97

Impairment charges
—

 
3

 
2

 
3

Gain on sales of assets
(24
)
 
(19
)
 
(76
)
 
(47
)
Total costs and expenses
2,856

 
3,087

 
8,916

 
9,442

Operating loss
$
(149
)
 
$
(171
)
 
$
(389
)
 
$
(255
)
Adjusted EBITDA
$
(97
)
 
$
(139
)
 
$
(304
)
 
$
(169
)
Number of stores
 
 
 
 
1,050

 
1,183

13-week period ended November 1, 2014 compared to the 13-week period ended November 2, 2013
Revenues and Comparable Store Sales
For the quarter, Kmart’s revenues decreased by $209 million to $2.7 billion in 2014 primarily due to the effect of having fewer stores in operation, which accounted for $229 million of the decline, and was partially offset by an increase in revenues resulting from an increase in comparable store sales of 0.5% .
The increase in comparable store sales primarily reflects improvements in most categories, most notably apparel, outdoor living and toys, partially offset by declines in the grocery & household and consumer electronics categories. Excluding the grocery & household and consumer electronics categories, comparable store sales would have increased 2.8%.
Gross Margin
For the quarter, Kmart generated $560 million in gross margin in 2014 compared to $589 million in 2013 . The decrease in Kmart’s gross margin was due to the decrease in sales partially offset by an increase in gross margin rate. Gross margin for the third quarter of 2014 and 2013 included charges of $31 million and $12 million, respectively, related to store closures.

55

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

Kmart’s gross margin rate for the quarter increased 50 basis points to 20.7% in 2014 from 20.2% in 2013 . The gross margin rate increased primarily driven by an increase in the apparel category due to lower promotional activity.
Selling and Administrative Expenses
For the quarter, Kmart’s selling and administrative expenses decreased $37 million as compared to the third quarter in 2013 . The decrease primarily reflects decreases in payroll and advertising expenses. Selling and administrative expenses for the third quarter of 2014 and 2013 were impacted by expenses of $17 million and $5 million, respectively, related to store closings and severance, while the third quarter of 2014 was also impacted by other expense of $3 million.
Kmart’s selling and administrative expense rate for the quarter was 26.2% in 2014 and 25.5% in 2013 and increased primarily as a result of the significant items noted above.
Operating Loss
For the quarter, Kmart recorded an operating loss of $149 million and $171 million in 2014 and 2013 , respectively. Operating loss for the third quarter of 2014 included expenses related to store closings, severance and other expenses, which aggregated to an operating expense of $53 million. Operating loss for the third quarter of 2013 included expenses related to store closings, store impairments and severance of $23 million. Excluding these items, Kmart would have reported an operating loss of $96 million and $148 million in the third quarter of 2014 and 2013 , respectively. The decrease in Kmart’s operating loss was primarily the result of the improvement in gross margin rate, as well as the decrease in selling and administrative expenses, partially offset by the above noted decline in sales.
39-week period ended November 1, 2014 compared to the 39-week period ended November 2, 2013
Revenues and Comparable Store Sales
For the first nine months of 2014 , Kmart’s revenues decreased by $660 million to $8.5 billion in 2014 , primarily due to the effect of having fewer stores in operation, which accounted for $570 million of the decline. Revenues were also impacted by a decrease in comparable store sales of 1.2% , which accounted for $100 million of the decline.
The decline in comparable store sales was driven by declines in the grocery & household and consumer electronics categories, partially offset by an increase in the apparel category. Excluding the grocery & household and consumer electronics categories, Kmart's comparable store sales would have increased 0.4%.
Gross Margin
For the first nine months of 2014 , Kmart generated $1.7 billion in gross margin compared to $2.0 billion in the first nine months of 2013 . The decrease in Kmart’s gross margin was due to both the decrease in sales as well as a decrease in gross margin rate. Gross margin for the first nine months of 2014 and 2013 included charges of $46 million and $21 million, respectively, related to store closures.
Kmart’s gross margin rate for the first nine months of the year declined 140 basis points to 20.4% in 2014 from 21.8% in 2013 , and was impacted by transactions that offer both traditional promotional marketing discounts and Shop Your Way points. The gross margin rate declined due to decreases experienced in a majority of categories, particularly home, grocery & household and consumer electronics.
Selling and Administrative Expenses
For the first nine months of 2014 , Kmart’s selling and administrative expenses decreased $77 million as compared to the first nine months of 2013 . The decrease primarily reflects a decrease in payroll expense. Selling and administrative expenses for the first nine months of 2014 and 2013 were impacted by expenses of $38 million and $12 million, respectively, related to store closings and severance, while 2014 also included other expense of $3 million.

56

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

Kmart’s selling and administrative expense rate for the first nine months was 25.0% in 2014 and 24.0% in 2013 and increased as a result of the significant items noted above, as well as lower expense leverage due to the sales decline noted above.
Gain on Sales of Assets
Kmart recorded total gains on sales of assets for the first nine months of $76 million in 2014 and $47 million in 2013 . The gains recorded during the first nine months of 2014 included a gain of $10 million related to the sale of one Kmart store for which we received $10 million cash proceeds. The gains recorded during the first nine months of 2013 included a gain of $12 million related to the sale of one Kmart store for which the Company received $12 million in cash proceeds.
Operating Loss
For the first nine months of the year, Kmart recorded an operating loss of $389 million and $255 million in 2014 and 2013 , respectively. Operating loss for the first nine months of 2014 included expenses related to store closings, store impairments, severance and other expense, as well as gains on sales of assets which aggregated to an operating expense of $82 million. Operating loss for the first nine months of 2013 included expenses related to store closings, store impairments and severance, as well as gains on sales of assets which aggregated to an operating expense of $28 million. Excluding these items, Kmart would have reported an operating loss of $307 million and $227 million in the first nine months of 2014 and 2013 , respectively. The increase in Kmart’s operating loss was primarily the result of the above noted declines in sales and gross margin, partially offset by the decline in selling and administrative expenses.

57

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

Sears Domestic
Sears Domestic results and key statistics were as follows:
 
13 Weeks Ended
 
39 Weeks Ended
millions, except number of stores
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
Merchandise sales and services
$
3,889

 
$
4,419

 
$
12,484

 
$
13,709

 
 
 
 
 
 
 
 
Cost of sales, buying and occupancy
3,002

 
3,326

 
9,552

 
10,163

Gross margin dollars
887

 
1,093

 
2,932

 
3,546

Gross margin rate
22.8
%
 
24.7
%
 
23.5
%
 
25.9
%
 
 
 
 
 
 
 
 
Selling and administrative
1,131

 
1,244

 
3,487

 
3,800

Selling and administrative expense as a percentage of total revenues
29.1
%
 
28.2
%
 
27.9
%
 
27.7
%
Depreciation and amortization
110

 
128

 
334

 
390

Impairment charges
—

 
2

 
8

 
10

Gain on sales of assets
(44
)
 
(2
)
 
(73
)
 
(48
)
Total costs and expenses
4,199

 
4,698

 
13,308

 
14,315

Operating loss
$
(310
)
 
$
(279
)
 
$
(824
)
 
$
(606
)
Adjusted EBITDA
$
(199
)
 
$
(142
)
 
$
(458
)
 
$
(159
)
Lands' End separation
—

 
(29
)
 
(10
)
 
(70
)
Adjusted EBITDA (1)
$
(199
)
 
$
(171
)
 
$
(468
)
 
$
(229
)
Number of:
 
 
 
 
 
 
 
Full-line stores
 
 
 
 
751

 
785

Specialty stores
 
 
 
 
30

 
50

Total Domestic Sears Stores
 
 
 
 
781

 
835

(1) Adjusted to reflect the results of the Lands' End business that were included in our results of operations prior to the separation.
13-week period ended November 1, 2014 compared to the 13-week period ended November 2, 2013
Revenues and Comparable Store Sales
For the quarter, Sears Domestic's revenues decreased by $530 million to $3.9 billion . The decline in revenue was driven by the separation of the Lands' End business, which was completed on April 4, 2014 and accounted for $384 million of the decline, as well as the effect of having fewer Full-line stores in operation, which accounted for $111 million of the decline. Revenues were also impacted by a decrease in comparable store sales of 0.7% , which accounted for $18 million of the decline.
The decrease in comparable store sales for the quarter primarily reflects decreases in consumer electronics, apparel and Sears Auto Centers, partially offset by increases in home appliances and mattresses. Excluding the impact of consumer electronics, comparable store sales would have increased 1.0%.
Gross Margin
For the quarter, Sears Domestic generated gross margin dollars of $887 million and $1.1 billion in 2014 and 2013 , respectively. Gross margin for the third quarter of 2014 and 2013 , respectively, included charges of $10 million and $1 million related to store closures. The third quarter of 2013 also included gross margin of $150 million from the Lands' End business.

58

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

Sears Domestic's gross margin rate for the quarter decreased 190 basis points to 22.8% in 2014 from 24.7% in 2013 , and was impacted by the absence of the higher margin Lands' End transactions. Excluding the impact of Lands' End, the gross margin rate would have declined 60 basis points, primarily due to decreases experienced in a majority of categories, most notably consumer electronics, home appliances (partially due to free delivery), tools and home.
Selling and Administrative Expenses
For the quarter, Sears Domestic's selling and administrative expenses decreased $113 million in 2014 as compared to 2013 . Selling and administrative expenses for the third quarter of 2014 and 2013 , respectively, were impacted by expenses related to our domestic pension plan, store closings and severance of $32 million and $8 million, while the third quarter of 2014 also included expenses of $3 million for transactions costs incurred in connection with strategic initiatives. The third quarter of 2013 also included selling and administrative expense related to the Lands' End business of $121 million . Excluding these items, selling and administrative expenses decreased $19 million primarily due to decreases in payroll and advertising expenses.
Sears Domestic’s selling and administrative expense rate for the quarter was 29.1% in 2014 and 28.2% in 2013 and increased primarily as a result of lower expense leverage due to the sales decline noted above.
Gain on Sales of Assets
Sears Domestic recorded a total gain on sales of assets for the third quarter of $44 million and $2 million in 2014 and 2013 , respectively. The gains recorded in the third quarter of 2014 included a gain of $42 million related to the sale of two Sears Full-Line stores for which we received $64 million in cash proceeds.
Operating Loss
For the quarter, Sears Domestic reported an operating loss of $310 million and $279 million in 2014 and 2013 , respectively. Sears Domestic's operating loss for the third quarter of 2014 included expenses related to our domestic pension plan, store closings, severance and transaction costs, as well as gains on the sales of assets, which aggregated to operating expense of $7 million. Sears Domestic's operating loss for the third quarter of 2013 included expenses related to our domestic pension plan, store closings, store impairments and severance, as well as operating income of the Lands' End business which aggregated to operating income of $13 million. Excluding these items, Sears Domestic would have reported an operating loss of $303 million and $292 million in the third quarter of 2014 and 2013 , respectively. The increase in operating loss in 2014 was primarily driven by the above noted declines in sales and gross margin.
39-week period ended November 1, 2014 compared to the 39-week period ended November 2, 2013
Revenues and Comparable Store Sales
For the first nine months of 2014 , Sears Domestic's revenues decreased by $1.2 billion to $12.5 billion . The decline in revenue was driven by the separation of the Lands' End business, which was completed on April 4, 2014 and accounted for $811 million of the decline, as well as the effect of having fewer Full-line stores in operation, which accounted for $214 million of the decline. Sears Domestic also experienced a revenue decline in its Home Services business during the first nine months of 2014 , as well as a decline in delivery revenues which when combined, accounted for $131 million of the decline. Revenues were also impacted by a decrease in comparable store sales of 0.1% , which accounted for $9 million of the decline in revenues.
The decrease in comparable store sales for the first nine months of 2014 primarily reflects decreases in the consumer electronics and lawn & garden categories, as well as a decline in Sears Auto Centers, partially offset by increases in the home appliance and mattress categories. Excluding the impact of consumer electronics, comparable store sales would have increased 1.1%.
Gross Margin
For the first nine months of the year, Sears Domestic generated gross margin dollars of $2.9 billion and $3.5 billion in 2014 and 2013 , respectively. Gross margin included charges of $12 million and $7 million in the first nine months

59

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

of 2014 and 2013 , respectively, related to store closures, as well as gross margin of $87 million and $408 million from the Lands' End business in the first nine months of 2014 and 2013 , respectively. Excluding these items, gross margin decreased $288 million.
Sears Domestic's gross margin rate for the first nine months of the year decreased 240 basis points to 23.5% in 2014 from 25.9% in 2013 , and was impacted by transactions that offer both traditional promotional marketing discounts and Shop Your Way points and the absence of higher margin Lands' End transactions. Excluding the impact of Lands' End, margin rate would have declined 150 basis points primarily due to decreases experienced in the apparel, home appliances (partially due to free delivery), consumer electronics and tools categories.
Selling and Administrative Expenses
For the first nine months of the year, Sears Domestic's selling and administrative expenses decreased $313 million in 2014 as compared to 2013 and included expenses related to our domestic pension plan, store closings and severance of $82 million and $88 million, respectively, while the first nine months of 2014 also included $3 million of transaction costs incurred in connection with strategic initiatives. The first nine months of 2014 and 2013 also included selling and administrative expenses related to the Lands' End business of $77 million and $338 million , respectively. Excluding these items, selling and administrative expenses decreased $49 million primarily due to decreases in payroll and advertising expenses.
Sears Domestic's selling and administrative expense rate for the first nine months of the year was 27.9% in 2014 and 27.7% in 2013 and increased slightly as the above noted expense reduction was more than offset by the above noted decline in revenues.
Gain on Sales of Assets
Sears Domestic recorded a total gain on sales of assets for the first nine months of $73 million and $48 million in 2014 and 2013 , respectively. The gains recorded during the first nine months of 2014 included a gain of $42 million recognized on the sale of two Sears Full-line stores for which we received $64 million of cash proceeds, and a gain of $13 million recognized on the sale of a distribution facility for which we received $16 million cash proceeds. The gains recorded in the first nine months of 2013 included a gain of $43 million related to the sale of a store previously operated under The Great Indoors format and two Sears Full-line stores for which the Company received $74 million in cash proceeds.
Operating Loss
For the first nine months of the year, Sears Domestic reported an operating loss of $824 million and $606 million in 2014 and 2013 , respectively. Sears Domestic's operating loss for the first nine months of 2014 included expenses related to our domestic pension plan, store closings, store impairments, severance and transaction costs, as well as gains on sales of assets and operating income from the Lands' End business, which aggregated to operating expense of $47 million. Operating loss for the first nine months of 2013 included expenses related to our domestic pension plan, store closings, store impairments and severance, as well as gains on sales of assets and operating income from the Lands' End business, which aggregated to operating expense of $9 million. Excluding these items, we would have reported an operating loss of $777 million and $597 million in the first nine months of 2014 and 2013 , respectively. The increase in operating loss in 2014 was primarily driven by the above noted declines in sales and gross margin, partially offset by the decrease in selling and administrative expenses.

60

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

Sears Canada
Sears Canada conducts similar retail operations as Sears Domestic. As previously noted, the Company completed a rights offering for a portion of its interest in Sears Canada in the third quarter of 2014. As such, the Company no longer maintained control of Sears Canada resulting in the de-consolidation of Sears Canada on October 16, 2014.
Sears Canada results and key statistics were as follows:
 
13 Weeks Ended
 
39 Weeks Ended
millions, except number of stores
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
Merchandise sales and services
$
611

 
$
937

 
$
2,088

 
$
2,699

 
 
 
 
 
 
 
 
Cost of sales, buying and occupancy
457

 
688

 
1,586

 
1,975

Gross margin dollars
154

 
249

 
502

 
724

Gross margin rate
25.2
%
 
26.6
%
 
24.0
%
 
26.8
%
 
 
 
 
 
 
 
 
Selling and administrative
172

 
273

 
603

 
766

Selling and administrative expense as a percentage of total revenues
28.2
%
 
29.1
%
 
28.9
%
 
28.4
%
Depreciation and amortization
13

 
22

 
49

 
72

Impairment charges
—

 
1

 
15

 
1

(Gain) loss on sales of assets
—

 
—

 
1

 
(181
)
Total costs and expenses
642

 
984

 
2,254

 
2,633

Operating income (loss)
$
(31
)
 
$
(47
)
 
$
(166
)
 
$
66

Adjusted EBITDA
$
(13
)
 
$
(5
)
 
$
(71
)
 
$
(21
)
Number of:
 
 
 
 
 
 
 
Full-line stores
 
 
 
 
113

 
118

Specialty stores
 
 
 
 
305

 
338

Total Sears Canada Stores
 
 
 
 
418

 
456

13-week period ended November 1, 2014 compared to the 13-week period ended November 2, 2013
Revenues and Comparable Store Sales
Sears Canada’s revenues decreased $326 million for the third quarter of 2014 as compared to the same period last year primarily driven by the de-consolidation of Sears Canada, which occurred on October 16, 2014 and accounted for approximately $161 million of the revenue decline. Revenues also declined due to a 9.5% decline in comparable store sales, which accounted for $68 million of the decline, as well as the effect of having fewer stores in operation, which accounted for $38 million of the decline. Revenues also included a decrease of $29 million due to foreign currency exchange rates
Gross Margin
Gross margin dollars for the third quarter decreased $95 million in 2014 to $154 million , and included a $7 million decrease due to the impact of exchange rates. Gross margin decreased $88 million on a Canadian dollar basis and was affected by the de-consolidation on October 16, 2014.
For the quarter, Sears Canada’s gross margin rate declined 140 basis points to 25.2% from 26.6% in 2013 .
Selling and Administrative Expenses
For the third quarter of 2014 , Sears Canada’s selling and administrative expenses decreased $101 million , and included a decrease of $8 million due to the impact of exchange rates. On a Canadian dollar basis, selling and

61

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

administrative expenses decreased by $93 and was affected by the de-consolidation which occurred on October 26, 2014.
Sears Canada’s selling and administrative expense rate for the quarter was 28.2% in 2014 and 29.1% in 2013 .
Operating Loss
Sears Canada recorded an operating loss of $31 million and $47 million in the third quarter of 2014 and 2013 , respectively.
39-week period ended November 1, 2014 compared to the 39-week period ended November 2, 2013
Revenues and Comparable Store Sales
Sears Canada’s revenues decreased $611 million for the first nine months of 2014 as compared to the same period last year and was driven by the de-consolidation of Sears Canada which occurred on October 16, 2014 and accounted for approximately $161 million of the revenue decline. Revenues also declined due to an 8.0% decline in comparable store sales, which accounted for $161 million of the decline, as well as the effect of having fewer stores in operation, which accounted for $97 million of the decline. Sears Canada also experienced declines in the Home Services business which accounted for $27 million of the decline. Revenues also included a decrease of $125 million due to foreign currency exchange rates.
Gross Margin
Gross margin dollars for the first nine months of the year decreased $222 million in 2014 to $502 million , and included a $28 million decrease due to the impact of exchange rates. Gross margin decreased $194 million on a Canadian dollar basis and was affected by the de-consolidation on October 16, 2014.
For the first nine months of the year, Sears Canada’s gross margin rate decreased 280 basis points to 24.0% from 26.8% in 2013 .
Selling and Administrative Expenses
For the first nine months of 2014 , Sears Canada’s selling and administrative expenses decreased $163 million , and included a decrease of $37 million due to the impact of exchange rates. On a Canadian dollar basis, selling and administrative expenses decreased by $126 million. Selling and administrative expenses for the first nine months of 2014 and 2013 were impacted by the de-consolidation on October 16, 2014.
Sears Canada’s selling and administrative expense rate for the first nine months of the year was 28.9% in 2014 and 28.4% in 2013 .
Gain on Sales of Assets
Sears Canada recorded total gains on sales of assets of $181 million for the first nine months of 2013, which included a gain of $180 million recognized on the amendment and early termination of the leases on two properties operated by Sears Canada for which Sears Canada received $184 million ($191 million Canadian) in cash proceeds.
Operating Income (Loss)
Sears Canada recorded an operating loss of $166 million and operating income of $66 million in the first nine months of 2014 and 2013 , respectively.

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ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
Cash Balances
Our cash and cash equivalents include all highly liquid investments with original maturities of three months or less at the date of purchase. Our cash balances as of November 1, 2014 ,  November 2, 2013 and February 1, 2014 are detailed in the following table.
millions
November 1,
2014
 
November 2,
2013
 
February 1,
2014
Domestic
 
 
 
 
 
Cash and equivalents
$
173

 
$
196

 
$
428

Cash posted as collateral
3

 
18

 
18

Credit card deposits in transit
150

 
170

 
131

Total domestic cash and cash equivalents
326

 
384

 
577

Sears Canada
—

 
215

 
451

Total cash and cash equivalents
326

 
599

 
1,028

Restricted cash
—

 
8

 
10

Total cash balances
$
326

 
$
607

 
$
1,038

We had total cash balances of $326 million at November 1, 2014 , $607 million at November 2, 2013 and $1.0 billion at February 1, 2014 . During the first nine months of 2014, the Company received a $500 million dividend from Lands' End immediately prior to the completion of the spin-off, $400 million from the secured short-term loan and $169 million in connection with the Sears Canada rights offering. The decrease in domestic cash during the first nine months of 2014 was primarily due to increased operating losses.
At various times, we have posted cash collateral for certain outstanding letters of credit and self-insurance programs. Such cash collateral is classified within cash and cash equivalents given we have the ability to substitute letters of credit at any time for this cash collateral and it is therefore readily available to us.
Our invested cash may include, from time to time, investments in, but not limited to, commercial paper, federal, state and municipal government securities, floating-rate notes, repurchase agreements and money market funds. Cash amounts held in these short-term investments are readily available to us.
Credit card deposits in transit include deposits in transit from banks for payments related to third-party credit card and debit card transactions.
Restricted cash consisted of cash related to Sears Canada’s balances, which had been pledged as collateral for letters of credit obligations issued under its offshore merchandise purchasing program.
We classify outstanding checks in excess of funds on deposit within other current liabilities and reduce cash balances when these checks clear the bank on which they were drawn. Outstanding checks in excess of funds on deposit were $45 million , $88 million and $97 million as of November 1, 2014 , November 2, 2013 and February 1, 2014 , respectively.
Operating Activities
During the first nine months of 2014 , we used net cash in operating activities of $1.9 billion compared to $1.7 billion in the first nine months of 2013. Our primary source of operating cash flows is the sale of goods and services to customers, while the primary use of cash in operations is the purchase of merchandise inventories. We used more cash in operations in the first nine months of 2014 compared to the prior year primarily driven by an increase in operating loss, which was partially offset by less cash being used for merchandise inventory purchases due to inventory productivity initiatives and store closures.
Merchandise inventories were $6.5 billion at November 1, 2014 and $8.9 billion at November 2, 2013 . Merchandise payables were $2.4 billion at November 1, 2014 and $3.5 billion at November 2, 2013 . Our Domestic inventory balances decreased approximately $1.5 billion from $8.0 billion at November 2, 2013 to $6.5 billion at November 1,

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2014 . Excluding inventory related to the Lands' End business, our Domestic inventory decreased approximately $1.1 billion due to both improved productivity and store closures. Sears Domestic inventory decreased in virtually all categories, with the most notable decreases in the apparel, consumer electronics, home and automotive categories. Kmart inventory also decreased in virtually all categories with the most notable decreases in the apparel, consumer electronics, toys and drugstore categories.
Investing Activities
During the first nine months of 2014 , we generated net cash flows from investing activities of $76 million , which consisted of cash proceeds from the sale of properties and investments of $316 million , partially offset by cash used for capital expenditures of $202 million . The first nine months of 2014 also included proceeds from the Sears Canada rights offering of $169 million, which was offset by $207 million resulting from the de-consolidation of Sears Canada cash. For the first nine months of 2013 , we generated net cash flows from investing activities of $100 million , which consisted of cash generated from the sales of properties and investments of $300 million , partially offset by cash used for capital expenditures of $201 million .
Financing Activities
For the first nine months of 2014 , we generated net cash flows from financing activities of $1.2 billion which primarily consisted of Lands' End pre-separation funding of $515 million , proceeds from a secured short-term loan of $400 million and an increase in short-term borrowings of $364 million . This cash generated from financing activities was partially offset by repayments of long-term debt of $61 million . This compares to net cash flows from financing activities of $1.6 billion in the first nine months of 2013, which was primarily due to proceeds from debt issuances of $994 million , as well as an increase in short-term borrowings of $657 million , partially offset by repayments of long-term debt of $65 million .
We did not repurchase any of our common shares under our share repurchase program in the first nine months of 2014 or 2013 . The common share repurchase program was initially announced in 2005 and had a total authorization since inception of the program of $6.5 billion. At November 1, 2014 , we had $504 million of remaining authorization under the program. The common share repurchase program has no stated expiration date and share repurchases may be implemented using a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, the purchase of call options, the sale of put options or otherwise, or by any combination of such methods.
Liquidity
Our primary need for liquidity is to fund working capital requirements of our businesses, capital expenditures and for general corporate purposes, including debt repayment and pension plan contributions. Over the past several months, the Company has taken a number of actions to enhance its financial flexibility and fund its continued transformation, support its operations during the upcoming holiday and post-holiday season, and meet its obligations. In the first half of 2014, the Company raised $665 million in cash from the $500 million dividend the Company received in connection with the Lands' End separation, plus $165 million in proceeds from certain real estate transactions. In the second half of 2014 through November, the Company raised an additional $1.6 billion consisting of $400 million from the secured short-term loan the Company completed during the third quarter, $151 million in additional proceeds from certain real estate transactions, $380 million from the Sears Canada rights offering, of which $169 million was received during the third quarter, and $625 million from the rights offering for the senior unsecured notes with warrants, which was oversubscribed after the close of the third quarter. Taken together, the actions we have taken have generated $2.2 billion in liquidity in fiscal 2014 thus far.
This demonstrates the Company's financial flexibility and provides us with the means to fund our transformation and meet our obligations. As we leverage Shop Your Way® and Integrated Retail, we will continue to right-size, redeploy and highlight the value of our assets, including our substantial real estate portfolio, in our transition from an asset intensive, historically "store-only" based retailer to a more asset light, integrated membership-focused company. As we announced on August 21, 2014, we intend to continue to evaluate and evolve Holdings' capital structure with a goal of achieving more long-term financial flexibility utilizing our rich portfolio of assets.

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As we previously announced, one of those potential actions involves actively exploring a REIT transaction involving 200 to 300 owned properties through a rights offering to Holdings' shareholders. In addition, over the next three to nine months, we intend to work with our lenders and others to evaluate our capital structure with a goal of achieving more long-term flexibility, and may take other actions as appropriate.
We cannot predict the outcome of the actions to generate liquidity to fund the transformation discussed above, or whether such actions would generate the expected liquidity to fund the transformation as currently planned. If results of operations deteriorate, and we are not able to generate enough funds from the above actions (or some combination of other actions), the availability under our domestic credit facility might be fully utilized and we would need to secure additional sources of funds. Moreover, if the borrowing base (as calculated pursuant to the indenture) falls below the principal amount of the notes plus the principal amount of any other indebtedness for borrowed money that is secured by liens on the collateral for the notes on the last day of any two consecutive quarters, it could trigger an obligation to repurchase notes in an amount equal to such deficiency.
Our outstanding borrowings at November 1, 2014 ,  November 2, 2013 and February 1, 2014 were as follows:
millions
November 1,
2014
 
November 2,
2013
 
February 1,
2014
Short-term borrowings:
 
 
 
 
 
Unsecured commercial paper
$
91

 
$
160

 
$
9

Secured short-term loan
400

 
—

 
—

Secured borrowings
1,605

 
1,591

 
1,323

Long-term debt, including current portion:
 
 
 
 
 
Notes and debentures outstanding
2,564

 
2,571

 
2,571

Capitalized lease obligations
280

 
373

 
346

Total borrowings
$
4,940

 
$
4,695

 
$
4,249


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We fund our peak sales season working capital needs through our domestic revolving credit facility, commercial paper markets and secured short-term debt.
 
13 Weeks Ended
 
39 Weeks Ended
millions
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
Secured borrowings:
 
 
 
 
 
 
 
Maximum daily amount outstanding during the period
$
1,605

 
$
2,055

 
$
1,605

 
$
2,055

Average amount outstanding during the period
1,350

 
1,567

 
1,282

 
1,318

Amount outstanding at period-end
1,605

 
1,591

 
1,605

 
1,591

Weighted average interest rate
2.7
%
 
2.8
%
 
2.8
%
 
2.8
%
 
 
 
 
 
 
 
 
Unsecured commercial paper:
 
 
 
 
 
 
 
Maximum daily amount outstanding during the period
$
107

 
$
271

 
$
159

 
$
398

Average amount outstanding during the period
53

 
191

 
42

 
285

Amount outstanding at period-end
91

 
160

 
91

 
160

Weighted average interest rate
4.1
%
 
2.7
%
 
3.2
%
 
2.7
%
 
 
 
 
 
 
 
 
Secured short-term loan:
 
 
 
 
 
 
 
Maximum daily amount outstanding during the period
$
400

 
$
—

 
$
400

 
$
—

Average amount outstanding during the period
181

 
—

 
60

 
—

Amount outstanding at period-end
400

 
—

 
400

 
—

Weighted average interest rate
5.0
%
 
—
%
 
5.0
%
 
—
%
Domestic Credit Agreement
During the first quarter of 2011, SRAC, Kmart Corporation (together with SRAC, the "Borrowers") and Holdings entered into an amended credit agreement (the "Domestic Credit Agreement"). The Domestic Credit Agreement provides for a $3.275 billion asset-based revolving credit facility (the "Revolving Facility") with a $1.5 billion letter of credit sub-limit. On October 2, 2013, Holdings and the Borrowers entered into a First Amendment (the "Amendment") to the Domestic Credit Agreement with a syndicate of lenders. Pursuant to the Amendment, the Borrowers borrowed $1.0 billion under a senior secured term loan facility (the "Term Loan").
Advances under the Domestic Credit Agreement bear interest at a rate equal to, at the election of the Borrowers, either the London Interbank Offered Rate ("LIBOR") or a base rate, in either case plus an applicable margin. The Domestic Credit Agreement’s interest rates for LIBOR-based borrowings vary based on leverage in the range of LIBOR plus 2.0% to 2.5% . Interest rates for base rate-based borrowings vary based on leverage in the range of the applicable base rate plus 1.0% to 1.5% . Commitment fees are in a range of 0.375% to 0.625% based on usage. The Revolving Facility is in place as a funding source for general corporate purposes and is secured by a first lien on our domestic inventory and credit card and pharmacy receivables, and is subject to a borrowing base formula to determine availability. The Domestic Credit Agreement permits aggregate second lien indebtedness of up to $2.0 billion , of which $1.2 billion in second lien notes were outstanding at November 1, 2014 , resulting in $760 million of permitted second lien indebtedness, subject to limitations imposed by a borrowing base requirement under the indenture that governs our 6 5/8% senior secured notes due 2018. The Revolving Facility is expected to expire in April 2016.
The Term Loan bears interest at a rate equal to, at the election of the Borrowers, either (1) LIBOR (subject to a 1.00% LIBOR floor) or (2) the highest of (x) the prime rate of the bank acting as agent of the syndicate of lenders, (y) the federal funds rate plus 0.50% and (z) the one-month LIBOR rate plus 1.00% (the highest of (x), (y) and (z), the "Base Rate"), plus an applicable margin for LIBOR loans of 4.50% and for Base Rate loans of 3.50% . Beginning February 2, 2014, the Borrowers are required to repay the Term Loan in quarterly installments of $2.5 million , with

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the remainder of the Term Loan maturing June 30, 2018. Beginning with the fiscal year ending January 2015, the Borrowers are also required to make certain mandatory repayments of the Term Loan from excess cash flow (as defined in the Domestic Credit Agreement). The Term Loan may be prepaid in whole or part without penalty, other than a 1.00% prepayment premium if the Borrowers enter into certain repricing transactions with respect to the Term Loan prior to October 2, 2014, which did not occur. The Term Loan is secured by the same collateral as the Revolving Facility on a pari passu basis with the Revolving Facility, and is guaranteed by the same subsidiaries of the Company that guarantee the Revolving Facility.
The Domestic Credit Agreement limits our ability to make restricted payments, including dividends and share repurchases, subject to specified exceptions that are available if, in each case, no event of default under the credit facility exists immediately before or after giving effect to the restricted payment. These include exceptions that require that projected availability under the credit facility, as defined, is at least 15% and an exception that requires that the restricted payment is funded from cash on hand and not from borrowings under the credit facility or from the proceeds of certain dividends or asset sales. The Domestic Credit Agreement also imposes various other requirements, which take effect if availability falls below designated thresholds, including a cash dominion requirement and a requirement that the fixed charge ratio at the last day of any quarter be not less than 1.0 to 1.0. If availability were to fall below 10%, the Company would not comply with the springing fixed charge coverage ratio covenant, and the lenders under our domestic credit facility could demand immediate payment in full of all amounts outstanding and terminate their obligations under the facility.
We had Revolving Facility borrowings of $1.6 billion at both November 1, 2014 and November 2, 2013 and $1.3 billion at February 1, 2014 , and $671 million , $684 million and $661 million of letters of credit outstanding under the Revolving Facility at November 1, 2014 , November 2, 2013 and February 1, 2014 , respectively. At November 1, 2014 and February 1, 2014 , the amount available to borrow under the Revolving Facility was $234 million and $549 million , respectively, which reflects the effect of the springing fixed charge coverage ratio covenant and the borrowing base limitation. At November 2, 2013 , the amount available to borrow was $572 million , which reflects the effect of the springing fixed charge coverage ratio covenant, while the borrowing base requirement had no effect on availability. The majority of the letters of credit outstanding are used to provide collateral for our insurance programs. As of December 3, 2014, the amount available to borrow under the Revolving Facility was approximately $1.5 billion. At November 1, 2014 and February 1, 2014 , we had approximately $993 million and $1.0 billion , respectively, of borrowings under the Term Loan.
Senior Secured Notes
In October 2010, we sold $1.0 billion aggregate principal amount of senior secured notes (the "Notes"), which bear interest at 6 5/8% per annum and mature on October 15, 2018 . Concurrent with the closing of the sale of the Notes, the Company sold $250 million aggregate principal amount of Notes to the Company's domestic pension plan in a private placement, of which approximately $110 million remains in the domestic pension plan. The Notes are guaranteed by certain subsidiaries of the Company and are secured by a security interest in certain assets consisting primarily of domestic inventory and credit card receivables (the "Collateral"). The lien that secures the Notes is junior in priority to the lien on such assets that secures obligations under the Domestic Credit Agreement, as well as certain other first priority lien obligations. The Company used the net proceeds of this offering to repay borrowings outstanding under a previous domestic credit agreement on the settlement date and to fund the working capital requirements of our retail businesses, capital expenditures and for general corporate purposes. The indenture under which the Notes were issued contains restrictive covenants that, among other things, (1) limit the ability of the Company and certain of its domestic subsidiaries to create liens and enter into sale and leaseback transactions and (2) limit the ability of the Company to consolidate with or merge into, or sell other than for cash or lease all or substantially all of its assets to, another person. The indenture also provides for certain events of default, which, if any were to occur, would permit or require the principal and accrued and unpaid interest on all the then outstanding notes to be due and payable immediately. Generally, the Company is required to offer to repurchase all outstanding Notes at a purchase price equal to 101% of the principal amount upon the occurrence of certain change of control triggering events. Moreover, if the borrowing base (as calculated pursuant to the indenture) falls below the principal amount of the Notes plus the principal amount of any other indebtedness for borrowed money that is secured by liens on the collateral for the Notes on the last day of any two consecutive quarters, it could trigger an obligation to repurchase notes in an amount equal to such deficiency. The Company may call the Notes at a premium based on the "Treasury Rate" as defined in the indenture, plus 50 basis points. On September 6, 2011, we completed our offer to

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exchange the Notes held by nonaffiliates for a new issue of substantially identical notes registered under the Securities Act of 1933, as amended.
Sears Canada Credit Agreement
In September 2010, Sears Canada entered into a five -year, $800 million Canadian senior secured revolving credit facility (the "Sears Canada Facility"). On May 28, 2014, Sears Canada announced that it had extended the term of the Sears Canada Facility (the "Amended Sears Canada Facility") to May 28, 2019 and reduced the total credit limit to $300 million Canadian.
The Amended Sears Canada Facility is available for Sears Canada's general corporate purposes and is secured by a first lien on inventory and credit card receivables. Availability under the Amended Sears Canada Facility is determined pursuant to a borrowing base formula based on inventory and credit card receivables, subject to certain limitations, up to a maximum availability of $300 million Canadian. We had no borrowings outstanding under the Sears Canada Facility at November 2, 2013 and February 1, 2014 . Availability under the Amended Sears Canada Facility was approximately $729 million ( $760 million Canadian) and $336 million ( $374 million Canadian), respectively, at November 2, 2013 and February 1, 2014 .
Trade Creditor Matters
We have ongoing discussions concerning our liquidity and financial position with the vendor community and third parties that offer various credit protection services to our vendors. The topics discussed have included such areas as pricing, payment terms and ongoing business arrangements. As of the date of this report, we have not experienced any significant disruption in our access to merchandise or our operations.
Unsecured Commercial Paper
We borrow through the commercial paper markets. At November 1, 2014 ,  November 2, 2013 and February 1, 2014 , we had outstanding commercial paper borrowings of $91 million , $160 million and $9 million , respectively. ESL held $85 million and $140 million , respectively, of our commercial paper at November 1, 2014 and November 2, 2013 , including $48 million and $88 million , respectively, held by Mr. Lampert. Neither ESL nor Mr. Lampert held any of our commercial paper at February 1, 2014 . See Note 13 for further discussion of these borrowings.
Secured Short-Term Loan
On September 15, 2014, the Company, through Sears, Sears Development Co. and Kmart Corporation ("Borrowers"), entities wholly-owned and controlled, directly or indirectly by the Company, entered into a $400 million secured short-term loan (the "Loan") with JPP II, LLC and JPP, LLC (together, the "Lender"), entities affiliated with ESL. The first $200 million of the Loan was funded at the closing on September 15, 2014 and the remaining $200 million was funded on September 30, 2014. Proceeds of the Loan were used for general corporate purposes.
The Loan is scheduled to mature on December 31, 2014, but as long as there is no event of default, the maturity date can be extended to February 28, 2015 at the discretion of the Company upon the payment of an extension fee equal to 0.5% of the principal amount. The Loan will have an annual base interest rate of 5% . The Borrowers paid an upfront fee of 1.75% of the full principal amount.
The Loan is guaranteed by the Company and is secured by a first priority lien on certain real properties owned by the Borrowers. In certain circumstances, the Lender may exercise its reasonable determination to substitute one or more of the properties with substitute properties. The Loan includes customary representations and covenants, including with respect to the condition and maintenance of the real property collateral.
The Loan has customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, and bankruptcy or insolvency proceedings. If there is an event of default, the Lender may declare all or any portion of the outstanding indebtedness to be immediately due and payable, exercise any rights it might have under any of the Loan documents (including against the collateral), and instead of the base interest rate, the Borrowers will be

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required to pay a default rate equal to the greater of (i) 2.5% in excess of the base interest rate and (ii) the prime rate plus 1%. The Loan may be prepaid in whole or in part any time prior to maturity, without penalty or premium.
The Lender sold certain participating interests in the Loan during the third quarter, which may restrict the taking of certain actions with respect to the Loan, including the waiver of certain defaults under the Loan.
At November 1, 2014 , the outstanding balance of the Loan was $400 million .
Debt Ratings
Our corporate family debt ratings at November 1, 2014 appear in the table below:
Moody’s
Investors Service
Standard & Poor’s
Ratings Services
Fitch Ratings
Caa1
CCC+
CC
Domestic Pension Plan Funding
In our Annual Report on Form 10-K for the fiscal year ended February 1, 2014, we disclosed that we expected our contributions to our domestic pension plans to be approximately $487 million in 2014 and $310 million in 2015. As of year-end 2013, we also expected contributions to our domestic pension plans to be approximately $270 million in 2016, $250 million in 2017, $215 million in 2018 and $75 million in 2019. On August 8, 2014, new legislation was enacted that amends existing funding requirements, which we expect will increase the discount rates we use to determine our pension liability resulting in lower liabilities and lower funding obligations. We currently expect our contributions to our domestic pension plans to be $417 million in 2014, $243 million in 2015, $243 million in 2016, $247 million in 2017, $228 million in 2018 and $169 million in 2019. The ultimate amount of pension contributions and timing could be affected by changes in the applicable regulations, or other regulatory actions, as well as financial market and investment performance.
Recent Accounting Pronouncements
See Part I, Item 1, "Financial Statements – Notes to Condensed Consolidated Financial Statements," Note 12 – "Recent Accounting Pronouncements," for information regarding new accounting pronouncements.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements made in this Quarterly Report on Form 10-Q and in other public announcements by us contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include information concerning our future financial performance, business strategy, plans, goals and objectives. Statements preceded or followed by, or that otherwise include, the words "believes," "expects," "anticipates," "intends," "estimates," "plans," "forecast," "is likely to" and similar expressions or future or conditional verbs such as "will," "may" and "could" are generally forward-looking in nature and not historical facts. Such statements are based upon the current beliefs and expectations of the Company's management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements.
The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: our ability to offer merchandise and services that our customers want, including our proprietary brand products; our ability to successfully implement our integrated retail strategy to transform our business; our ability to successfully manage our inventory levels; initiatives to improve our liquidity through inventory management and other actions; competitive conditions in the retail and related services industries; worldwide economic conditions and business uncertainty, including the availability of consumer and commercial credit, changes in consumer confidence and spending, the impact of rising fuel prices, and changes in vendor relationships; vendors’ lack of willingness to provide acceptable payment terms or otherwise restricting financing to purchase inventory or services; possible limits on our access to our domestic credit facility, which is subject to a borrowing base limitation and a springing fixed charge coverage ratio covenant, capital markets and other financing sources, including additional second lien financings, with respect to which we do not have commitments from lenders; our ability to successfully achieve our plans to generate liquidity through potential transactions or otherwise; potential liabilities in connection with the separation of Lands’ End and disposition of a portion of our ownership interest in Sears Canada; our ability to enter into or complete possible transactions for our Sears Auto Centers business or with respect to the sale-leaseback/real estate investment trust transaction regarding certain owned real estate, in each case, on acceptable terms, on intended timetables or at all, the form or terms and conditions of any such transaction, and the impact of the evaluation and/or completion of any such transaction on our other businesses; our extensive reliance on computer systems, including legacy systems, to implement our integrated retail strategy, process transactions, summarize results, maintain customer, member, associate and Company data, and otherwise manage our business, which may be subject to disruptions or security breaches; the impact of seasonal buying patterns, including seasonal fluctuations due to weather conditions, which are difficult to forecast with certainty; our dependence on sources outside the United States for significant amounts of our merchandise; our reliance on third parties to provide us with services in connection with the administration of certain aspects of our business and the transfer of significant internal historical knowledge to such parties; impairment charges for goodwill and intangible assets or fixed-asset impairment for long-lived assets; our ability to attract, motivate and retain key executives and other associates; our ability to protect or preserve the image of our brands; the outcome of pending and/or future legal proceedings, including product liability and qui tam claims and proceedings with respect to which the parties have reached a preliminary settlement; and the timing and amount of required pension plan funding.
Certain of these and other factors are discussed in more detail in our filings with the Securities and Exchange Commission and the Annual Report on Form 10-K of Sears Holdings Corporation for the fiscal year ended February 1, 2014, which may be accessed through the Commission's website at www.sec.gov.
While we believe that our forecasts and assumptions are reasonable, we caution that actual results may differ materially. We intend the forward-looking statements to speak only as of the time made and do not undertake to update or revise them as more information becomes available, except as required by law.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We face market risk exposure in the form of interest rate risk. This market risk arises from our debt obligations.

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Interest Rate Risk
We manage interest rate risk through the use of fixed and variable-rate funding. All debt securities are considered non-trading. At November 1, 2014 , 54% of our debt portfolio was variable rate. Based on the size of this variable rate debt portfolio at November 1, 2014 , which totaled approximately $2.7 billion, an immediate 100 basis point change in interest rates would have affected annual pretax funding costs by $27 million. These estimates do not take into account the effect on income resulting from invested cash or the returns on assets being funded. These estimates also assume that the variable rate funding portfolio remains constant for an annual period and that the interest rate change occurs at the beginning of the period.
Item 4. Controls and Procedures
Our management, with the participation of our principal executive and financial officers, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report (the "Evaluation Date"). Based on this evaluation, the principal executive and financial officers concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
In addition, based on that evaluation, no changes in our internal control over financial reporting have occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 103 of SEC Regulation S-K requires that we disclose legal proceedings to which the Company and a governmental authority is a party and that arise under laws dealing with the discharge of materials into the environment or the protection of the environment, if the proceeding reasonably involves potential monetary sanctions of $100,000 or more. Disclosure also is required as to any such proceedings known by us to be contemplated by governmental authorities. In that connection, we note that we have received a notice of violation from the California Department of Pesticide Regulation ("DPR") alleging that Kmart stores located in California sold certain products without proper registration with DPR.  The parties have entered into a settlement agreement and the vendor of this merchandise has agreed to reimburse Sears for a substantial majority of the amount payable pursuant to its indemnification obligations to Sears.
See Part I, Item 1, "Financial Statements—Notes to Condensed Consolidated Financial Statements," Note 11—"Legal Proceedings," for additional information regarding legal proceedings, which information is incorporated herein by this reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about shares of common stock we acquired during the third quarter of 2014 . During the 13 weeks ended November 1, 2014 , we did not repurchase any shares of our common stock under our common share repurchase program. At November 1, 2014 , we had approximately $504 million of remaining authorization under the program.
 
Total Number of Shares Purchased (1)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Program (2)
 
Average Price Paid per Share for Publicly Announced Program
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
August 3, 2014 to August 30, 2014
12,095

 
$
33.55

 
—

 
$
—

 
 
August 31, 2014 to October 4, 2014
4,683

 
32.32

 
—

 
—

 
 
October 5, 2014 to November 1, 2014
12,893

 
29.69

 
—

 
—

 
 
Total
29,671

 
$
31.68

 
—

 
$
—

 
$
503,907,832

(1)  
Consists entirely of 29,671 shares acquired from associates to meet withholding tax requirements from the vesting of restricted stock.
(2)  
Our common share repurchase program was initially announced on September 14, 2005 and has a total authorization since inception of the program of $6.5 billion, including the authorizations to purchase up to an additional $500 million of common stock on each of December 17, 2009 and May 2, 2011. The program has no stated expiration date.
The Domestic Credit Agreement limits our ability to make restricted payments, including dividends and share repurchases, subject to specified exceptions that are available if, in each case, no event of default under the credit facility exists immediately before or after giving effect to the restricted payment. These include exceptions that require that projected availability under the credit facility, as defined, is at least 15% and an exception that requires that the restricted payment is funded from cash on hand and not from borrowings under the credit facility. The Domestic Credit Agreement also imposes various other requirements, which take effect if availability falls below designated thresholds, including a cash dominion requirement and a requirement that the fixed charge ratio at the last day of any quarter be not less than 1.0 to 1.0.
Item 4. Mine Safety Disclosures
Not applicable.

71

SEARS HOLDINGS CORPORATION


Item 6. Exhibits
Certain of the agreements filed with or incorporated by reference into this report contain representations and warranties and other agreements and undertakings by us and third parties. These representations and warranties, agreements and undertakings have been made as of specific dates, may be subject to important qualifications and limitations agreed to by the parties to the agreement in connection with negotiating the terms of the agreement, and have been included in the agreement for the purpose of allocating risk between the parties to the agreement rather than to establish matters as facts. Any such representations and warranties, agreements, and undertakings have been made solely for the benefit of the parties to the agreement and should not be relied upon by any other person.  
(a)
Exhibits.
An Exhibit Index has been filed as part of this Report on Page E-1.

72

SEARS HOLDINGS CORPORATION


SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SEARS HOLDINGS CORPORATION
 
 
By:
/s/ ROBERT A. RIECKER
Name:
Robert A. Riecker
Title:
Vice President, Controller and Chief
 
Accounting Officer
Date:
December 4, 2014
                    



 


73


SEARS HOLDINGS CORPORATION
EXHIBIT INDEX
3.1
Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Registrant's Current Report on Form 8-K, dated March 24, 2005, filed on March 24, 2005 (File No. 000-51217)).
 
 
3.2
Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 to Registrant's Current Report on Form 8-K, dated January 22, 2014, filed on January 24, 2014 (File No. 000-51217)).
 
 
*10.1
Loan Agreement, dated as of September 15, 2014, between Sears, Roebuck and Co., Sears Development Co., Kmart Corporation, JPP II, LLC and JPP, LLC.
 
 
*10.2
Guaranty, dated as of September 15, 2014, by Sears Holdings Corporation under the Loan Agreement, dated as of September 15, 2014, between Sears, Roebuck and Co., Sears Development Co., Kmart Corporation, JPP II, LLC and JPP, LLC.
 
 
*31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
*31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
*32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
*32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101
The following financial information from the Quarterly Report on Form 10-Q for the fiscal quarter ended November 1, 2014, formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Statements of Operations (Unaudited) for the 13 and 39 Weeks Ended November 1, 2014 and November 2, 2013; (ii) the Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the 13 and 39 Weeks Ended November 1, 2014 and November 2, 2013 (iii) the Condensed Consolidated Balance Sheets (Unaudited) as of November 1, 2014, November 2, 2013 and February 1, 2014; (iv) the Condensed Consolidated Statements of Cash Flows (Unaudited) for the 39 Weeks Ended November 1, 2014 and November 2, 2013; (v) the Condensed Consolidated Statements of Equity (Unaudited) for the 39 Weeks Ended November 1, 2014 and November 2, 2013; and (vi) the Notes to the Condensed Consolidated Financial Statements (Unaudited).
___________________
*
Filed herewith.

E-1
EXHIBIT 10.1







LOAN AGREEMENT
Dated as of September 15, 2014
between
SEARS, ROEBUCK AND CO., SEARS DEVELOPMENT CO.
and KMART CORPORATION

collectively, as Borrower,
and
JPP II, LLC and JPP, LLC

collectively, as Lender











LOAN AGREEMENT
This Loan Agreement (this “ Agreement ”) is dated September 15, 2014 and is between JPP II, LLC and JPP, LLC, each a Delaware limited liability company, as lender (collectively, together with their respective successors and assigns, including any lawful holder of any portion of the Indebtedness, as hereinafter defined, “ Lender ”), and SEARS, ROEBUCK AND CO., SEARS DEVELOPMENT CO. and KMART CORPORATION, as borrower (individually or collectively, as the context may require, jointly and severally, together with their respective permitted successors and assigns, “ Borrower ”).
RECITALS
Borrower desires to obtain from Lender the Loan (as hereinafter defined) in connection with the financing of the Properties (as hereinafter defined).
Lender is willing to make the Loan on the terms and subject to the conditions set forth in this Agreement if Borrower joins in the execution and delivery of this Agreement, the Note and the other Loan Documents.
In consideration of the agreements, provisions and covenants contained herein and in the other Loan Documents, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower agree as follows:
DEFINITIONS
(a)    When used in this Agreement, the following capitalized terms have the following meanings:
“ Agreement ” means this Loan Agreement, as the same may from time to time hereafter be amended, restated, replaced, supplemented or otherwise modified in accordance herewith.
“ Alteration ” means any demolition, or any material alteration, installation, improvement or expansion of or to any of the Properties or any portion thereof.
“ Appraisal ” means, with respect to each Property, an as-is appraisal of such Property that is prepared by a member of the Appraisal Institute selected by Lender, meets the minimum appraisal standards for national banks promulgated by the Comptroller of the Currency pursuant to Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, as amended (FIRREA) and complies with the Uniform Standards of Professional Appraisal Practice (USPAP).
“ Assignment ” has the meaning set forth in Section 7.7(b) .
“ Bankruptcy Code ” has the meaning set forth in Section 6.1(d) .



“ Borrower or “ Borrowers ” has the meaning set forth in the first paragraph of this Agreement.
“ Burlington Condition ” has the meaning set forth in Section 2.1(c) .
“ Business Day ” means any day other than (i) a Saturday and a Sunday and (ii) a day on which federally insured depository institutions in the State of New York or the state in which the offices of Lender, its trustee, its Servicer or its Servicer’s collection account are located are authorized or obligated by law, governmental decree or executive order to be closed.
“ Casualty ” means a fire, explosion, flood, collapse, earthquake or other casualty affecting all or any portion of any Property.
“ Closing Date ” means the date of this Agreement.
“ Closing Date Advance ” has the meaning set forth in Section 1.1(a) .
“ Closing Date Advance Amount ” means $200,000,000.
“ Code ” means the Internal Revenue Code of 1986, as amended.
“ Collateral ” means all assets owned from time to time by Borrower located at and including the Properties and all other tangible and intangible property located at or related to the Properties, in respect of which Lender is expressly granted a Lien under the Loan Documents, and all proceeds thereof.
“ Condemnation ” means a taking or voluntary conveyance of all or part of any of the Properties or any interest in or right accruing to or use of any of the Properties, as the result of, or in settlement of, any condemnation or other eminent domain proceeding by any Governmental Authority, other than immaterial takings by and/or the granting of immaterial easements or rights of way to a Governmental Authority in the ordinary course of business that do not, in the aggregate, have a Property Material Adverse Effect.
“ Contingent Obligation ” means, with respect to any Person, any obligation of such Person directly or indirectly guaranteeing any Debt of any other Person in any manner and any contingent obligation to purchase, to provide funds for payment, to supply funds to invest in any other Person or otherwise to assure or indemnify a creditor against loss.
“ Damages ” to a Person means any and all liabilities, obligations, losses, demands, damages, penalties, assessments, actions, causes of action, judgments, proceedings, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including reasonable attorneys’ fees and other costs of defense and/or enforcement whether or not suit is brought), fines, charges, fees, settlement costs and disbursements imposed on, incurred by or asserted against such party, whether based on any federal, state, local or foreign laws, statutes, rules or regulations (including securities and commercial laws, statutes, rules or regulations and Environmental Laws), on common law or equitable cause or on contract or otherwise; provided, however, that “Damages” shall not include special, consequential or punitive damages, except to the extent imposed upon Lender by one or more third parties.

2


“ Debt ” means, with respect to any Person, without duplication:
(i)    all indebtedness of such Person to any other party (regardless of whether such indebtedness is evidenced by a written instrument such as a note, bond or debenture), including indebtedness for borrowed money or for the deferred purchase price of property or services;
(ii)    all letters of credit issued for the account of such Person and all unreimbursed amounts drawn thereunder;
(iii)    all indebtedness secured by a Lien on any property owned by such Person (whether or not such indebtedness has been assumed) except obligations for impositions that are not yet due and payable;
(iv)    all Contingent Obligations of such Person;
(v)    all payment obligations of such Person under any interest rate protection agreement (including any interest rate swaps, floors, collars or similar agreements) and similar agreements;
(vi)    all contractual indemnity obligations of such Person; and
(vii)    any material actual or contingent liability to any Person or Governmental Authority with respect to any employee benefit plan (within the meaning of Section 3(3) of ERISA) subject to Title IV of ERISA, Section 302 of ERISA or Section 412 of the Code.
“ Default ” means the occurrence of any event that, but for the giving of notice or the passage of time, or both, would be an Event of Default.
“ Default Interest ” means, during the continuance of an Event of Default, the amount by which interest accrued on the Notes or Note Components at their respective Default Rates exceeds the amount of interest that would have accrued on the Notes or Note Components at their respective Interest Rates.
“ Default Rate ” means, with respect to any Note or Note Component, the greater of (x) 2.5% per annum in excess of the interest rate otherwise applicable to such Note or Note Component hereunder and (y) 1% per annum in excess of the Prime Rate from time to time; provided that, if the foregoing would result in an interest rate in excess of the maximum rate permitted by applicable law, the Default Rate shall be limited to the maximum rate permitted by applicable law.
“ Delayed Advance ” has the meaning set forth in Section 1.1(b) .
“ Delayed Advance Amount ” means $200,000,000.
“ Engineering Report ” means a structural and (and, with respect to the Properties located in California only, seismic engineering) report or reports (including a “probable

3


maximum loss” calculation, if applicable) with respect to each of the Properties prepared by an independent engineer approved by Lender and delivered to Lender in connection with the Loan, and any amendments or supplements thereto delivered to Lender.
“ Environmental Claim ” means any written notice, claim, proceeding, notice of proceeding, investigation, demand, abatement order or other order or directive by any Person or Governmental Authority alleging or asserting liability with respect to Borrower directly in connection with any Property arising out of, based on, in connection with, or resulting from (i) the actual or alleged presence, Use or Release of any Hazardous Substance, (ii) any actual or alleged violation of any Environmental Law, or (iii) any actual or alleged injury or threat of injury to property, health or safety, natural resources or to the environment caused by Hazardous Substances.
“ Environmental Indemnity ” means that certain environmental indemnity agreement executed by Borrower and Guarantor as of the Closing Date, as the same may from time to time be amended, restated, replaced, supplemented or otherwise modified in accordance herewith.
“ Environmental Laws ” means, with respect to any Properties, any and all present and future federal, state and local laws, statutes, ordinances, orders, rules, regulations and the like, as well as common law, any judicial or administrative orders, decrees or judgments thereunder, and any permits, approvals, licenses, registrations, filings and authorizations, in each case as now or hereafter in effect, relating to (i) the pollution, protection or cleanup of the environment, (ii) the impact of Hazardous Substances on property, health or safety, (iii) the Use or Release of Hazardous Substances, (iv) occupational safety and health, industrial hygiene or the protection of human, plant or animal health or welfare or (v) the liability for or costs of other actual or threatened danger to health or the environment. The term “Environmental Law” includes, but is not limited to, the following statutes, as amended, any successors thereto, and any regulations promulgated pursuant thereto, and any state or local statutes, ordinances, rules, regulations and the like addressing similar issues: the Comprehensive Environmental Response, Compensation and Liability Act; the Emergency Planning and Community Right-to-Know Act; the Hazardous Materials Transportation Act; the Resource Conservation and Recovery Act (including Subtitle I relating to underground storage tanks); the Clean Water Act; the Clean Air Act; the Toxic Substances Control Act; the Safe Drinking Water Act; the Occupational Safety and Health Act; the Federal Water Pollution Control Act; the Federal Insecticide, Fungicide and Rodenticide Act; the Endangered Species Act; the National Environmental Policy Act; and the River and Harbors Appropriation Act. The term “Environmental Law” also includes, but is not limited to, any present and future federal state and local laws, statutes ordinances, rules, regulations and the like, as well as common law, conditioning transfer of property upon a negative declaration or other approval of a Governmental Authority of the environmental condition of a property; or requiring notification or disclosure of Releases of Hazardous Substances or other environmental conditions of a property to any Governmental Authority or other Person, whether or not in connection with transfer of title to or interest in property.
“ Environmental Reports ” means “Phase I Environmental Site Assessments” as referred to in the ASTM Standards on Environmental Site Assessments for Commercial Real Estate, E 1527-013 (and, if necessary as determined in such Phase I Environmental Site

4


Assessments, “Phase II Environmental Site Assessments”), prepared by an independent environmental auditor selected by Borrower and reasonably approved by Lender and delivered to Lender in connection with the Loan and any amendments or supplements thereto delivered to Lender, and shall also include any other environmental reports delivered to Lender pursuant to this Agreement and the Environmental Indemnity.
“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated thereunder.
“ ERISA Affiliate ” means, at any time, each trade or business (whether or not incorporated) that would, at the time, be treated together with Borrower as a single employer under Title IV or Section 302 of ERISA or Section 412 of the Code.
“ Event of Default ” has the meaning set forth in Section 6.1 .
“ Exception Report ” means the report prepared by Borrower and certified to Lender in the Officer’s Certificate, setting forth any exceptions to the representations set forth in Article III .
“ Extension Term ” has the meaning set forth in Section 1.1(d) .
“ FATCA ” means Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof and any agreement entered into pursuant to Section 1471(b)(1) of the Code or any legislation adopted pursuant to any intergovernmental agreement entered into in connection with the implementation of such Sections of the Code.
“ Form W-8BEN ” means Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)) of the Department of Treasury of the United States of America, and any successor form.
“ Form W-8BEN-E ” means Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)) of the Department of the Treasury of the United States of America, and any successor form.
“ Form W-8ECI ” means Form W-8ECI (Certificate of Foreign Person’s Claim that Income is Effectively Connected with the Conduct of a Trade or Business in the United States) of the Department of the Treasury of the United States of America, and any successor form.
“ Form W-9 ” means Form W-9 (Request for Taxpayer Identification Number and Certification) of the Department of the Treasury of the United States of America, and any successor form.
“ GAAP ” means generally accepted accounting principles in the United States of America, consistently applied.

5


“ Governmental Authority ” means any federal, state, county, regional, local or municipal government, any bureau, department, agency or political subdivision thereof and any Person with jurisdiction exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government (including any court).
“ Guarantor ” means Sears Holdings Corporation.
“ Guaranty ” means that certain guaranty, dated as of the Closing Date, executed by Guarantor for the benefit of Lender, as the same may be amended, restated, replaced, supplemented or otherwise modified in accordance herewith.
“ Hazardous Substances ” means any and all substances (whether solid, liquid or gas) defined, listed, or otherwise classified as pollutants, hazardous wastes, hazardous substances, hazardous materials, extremely hazardous wastes, toxic substances, toxic pollutants, contaminants, pollutants or words of similar meaning or regulatory effect under any present or future Environmental Laws or the presence of which on, in or under any of the Properties is prohibited or requires monitoring, investigation or remediation under Environmental Law, including petroleum and petroleum by-products, asbestos and asbestos-containing materials, toxic mold, polychlorinated biphenyls, lead and radon, and compounds containing them (including gasoline, diesel fuel, oil and lead-based paint), pesticides and radioactive materials, flammables and explosives and compounds containing them, but excluding those substances commonly used in the operation and maintenance of properties of kind and nature similar to those of the Properties that are used at the Properties in compliance with all Environmental Laws and in a manner that does not result in contamination any of the Properties or in a Property Material Adverse Effect.
“ Indebtedness ” means the Principal Indebtedness, together with interest and all other obligations and liabilities of Borrower under the Loan Documents, including all transaction costs, late fees and other amounts due or to become due to Lender pursuant to this Agreement, under the Notes or in accordance with any of the other Loan Documents, and all other amounts, sums and expenses reimbursable by Borrower to Lender hereunder or pursuant to the Notes or any of the other Loan Documents.
“ Indemnified Parties ” has the meaning set forth in Section 7.17 .
“ Insurance Requirements ” means, collectively, (i) all material terms of any insurance policy required pursuant to this Agreement and (ii) all material regulations and then-current standards applicable to or affecting any of the Properties or any portion thereof or any use or condition thereof, which may, at any time, be recommended by the board of fire underwriters, if any, having jurisdiction over any of the Properties, or any other body exercising similar functions.
“ Interest Accrual Period ” means each period from and including the first day of a calendar month (and, if the Closing Date is not the first day of a calendar month, the Closing Date) through but excluding the first day of the immediately succeeding calendar month (or, if earlier, the Maturity Date). Notwithstanding the foregoing, the first Interest Accrual Period shall commence on and include the Closing Date.

6


“ Interest Rate ” means 5% per annum.
“ Lease ” means any leasehold estate, lease, sublease, sub-sublease, license, concession, occupancy agreement or other agreement (written or oral, now or at any time in effect and every modification, amendment or other agreement relating thereto, including every guarantee of the performance and observance of the covenants, conditions and agreements to be performed and observed by the other party thereto) that grant a possessory interest in, or the right to use or occupy, all or any part of the Property, together with all related security and other deposits (together with any and all modifications, renewals, extensions and substitutions of the foregoing), but specifically excluding (a) all Leases under which Borrower is not the landlord, sublandlord or licensor thereunder, (b) Multi-Site Agreements and (c) REA’s that expressly prohibit the encumbrance of Borrower’s interests, rights and obligations thereunder.
“ Legal Requirements ” means all governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions of Governmental Authorities (including Environmental Laws and zoning restrictions) affecting Borrower, Guarantor, the Property or any other Collateral or any portion thereof or the construction, ownership, use, alteration or operation thereof, or any portion thereof (whether now or hereafter enacted and in force), and all permits, licenses and authorizations and regulations relating thereto.
“ Lender ” has the meaning set forth in the first paragraph of this Agreement and in Section 7.7 .
“ Lien ” means any mortgage, lien (statutory or other), pledge, hypothecation, assignment, preference, priority, security interest, restrictive covenant, easement, or any other encumbrance or charge on or affecting any Collateral or any portion thereof, or any interest therein (including any conditional sale or other title retention agreement, any sale-leaseback, any financing lease or similar transaction having substantially the same economic effect as any of the foregoing, the filing of any financing statement or similar instrument under the Uniform Commercial Code or comparable law of any other jurisdiction, domestic or foreign, and mechanics’, materialmen’s and other similar liens and encumbrances, as well as any option to purchase, right of first refusal, right of first offer or similar right).
“ Loan ” has the meaning set forth in Section 1.1(a) .
“ Loan Amount ” means $400,000,000.
“ Loan Documents ” means this Agreement, the Note, each of the Mortgages (and related financing statements), the Environmental Indemnity, the Guaranty and all other agreements, instruments, certificates and documents necessary to effectuate the granting to Lender of Liens on the Collateral or otherwise in satisfaction of the requirements of this Agreement or the other documents listed above or hereafter entered into by Lender and Borrower in connection with the Loan, as all of the aforesaid may be amended, restated, replaced, supplemented or otherwise modified from time to time in accordance herewith.
“ Loss Proceeds ” means amounts, awards or payments payable to Borrower or Lender in respect of all or any portion of any of the Properties in connection with a Casualty or Condemnation thereof (after the deduction therefrom and payment to Borrower and Lender,

7


respectively, of any and all reasonable expenses incurred by Borrower and Lender in the recovery thereof, including all attorneys’ fees and disbursements, the fees of insurance experts and adjusters and the costs incurred in any litigation or arbitration with respect to such Casualty or Condemnation), other than any amounts payable to Borrower in connection with the grant of the Redmond Easement.
“ Material Adverse Effect ” means a material adverse effect upon (i) Borrower’s title to the Properties taken as a whole, (ii) the ability of Borrower and Guarantor, taken as a whole, to perform their obligations under the Loan Documents, (iii) Lender’s ability to enforce and derive the principal benefit of the security intended to be provided by the Mortgage and the other Loan Documents, or (iv) the use or value of the Properties taken as a whole.
“ Material Agreements ” means each contract and agreement in force and effect relating to the Property a default under which or the termination or cancellation of which could reasonably be expected to result in a Material Adverse Effect, other than (i) Leases (but including REA’s), (ii) Multi-Site Agreements and (iii) any agreement (other than REA’s) set forth on Schedule B of the Title Insurance Policy.
“ Material Alteration ” means any Alteration to be performed by or on behalf of Borrower at any of the Properties that (i) is reasonably expected to result in a Material Adverse Effect with respect to the applicable Property or (ii) is reasonably expected to permit (or is reasonably likely to induce) any Tenant to terminate its Lease or abate rent.
“ Maturity Date ” means December 31, 2014, as same may be extended in accordance with Section 1.1(d) , or such earlier date as may result from acceleration of the Loan in accordance with this Agreement.
“ Mortgage ” means, with respect to each Property, that certain mortgage, deed of trust or deed to secure debt, as the case may be, assignment of rents and leases, collateral assignment of property rents, security agreement and fixture filing encumbering such Property, executed by Borrower as of the Closing Date, as the same may from time to time be amended, restated, replaced, supplemented or otherwise modified in accordance herewith. Each Mortgage shall secure the entire Indebtedness, provided that in the event that the jurisdiction in which the Property is located imposes a mortgage recording, intangibles or similar Tax and does not permit the allocation of indebtedness for the purpose of determining the amount of such Tax payable, the principal amount secured by such Mortgage shall be equal to 125% of the portion of the Loan Amount allocated to the applicable Property, as reasonably estimated by Lender.
“ Multi-Site Agreements ” means, collectively, national, multi-site or master leases, licenses, or concession or department agreements with tenants or licensees that operate within and as a part of Borrower’s store, or that operate kiosks, ATM or vending machines or drive –through facilities located on the Property, in each case, solely to the extent any such leases, licenses, concessions or agreements terminate with respect to the Property upon the cessation of Mortgagor’s operations at the Property.
“ Note(s) ” means that certain promissory note, dated as of the Closing Date, made by Borrower to the order of Lender to evidence the Loan, as such note may be replaced by

8


multiple Notes in accordance with Section 1.1(c) and as otherwise assigned (in whole or in part), amended, restated, replaced, supplemented or otherwise modified in accordance herewith.
“ Note Component ” has the meaning set forth in the Note.
“ Officer’s Certificate ” means the officer’s certificate of Borrower, dated as of the date hereof, delivered to Lender and certifying (i) certain organizational documents of Borrower, (ii) the Properties, (iii) the Substitution Properties, (iv) the Valuations, (v) the Rent Roll, (vi) the Exception Report and (vii) the Redmond Easement.
“ Overpaying Borrower ” has the meaning set forth in Section 7.28 .
“ Participation ” has the meaning set forth in Section 7.7(b) .
“ PATRIOT Act ” means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001), as amended from time to time.
“ Payment Date ” means (i) the first day of each calendar month immediately following each Interest Accrual Period and (ii) the Maturity Date. Whenever a Payment Date is not a Business Day, the entire amount that would have been due and payable on such Payment Date shall instead be due and payable on the immediately succeeding Business Day.
“ Permits ” means all licenses, permits, variances and certificates used in connection with the ownership, operation, use or occupancy of each of the Properties (including certificates of occupancy, business licenses, state health department licenses, licenses to conduct business and all such other permits, licenses, consents, approvals and rights, obtained from any Governmental Authority or private Person concerning ownership, operation, use or occupancy of such Property).
“ Permitted Debt ” means the Indebtedness and any other Debt of Borrower or any affiliate of Borrower that is not secured by a lien on any of the Properties and, to the extent constituting Debt, all obligations secured by Liens constituting Permitted Encumbrances other than Debt for borrowed money secured by a Lien on the Land or the Improvements, each as defined in the Mortgage.
“ Permitted Encumbrances ” means:
(i)    the Liens created by the Loan Documents;
(ii)    all (A) Liens and other matters specifically disclosed on Schedule B of the Title Insurance Policies and any matters omitted from any previous title report or commitment that would have appeared on such Schedule B but for such omission, (B) easements, rights-of-way, covenants, conditions, restrictions (including building, fire and safety, land use and development, and zoning regulations and restrictions), declarations, rights of reverter, minor defects or irregularities in title and other similar charges or encumbrances, whether or not of record, in each case and (C) matters which a physical inspection or accurate survey of the Properties would disclose, in each case of (B) and

9


(C), solely to the extent the same do not, in the aggregate, result in a Material Adverse Effect;
(iii)    the Redmond Easement;
(iv)    Liens, if any, for Taxes not yet delinquent and Liens for delinquent taxes or impositions if being diligently contested in good faith and by appropriate proceedings, provided that, with respect to delinquent taxes or impositions, either (a) each such Lien is released or discharged of record or fully insured over by the title insurance company issuing the applicable Title Insurance Policy (including be subsequent endorsement) within 60 days of its creation, or (b) Borrower deposits with Lender, by the expiration of such 60-day period, an amount equal to 125% of the dollar amount of such Lien or a bond in the aforementioned amount from such surety, and upon such terms and conditions, as is reasonably satisfactory to Lender, as security for the payment or release of such Lien;
(v)    mechanics’, materialmen’s, environmental or similar Liens or other Liens created by operation of law and judgment liens or lis pendens , in each case securing obligations that are not overdue for a period of more than 30 days or that are being diligently contested in good faith and by appropriate proceedings, provided that no such Lien is in imminent danger of foreclosure and provided further that either (a) each such Lien is released or discharged of record or fully insured over by the title insurance company issuing the applicable Title Insurance Policy (including by subsequent endorsement) within 30 days of its creation, or (b) Borrower deposits with Lender, by the expiration of such 30-day period, an amount equal to 125% of the dollar amount of such Lien or a bond in the aforementioned amount from such surety, and upon such terms and conditions, as is reasonably satisfactory to Lender, as security for the payment or release of such Lien;
(vi)    all Leases and all Multi-Site Agreements, and all rights of existing and future Tenants as tenants only (including the rights of any subtenant or licensee deriving rights through any such Tenant) pursuant to written Leases, and all rights of existing and future occupants under all Multi-Site Agreements;
(vii)    any interest or title of a lessor under any lease with respect to assets other than the Land or Improvements as defined in the Mortgage (including without limitation, leases of furniture, furnishings, fixtures, equipment and other personal property) entered into by a Borrower in the ordinary course of business and covering only the assets so leased;
(viii)    all other Liens on personal property Collateral existing as of the date hereof or hereafter incurred in connection with the acquisition thereof;
(ix)     all bonds, deposits and security instruments or other Liens required or imposed by any Governmental Authority in connection with the use, occupancy or operation of the Property in the ordinary course of business of a Borrower, so long as

10


such Liens do not arise from the failure of Borrower to pay taxes or other amounts payable with respect to the Properties;
(x)     all Material Agreements and all other agreements and licenses in connection the ordinary use and operation of the Properties, in each case, solely to the extent the same do not grant a Lien on the Land or the Improvements (as defined in the Mortgage) for the purpose of securing Debt; and
(xi)    any financing of a Tenant’s leasehold interest under its Lease.
“ Person ” means any natural person, corporation, limited liability company, partnership, joint venture, estate, trust, unincorporated association or Governmental Authority and any fiduciary acting in such capacity on behalf of any of the foregoing.
“ Plan Assets ” means assets of any (i) employee benefit plan (as defined in Section 3(3) of ERISA) subject to Title I of ERISA, (ii) plan (as defined in Section 4975(e)(1) of the Code) subject to Section 4975 of the Code, or (iii) governmental plan (as defined in Section 3(32) of ERISA) subject to federal, state or local laws, rules or regulations substantially similar to Title I of ERISA or Section 4975 of the Code.
“ Policies ” means each insurance policy covering any of the Properties as more particularly described on Schedule A .
“ Post-Closing Items ” means the items described in Section 2.2 hereof that have not been delivered as of the Closing Date.
“ Prime Rate ” means the “prime rate” published in the “Money Rates” section of The Wall Street Journal . If The Wall Street Journal ceases to publish the “prime rate,” then Lender shall select an equivalent publication that publishes such “prime rate,” and if such “prime rate” is no longer generally published or is limited, regulated or administered by a governmental or quasi-governmental body, then Lender shall reasonably select a comparable interest rate index.
“ Principal Indebtedness ” means the principal balance of the Loan outstanding from time to time, including any Delayed Advance actually advanced to Borrower.
“ Prohibited Change of Control ” means the failure of each Borrower to be, directly or indirectly, wholly owned by Guarantor.
“ Properties ” means the real property on the list of properties certified to Lender in the Officer’s Certificate (other than any such property that is replaced pursuant to Section 2.1(b)) , together with any Substitution Property encumbered by a Mortgage, in each case, as described in greater detail under the applicable Mortgage, together with all buildings and other improvements thereon (other than leasehold improvements that are the property of a Tenant under a Lease at a Property) and all personal property owned by Borrower and encumbered by the Mortgages, together with all rights pertaining to such property; and “ Property ” means an individual property included in the Properties or all Properties collectively, as the context may require.

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“ Property Material Adverse Effect ” means a material adverse effect upon (i) Borrower’s title to any individual Property, (ii) Lender’s ability to enforce and derive the principal benefit of the security intended to be provided by any Mortgage and/or the other Loan Documents, or (iii) the use or value of any individual Property.
“ Proportional Amount ” has the meaning set forth in Section 7.28 .
“ REA ” means any reciprocal access, easement, construction and/or operating or similar agreements with respect to the individual Properties in effect as of the Closing Date.
“ Redmond Easement ” means the easement to be granted with respect to the real property identified as Store 1069 located in Redmond, Washington, as depicted on the site plan certified to Lender in the Officer’s Certificate
“ Release ” with respect to any Hazardous Substance means any release, deposit, discharge, emission, leaking, leaching, spilling, seeping, migrating, injecting, pumping, pouring, emptying, escaping, dumping, disposing or other movement of Hazardous Substances into the indoor or outdoor environment (including the movement of Hazardous Substances through ambient air, soil, surface water, ground water, wetlands, land or subsurface strata), and “Released” has the meaning correlative thereto.
“ Rent Roll ” means the rent roll certified to Lender in the Officer’s Certificate.
“ Replacement Qualifications ” has the meaning set forth in Section 2.1(b) .
“ Representative Borrower ” has the meaning set forth in Section 7.04(a ).
“ SAC Conditions ” means, collectively, the visible or surface level presence of materials and/or the existence of hydraulic lifts, oil and fluid separators, underground storage tanks and all other machinery and equipment, in each case, solely to the extent related to, used in or incidental to the operation of a Sears Auto Center facility.
“ Service ” means the Internal Revenue Service or any successor agency thereto.
“ Servicer ” means the entity or entities (if any) appointed by Lender from time to time to serve as servicer and/or special servicer of the Loan. If at any time no entity is so appointed, the term “Servicer” shall be deemed to refer to Lender.
“ Severed Loan Documents ” has the meaning set forth in Section 6.2(g) .
“ Substitution Properties ” means the real property on the list of substitution properties certified to Lender in the Officer’s Certificate, together with all buildings and other improvements thereon (other than leasehold improvements that are the property of a Tenant under a Lease at a Property); and “ Substitution Property ” means an individual property included in the Substitution Properties or all Substitution Properties collectively, as the context may require; provided , however , in the event there is an insufficient number of Substitution Properties on such list to satisfy the replacements required hereunder (or if the value of such Substitution Properties based on the Valuations is not sufficient to satisfy the Replacement Qualifications),

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Borrower and Lender shall agree on such additional properties owned by Borrower as necessary to provide such replacements.
“ Survey ” means, with respect to each Property, a current land title survey thereof, certified to Borrower, the title company issuing the applicable Title Insurance Policy and Lender and their respective successors and assigns, in form and substance reasonably satisfactory to Lender.
“ Taxes ” means all real estate and personal property taxes, assessments, fees, taxes on rents or rentals, water rates or sewer rents, facilities and other governmental, municipal and utility district charges or other similar taxes or assessments now or hereafter levied or assessed or imposed against the Properties or Borrower with respect to the Properties or rents therefrom or that may become Liens upon any of the Properties, without deduction for any amounts reimbursable to Borrower by third parties.
“ Tenant ” means any Person liable by contract or otherwise to pay monies (including a percentage of gross income, revenue or profits) pursuant to a Lease.
“ Threshold Amount ” means, with respect to each Property, $1,000,000.
“ Third-Party Lease ” means any Lease that covers all or any portion of any Property with a Tenant that is not an affiliate of Borrower.
“ Title Insurance Policy ” means, with respect to each Property, an American Land Title Association lender’s title insurance policy or a comparable form of lender’s title insurance policy approved for use in the applicable jurisdiction, in form and substance reasonably satisfactory to Lender (taking into account any endorsements or other modifications to the any such policy to made upon the subsequent delivery of the Surveys and zoning reports required to be delivered pursuant to this Agreement).
“ Transaction ” means, collectively, the transactions contemplated and/or financed by the Loan Documents.
“ Transfer ” means the sale or other whole or partial conveyance of all or any portion of any of the Collateral or any direct or indirect interest therein to a third party, including any grant made after the Closing Date of any purchase options, rights of first refusal, rights of first offer or similar rights in respect of any portion of the Collateral or the subjecting of any portion of the Collateral to restrictions on transfer; except that the conveyance (including assignment and subleasing) of a space lease at such Property by a Borrower in accordance herewith or by a Tenant or subtenant or licensee in accordance with the terms and conditions of any Lease shall not constitute a Transfer.
“ Use ” means, with respect to any Hazardous Substance, the generation, manufacture, processing, distribution, handling, possession, use, discharge, placement, treatment, disposal, disposition, removal, abatement, recycling or storage of such Hazardous Substance or transportation of such Hazardous Substance.

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“ Valuations ” means the valuations of the Properties and the Substitution Properties certified to Lender in the Officer’s Certificate.
“ Waste ” means any intentional and material abuse or destructive use (whether by action or inaction) of any Property.
(b)     Rules of Construction . Unless otherwise specified, (i) all references to sections, schedules and exhibits are to sections, schedules and exhibits in or to this Agreement, (ii) all meanings attributed to defined terms in this Agreement shall be equally applicable to both the singular and plural forms of the terms so defined, (iii) “including” means “including, but not limited to”, (iv) “mortgage” means a mortgage, deed of trust, deed to secure debt or similar instrument, as applicable, and “mortgagee” means the secured party under a mortgage, deed of trust, deed to secure debt or similar instrument, (v) the words “hereof,” “herein,” “hereby,” “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision, article, section or other subdivision of this Agreement, (vi) unless otherwise indicated, all references to “this Section” shall refer to the Section of this Agreement in which such reference appears in its entirety and not to any particular clause or subsection or such Section, (vii) terms used herein and defined by cross-reference to another agreement or document shall have the meaning set forth in such other agreement or document as of the Closing Date, notwithstanding any subsequent amendment or restatement of or modification to such other agreement or document. Except as otherwise indicated, all accounting terms not specifically defined in this Agreement shall be construed in accordance with GAAP, as the same may be modified in this Agreement and (viii) all references to “foreclosure’ herein shall include acceptance of a deed-in-lieu of foreclosure.
ARTICLE I

GENERAL TERMS
Section 1.1.     The Loan; Term .
(a)    On the Closing Date, subject to the terms and conditions of this Agreement, Lender shall make an advance (the “ Closing Date Advance ”) to Borrower in an amount equal to the Closing Date Advance Amount. The Loan shall initially be represented by a single Note that shall bear interest as described in this Agreement at a per annum rate equal to the Interest Rate. Interest payable hereunder shall be computed on the basis of a 360-day year and the actual number of days elapsed in the related Interest Accrual Period.
(b)    Provided no Event of Default is continuing, Lender shall make a single delayed advance (“ Delayed Advance ”) to Borrower on September 30, 2014 (or such other date as Lender and Borrower shall agree) in the amount of the Delayed Advance Amount, which Delayed Advance shall be conditioned on the delivery of Title Insurance Policies reasonably acceptable to Lender for each of the Properties. Interest on the Delayed Advance shall begin to accrue on the date that the Delayed Advance is made to Borrower. The Delayed Advance is not in the nature of a revolving credit facility, and amounts borrowed and repaid hereunder may not be re-borrowed.

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(c)    The Closing Date Advance together with the Delayed Advance is referred to herein as the “ Loan ”. The Loan shall be secured by the Collateral pursuant to the Mortgage and the other Loan Documents.
(d)    Borrower shall have a single option to extend the scheduled Maturity Date of the Loan to February 28, 2015 (the period of such extension, an “ Extension Term ”), provided that, as a condition to such Extension Term (i) Borrower shall deliver to Lender written notice of such extension at least 10 Business Days prior to December 31, 2014; (ii) no Event of Default shall be continuing on either the date of such notice or on December 31, 2014; (iii) Borrower shall have paid an extension fee in respect of such Extension Term in an amount equal to 0.5% of the Principal Indebtedness and (iv) Borrower shall have paid all reasonable out-of-pocket expenses incurred by Lender in connection with such extension. If Borrower fails to exercise any extension option in accordance with the provisions of this Agreement, such extension option will automatically cease and terminate
Section 1.2.     Interest and Principal .
(a)    On each Payment Date, Borrower shall pay to Lender interest in arrears on each Note for the applicable Interest Accrual Period at the applicable Interest Rate (except that in each case, interest shall be payable on the Indebtedness, including due but unpaid interest, at the Default Rate with respect to any portion of such Interest Accrual Period falling during the continuance of an Event of Default).
(b)    The Loan may be prepaid in whole or in part on any Business Day; provided that any prepayment hereunder shall be accompanied by all interest accrued on the amount prepaid through and including the date of such prepayment, plus all other amounts then due under the Loan Documents. The entire outstanding principal balance of the Loan, together with interest through the Maturity Date and all other amounts then due under the Loan Documents, shall be due and payable by Borrower to Lender on the Maturity Date. Interest will cease to accrue on any portion of the Principal Indebtedness that has been repaid to Lender.
(c)    Any payments of interest and/or principal not paid when due hereunder shall bear interest at the applicable Default Rate.
(d)    Any and all payments by or on account of any obligation of Borrower hereunder shall be made without deduction or withholding for any taxes, except as required by law; provided that to the extent any deduction or withholding is so required by law, Borrower shall be entitled to so deduct or withhold the amounts required to be withheld or deducted from any such payment.
Section 1.3.     Method and Place of Payment . Except as otherwise specifically provided in this Agreement, all payments and prepayments under this Agreement and the Notes shall be made to Lender not later than 1:00 p.m., New York City time, on the date when due and shall be made in lawful money of the United States of America by wire transfer in federal or other immediately available funds to the account specified from time to time by Lender. Any funds received by Lender after such time shall be deemed to have been paid on the next succeeding Business Day. Lender shall notify Borrower in writing of any changes in the account

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to which payments are to be made. If the amount received from Borrower is less than the sum of all amounts then due and payable hereunder, such amount shall be applied, at Lender’s sole discretion, either toward the components of the Indebtedness ( e.g. , interest, principal and other amounts payable hereunder) and the Notes and Note Components, in such sequence as Lender shall elect in its sole discretion, or toward the payment of Property expenses.
Section 1.4.      Taxes; Regulatory Change . Borrower shall indemnify Lender and hold Lender harmless from and against any present or future stamp, documentary or other similar taxes or charges now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority solely by reason of the execution and delivery of the Loan Documents and any consents, waivers, amendments and enforcement of rights under the Loan Documents, other than any such taxes or charges imposed as a result of a present or former connection between Lender and the jurisdiction imposing such tax or charges (other than connections arising from the Lender having executed, delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to or enforced any Loan Document, or sold or assigned an interest in the Loan or any Loan Document).
Section 1.5.     Release . Upon payment of the Indebtedness in full, or in connection with the replacement of a Property with a Substitution Property pursuant to Section 2.1 , Lender shall execute instruments prepared by Borrower and reasonably satisfactory to Lender, which, at Borrower’s election and at Borrower’s sole cost and expense: either, (a) in the case of a repayment of the indebtedness in full (i) release and discharge all Liens on all Collateral securing payment of the Indebtedness (subject to Borrower’s obligation to pay any associated fees and expenses), or (ii) assign such Liens (and the Loan Documents) to a new lender designated by Borrower; or (b) in the case of the replacement of a Property with a Substitution Property, release and discharge the Lien of the applicable Mortgage on the Property being so replaced. All Liens on Collateral constituting personal property (but expressly excluding the Land and Improvements as defined in the Loan Agreement) shall be automatically released upon any transfer of such Collateral permitted under Section 5.2 . Any release or assignment provided by Lender pursuant to this Section shall be without recourse, representation or warranty of any kind.
ARTICLE II

CLOSING DELIVERIES; SUBSTITUTION PROPERTIES
Section 2.1.     Post-Closing Deliveries .
(a)    As a material inducement to Lender making the Loan, Borrower agrees that it shall deliver Title Insurance Policies for each of the Properties on or before September 30, 2014 and use commercially reasonable efforts to satisfy all other Post-Closing Items to Lender’s reasonable satisfaction by October 15, 2014; provided , however , that in any event Borrower shall satisfy all such Post-Closing Items to Lender’s reasonable satisfaction by October 30, 2014, or such later date as to which Lender may grant its consent, not to be unreasonably withheld, delayed or conditioned (so long as Borrower is diligently pursuing the satisfaction of the applicable Post-Closing Items). Post-Closing Items with respect to any Substitution Property shall be delivered no later than the date that is 45 days following the selection of the Substitution Property, or such later date as to which Lender may grant its consent, not to be unreasonably

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withheld, delayed or conditioned (so long as Borrower is diligently pursuing the satisfaction of the applicable Post-Closing Items). For the avoidance of doubt, notwithstanding the foregoing, the making of the Delayed Advance shall be conditioned on Lender’s receipt of reasonably acceptable Title Insurance Policies for each of the Properties.
(b)    In the event that information received by Lender in connection with the satisfaction of any Post-Closing Item (whether with respect to a Property or a Substitution Property) shall result in the determination by Lender in its sole but reasonable discretion that (i) any material representation in this Agreement with respect to any Property or Substitution Property is untrue, provided that, solely for the purposes of this clause (i), any reference to the term “Material Adverse Effect” in any representation in this Agreement shall be deemed to be replaced with “Property Material Adverse Effect”, (ii) any Property or Substitution Property does not constitute acceptable Collateral for the Loan (other than solely by virtue of the existence of SAC Conditions), including by reason of anything contained in any Lease or Material Agreement heretofore delivered to Lender or the results of any searches with respect to the Borrower or the Properties received by Lender, or (iii) subject to clause (A) of the last sentence of Section 2.1(c) , if Borrower does not provide a Phase II Environmental Report with respect to any Property or Substitution Property following a request by Lender to provide such Phase II Environmental Report (if obtaining such a Phase II Environmental Report is indicated by a Phase I Environmental Report with respect to such Property or Substitution Property for any reason other than the existence of SAC Conditions), then, in each such case, Lender shall have the right, in its sole discretion, to require that the applicable Property or Substitution Property be replaced by a Substitution Property, which Substitution Property may be selected by Borrower (but subject to Lender’s reasonable approval under the circumstances set forth in the last sentence of Section 2.1(c) ) so long as (1) such Substitution Property has a value no less than the value of the Property being replaced, as determined by reference to the Valuations and (2) Borrower shall certify that each of the representations in Article III hereof are true with respect to the applicable Substitution Property (collectively, the “ Replacement Qualifications ”), subject to any exceptions to such representations contained in any such certification (which exceptions shall be deemed to be a part of the Exception Report); provided , however , the Replacement Qualifications shall not be deemed satisfied if Lender shall reasonably determine that such exceptions to such representations are not acceptable. In addition, in connection with the disposition of any Property by Borrower to a Person that is not an affiliate of Borrower or Guarantor, the Property so disposed shall be replaced with a Substitution Property selected by Lender. In connection with any such replacement by a Substitution Property, (w) Borrower shall certify that the representations contained in Article III hereof are true and correct with respect to such Substitution Property, subject to any exceptions to such representations contained in any such certification (which exceptions shall be deemed to be a part of the Exception Report); provided , however , this clause (w) shall not be deemed satisfied if Lender shall reasonably determine that such exceptions to such representations are not acceptable, (x) Borrower shall cooperate with Lender in executing and recording a Mortgage securing the applicable Substitution Property and shall provide to Lender such other then-existing information and documentation in Borrower’s possession or control with respect to such Substitution Property as was provided to Lender in connection with the other Properties, together with all documentation and information necessary to satisfy each of the items in Section 2.2 and (y) upon the recordation of a Mortgage securing such Substitution Property, Lender shall fully release of record the Property being so replaced from the Lien of the applicable Mortgage in accordance with Section 1.5 . In the case of clause

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(i) of the first sentence of this paragraph, such replacement shall constitute the sole remedy of Lender for such misrepresentation, so long as Borrower did not intentionally cause such misrepresentation to occur. Notwithstanding anything to the contrary contained herein, if Borrower is required to replace one or more Properties pursuant to this Section 2.1 (A) any individual Property may be replaced by multiple Substitution Properties, so long as the aggregate value of such Substitution Properties is no less than the value of the individual Property so replaced (in each case, based on the Valuations) and (B) up to two Properties may be replaced by a single Substitution Property, so long as the value of such Substitution Properties is no less than the aggregate value of the Properties so replaced (in each case, based on the Valuations).
(c)    If Lender shall receive comments to any Mortgage from local counsel in connection with the delivery of the opinions delivered pursuant to Section 2.2(b) , or from the title company issuing the Title Insurance Policies, in each case, regarding the enforceability, validity, effectiveness or insurability of such Mortgage, Borrower shall cooperate with Lender in the preparation, execution and recording of any amendments to such Mortgages necessitated by such comments and the delivery of an appropriate mortgage modification endorsement to the applicable Title Insurance Policy, all at Borrower’s sole cost and expense. In addition, Lender and Borrower acknowledge and agree that the legal descriptions attached to the Mortgages delivered as of the Closing Date may not be up to date, and such legal descriptions shall be amended as necessary to conform to the legal descriptions in the Title Insurance Policies as and when delivered.  In such event, an amendment or modification of the respective affected Mortgages shall be executed, acknowledged and recorded by the parties to substitute the amended legal description as contained in the Title Insurance Policies and an appropriate mortgage modification endorsement to the applicable Title Insurance Policy shall be obtained, all at the sole cost and expense of  Borrower. In addition, if any Environmental Report delivered to Lender shall recommend the performance of a Phase II Environmental Report other than by virtue of the existence of SAC Conditions, at Lender’s request, Borrower shall promptly obtain such assessment with respect to the applicable Property if (1) Lender has requested a Phase II Environmental Report with respect to the applicable Property, (2) no then-identified Substitution Property or Substitution Properties have a value equal to or greater than the value of the Property for which such request has been made, as determined by reference to the Valuations, and (3) either (x) Borrower has not proposed one or more Substitution Properties to be added to the list of Substitution Properties (pursuant to the proviso of the definition of “Substitution Properties”) that have a value equal to or greater than the value of the Property for which such request has been made or (y) Borrower has made such a proposal and Lender has reasonably rejected the same; provided , however , (A) Lender shall not have the right to require a Phase II Environmental Report for the Property located at 1100 Middlesex Turnpike in Burlington, Massachusetts, unless Borrower shall receive from a Governmental Authority written notification that Borrower is responsible for the remediation of the condition (the “ Burlington Condition ”) referenced in that certain letter to Borrower, dated as of September 18, 2001, from the Massachusetts Executive Office of Environmental Affairs Department of Environmental Protection and (B) if Lender shall have the right to require the delivery of a Phase II Environmental Report with respect to any Property pursuant to this sentence, to the extent practicable based on the recommendations of a reputable environmental engineer, any investigation of the Property in connection with the creation of such report shall be limited only to the portions of the Property as may be reasonably necessary to address the recommendations contained in the related Phase I Environmental Report, other than recommendations related to SAC Conditions.

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Section 2.2.     Deliverables . Borrower shall satisfy the following requirements within the time periods set forth in Section 2.1(a) :
(a)     Title . Lender shall have received a marked, signed commitment to issue, or a signed pro-forma version of, a Title Insurance Policy in respect of each Property, listing only such exceptions as are reasonably satisfactory to Lender, subject to all Permitted Encumbrances (with the exception of clause (ii)(A) thereof). If any Title Insurance Policy is to be issued by, or if disbursement of the proceeds of the Loan are to be made through, an agent of the actual insurer under such Title Insurance Policy (as opposed to the insurer itself), the actual insurer shall have issued to Lender for Lender’s benefit a so-called “Insured Closing Letter.”
(b)     Opinion of Local Counsel . Lender shall have received, in form and substance reasonably satisfactory to Lender, a legal opinion as to the enforceability of each Mortgage under the laws of the state in which the applicable individual Property is located, the good standing, foreign qualification, valid existence or other comparable concept under applicable law of the applicable Borrower in such state and the other matters described in the form local counsel opinion delivered to Borrower as of the Closing Date (it being understood that the formulation of such opinions shall be subject to the policies of the counsel providing such opinions and qualifications required by the various jurisdictions in which the Properties are located).
(c)     Lien Search Reports . Lender shall have received satisfactory reports of Uniform Commercial Code, tax lien, bankruptcy and judgment searches (subject to all Permitted Encumbrances) conducted by a search firm acceptable to Lender with respect to the Property, Guarantor and each Borrower, such searches to be conducted in such locations as Lender shall have requested.
(d)     Zoning . Lender shall have received zoning report for each Property indicating that it is in material compliance with all applicable zoning requirements (taking into account all grandfathering provisions thereof).
(e)     Engineering Report . Lender shall have received a current Engineering Report with respect to each Property, which report shall be in form and substance reasonably satisfactory to Lender. No such report shall be deemed unsatisfactory solely by reason of the location of such Property in a seismic zone or in area which may be prone to or affected by seismic events.
(f)     Environmental Report . Lender shall have received an Environmental Report (not more than six months old) with respect to each Property that discloses no material environmental contingencies with respect to the Properties. In addition, Lender shall have received all Phase II Environmental Reports relating to the Properties in the possession of Borrower.
(g)     Survey . Lender shall have received a Survey with respect to each Property in form and substance reasonably satisfactory to Lender.


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ARTICLE III

REPRESENTATIONS
Each individual Borrower represents to Lender with respect to itself and each other Borrower that, as of the Closing Date, except as set forth in the Exception Report:
Section 3.1.     Organization .
(a)    Each Borrower is duly organized, validly existing and in good standing under the laws of the of its jurisdiction of organization, and is in good standing in each other jurisdiction where ownership of the Properties requires it to be so, and each Borrower has all power and authority under such laws and its organizational documents and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted at the Properties.
(b)    The organizational chart contained in Exhibit A is true and correct as of the date hereof.
Section 3.2.     Authorization . Borrower has the power and authority to enter into this Agreement and the other Loan Documents, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated by the Loan Documents and has by proper action duly authorized the execution and delivery of the Loan Documents.
Section 3.3.     No Conflicts . Neither the execution and delivery of the Loan Documents, nor the consummation of the transactions contemplated therein, nor performance of and compliance with the terms and provisions thereof will (i) violate or conflict with any provision of its formation and governance documents, (ii) violate any Legal Requirement, regulation (including Regulation U, Regulation X or Regulation T), order, writ, judgment, injunction, decree or permit applicable to it where, except in the case of Regulation U, Regulation X or Regulation T, such violation is not reasonably be expected to result in a Material Adverse Effect, (iii) violate or conflict with contractual provisions of, or cause an event of default under, any indenture, loan agreement, mortgage, contract or other Material Agreement to which Guarantor, any of its direct or indirect subsidiaries or any Borrower is a party or may be bound except where such violation or conflict is not reasonably be expected to result in a Material Adverse Effect, or (iv) result in or require the creation of any Lien or other charge or encumbrance upon or with respect to the Collateral in favor of any Person other than Lender. No reciprocal easement agreement or similar agreement to which any of the Properties are subject requires Borrower to obtain the consent of any party thereto in connection with the making of the Loan or the recording of the Mortgages.
Section 3.4.     Consents . No consent, approval, authorization or order of, or qualification with, any court or Governmental Authority is required in connection with the execution, delivery or performance by Borrower of this Agreement or the other Loan Documents, except for any of the foregoing that have already been obtained and for the filings to perfect any security interest granted to Lender or its agents or representatives under the Loan Documents.

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Section 3.5.     Enforceable Obligations . This Agreement and the other Loan Documents have been duly executed and delivered by Borrower and constitute Borrower’s legal, valid and binding obligations, enforceable in accordance with their respective terms, subject to bankruptcy, insolvency and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles (whether enforcement is sought by proceedings in equity or at law), and further subject to any requirements in the various jurisdictions in which the Properties are located with respect to the order of and requirements for the realization on security, including any applicable so-called “security first” and “one-action” or similar rules, requirements or limitations. The Loan Documents to which Guarantor is a party have been duly executed and delivered by Guarantor and constitute Guarantor’s legal, valid and binding obligations, enforceable in accordance with their respective terms, subject to bankruptcy, insolvency and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles (whether enforcement is sought by proceedings in equity or at law), and further subject to any requirements in the various jurisdictions in which the Properties are located with respect to the order of and requirements for the realization on security, including any applicable so-called “security first” and “one-action” or similar rules, requirements or limitations. The Loan Documents are not subject to any right of rescission, offset, abatement, counterclaim or defense by Borrower or Guarantor, including the defense of usury or fraud
Section 3.6.     No Default . No Default or Event of Default will exist immediately following the making of the Loan.
Section 3.7.     Payment of Taxes . Borrower has filed, or caused to be filed, all material tax returns (federal, state, local and foreign) required to be filed (taking into account any applicable extensions) and paid all material amounts of taxes due (including interest and penalties) except for taxes that are not yet delinquent and taxes the amount or validity of which are currently being contested in good faith by appropriate proceedings and has paid all other taxes, fees, assessments and other governmental charges (including mortgage recording taxes, documentary stamp taxes and intangible taxes) owing by it necessary to preserve the Liens in favor of Lender.
Section 3.8.     Compliance with Law . To the knowledge of Borrower, Borrower, each Property and the uses thereof comply in all material respects with all applicable material Insurance Requirements and Legal Requirements, including building and zoning ordinances and codes (taking into account all grandfathering provisions thereof). Borrower is not in default or violation of any order, writ, injunction, decree or demand of any Governmental Authority with respect to any Property the violation of which could result in a Material Adverse Effect. There has not been committed by or on behalf of Borrower or, to Borrower’s knowledge, any other person in occupancy of or involved with the operation or use of any Property, any act or omission affording any federal Governmental Authority or any state or local Governmental Authority the right of forfeiture as against any Property or any portion thereof or any monies paid in performance of its obligations under any of the Loan Documents. Neither Borrower nor Guarantor has purchased any portion of the Properties with proceeds of any illegal activity.
Section 3.9.     ERISA . Except as would not be otherwise expect to result in a Material Adverse Effect, neither Borrower nor any ERISA Affiliate of Borrower (a) has incurred any liability under Title IV of ERISA other than the payment of premiums to the Pension Benefit

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Guaranty Corporation, none of which are overdue, or (b) failed to satisfy the requirements of Section 302(a) of ERISA and Section 412(a) of the Code with respect to any employee benefit plan (as defined in Section 3(3) of ERISA) subject to Title IV or Section 302 of ERISA or Section 412 of the Code The consummation of the transactions contemplated by this Agreement will not constitute or result in any non-exempt prohibited transaction under Section 406 of ERISA, Section 4975 of the Code or substantially similar provisions under federal, state or local laws, rules or regulations, assuming that the source of funds used by Lender for the Loan does not constitute Plan Assets.
Section 3.10.     Investment Company Act . Borrower is not an “investment company”, or a company “controlled” by an “investment company”, registered or required to be registered under the Investment Company Act of 1940, as amended.
Section 3.11.     [Reserved] .
Section 3.12.     Other Debt . Borrower does not have outstanding any Debt other than Permitted Debt.
Section 3.13.     Litigation . There are no actions, suits, proceedings, arbitrations or governmental investigations by or before any Governmental Authority or other court or agency now filed or otherwise pending, and to Borrower’s knowledge there are no such actions, suits, proceedings, arbitrations or governmental investigations threatened in writing against Borrower, Guarantor or any of the Collateral, in each case, (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby or (b) that would reasonably be expected to have a Material Adverse Effect.
Section 3.14.     Leases; Material Agreements .
(a)    Borrower has delivered to Lender true and complete copies of all Leases pursuant to which any Borrower is the lessor at any of the Properties, including all modifications and amendments thereto, which are in Borrower’s possession. Except for Borrower or affiliates of Borrower occupying all or any part of any Property, no person has any possessory interest in any of the Properties or right to occupy the same except under and pursuant to the provisions of the Leases or Permitted Encumbrances. The Rent Roll is accurate and complete in all material respects as of the Closing Date, and the applicable Borrower that owns the Property covered by each Lease on the Rent Roll is the lessor under such Lease. Except as indicated on the Rent Roll or Exception Report, no security deposits are being held by Borrower (including bonds or letters of credit being held in lieu of cash security deposits) and no Tenant or other party has any option, right of first refusal or similar preferential right to purchase all or any portion of any Property. Subject to the provisions of Section 4.7(a) , upon foreclosure on any Property, with respect to each Lease at such Property either (i) Lender shall automatically succeed to the rights and obligations of the landlord under such Leases (ii) or such Leases shall automatically terminate. No material amounts are payable by Borrower to any Tenant under a Lease (other than in connection with common area maintenance and other routine reconciliations) and no Tenant has the right to require Borrower to perform or finance any Material Alterations or improvements to the space covered by its Lease. Notwithstanding any provision contained in this Agreement to the contrary, Leases may contain (and the same shall be expressly permitted hereunder without

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notice to or the consent of Lender, except to the extent required pursuant to Section 4.7(b) ) the rights of tenants to receive reimbursement, contribution or allowance by landlord for tenant improvements or rent concessions or abatements, in each case as set forth in the Exception Report.
(b)    There are no Material Agreements except as described in Schedule B . Borrower has made available to Lender true and complete copies of all Material Agreements. Each Material Agreement has been entered into at arm’s length in the ordinary course of business by or on behalf of Borrower. The Material Agreements are in full force and effect and there are no defaults thereunder by Borrower or, to Borrower’s knowledge, any other party thereto. Borrower is not in default in any material respect in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any Permitted Encumbrance.
Section 3.15.     Full and Accurate Disclosure . No statement of fact heretofore delivered by Guarantor or Borrower to Lender in writing with respect to the Properties or the Loan contains any untrue statement of a material fact or omits to state any material fact necessary to make statements contained therein not misleading unless subsequently corrected (except that the foregoing representation, as it relates to any Environmental Report, Engineering Report, Title Insurance Policy and zoning report delivered to Lender in connection with the closing of the Loan, shall be limited to Borrower’s actual knowledge). To Borrower’s actual knowledge, there is no fact, event or circumstance presently known to Borrower that has intentionally not been disclosed to Lender that has had or could reasonably be expected to result in a Material Adverse Effect.
Section 3.16.     Use of Loan Proceeds . No part of the proceeds of the Loan will be used for the purpose of purchasing or acquiring any “margin stock” within the meaning of Regulations T, U or X of the Board of Governors of the Federal Reserve System or for any other purpose that would be inconsistent with such Regulations T, U or X or any other Regulations of such Board of Governors, or for any purpose prohibited by Legal Requirements or by the terms and conditions of the Loan Documents. The Loan is solely for the general corporate purposes of Borrower, Guarantor and the subsidiaries and no portion thereof shall be used for personal, consumer, household or similar purposes.
Section 3.17.     [Reserved]
Section 3.18.     [Reserved]Title . Borrower owns good, valid and insurable title to the Properties and good, valid and transferrable title to any other Collateral, in each case free and clear of all Liens whatsoever except the Permitted Encumbrances. No Property is subject to a Lien that secures Debt for borrowed money (expressly excluding all leases of furnishings, fixtures, equipment and other personal property). The Mortgages, when properly recorded in the appropriate records, together with any Uniform Commercial Code financing statements required to be filed in connection therewith, will create (i) valid, perfected first priority Liens on the Properties, enforceable as such against creditors of and purchasers from Borrower and subject only to Permitted Encumbrances any requirements in the various jurisdictions in which the Properties are located with respect to the order of and requirements for the realization on security, including any applicable so-called “security first” and “one-action” or similar rules,

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requirements or limitations and (ii) perfected Liens in and to all personalty constituting Collateral, all in accordance with the terms thereof, in each case subject only to any applicable Permitted Encumbrances any requirements in the various jurisdictions in which the Properties are located with respect to the order of and requirements for the realization on security, including any applicable so-called “security first” and “one-action” or similar rules, requirements or limitations. The Permitted Encumbrances do not, individually or in the aggregate, result in a Material Adverse Effect. Subject to clause (v) of the definition of Permitted Encumbrances, there are no claims for payment for work, labor or materials affecting the Properties that are or may become a Lien prior to, or of equal priority with, the Liens created by the Loan Documents.
Section 3.20.     No Encroachments . Except as set forth on the Surveys, all of the improvements on each Property lie wholly within the boundaries and building restriction lines of the such Property, and no improvements on adjoining property encroach upon any Property, and no easements or other encumbrances upon any Property encroach upon any of the improvements, except to the extent the same is not reasonably be expected to result in a Material Adverse Effect.
Section 3.21.     Physical Condition .
(a)    Except as would not reasonably be expected to result in a Material Adverse Effect, each Property and all building systems (including sidewalks, storm drainage system, roof, plumbing system, HVAC system, fire protection system, electrical system, equipment, elevators, exterior sidings and doors, irrigation system and all structural components) are free of all material damage and are in good condition, order and repair in all respects material to such Property’s use, operation and value, subject to ordinary wear and tear and any maintenance, restoration, repairs and/or replacements that are diligently being prosecuted to completion in accordance with Borrower’s ordinary course of business.
(b)    Except as would not reasonably be expected to result in a Material Adverse Effect, Borrower is not aware of any material structural or other material defect or damages in any of the Properties, whether latent or otherwise.
(c)    Borrower has not received written notice, and has not received written notice that any Tenant has received written notice from any insurance company or bonding company of any defects or inadequacies in any of the Properties that would, alone or in the aggregate, adversely affect in any material respect the insurability of the same or cause the imposition of extraordinary premiums or charges thereon or of any termination or threatened termination of any policy of insurance or bond.
Section 3.22.     Reserved .
Section 3.23.     Management . No property management agreements to which Borrower or any affiliate is a party are in effect with respect to the Properties.
Section 3.24.     Condemnation . No Condemnation has been commenced or, to Borrower’s knowledge, is contemplated or threatened with respect to all or any portion of any of the Properties or for the relocation of roadways providing access to any of the Properties to the extent that such Condemnation would reasonably be expected to cause a Material Adverse Effect.

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Section 3.25.     Utilities and Public Access . Each Property has adequate rights of access to dedicated public ways (and makes no material use of any means of access or egress that is not pursuant to such dedicated public ways or recorded, irrevocable rights-of-way or easements) and is adequately served by all public utilities, including water and sewer (or well and septic), necessary to the continued use and enjoyment of such Property as presently used and enjoyed.
Section 3.26.     Environmental Matters . A Person unaffiliated with Borrower or Guarantor is liable for the remediation of the Burlington Condition, and neither Borrower nor any affiliate of Borrower or Guarantor has received any written notice from any Governmental Authority that Borrower, Guarantor or any of their respective affiliates has any liability for the remediation thereof. Borrower has not received any written notification that the Person liable for the remediation of the Burlington Condition is not performing or does not intend to perform such remediation. To Borrower’s knowledge, except as would reasonably expected to result in a Property Material Adverse Effect (it being agreed that the presence of SAC Conditions shall not, in and of themselves, constitute a Property Material Adverse Effect):
(i)    No Hazardous Substances are located at, on, in or under any of the Properties or have been handled, manufactured, generated, stored, processed, or disposed of at, on, in or under, or have been Released from, any of the Properties. Without limiting the foregoing, there is not present at, on, in or under any of the Properties, any PCB-containing equipment, asbestos or asbestos containing materials, underground storage tanks or surface impoundments for any Hazardous Substance, lead in drinking water (except in concentrations that comply with all Environmental Laws), or lead-based paint. There is no threat of any Release of any Hazardous Substance migrating to any of the Properties.
(ii)    Each Property is in compliance in all material respects with all Environmental Laws applicable to such Property (which compliance includes, but is not limited to, the possession of, and compliance with, all environmental, health and safety permits, approvals, licenses, registrations and other governmental authorizations required in connection with the ownership and operation of such Property under all Environmental Laws). No Environmental Claim is pending with respect to any of the Properties, nor is any threatened, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to Borrower or any of the Properties.
(iii)    No Liens are presently recorded with the appropriate land records under or pursuant to any Environmental Law with respect to any of the Properties and, to Borrower’s knowledge, no Governmental Authority has been taking any action to subject any of the Properties to Liens under any Environmental Law.
(iv)    There are Phase I Environmental Reports in the possession of Borrower in relation to any of the Properties that have not been made available to Lender.

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Section 3.27.     Assessments . There are no pending or, to Borrower’s knowledge, proposed special or other assessments for public improvements or otherwise affecting any of the Properties, nor are there any contemplated improvements to any of the Properties that may result in such special or other assessments, to the extent the same would reasonably be expected to result in a Material Adverse Effect.
Section 3.28.     No Joint Assessment . Borrower has not suffered, permitted or initiated the joint assessment of any of the Properties (i) with any other real property constituting a separate tax lot, or (ii) with any personal property, or any other procedure whereby the Lien of any Taxes that may be levied against such other real property or personal property shall be assessed or levied or charged to any of the Properties as a single Lien.
Section 3.29.     Separate Lots . No portion of any of the Properties is part of a tax lot that also includes any real property that is not Collateral.
Section 3.30.     Permits; Certificate of Occupancy . Borrower has obtained all material Permits necessary for the present use and operation of each Property. The uses being made of each Property are in conformity in all material respects with the certificate of occupancy (if any) and/or Permits for such Property and any other restrictions, covenants or conditions affecting such Property.
Section 3.31.     Flood Zone . None of the improvements on any of the Properties is located in an area identified by the Federal Emergency Management Agency or the Federal Insurance Administration as a “100 year flood plain” or as having special flood hazards (including Zones A and V), or, to the extent that any portion of any of the Properties is located in such an area, such Property is covered by flood insurance in an amount equal to the maximum limit of coverage available under the National Flood Insurance Program.
Section 3.32.     Security Deposits . Borrower is in compliance in all material respects with all Legal Requirements relating to security deposits.
Section 3.33.     Insurance . Borrower has obtained insurance policies reflecting the insurance coverages set forth on Schedule A , and such Schedule A accurately reflects the insurance coverage maintained with respect to each of the Properties. All premiums on such insurance policies required to be paid as of the Closing Date have been paid for the current policy period. No Person, including Borrower, has done, by act or omission, anything that would impair the coverage of any such policy.
Section 3.34.     No Dealings . Neither Borrower nor Guarantor is aware of any unlawful influence on the assessed value of any of the Properties.
Section 3.35.     [Reserved .]

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ARTICLE IV

AFFIRMATIVE COVENANTS
Each individual Borrower covenants and agrees as follows with respect to itself, and each other individual Borrower:
Section 4.1.     Existence; Licenses . Each Borrower shall do or cause to be done all things necessary to remain in existence. Borrower shall do or cause to be done all things necessary to preserve, renew and keep in full force and effect all rights, licenses, Permits, franchises, certificates of occupancy, consents, approvals and other agreements necessary for the continued use and operation of the Properties.
Section 4.2.     Maintenance of Properties . Borrower shall cause each Property to be maintained in good and safe working order and repair, reasonable wear and tear excepted, and in keeping with the condition and repair of properties of a similar use, value, age, nature and construction, all in accordance with each Borrower’s customary practice in the ordinary course of business. Borrower shall not knowingly use, maintain or operate any Property in any manner that constitutes a public or private nuisance or that makes void, voidable, or cancelable, or increases the premium of, any insurance then in force with respect thereto. Subject to Section 5.9 , no improvements or fixtures constituting Collateral located at or on any Property shall be voluntarily removed, demolished or materially altered without the prior written consent of Lender (except for replacement of fixtures, furnishings, machinery, equipment and other personal property in the ordinary course of Borrower’s business with items of the same utility and of equal or greater value and sales or dispositions of obsolete or economically unusable fixtures, furnishings, machinery, equipment or other personal property no longer needed for the operation of the applicable Property), and Borrower shall from time to time make, or cause to be made, all reasonably necessary and desirable repairs, renewals, replacements, betterments and improvements to the Properties in accordance with Borrower’s reasonable business judgment. Borrower shall not make any change in the use of any Property that would materially increase the risk of fire or other hazard arising out of the operation of any Property, or do or permit to be done thereon anything that may in any way impair the value of any Property in any material respect or the Liens of the Mortgages or otherwise cause or reasonably be expected to result in a Property Material Adverse Effect. Borrower shall not install or permit to be installed on any Property any underground storage tank except in accordance with Environmental Laws, and solely in connection with the Sears Auto Centers. Borrower shall not, without the prior written consent of Lender, permit any drilling or exploration for or extraction, removal, or production of any minerals from the surface or the subsurface of any Property, regardless of the depth thereof or the method of mining or extraction thereof, subject to all Permitted Encumbrances.
Section 4.3.     Compliance with Legal Requirements . Borrower shall materially comply with (or cause all Tenants to materially comply with), and shall cause each Property to materially comply with and be operated, maintained, repaired and improved in material compliance with, all Legal Requirements, Insurance Requirements and all material contractual obligations by which Borrower is legally bound.

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Section 4.4.     Impositions and Other Claims . Borrower shall timely pay and discharge all Taxes and all other taxes, assessments and governmental charges levied upon it, its income and its assets pursuant to Legal Requirements as and when such taxes, assessments and charges are due and payable, as well as all lawful claims for labor, materials and supplies or otherwise, subject to any rights to contest contained in the definition of Permitted Encumbrances. Borrower shall timely file all material federal, state and local tax returns and other reports that it is required by law to file (taking into account any applicable extensions). If any law or regulation applicable to Lender, any Note, any of the Collateral or any of the Mortgages is enacted that deducts from the value of property for the purpose of taxation any Lien thereon, or imposes upon Lender the payment of the whole or any portion of the taxes or assessments or charges or Liens required by this Agreement to be paid by Borrower, or changes in any way the laws or regulations relating to the taxation of mortgages or security agreements or debts secured by mortgages or security agreements or the interest of the mortgagee or secured party in the property covered thereby, or the manner of collection of such taxes, so as to affect any of the Mortgages, the Indebtedness or Lender, then Borrower, upon demand by Lender, shall pay such taxes, assessments, charges or Liens, or reimburse Lender for any amounts paid by Lender.
Section 4.5.     Access to Properties . Borrower shall permit, subject to the rights of Tenants under Leases, agents, representatives and employees of Lender and the Servicer to enter and inspect the Properties or any portion thereof, and/or inspect, examine, audit and copy the books and records of Borrower to the extent relating to the Properties (including all recorded data of any kind or nature, regardless of the medium of recording), at such reasonable times so as not to disrupt the normal business operations of Borrower as may be requested by Lender upon reasonable advance notice allowing an opportunity for agents or representatives of Borrower to be present. If an Event of Default is continuing, the reasonable cost of such inspections, examinations, copying or audits shall be borne by Borrower, including the reasonable cost of all follow up or additional investigations, audits or inquiries deemed reasonably necessary by Lender. The cost of such inspections, examinations, audits and copying, if not paid for by Borrower within a reasonable time after presentment with documentation of expenses in reasonable detail following demand, may be added to the Indebtedness and shall bear interest thereafter until paid at the Default Rate.
Section 4.6.     Cooperate in Legal Proceedings . Except with respect to any claim by Borrower against Lender, Borrower shall reasonably cooperate with Lender with respect to any proceedings before any Governmental Authority that may in any way affect the rights of Lender hereunder or under any of the Loan Documents and, in connection therewith, Lender may, at its election, participate or designate a representative to participate in any such proceedings.
Section 4.7.     Leases .
(a)    Borrower shall furnish Lender with executed copies of all Leases to which any Borrower is a party entered into after the Closing Date. All new Leases and renewals or amendments of Leases shall, subject in the case of renewals to the terms and provisions of the applicable existing Lease (including any conditions or requirements with respect to attornment, subordination and attornment), be (i) entered into on terms and with Tenants that could not

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reasonably be expected to result in a Material Adverse Effect, (ii) subject and subordinate to the Mortgages and (iii) contain provisions for the agreement by the Tenant thereunder to attorn to Lender and any purchaser at a foreclosure sale, such attornment to be self-executing and effective upon acquisition of title to the applicable Property by any purchaser at a foreclosure sale, which agreement by Tenant may be conditioned upon Lender entering into a subordination, attornment and non-disturbance agreement mutually acceptable to Lender and the applicable Tenant. If expressly required pursuant to a Lease, Lender shall enter into a subordination, attornment and non-disturbance agreement mutually acceptable to Lender and the applicable Tenant.
(b)    Any Lease that does not conform to the standards set forth in Section 4.7(a) (except for any Lease to an owner or operator of part or all of the Sears Auto Center business in connection with the separation of a material portion of the business or assets of such business from the assets of Guarantor ) shall be subject to the prior written consent of Lender, which consent shall not be unreasonably withheld, delayed or conditioned. In addition, all new Leases that are Third-Party Leases, and all terminations, renewals and amendments of Third-Party Leases, and any surrender of rights under any Third-Party Lease, shall be subject to the prior written consent of Lender, which consent shall not be unreasonably withheld, delayed or conditioned.
(c)    Borrower shall (i) observe and punctually perform in all material respects all the material obligations imposed upon the lessor under the Leases; (ii) use all reasonable efforts to enforce all of the material terms, covenants and conditions contained in the Leases on the part of the lessee thereunder to be observed or performed, short of termination thereof, except that Borrower may terminate any Lease following a material default thereunder by the respective Tenant; (iii) not collect any of the rents thereunder more than one month in advance; (iv) not execute any assignment of lessor’s interest in the Leases or associated rents other than the assignments of rents and leases under the Mortgages; and (v) not cancel or terminate any guarantee of any of the Third-Party Leases without the prior written consent of Lender.
(d)    Security deposits of Tenants under all Leases shall be held in compliance with Legal Requirements and any provisions in Leases relating thereto. Borrower shall maintain books and records of sufficient detail to identify all security deposits of Tenants separate and apart from any other payments received from Tenants. Subject to Legal Requirements, Borrower hereby pledges to Lender as security for the Indebtedness any bond or other instrument held by Borrower in lieu of cash security. Upon foreclosure on any Property, Borrower shall deliver to Lender an amount equal to the aggregate security deposits of the Tenants at such Property (and any interest theretofore earned on such security deposits and actually received by Borrower), and any such bonds, that Borrower had not returned to the applicable Tenants or applied in accordance with the terms of the applicable Lease.
(e)    Borrower shall promptly deliver to Lender a copy of each written notice from a Tenant under any Third-Party Lease claiming that Borrower is in default in the performance or observance of any of the material terms, covenants or conditions thereof to be performed or observed by Borrower. Borrower shall use commercially reasonable efforts to provide in each Third-Party Lease executed after the Closing Date to which Borrower is a party that any Tenant delivering any such notice shall send a copy of such notice directly to Lender.

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(f)    All agreements entered into by or on behalf of Borrower that require the payment of leasing commissions with respect to Leases at any Property or other similar compensation to any party shall (i) provide that the obligation will not be enforceable against Lender and (ii) be subordinate to the lien of the Mortgage.
Section 4.8.     Plan Assets, etc. Borrower will do, or cause to be done, all things necessary to ensure that it will not be deemed to hold Plan Assets at any time.
Section 4.9.     Further Assurances . Borrower shall, at Borrower’s sole cost and expense, from time to time as reasonably requested by Lender, execute, acknowledge, record, register, file and/or deliver to Lender such other reasonable instruments, agreements, certificates and documents (including amended or replacement mortgages), and Borrower hereby consents to the filing by Lender of any Uniform Commercial Code financing statements, in each case as Lender may reasonably request to evidence, confirm, perfect and maintain the Liens securing or intended to secure the obligations of Borrower and the rights of Lender under the Loan Documents and do and execute all such further lawful and reasonable acts, conveyances and assurances for the better and more effective carrying out of the intents and purposes of this Agreement and the other Loan Documents as Lender shall reasonably request from time to time (including the payment and application of Loss Proceeds), so long as none of the same decrease any rights or remedies of Borrower under any of the Loan Documents (the “ Further Assurance Standard ”). Upon foreclosure, the appointment of a receiver or any other relevant action, Borrower shall, at its sole cost and expense, cooperate fully and completely to effect the assignment or transfer of any license, permit, agreement or any other right necessary or useful to the operation of the Collateral, subject to the Further Assurance Standard. Upon receipt of an affidavit of Lender as to the loss, theft, destruction or mutilation of any Note, Borrower shall issue, in lieu thereof, a replacement Note in the same principal amount thereof and in the form thereof. Borrower hereby authorizes and appoints Lender as its attorney-in-fact to, during the continuance of an Event of Default, execute, acknowledge, record, register and/or file such instruments, agreements, certificates and documents, and to do and execute such acts, conveyances and assurances, should Borrower fail to do so itself in violation of this Agreement or the other Loan Documents following written request from Lender, in each case without the signature of Borrower, subject to the Further Assurance Standard. The foregoing grant of authority is a power of attorney coupled with an interest and such appointment shall be irrevocable for the term of this Agreement. Borrower hereby ratifies all actions that such attorney shall lawfully take or cause to be taken in accordance with this Section.
Section 4.10.     Notice of Material Event . Borrower shall give Lender prompt notice (containing reasonable detail) of (i) any material change in the financial or physical condition of any Property that would have a Material Adverse Effect, (ii) any litigation or governmental proceedings pending or threatened in writing against Borrower or any Property that is reasonably expected to result in a Material Adverse Effect, (iii) the insolvency or bankruptcy filing of any Borrower, Guarantor or an affiliate of any of the foregoing and (iv) any other circumstance or event that could reasonably be expected to result in a Material Adverse Effect.
Section 4.11.     Property-Specific Information . At Lender’s request, Borrower shall furnish within 30 days after the end of the applicable calendar month such information with

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respect to the Properties as Lender shall reasonably request, to the extent such other information is then reasonably available at no material expense to Borrower.
Section 4.12.     Insurance .
(a)    At all times while any portion of the Loan remains outstanding, Borrower shall maintain the Policies with respect to the Properties, for the mutual benefit of Borrower and Lender.
(b)    All Policies:
(i)    shall be maintained throughout the term of the Loan without cost to Lender and shall name each Borrower (and may name affiliates of each Borrower) as the named insured;
(ii)    with respect to property insurance policies, shall contain a standard noncontributory mortgagee clause naming Lender and its successors and assigns as their interests may appear as first mortgagee and loss payee;
(iii)    with respect to liability policies, except for workers compensation, employers liability and auto liability, shall name Lender and its successors and assigns as their interests may appear as additional insureds;
(iv)    with respect to property insurance policies, shall either be written on a no coinsurance form or contain an endorsement providing that neither Borrower nor Lender nor any other party shall be a co‑insurer under such Policies;
(v)    with respect to property insurance policies, shall contain an endorsement or other provision providing that Lender shall receive 10 days’ prior written notice of cancellation thereof due to non-payment of premium;
(vi)    with respect to property insurance policies, shall contain an endorsement providing that no act or negligence of Borrower or any foreclosure or other proceeding or notice of sale relating to one or more of the Properties shall affect the validity or enforceability of the insurance insofar as a mortgagee is concerned;
(vii)    shall not contain provisions that would make Lender liable for any insurance premiums thereon or subject to any assessments thereunder;
(viii)    shall contain a waiver of subrogation against Lender, as applicable;
(ix)    may be in the form of a blanket or umbrella policy; and
(x)    shall otherwise be reasonably satisfactory in form and substance to Lender and shall contain such other provisions as Lender deems reasonably necessary or desirable to protect its interests.

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(c)    Borrower shall pay the premiums for all Policies as the same become due and payable. Complete copies of such Policies shall be delivered to Lender reasonably promptly upon request. Not later than 30 days prior to the expiration date of each Policy, Borrower shall deliver to Lender evidence, reasonably satisfactory to Lender, of its renewal. Borrower shall reasonably promptly forward to Lender a copy of each written notice received by Borrower of any modification, reduction or cancellation of any of the Policies or of any of the coverages afforded under any of the Policies.
(d)    Borrower shall not procure any other insurance coverage that would be on the same level of payment as the Policies or would adversely impact in any way the ability of Lender or Borrower to collect any proceeds under any of the Policies, unless the foregoing provisions (a)-(c) are applicable to such other insurance coverage. If at any time Lender is not in receipt of written evidence that all Policies are in full force and effect when and as required hereunder, upon notice to Borrower Lender shall have the right to take such reasonable action as Lender deems necessary to protect its interest in the Properties, including the obtaining of such insurance coverage as Lender in its sole discretion deems appropriate (but limited to the coverages and amounts required hereunder). All premiums, costs and expenses (including reasonable attorneys’ fees and expenses) incurred by Lender in connection with such action or in obtaining such insurance and keeping it in effect shall be paid by Borrower to Lender upon demand and, until paid, shall bear interest at the Default Rate.
(e)    Borrower or Guarantor shall provide Lender with at least 30 days’ prior written notice of cancellation by Borrower or Guarantor or any of their respective affiliates of any property insurance policies relating to any Property.
Section 4.13.     Casualty and Condemnation .
(a)    Upon learning thereof, Borrower shall give reasonably prompt notice to Lender of any Casualty or Condemnation or of the actual or threatened commencement of proceedings that would result in a Condemnation.
(b)    Lender may participate in any proceedings for any taking by any public or quasi-public authority accomplished through a Condemnation or any transfer made in lieu of or in anticipation of a Condemnation, to the extent permitted by law. Upon Lender’s request, Borrower shall deliver to Lender all instruments reasonably requested by it to permit such participation. Borrower shall, at its sole cost and expense, diligently prosecute any such proceedings, and shall consult with Lender, its attorneys and experts, and cooperate with them in the carrying on or defense of any such proceedings. Borrower shall not consent or agree to a Condemnation or action in lieu thereof without the prior written consent of Lender in each instance, which consent shall not be unreasonably withheld, delayed or conditioned in the case of a taking of an immaterial portion of any Property.
(c)    Lender may (x) jointly with Borrower settle and adjust any insurance claims, (y) following the commencement of a foreclosure action, settle and adjust any insurance claims without the consent or cooperation of Borrower, or (z) allow Borrower to settle and adjust any insurance claims; except that if no Event of Default is continuing, Borrower may settle and adjust such claims aggregating not in excess of the Threshold Amount if such settlement

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or adjustment is carried out in a competent and timely manner, but Lender, at its election, shall be entitled to collect and receive (as set forth below) any and all Loss Proceeds. The reasonable expenses incurred by Lender in the adjustment and collection of Loss Proceeds shall become part of the Indebtedness and shall be reimbursed by Borrower to Lender upon demand therefor.
(d)    All Loss Proceeds from any Casualty or Condemnation shall be immediately deposited into an account under the sole dominion and control of Lender. So long as no Event of Default exists and is continuing, Loss Proceeds after receipt thereof by Lender and reimbursement of any reasonable expenses incurred by Lender in connection therewith shall be applied promptly to the cost of restoring, repairing, replacing or rebuilding such Property or part thereof subject to the Casualty or Condemnation, in the manner set forth below (and Borrower shall commence, as promptly and diligently as practicable, to prosecute such restoring, repairing, replacing or rebuilding of such Property in a workmanlike fashion and in accordance with applicable law to a status at least equivalent to the quality and character of such Property immediately prior to the Condemnation or Casualty). Provided that no Event of Default shall have occurred and be then continuing, Lender shall disburse such Loss Proceeds to Borrower upon Lender’s being furnished with (i) evidence reasonably satisfactory to it of the estimated cost of completion of the restoration, (ii) if the cost of completion of the restoration plus payment of debt service on the Loan during the period of restoration exceeds the amount then contained in the Loss Proceeds Account, funds in an amount equal to such excess, which funds shall be remitted into the Loss Proceeds Account as additional Collateral for the Loan, and (iii) such architect’s certificates, waivers of lien, contractor’s sworn statements, title insurance endorsements, bonds, plats of survey and such other evidences of cost, payment and performance as Lender may reasonably request; and Lender may, in any event, require that all plans and specifications for restoration reasonably estimated by Lender to exceed the Threshold Amount be submitted to and approved by Lender prior to commencement of work (which approval shall not be unreasonably withheld, delayed or conditioned). If Lender reasonably estimates that the cost to restore will exceed the Threshold Amount, Lender may retain a local construction consultant to inspect such work and review Borrower’s request for payments and Borrower shall, on demand by Lender, reimburse Lender for the reasonable fees and expenses of such consultant (which fees and expenses shall constitute Indebtedness). No payment shall exceed 90% of the value of the work performed from time to time until such time as 50% of the restoration (calculated based on the anticipated aggregate cost of the work) has been completed, and thereafter, 100% of the value of the work shall be disbursed, and amounts retained prior to completion of 50% of the restoration shall not be paid prior to the final completion of the restoration. Funds other than Loss Proceeds shall be disbursed prior to disbursement of such Loss Proceeds, and at all times the undisbursed balance of such proceeds remaining in the Loss Proceeds Account, together with any additional funds irrevocably and unconditionally deposited therein or irrevocably and unconditionally committed for that purpose, shall be at least sufficient in the reasonable judgment of Lender to pay for the cost of completion of the restoration free and clear of all Liens or claims for Lien, subject to all Permitted Encumbrances.
(e)    Borrower shall cooperate with Lender in obtaining for Lender the benefits of any Loss Proceeds lawfully or equitably payable to Lender in connection with the Properties. Lender shall be reimbursed for any expenses reasonably incurred in connection therewith (including reasonable attorneys’ fees and disbursements, and, if reasonably necessary to collect

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such proceeds, the expense of an Appraisal on behalf of Lender) out of such Loss Proceeds or, if insufficient for such purpose, by Borrower.
Section 4.14.     Compliance with Encumbrances and Material Agreements . Borrower covenants and agrees as follows:
(i)    Borrower shall comply with all material terms, conditions and covenants of each Material Agreement and each material Permitted Encumbrance, including any reciprocal easement agreement, ground lease, declaration of covenants, conditions and restrictions, and any condominium arrangements.
(ii)    Borrower shall promptly deliver to Lender a true and complete copy of each and every notice of default or event of default received by Borrower with respect to any obligation of Borrower under the provisions of any Material Agreement and/or Permitted Encumbrance.
(iii)    Borrower shall deliver to Lender copies of any written notices of default or event of default relating to any Material Agreement and/or Permitted Encumbrance served by Borrower.
(iv)    Without the prior written consent of Lender, not to be unreasonably withheld, conditioned or delayed, Borrower shall not grant or withhold any material consent, approval or waiver under any Material Agreement or Permitted Encumbrance, unless no Event of Default is continuing and the same is not be reasonably likely to have a Material Adverse Effect.
(v)    Borrower shall deliver to each other party to any Permitted Encumbrance and any Material Agreement notice of the identity of Lender and each assignee of Lender of which Borrower is aware if such notice is required under the terms of such Material Agreement or Permitted Encumbrance in order to protect Lender’s interest thereunder.
(vi)    Borrower shall use reasonable efforts to enforce, short of termination thereof, the performance and observance of each and every material term, covenant and provision of each Material Agreement and Permitted Encumbrance to be performed or observed, if any, if and to the extent the failure to do so would have a Material Adverse Effect.
Section 4.15.     FATCA . If a payment made to the Lender under any Loan Document would be subject to U.S. Federal withholding Tax imposed by FATCA if the Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such Lender shall deliver to such Borrower at the time or times prescribed by law and at such time or times reasonably requested by such Borrower such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by such Borrower as may be necessary for such Borrower to comply with its obligations under FATCA and to determine that the Lender has complied with the Lender’s obligations under FATCA or to determine the amount to deduct and withhold from such payment.


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ARTICLE V

NEGATIVE COVENANTS
Each individual Borrower covenants and agrees as follows with respect to itself and each other individual Borrower:
Section 5.1.     Liens on the Collateral . No Borrower shall permit or suffer the existence of any Lien on any of the Properties senior to the Lien of the applicable Mortgage, other than Permitted Encumbrances.
Section 5.2.     Transfer; Prohibited Change of Control . Borrower shall not Transfer any Collateral other than the replacement or other disposition of obsolete or non-useful personal property and fixtures in the ordinary course of business, and except as otherwise provided in Section 4.2, and Borrower shall not hereafter file a declaration of condominium with respect to any of the Properties. No Prohibited Change of Control shall occur. No transfers of any direct or indirect equity interests in any Borrower shall be permitted, except for (i) any such transfers that do not result in a Prohibited Change of Control, (ii) transfers of shares of common stock in Sears Holdings Corporation and (iii) any other such transfer for which Borrower shall have obtained Lender’s prior written consent. Notwithstanding the foregoing, Borrower may transfer any Property to a Person not affiliated with Borrower or Guarantor provided that it (i) replaces such Property with a Substitution Property selected by Lender and otherwise complies with the requirements of Section 2.1 with respect to the replacement of a Property with a Substitution Property.
Section 5.3.     Debt . Borrower shall not have any Debt, other than Permitted Debt.
Section 5.4.     Dissolution; Merger or Consolidation . No Borrower shall dissolve, liquidate, merge with or consolidate into another Person, unless such Borrower is the surviving Person.
Section 5.5.     Misapplication of Funds . Borrower shall not (a) distribute any Loss Proceeds in violation of the provisions of this Agreement (and shall promptly cause the reversal of any such distributions made in error of which Borrower becomes aware), or (b) misappropriate any security deposit or portion thereof.
Section 5.6.     Jurisdiction of Formation; Name . Borrower shall not change its jurisdiction of formation or name without receiving Lender’s prior written consent, not to be unreasonably withheld, delayed or conditioned, and promptly providing Lender such information and replacement Uniform Commercial Code financing statements and legal opinions as Lender may reasonably request in connection therewith.
Section 5.7.     Modifications and Waivers . Unless otherwise consented to in writing by Lender:

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(i)    Borrower shall not amend, modify, terminate, renew, or surrender any material rights or remedies under any Lease, or enter into any Lease, except in accordance with the express terms and conditions of any Lease or otherwise in compliance with Section 4.7 ; and
(ii)    Borrower shall not (x) enter into any Material Agreement, or amend, modify, surrender or waive any material rights or remedies under any Material Agreement, except, in each case, on arms-length commercially reasonable terms, (y) terminate any Material Agreement, except for terminations in connection with a material default thereunder, or (z) default in its material obligations under any Material Agreement.
Section 5.8.     ERISA . (a)    Borrower shall not maintain or contribute to, or agree to maintain or contribute to, or permit any ERISA Affiliate of Borrower to maintain or contribute to or agree to maintain or contribute to, any employee benefit plan (as defined in Section 3(3) of ERISA) subject to Title IV or Section 302 of ERISA or Section 412 of the Code which would be reasonably likely to result in a Material Adverse Effect.
(b)    Borrower shall not engage in a non-exempt prohibited transaction under Section 406 of ERISA, Section 4975 of the Code, or substantially similar provisions under federal, state or local laws, rules or regulations or in any transaction that would cause any obligation or action taken or to be taken hereunder (or the exercise by Lender of any of its rights under the Notes, this Agreement, the Mortgages or any other Loan Document) to be a non-exempt prohibited transaction under such provisions assuming that the source of the funds for the Loan by Lender does not constitute Plan Assets.
Section 5.9.     Alterations and Expansions . Borrower shall not perform, undertake, contract to perform or consent to any Material Alteration without the prior written consent of Lender, which consent (in the absence of the continuation of an Event of Default) shall not be unreasonably withheld, delayed or conditioned, but may be conditioned on the delivery of additional collateral in the form of cash or cash equivalents acceptable to Lender in respect of the amount by which any such Material Alteration exceeds the Threshold Amount. If Lender’s consent is requested hereunder with respect to a Material Alteration, Lender may retain a construction consultant to review such request and, if such request is granted, Lender may retain a construction consultant to inspect the work from time to time. Borrower shall, on demand by Lender, reimburse Lender for the reasonable fees and disbursements of such consultant.
Section 5.10.     Zoning and Uses . Borrower shall not do any of the following without the prior written consent of Lender:
(i)    initiate or support any limiting change in the permitted uses of any of the Properties (or to the extent applicable, zoning reclassification of any of the Properties) or any portion thereof, seek any variance under existing land use restrictions, laws, rules or regulations (or, to the extent applicable, zoning ordinances) applicable to a Property, or use or permit the use of a Property in a manner that would result in the use of such Property first becoming a nonconforming use under applicable land-use restrictions or

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zoning ordinances or that would violate any of the material terms of any Lease, Material Agreement or Legal Requirement (and if under applicable zoning ordinances the use of all or any portion of any Property is a nonconforming use, Borrower shall not cause or permit such nonconforming use to be discontinued or abandoned);
(ii)    execute or file any subdivision plat affecting any of the Properties, or institute, or permit the institution of, proceedings to alter any tax lot comprising any of the Properties; or
(iii)    permit or consent to any of the Properties being used by the public or any Person in such manner as might reasonably make possible a valid claim of adverse usage or possession or of any implied dedication or easement.
Section 5.11.     Waste . Borrower shall not commit or permit any Waste on any of the Properties, nor take any actions that might invalidate any insurance carried on any of the Properties (and Borrower shall promptly correct any such actions of which Borrower becomes aware).
ARTICLE VI

DEFAULTS
Section 6.1.     Event of Default . The occurrence of any one or more of the following events shall be, and shall constitute the commencement of, an “ Event of Default ” hereunder (any Event of Default that has occurred shall continue unless and until waived by Lender in writing in its sole discretion):
(a)     Payment .
(i)    Borrower shall default in the payment when due of any principal or interest owing hereunder or under the Notes (including any mandatory prepayment required hereunder); or
(ii)    Borrower shall default, and such default shall continue for at least five Business Days after notice to Borrower that such amounts are owing, in the payment when due of fees, expenses or other amounts owing to Lender hereunder, under the Notes or under any of the other Loan Documents (other than principal and interest).
(b)     Representations . Any representation made by Borrower in any of the Loan Documents, or in the Officer’s Certificate shall have been false or misleading in any material respect (or, with respect to any representation that itself contains a materiality qualifier, in any respect) as of the date such representation was made; provided , however , if the falsity of any such representation is first determined by information received by Borrower or Lender in connection with the satisfaction of any Post-Closing Item, and Borrower did not have actual knowledge of such falsity as of the Closing Date, the same shall not constitute an Event of Default hereunder (and the replacement of the applicable Property with a Substitution Property shall constitute Lender’s exclusive remedy for such falsity of such representation), unless
Borrower fails to cooperate with Lender in providing a Substitution Property pursuant to Section 2.1 .

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(c)     Other Loan Documents . Any Loan Document shall fail to be in full force and effect or to convey the material Liens, rights, powers and privileges purported to be created thereby and Borrower shall fail to promptly remedy such failure in accordance with Section 4.9 .
(d)     Bankruptcy, etc .
(i)    Any Borrower or Guarantor shall commence a voluntary case concerning itself under any Title of the United States Code concerning bankruptcy or insolvency (as amended, modified, succeeded or replaced, from time to time, the “ Bankruptcy Code ”);
(ii)    any Borrower or Guarantor shall commence any other proceeding under any reorganization, arrangement, adjustment of debt, relief of creditors, dissolution, insolvency or similar law of any jurisdiction whether now or hereafter in effect relating to such Borrower or Guarantor, or shall dissolve or otherwise cease to exist;
(iii)    there is commenced against any Borrower or Guarantor an involuntary case under the Bankruptcy Code, or any such other proceeding, which remains undismissed for a period of 90 days after commencement;
(iv)    any Borrower or Guarantor is adjudicated insolvent or bankrupt by a court of competent jurisdiction;
(v)    any Borrower or Guarantor suffers appointment of any custodian or the like for it or for any substantial portion of its property and such appointment continues unchanged or unstayed for a period of 90 days after commencement of such appointment;
(vi)    any Borrower or Guarantor makes a general assignment for the benefit of creditors; or
(vii)    any Borrower or Guarantor takes any action for the purpose of effecting any of the foregoing.
(e)     Prohibited Change of Control . A Prohibited Change of Control shall occur.
(f)     Insurance . Borrower shall fail to maintain in full force and effect all Policies required hereunder.
(g)     Negative Covenants . A default shall occur in the due performance or observance by Borrower of any term, covenant or agreement contained in Article V , provided that such default shall not constitute an Event of Default unless and until it shall remain uncured for 30 days after Borrower receives written notice thereof.
(h)     Legal Requirements . Borrower shall fail to cure properly any violations of Legal Requirements affecting all or any portion of any Property that could reasonably be

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expected to result in a Material Adverse Effect within 30 days after Borrower first receives written notice of any such violations; provided , however , if any such violation is reasonably susceptible of cure, but not within such 30 day period, then Borrower shall be permitted up to an additional 30 days to cure such violation provided that Borrower commences a cure within such initial 30 day period and thereafter diligently and continuously pursues such cure.
(i)     Other Covenants . A default shall occur in the due performance or observance by Borrower of any material term, covenant or agreement (other than those referred to in any other subsection of this Section or those, if any, that expressly provide for a notice and cure period other than as set forth in this clause (i)) contained in this Agreement or in any of the other Loan Documents, except that in the case of a default that can be cured by the payment of money, such default shall not constitute an Event of Default unless and until it shall remain uncured for 10 days after Borrower receives written notice thereof; and in the case of a default that cannot be cured by the payment of money but is susceptible of being cured within 30 days, such default shall not constitute an Event of Default unless and until it remains uncured for 30 days after Borrower receives written notice thereof, provided that if such non-monetary default is not cured within such 30 day period despite Borrower’s diligent efforts but is susceptible of being cured within 90 days of Borrower’s receipt of Lender’s original notice, then Borrower shall have such additional time as is reasonably necessary to effect such cure, but in no event in excess of 90 days from Borrower’s receipt of Lender’s original notice, provided that Borrower promptly delivers written notice to Lender of its intention and ability to effect such cure prior to the expiration of such 90 day period.
Section 6.2.     Remedies .
(a)    During the continuance of an Event of Default, Lender may by written notice to Borrower, in addition to any other rights or remedies available pursuant to this Agreement, the Notes, the Mortgages and the other Loan Documents, at law or in equity, declare by written notice to Borrower all or any portion of the Indebtedness to be immediately due and payable, whereupon all or such portion of the Indebtedness shall so become due and payable, and Lender may enforce or avail itself of any or all rights or remedies provided in the Loan Documents against Borrower and the Collateral (including all rights or remedies available at law or in equity); provided , however , that, notwithstanding the foregoing, if an Event of Default specified in Section 6.1(d) shall occur, then (except as specified in Section 6.2(f) below) the Indebtedness shall immediately become due and payable without the giving of any notice or other action by Lender. Any actions taken by Lender shall be cumulative and concurrent and may be pursued independently, singly, successively, together or otherwise, at such time and in such order as Lender may determine in its sole discretion, to the fullest extent permitted by law, without impairing or otherwise affecting the other rights and remedies of Lender permitted by law, equity or contract or as set forth in this Agreement or in the other Loan Documents.
(b)    If Lender forecloses on any Collateral, Lender shall apply all net proceeds of such foreclosure to repay the Indebtedness, the Indebtedness shall be reduced to the extent of such net proceeds and the remaining portion of the Indebtedness shall remain outstanding and secured by the remaining Collateral. At the election of Lender, the Notes shall be deemed to have been accelerated only to the extent of the net proceeds actually received by Lender with respect to the Properties and applied in reduction of the Indebtedness.

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(c)    During the continuance of any Event of Default (including an Event of Default resulting from a failure to satisfy the insurance requirements specified herein), Lender may, but without any obligation to do so and without notice to or demand on Borrower and without releasing Borrower from any obligation hereunder, take any action to cure such Event of Default. Lender may enter upon any or all of the Properties upon reasonable notice to Borrower for such purposes or appear in, defend, or bring any action or proceeding to protect its interest in the Collateral or to foreclose the Mortgages or collect the Indebtedness. The costs and expenses incurred by Lender in exercising rights under this paragraph (including reasonable attorneys’ fees), with interest at the Default Rate for the period after notice from Lender that such costs or expenses were incurred to the date of payment to Lender, shall constitute a portion of the Indebtedness, shall be secured by the Mortgages and other Loan Documents and shall be due and payable to Lender upon demand therefor.
(d)    Interest shall accrue on any judgment obtained by Lender in connection with its enforcement of the Loan at a rate of interest equal to the Default Rate.
(e)    Notwithstanding the availability of legal remedies, Lender will be entitled to obtain specific performance, mandatory or prohibitory injunctive relief, or other equitable relief requiring Borrower to cure or refrain from repeating any Default
(f)    Notwithstanding anything herein to the contrary, if an event specified in Section 6.1(d) occurs solely in respect of Guarantor and not any Borrower, then such event shall not constitute an Event of Default or result in an acceleration of the Loan unless, in each case, Lender so determines in its sole discretion by written notice to Borrower; and unless and until Lender sends such notice, a Trigger Period shall be deemed to have commenced for all purposes hereunder, which Trigger Period shall continue until the Loan is repaid in full.
(g)    Upon the occurrence and during the continuance of an Event of Default, Lender shall have the right from time to time to sever the Note and the other Loan Documents into one or more separate notes, mortgages and other security documents (the “ Severed Loan Documents ”) in such denominations as Lender shall determine in its sole discretion for purposes of evidencing and enforcing its rights and remedies provided hereunder. Borrower shall execute and deliver to Lender from time to time, promptly after the request of Lender, a severance agreement and such other documents as Lender shall request in order to effect the severance described in the preceding sentence, all in form and substance reasonably satisfactory to Lender. Borrower hereby absolutely and irrevocably appoints Lender as its true and lawful attorney, coupled with an interest, in its name and stead to execute the Severed Loan Documents (Borrower ratifying all that its said attorney shall do by virtue thereof); provided , however , that Lender shall not make or execute any such Severed Loan Documents under such power until the expiration of three days after written notice has been given to Borrower by Lender of Lender’s intent to exercise its rights under the aforesaid power. Borrower shall be obligated to pay any costs or expenses incurred in connection with the preparation, execution, recording or filing of the Severed Loan Documents. The Severed Loan Documents shall not contain any representations, warranties or covenants not contained in the Loan Documents, and any such representations and warranties contained in the Severed Loan Documents will be given by Borrower only as of the Closing Date.

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Section 6.3.     Application of Payments after an Event of Default . Notwithstanding anything to the contrary contained herein, during the continuance of an Event of Default, all amounts received by Lender in respect of the Loan shall be applied at Lender’s sole discretion either toward the components of the Indebtedness ( e.g. , Lender’s expenses in enforcing the Loan, interest, principal and other amounts payable hereunder) and the Notes or Note Components in such sequence as Lender shall elect in its sole discretion, or toward the payment of Property expenses.
ARTICLE VII

MISCELLANEOUS
Section 7.1.     Successors . Except as otherwise provided in this Agreement, whenever in this Agreement any of the parties to this Agreement is referred to, such reference shall be deemed to include the successors and permitted assigns of such party. All covenants, promises and agreements in this Agreement contained, by or on behalf of Borrower, shall inure to the benefit of Lender and its successors and assigns.
Section 7.2.     GOVERNING LAW .
(A)    THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CHOICE OF LAW RULES TO THE EXTENT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
(B)    ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST LENDER OR BORROWER ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS (OTHER THAN ANY ACTION IN RESPECT OF THE CREATION, PERFECTION OR ENFORCEMENT OF A LIEN OR SECURITY INTEREST CREATED PURSUANT TO ANY LOAN DOCUMENTS NOT GOVERNED BY THE LAWS OF THE STATE OF NEW YORK) MAY BE INSTITUTED IN ANY FEDERAL OR STATE COURT IN NEW YORK, NEW YORK. BORROWER AND LENDER HEREBY (i) IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT THEY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM, (ii) IRREVOCABLY SUBMIT TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUCH SUIT, ACTION OR PROCEEDING, AND (iii) IRREVOCABLY CONSENT TO SERVICE OF PROCESS BY MAIL, PERSONAL SERVICE OR IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW, AT THE ADDRESS SPECIFIED IN SECTION 7.4 (AND AGREES THAT SUCH SERVICE AT SUCH ADDRESS IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER ITSELF IN ANY SUCH SUIT, ACTION OR PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT).

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Section 7.3.     Modification, Waiver in Writing . Neither this Agreement nor any other Loan Document may be amended, changed, waived, discharged or terminated, nor shall any consent or approval of Lender be granted hereunder, unless such amendment, change, waiver, discharge, termination, consent or approval is in writing signed by Lender.
Section 7.4.     Notices . All notices, consents, approvals and requests required or permitted hereunder or under any other Loan Document shall be given in writing by expedited prepaid delivery service, either commercial or United States Postal Service, with proof of delivery or attempted delivery, addressed as follows (except that any party hereto may change its address and other contact information for purposes hereof at any time by sending a written notice to the other parties to this Agreement in the manner provided for in this Section). A notice shall be deemed to have been given when delivered or upon refusal to accept delivery.
If to Lender:
c/o ESL Investments, Inc.
1170 Kane Concourse, Suite 200
Bay Harbor Islands, FL 33154
Attention: Edward S. Lampert, CEO

and

ESL Investments, Inc.
1170 Kane Concourse, Suite 200
Bay Harbor Islands, FL 33154
Attention: Harold R. Talisman
with copies to:

with a copy (which shall not constitute notice) to:

Cleary Gottlieb Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attention: Steven G. Horowitz, Esq.

    If to Borrower:
Sears, Roebuck and Co.
3333 Beverly Road
Hoffman Estates, Illinois 60179
Attention: General Counsel

with copies to (which shall not constitute notice:

Sears, Roebuck and Co.
3333 Beverly Road, Dept. 824RE
Hoffman Estates, IL  60179

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Attention:  Vice President Real Estate

and

Sears, Roebuck and Co.
3333 Beverly Road, Dept. 824RE
Hoffman Estates, IL  60179
Attention:  Associate General Counsel, Real Estate
 
and

Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Scott Charles, Esq.

Borrowers hereby appoint the individual Borrower named as notice party above (the “ Representative Borrower ”) to serve as agent on behalf of all Borrowers to receive any notices required to be delivered to any or all Borrowers hereunder or under the other Loan Documents and to be the sole party authorized to deliver notices on behalf of the Borrowers hereunder and under each of the other Loan Documents. Any notice delivered to the Representative Borrower shall be deemed to have been delivered to all Borrowers, and any notice received from the Representative Borrower shall be deemed to have been received from all Borrowers. Borrowers shall be entitled from time to time to appoint a replacement Representative Borrower by written notice delivered to Lender and signed by both the new Representative Borrower and the Representative Borrower being so replaced.
Section 7.5.     TRIAL BY JURY . LENDER AND BORROWER, TO THE FULLEST EXTENT THAT THEY MAY LAWFULLY DO SO, HEREBY AGREE NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVE ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THE LOAN DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY LENDER AND BORROWER AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE. LENDER AND BORROWER ARE EACH HEREBY INDIVIDUALLY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER.
Section 7.6.     Headings . The Article and Section headings in this Agreement are included in this Agreement for convenience of reference only and shall not constitute a part of this Agreement for any other purpose.
Section 7.7.     Assignment and Participation .

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(a)    Except as expressly set forth in Article II , Borrower may not sell, assign or otherwise transfer any rights, obligations or other interest of Borrower in or under the Loan Documents.
(b)    Lender and each assignee of all or a portion of the Loan shall have the right from time to time in its discretion and without the consent of Borrower to sell one or more of the Notes or Note Components or any interest therein (an “ Assignment ”) and/or sell a participation interest in one or more of the Notes or Note Components (a “ Participation ”), in each case other than to a competitor or affiliate of a competitor of any Borrower or Guarantor; provided that so long as no Event of Default is continuing, no Assignment may occur if it results in the Persons party this Agreement as Lender on the date hereof or their affiliates holding less than a majority of the aggregate principal amount of the outstanding Loans, unless an Assignment of a larger portion of the Loan is required to satisfy liquidity requirements relating to redemption requests by such Person’s investors. Borrower shall reasonably cooperate with Lender, at Lender’s request, in order to effectuate any such Assignment or Participation. In the case of an Assignment, (i) each assignee shall have, to the extent of such Assignment, the rights, benefits and obligations of the assigning Lender as a “Lender” hereunder and under the other Loan Documents, (ii) the assigning Lender shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to an Assignment, relinquish its rights and be released from its obligations under this Agreement, and (iii) one Person shall serve as agent for all Lenders and shall be the sole Lender to whom notices, requests and other communications shall be addressed and the sole party authorized to grant or withhold consents hereunder on behalf of the Lenders (subject, in each case, to appointment of a Servicer, pursuant to Section 7.21 , to receive such notices, requests and other communications and/or to grant or withhold consents, as the case may be). Notwithstanding anything in this Agreement to the contrary, after an Assignment, the assigning Lender (in addition to the assignee) shall continue to have the benefits of any indemnifications contained in this Agreement that such assigning Lender had prior to such assignment with respect to matters occurring prior to the date of such assignment. If, pursuant to this Section, any interest in this Agreement or any Note is transferred to any transferee, such transferee shall, promptly upon receipt of written request from Borrower, furnish to Borrower Form W-9, Form W-8BEN, Form W-8BEN-E or Form W-8ECI, as applicable.
Section 7.8.     Severability . Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or would otherwise be within the limitations of, another covenant shall not avoid the occurrence of a Default or an Event of Default if such action is taken or condition exists.
Section 7.9.     Preferences; Waiver of Marshalling of Assets . Lender shall have no obligation to marshal any assets in favor of Borrower or any other party or against or in payment of any or all of the obligations of Borrower pursuant to the Loan Documents. Lender shall have the continuing and exclusive right to apply or reverse and reapply any and all payments by Borrower to any portion of the obligations of Borrower hereunder and under the

44


Loan Documents. If any payment to Lender is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then the obligations hereunder or portion thereof intended to be satisfied by such payment shall be revived and continue in full force and effect, as if such payment had not been made. Borrower hereby waives any legal right otherwise available to Borrower that would require the sale of any Collateral either separate or apart from other Collateral, or require Lender to exhaust its remedies against any Collateral before proceeding against any other Collateral. Without limiting the foregoing, to the fullest extent permitted by law, Borrower hereby waives and shall not assert any rights in respect of a marshalling of Collateral, a sale in the inverse order of alienation, any homestead exemption, the administration of estates of decedents, or any other matters whatsoever to defeat, reduce or affect the right of Lender under the Loan Documents to a sale of the Collateral or any portion thereof in any sequence and any combination as determined by Lender in its sole discretion.
Section 7.10.     Remedies of Borrower . If a claim is made that Lender or its agents have unreasonably delayed acting or acted unreasonably (including unreasonable refusal of, or unreasonable conditioning of, of any consent or approval of Lender required hereunder) in any case where by law or under this Agreement or the other Loan Documents any of such Persons has an obligation to act promptly or reasonably, Borrower agrees that no such Person shall be liable for any monetary damages, and Borrower’s sole remedy shall be limited to commencing an action seeking specific performance, injunctive relief and/or declaratory judgment. Without limiting the foregoing, Borrower shall not assert, and hereby waives, any claim against Lender and/or its affiliates, directors, employees, attorneys, agents or sub-agents, on any theory of liability, for special, indirect, consequential or punitive damages (whether or not the claim therefor is based on contract, tort or duty imposed by any applicable Legal Requirement) arising out of, as a result of, or in any way related to, the Loan Agreement or any other Loan Document or any agreement or instrument contemplated hereby or thereby or referred to herein or therein, the transactions contemplated hereby or thereby, the Loan or the use of the proceeds thereof or any act or omission or event occurring in connection therewith, and Borrower hereby waives, releases and agrees not to sue upon any such claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor.
Section 7.11.     Offsets, Counterclaims and Defenses . All payments made by Borrower hereunder or under the other Loan Documents shall be made irrespective of, and without any deduction for, any offsets, counterclaims or defenses. Borrower waives the right to assert a counterclaim, other than a mandatory or compulsory counterclaim, in any action or proceeding brought against it by Lender arising out of or in any way connected with the Notes, this Agreement, the other Loan Documents or the Indebtedness. Any assignee of Lender’s interest in the Loan shall take the same free and clear of all offsets, counterclaims or defenses against the assigning Lender.
Section 7.12.     No Joint Venture . Nothing in this Agreement is intended to create a joint venture, partnership, tenancy-in-common, or joint tenancy relationship between Borrower and Lender, nor to grant Lender any interest in any Property other than that of mortgagee or lender.

45


Section 7.13.     Conflict; Construction of Documents . In the event of any conflict between the provisions of this Agreement and the provisions of the other Loan Documents, the provisions of this Agreement shall prevail. The parties acknowledge that they were each represented by competent counsel in connection with the negotiation, drafting and execution of the Loan Documents and that the Loan Documents shall not be subject to the principle of construing their meaning against the party that drafted same.
Section 7.14.     Brokers and Financial Advisors . Borrower represents that neither it nor Guarantor has dealt with any financial advisors, brokers, underwriters, placement agents, agents or finders in connection with the transactions contemplated by this Agreement. Borrower shall indemnify and hold Lender harmless from and against any and all claims, liabilities, costs and expenses of any kind in any way relating to or arising from a claim by any Person that such Person acted on behalf of Borrower in connection with the transactions contemplated in this Agreement. The provisions of this Section shall survive the expiration and termination of this Agreement and the repayment of the Indebtedness.
Section 7.15.     Counterparts . This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. Copies of originals, including copies delivered by facsimile, pdf or other electronic means shall have the same import and effect as original counterparts and shall be valid, enforceable and binding for the purposes of this Agreement.
Section 7.16.     Estoppel Certificates .
(a)    Borrower shall execute, acknowledge and deliver to Lender, within five days after receipt of Lender’s written request therefor at any time from time to time, a statement in writing setting forth (A) the Principal Indebtedness, (B) the date on which installments of interest and/or principal were last paid, (C) any offsets or defenses to the payment of the Indebtedness, (D) that the Notes, this Agreement, the Mortgages and the other Loan Documents are valid, legal and binding obligations and have not been modified or if modified, giving particulars of such modification and (E) that neither Borrower nor, to Borrower’s knowledge, Lender, is in default under the Loan Documents (or specifying any such default). Any prospective purchaser of any interest in a Loan shall be permitted to rely on such certificate.
(b)    Upon Lender’s written request, Borrower shall use commercially reasonable efforts to obtain from each Tenant and thereafter promptly deliver to Lender duly executed estoppel certificates from any one or more Tenants specified by Lender, attesting to such facts regarding the Leases as Lender may reasonably require, including attestations that each Lease covered thereby is in full force and effect with no material defaults thereunder on the part of any party, that rent has not been paid more than one month in advance, except as security, and that the Tenant claims no defense or offset against the full and timely performance of its obligations under the Lease.

46


Section 7.17.     General Indemnity; Payment of Expenses .
(a)    Borrower, at its sole cost and expense, shall protect, indemnify, reimburse, defend and hold harmless Lender and its officers, partners, members, directors, trustees, advisors, employees, agents, sub-agents, affiliates, successors, participants and assigns of any and all of the foregoing (collectively, the “ Indemnified Parties ”) for, from and against any and all Damages of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against any of the Indemnified Parties, in any way relating to or arising out of Lender’s interest in the Loan; provided, however, that no Indemnified Party shall have the right to be indemnified hereunder to the extent that such Damages have been found by a final, non-appealable judgment of a court of competent jurisdiction to have resulted from the gross negligence, bad faith or willful misconduct of such Indemnified Party.
(b)    If for any reason (including violation of law or public policy) the undertakings to defend, indemnify, pay and hold harmless set forth in this Section are unenforceable in whole or in part or are otherwise unavailable to an Indemnified Party or insufficient to hold it harmless, then Borrower shall contribute to the amount paid or payable by an Indemnified Party as a result of any Damages the maximum amount Borrower is permitted to pay under Legal Requirements. The obligations of Borrower under this Section will be in addition to any liability that Borrower may otherwise have hereunder and under the other Loan Documents.
(c)    To the extent any Indemnified Party has notice of a claim for which it intends to seek indemnification hereunder, such Indemnified Party shall give prompt written notice thereof to Borrower, provided that failure by Lender to so notify Borrower will not relieve Borrower of its obligations under this Section, except to the extent that Borrower suffers actual prejudice as a result of such failure. In connection with any claim for which indemnification is sought hereunder, Borrower shall have the right to defend the applicable Indemnified Party (if requested by the applicable Indemnified Party, in the name of such Indemnified Party) from such claim by attorneys and other professionals reasonably approved by the applicable Indemnified Party. Upon assumption by Borrower of any defense pursuant to the immediately preceding sentence, Borrower shall have the right to control such defense, provided that the Applicable Indemnified Party shall have the right to reasonably participate in such defense and Borrower shall not consent to the terms of any compromise or settlement of any action defended by Borrower in accordance with the foregoing without the prior consent of the applicable Indemnified Party, unless such compromise or settlement (i) includes an unconditional release of the applicable Indemnified Party from all liability arising out of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the applicable Indemnified Party. The applicable Indemnified Party shall have the right to retain its own counsel if (i) Borrower shall have failed to employ counsel reasonably satisfactory to the applicable Indemnified Party in a timely manner, or (ii) the applicable Indemnified Party shall have been advised by counsel that there are actual or potential material conflicts of interest between Borrower and the applicable Indemnified Party, including situations in which there are one or more legal defenses available to the applicable Indemnified Party that are different from or additional to those available to Borrower. So long as Borrower is conducting the defense of any action defended by Borrower in accordance with the foregoing in a prudent and commercially reasonable manner, Lender and the applicable Indemnified Party shall not

47


compromise or settle such action defended without Borrower’s consent, which shall not be unreasonably withheld or delayed. Upon demand, Borrower shall pay or, in the sole discretion of the applicable Indemnified Party, reimburse the applicable Indemnified Party for the payment of reasonable fees and disbursements of attorneys, engineers, environmental consultants, laboratories and other professionals retained by the Applicable Indemnified Party in accordance with this Section in connection with defending any claim subject to indemnification hereunder.
(d)    Any amounts payable to Lender by reason of the application of this Section shall be secured by the Mortgages and shall become immediately due and payable and shall bear interest at the Default Rate from the date Damages are sustained by the Indemnified Parties until paid.
(e)    The provisions of and undertakings and indemnifications set forth in this Section shall survive the satisfaction and payment in full of the Indebtedness and termination of this Agreement.
(f)    Borrower shall reimburse Lender upon receipt of written notice from Lender for (i) all reasonable and documented out-of-pocket costs and expenses incurred by Lender (or any of its affiliates) in connection with the origination of the Loan (whether incurred before or after the Closing Date), including legal fees and disbursements, accounting fees, and the costs of the Engineering Reports, the Title Insurance Policies, the Surveys, the Environmental Reports and any other third-party diligence materials; (ii) all reasonable and documented out-of-pocket costs and expenses incurred by Lender (or any of its affiliates) in connection with (A) the negotiation, preparation, execution, delivery and administration of any consents, amendments, waivers or other modifications to this Agreement and the other Loan Documents and any other documents or matters relating hereto (including Leases, Material Agreements, and Permitted Encumbrances), (B) filing, registration and recording fees and expenses and other similar expenses incurred in creating and perfecting the Liens in favor of Lender pursuant to this Agreement and the other Loan Documents (including the filing, registration or recording of any instrument of further assurance) and all stamp, court, recording, filing, documentary or other similar taxes (including, if applicable, intangible taxes), search fees, title insurance premiums, duties, imposts, assessments and charges arising out of or in connection with the execution and delivery of the Loan Documents, any mortgage supplemental thereto, any security instrument with respect to the Collateral or any instrument of further assurance (other than any such taxes or charges resulting from any present or former connection between Lender and the jurisdiction imposing such tax or charges (other than connections arising from the Lender having executed, delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to or enforced any Loan Document, or sold or assigned an interest in the Loan or any Loan Document)) and (C) enforcing or preserving any rights, in response to third party claims or the prosecuting or defending of any action or proceeding or other litigation, in each case against, under or affecting Borrower, this Agreement, the other Loan Documents or any Collateral; and (iii) all actual out-of-pocket costs and expenses (including attorney’s fees and, if the Loan has been Securitized, special servicing fees) incurred by Lender (or any of its affiliates) in connection with the enforcement of any obligations of Borrower, or a Default by Borrower, under the Loan Documents, including any actual or attempted foreclosure, deed-in-

48


lieu of foreclosure, refinancing, restructuring, settlement, protective advance or workout and any insolvency or bankruptcy proceedings (including any applicable transfer taxes).
Section 7.18.     No Third-Party Beneficiaries . This Agreement and the other Loan Documents are solely for the benefit of Lender and Borrower, and nothing contained in this Agreement or the other Loan Documents shall be deemed to confer upon anyone other than Lender, Borrower and Indemnified Parties any right to insist upon or to enforce the performance or observance of any of the obligations contained herein or therein. All conditions to the obligations of Lender to make the Loan hereunder are imposed solely and exclusively for the benefit of Lender, and no other Person shall have standing to require satisfaction of such conditions in accordance with their terms or be entitled to assume that Lender will refuse to make the Loan in the absence of strict compliance with any or all thereof, and no other Person shall under any circumstances be deemed to be a beneficiary of such conditions, any or all of which may be freely waived in whole or in part by Lender if, in Lender’s sole discretion, Lender deems it advisable or desirable to do so.
Section 7.19.     Right of Set-Off . In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, during the continuance of an Event of Default, Lender may from time to time, without presentment, demand, protest or other notice of any kind (all of such rights being hereby expressly waived), set-off and appropriate and apply any and all deposits (general or special) and any other indebtedness at any time held or owing by Lender (including branches, agencies or affiliates of Lender wherever located) to or for the credit or the account of Borrower against the obligations and liabilities of Borrower to Lender hereunder, under the Notes, the other Loan Documents or otherwise, irrespective of whether Lender shall have made any demand hereunder and although such obligations, liabilities or claims, or any of them, may be contingent or unmatured, and any such set-off shall be deemed to have been made immediately upon the occurrence of an Event of Default even though such charge is made or entered on the books of Lender subsequent thereto.
Section 7.20.     Exculpation of Lender . Lender neither undertakes nor assumes any responsibility or duty to Borrower or any other party to select, review, inspect, examine, supervise, pass judgment upon or inform Borrower or any third party of (a) the existence, quality, adequacy or suitability of Appraisals of the Properties or other Collateral, (b) any environmental report, or (c) any other matters or items, including engineering, soils and seismic reports that are contemplated in the Loan Documents. Any such selection, review, inspection, examination and the like, and any other due diligence conducted by Lender, is solely for the purpose of protecting Lender’s rights under the Loan Documents, and shall not render Lender liable to Borrower or any third party for the existence, sufficiency, accuracy, completeness or legality thereof.
Section 7.21.     Servicer . Lender may delegate any and all rights and obligations of Lender hereunder and under the other Loan Documents to the Servicer upon notice by Lender to Borrower, whereupon any notice or consent from the Servicer to Borrower, and any action by Servicer on Lender’s behalf, shall have the same force and effect as if Servicer were Lender.
Section 7.22.     No Fiduciary Duty .

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(a)    Borrower acknowledges that, in connection with this Agreement, the other Loan Documents and the Transaction, Lender has relied upon and assumed the accuracy and completeness of all of the financial, legal, regulatory, accounting, tax and other information provided to, discussed with or reviewed by Lender for such purposes, and Lender does not assume any liability therefor or responsibility for the accuracy, completeness or independent verification thereof. Lender, its affiliates and their respective equityholders and employees (for purposes of this Section, the “Lending Parties”) have no obligation to conduct any independent evaluation or appraisal of the assets or liabilities (including any contingent, derivative or off-balance sheet assets and liabilities) of Guarantor, Borrower or any other Person or any of their respective affiliates or to advise or opine on any related solvency or viability issues.
(b)    It is understood and agreed that (i) the Lending Parties shall act under this Agreement and the other Loan Documents as an independent contractor, (ii) the Transaction is an arm’s-length commercial transaction between the Lending Parties, on the one hand, and Borrower, on the other, (iii) each Lending Party is acting solely as principal and not as the agent or fiduciary of Borrower, Guarantor or their respective affiliates, stockholders, employees or creditors or any other Person and (iv) nothing in this Agreement, the other Loan Documents or the Transaction shall be deemed to create (A) a fiduciary duty (or other implied duty) on the party of any Lending Party to Guarantor, Borrower, any of their respective affiliates, stockholders, employees or creditors, or any other Person or (B) a fiduciary or agency relationship between Guarantor, Borrower or any of their respective affiliates, stockholders, employees or creditors, on the one hand, and the Lending Parties, on the other. Borrower agrees that neither it nor Guarantor nor any of their respective affiliates shall make, and hereby waives, any claim against the Lending Parties based on an assertion that any Lending Party has rendered advisory services of any nature or respect, or owes a fiduciary or similar duty to Borrower, Guarantor or their respective affiliates, stockholders, employees or creditors. Nothing in this Agreement or the other Loan Documents is intended to confer upon any other Person (including affiliates, stockholders, employees or creditors of Borrower and Guarantor) any rights or remedies by reason of any fiduciary or similar duty.
(c)    Borrower acknowledges and agrees that Borrower has consulted its own legal and financial advisors to the extent it deemed appropriate and that it is responsible for making its own independent judgment with respect to this Agreement, the other Loan Documents, the Transaction and the process leading thereto.
Section 7.23.     Borrower Information . Borrower shall make available to Lender all information concerning its business and operations that Lender may reasonably request. Lender agrees that it shall maintain in confidence any information relating to Borrower, Guarantor, any of their subsidiaries, their businesses or the Properties furnished to it by or on behalf of Borrower, Guarantor or any of their subsidiaries; provided that Lender shall have the right to disclose any and all such information (i) to affiliates of Lender and to Lender’s agents and advisors (so long as each such Person shall have been instructed to keep the same confidential in accordance with this Section 7.23), (ii) to any actual or potential assignee, transferee or Participant in connection with the contemplated assignment, transfer or participation of all or any portion of the Loan or any participations therein and their respective advisors and agents, or to any direct or indirect contractual counterparties (or the professional advisors thereto) to any swap or derivative transaction relating to Borrower and its obligations,

50


or to any Person that is a party to a repurchase agreement with respect to the Loan (so long as each such Person shall have been instructed to keep the same confidential in accordance with this Section 7.23) and (iii) to any governmental agency, if requested by such governmental agency or otherwise required to comply with the applicable rules and regulations of such governmental agency or if required pursuant to legal or judicial process. In addition, Lender may disclose the existence of this Agreement and the information about this Agreement to market data collectors, similar services providers to the lending industry, and service providers to Lender in connection with the administration and management of this Agreement and the other Loan Documents. Each party hereto (and each of their respective affiliates, employees, representatives or other agents) may disclose to any and all Persons, without limitation of any kind, the tax treatment and tax structure of the Transaction and all materials of any kind (including opinions and other tax analyses) that are provided to any such party relating to such tax treatment and tax structure. For the purpose of this Section, “tax structure” means any facts relevant to the federal income tax treatment of the Transaction but does not include information relating to the identity of any of the parties hereto or any of their respective affiliates.
Section 7.24.     Prior Agreements . THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS CONTAIN THE ENTIRE AGREEMENT OF THE PARTIES HERETO AND THERETO IN RESPECT OF THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY, AND ALL PRIOR AGREEMENTS AMONG OR BETWEEN SUCH PARTIES, WHETHER ORAL OR WRITTEN, INCLUDING ANY TERM SHEETS, CONFIDENTIALITY AGREEMENTS AND COMMITMENT LETTERS, ARE SUPERSEDED BY THE TERMS OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (EXCEPT THAT ANY ORIGINATION FEE SPECIFIED IN ANY TERM SHEET, COMMITMENT LETTER OR FEE LETTER SHALL BE AN OBLIGATION OF BORROWER AND SHALL BE PAID AT CLOSING, AND ANY INDEMNIFICATIONS, FLEX PROVISION, EXIT FEES AND THE LIKE PROVIDED FOR THEREIN SHALL SURVIVE THE CLOSING).
Section 7.25.     Delay Not a Waiver . Neither any failure nor any delay on the part of Lender in insisting upon strict performance of any term, condition, covenant or agreement, or exercising any right, power, remedy or privilege hereunder, under any other Loan Document, or under any other instrument given as security therefor, shall operate as or constitute a waiver thereof, nor shall a single or partial exercise thereof preclude any other future exercise, or the exercise of any other right, power, remedy or privilege. In particular, and not by way of limitation, by accepting payment after the due date of any amount payable hereunder or under any other Loan Document, Lender shall not be deemed to have waived any right either to require prompt payment when due of all other amounts due under this Agreement, the Note or the other Loan Documents, or to declare a default for failure to effect prompt payment of any such other amount.
Section 7.26.     Schedules and Exhibits Incorporated . The Schedules and Exhibits annexed hereto are hereby incorporated herein as a part of this Agreement with the same effect as if set forth in the body hereof.
Section 7.27.     Joint and Several Liability . The representations, covenants, warranties and obligations of Borrower hereunder are joint and several. In the event of (a) any

51


payment by any one or more of the Borrowers of any amount in excess of its respective Proportional Amount, or (b) the foreclosure of, or the delivery of deeds in lieu of foreclosure relating to, any of the Collateral owned by one or more of the Borrowers, each Borrower (the “ Overpaying Borrower ”) that has paid more than its Proportional Amount or whose Collateral or assets have been utilized to satisfy obligations under the Loan or otherwise for the benefit of one or more other Borrowers shall be entitled, after payment in full of the Note and the satisfaction of all the Borrowers’ other obligations to the Lender under the Loan Documents, to contribution from each of the benefited Borrowers (i.e., the Borrowers, other than the Overpaying Borrower, who have paid less than their respective Proportional Amount or whose Collateral or assets have not been so utilized to satisfy obligations under the Loan) for the amounts so paid, advanced or benefited, up to such benefited Borrower’s then current Proportional Amount. Such right to contribution shall be subordinate in all respects to the Loan. As used herein, the “ Proportional Amount ” with respect to any Borrower shall equal the amount derived as follows: (a) the ratio of the aggregate amount of the Loan allocable to the Property or Properties in which such Borrower has an interest to the then outstanding Principal Indebtedness; times (b) the aggregate amount paid or payable by the Borrowers under the Loan Documents (including interest).
Section 7.28.     Survival or Representations . All of the representations of Borrower set forth in this Agreement and in the other Loan Documents shall survive for so long as any portion of the Indebtedness is outstanding. All representations, covenants and agreements made by Borrower in this Agreement or in the other Loan Documents shall be deemed to have been relied upon by Lender notwithstanding any investigation heretofore or hereafter made by Lender or on its behalf.
Section 7.29.     Certain Tax Forms . Upon request of Borrower, Lender shall provide to Borrower a duly completed and executed Form W-9, Form W-8BEN, Form W-8BEN-E or Form W-8ECI, as applicable.

[ Signatures appear on following pages .]










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BORROWER :

SEARS DEVELOPMENT CO., a Delaware corporation  
   
By: /s/ Robert A. Riecker
         Name: Robert A. Riecker
Title: Vice President


   






























 
BORROWER :

SEARS, ROEBUCK & CO., a New York corporation  
   
By: /s/ Robert A. Schriesheim
         Name: Robert A. Schriesheim
Title: Executive Vice President and Chief
Financial Officer


   


 
BORROWER :

KMART CORPORATION, a Michigan corporation  
   
By: /s/ Robert A. Schriesheim
         Name: Robert A. Schriesheim
Title: Executive Vice President and Chief
Financial Officer


   


 
LENDER :

JPP, LLC, a Delaware limited liability company  
   
By: /s/ Edward S. Lampert
         Name: Edward S. Lampert


   





 
LENDER :

JPP II, LLC, a Delaware limited liability company  
   
By: /s/ Edward S. Lampert
         Name: Edward S. Lampert


   



Exhibit A



Organizational Chart


Schedule A
Insurance Policies









Schedule B
Material Agreements
A.    S#1638, Brea, CA
-
Letter Agreement dated May 28, 1992 between Corporate Property Investors and SRC re: CAM costs and Parking Deck.
-
Mutual Release and Settlement Agreement dated December 12, 2011 between SRC and The Retail Property Trust.
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
B.    S#1179, Canoga Park, CA
-
Separate Agreement dated December 29, 1995 between Topanga Plaza Partnership and SRC.
-
Amendment to Separate Agreement dated July 1, 1999 between Topanga Plaza LLC and SRC.
-
Letter Agreement dated November 18, 2002 between Westfield Corporation and SRC.
-
Notice dated May 18, 2006 from Westfield Topanga Owner LP to SRC.
-
Second Amendment to Separate Agreement dated May 18, 2006 between Westfield Topanga Owner, LLC and SRC.
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
C.    S#1518, Cerritos, CA
-
Agreement (1970?) between Broadway-Hale Stores, Inc., Landina, Inc., SRC, and Adcor Realty Corporation re: payment for execution of the REA, executed by Broadway-Hale Stores, Inc.
-
Agreement (1970?) between Broadway-Hale Stores, Inc., Landina, Inc., SRC, and Adcor Realty Corporation re: payment for execution of the REA, executed by SRC (Legal Approval dated February 10, 1971.
-
Approved Area Request for parking lot modification dated September 30, 1996 from The Hahn Company
-
Supplemental Agreement dated May 7, 2009 between Macerich Cerritos, LLC and SRC.
-
Amendment to Supplemental Agreement dated October 22, 2013 between Macerich Cerritos, LLC and SRC.


Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
D.    S#1358, Chula Vista, CA
-
Separate Agreement dated May 1, 1992 between Homart Development Company and SRC.
-
Memorandum of Separate Agreement dated May 1, 1992 between Homart Development Co. and SRC.
-
State of California, Dept. of Parks and Recreation Continuation Sheet dated September, 2013.
-
Minutes of City of Chula Vista Historic Preservation Commission dated December 4, 2013.
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
E.    S#1468, Cupertino, CA
-
First Agreement Supplementing Agreement (Sears Allocable Share) dated August 1, 1975 between Vallco Fashion Park Venture and SRC.
-
Second Agreement Supplementing Agreement (Sears Allocable Share) dated September 14, 1976 between Vallco Fashion Park Venture and SRC.
-
Supplemental Agreement dated March 6, 2006 between Vallco International Shopping Center LLC and SRC.
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
F.    S#1019, Pleasanton, CA
-
Supplemental Agreement dated October 1, 1997 between Security Trust Company and SRC.
-
Amendment to Supplemental Agreement dated June 16, 2006 between Stoneridge Properties, LLC and SRC.
-
Second Amendment to Supplemental Agreement dated March 13, 2013 between Stoneridge Properties, LLC and SRC.
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
G.    K#7678, San Diego, CA


-
License Agreement dated December 8, 1994 between CALMAT Co., and Rio Vista Station Joint Venture.
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
H.    S#1648, San Diego, CA
-
Supplemental Agreement dated September 20, 1983 between University Town Center Associates and SRC.
-
License, Indemnity and Dedication Agreement dated January 15, 1990 between University Town Center Associates, Adcor Realty Corporation, Teacher’s Insurance and Annuity Association and GSC Realty Corporation.
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
I.    S#1178, Santa Monica, CA
-
Any and all recorded REAdocuments only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
J.    S#1303, Danbury, CT
-    Acceptance Letter from Marc Weissman Associates (Architect) dated May 24, 1985.
-    Supplemental Agreement dated July 1, 1985 between Danbury Mall Associates and SRC.
-
Letter Agreement amending Supplemental Agreement dated November 5, 1986 between Danbury Mall Associates and SRC.
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
K.    S#1645, Boca Raton, FL
-
Supplemental Agreement dated April 8, 1979 between Federated Stores Realty, Inc. and SRC.
-
Retention Pond Cost Sharing Agreement dated February 1, 1985 between Arvida Corporation and Town Center Associates.
-    Letter Agreement dated December 20, 1985 between JMB/Federated Realty and SRC.
-    Letter Agreement dated August 8, 1979 between Federated Department Stores and SRC.
-    Letter Agreement dated July 12, 1985 between Arvida Corporation and SRC.


-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
L.    S#1655, Miami, FL
-
Supplemental Agreement dated September 24 th , 1981 between Aventura Mall Venture and SRC.
-
Second Supplemental Agreement dated March 19, 1998 between Aventura Mall Venture and SRC.
-
Third Supplemental Agreement dated April 30, 2007 between Aventura Mall Venture and SRC.
-
Parking Agreement dated May 17, 1985 between Aventura Mall Venture and SRC, J.C. Penney Company, Inc., Macy’s New York, Inc., and Associates Dry Goods Corporation.
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
M.    K#7480, Honolulu, HI
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
N.    K#3371, Chicago, IL
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
O.    S#1300, Oakbrook, IL
-    Consent Letter dated July 28, 1997 from SRC (re: Nordstrom expansion)
-    Letter Agreement dated March 29, 2012 between SRC and Macy’s Retail Holdings, Inc.
-
Master Operating Agreement dated October 22, 2010 between SRC and Custom Cosmetics Retail Group, Inc. dba Colorlab
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
P.    S#1570, Schaumburg, IL
-
Letter Agreement dated April 2, 1990 between SRC and The Taubman Company.
-
Guaranty dated June 21, 1971 of Chicago Title and Trust Company Trust No.46746 in favor of SRC, among others.


-
Amended and Restated Supplemental Agreement dated December 16, 1993 between Chicago Title & Trust Company Trust No. 46746 and SRC.
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
Q.    S#1163, Burlington, MA
-
Supplemental Agreement dated December 7, 1987 between SRC and Bellwether Properties of Massachusetts, Limited Partnership
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
R.    S#1294, Watchung, NJ
-
Any and all recorded documents listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
S.    S#1434, Wayne, NJ
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
T.    S#2507, McAllen, TX
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
U.    S#1067, Memorial City, TX
-
Sears Supplemental Agreement to Amended and Restated Construction, Operation, and Reciprocal Easement Agreement dated July 14, 2004 between MNC Mall, Ltd. and SRC.
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
V.    S#1127, Shepherd, TX
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
W.    S#1057, Dallas TX
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.


X.    S#1814, Fairfax, VA
-
Supplemental Agreement No. 1 dated June 27, 1978 between Fairfax Associates and SRC.
-
Supplemental Agreement No. 2 dated June 27, 1978 between Fairfax Associates and SRC.
-    Consent Letter dated July 8, 1987 from SRC to May Department Stores.
-
Letter dated April 18, 1997 from Fairfax Associates to Homestead Village, Inc. re: access road.
-
First Amendment to Supplemental Agreement No. 1 dated March 29, 1999 between Fairfax Company of Virginia, L.L.C. and SRC.
-
Letter Agreement dated November 1, 1999 between Fairfax Company of Virginia, L.L.C. and SRC.
-
Proffer Amendment Agreement dated August 7, 2007 between SRC and Fairfax Company of Virginia, L.L.C.
-
Consent Letter dated April 29, 2013 from SRC to Fairfax Company of Virginia, L.L.C.
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.
Y.    S#1069, Redmond, WA
-
Supplemental Agreement dated October 17, 1985 between SRC and Overlake/Aurora Associates.
-
Settlement Agreement dated July 14, 2014 between SRC and La Grande Coffee, LLC dba Jitters, and H. Len and Lenita Parris.
-
Unrecorded Quit Claim Deed (in process of recording) dated July 14, 2014 from La Grande Coffee, LLC in favor of SRC.
-
Stipulation and Agreed Order Adjudicating Public Use and Necessity and Granting Partial Immediate Use and Possession dated September 5, 2013.
-
Any and all recorded REA documents only (if any) listed on Schedule B of the title policy issued by First American Title Insurance Co. for this transaction.



EXHIBIT 10.2

GUARANTY

THIS GUARANTY (this “ Guaranty ”) is executed as of September 15, 2014 by SEARS HOLDINGS CORPORATION, a Delaware corporation (together with any permitted successors and assigns, “ Guarantor ”), for the benefit of JPP II, LLC, a Delaware limited Partnership and JPP, LLC, a Delaware limited liability company (collectively, together with their respective successors and assigns, “ Lender ”).
W I T N E S S E T H
WHEREAS, Lender has agreed to make a loan (the “ Loan ”) to the parties listed on Schedule A hereto (“ Borrower ”), in the original principal amount of $400,000,000 (the “ Loan Amount ”), pursuant to that certain Loan Agreement, dated as of the date hereof, by and between Borrower and Lender (the “ Loan Agreement ”; capitalized terms used herein but not otherwise defined shall have the respective meanings ascribed to such terms in the Loan Agreement);
WHEREAS, to evidence the Loan, Borrower has executed and delivered to Lender a promissory note, dated as of the date hereof, in the original principal amount of the Loan Amount (as the same may be amended, restated, replaced, supplemented, or otherwise modified from time to time, the “ Note ”), and Borrower has or will become indebted, and may from time to time become further indebted, to Lender with respect to the Loan;
WHEREAS, Lender requires as a condition to making the Loan that Guarantor agrees to unconditionally guaranty for the benefit of Lender and its successors and assigns, the full and timely payment and performance of the Guaranteed Obligations (as hereinafter defined);
WHEREAS, Guarantor directly and/or indirectly owns an interest in Borrower and will derive substantial economic benefit from the making of the Loan by Lender to Borrower; and
WHEREAS, Guarantor has agreed to execute and deliver this Guaranty in order to induce Lender to make the Loan.
NOW, THEREFORE, to induce Lender to make the Loan to Borrower and in consideration for the substantial benefit Guarantor will derive from the making of the Loan and for other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, the parties hereby agree as follows:
ARTICLE I
NATURE AND SCOPE OF GUARANTY
1.1      Guaranty of Obligations . Guarantor hereby absolutely, irrevocably and unconditionally guarantees to Lender the full and timely payment and performance of all of the Guaranteed Obligations as and when the same shall be due and payable, whether by lapse of

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time, by acceleration of maturity or otherwise. Guarantor hereby absolutely, irrevocably and unconditionally covenants and agrees that it is liable for the Guaranteed Obligations as primary obligor.
1.2      Definitions of Guaranteed Obligations . As used herein, the term “ Guaranteed Obligations ” means all obligations and liabilities of Borrower under the Loan Agreement, the Note and the other Loan Documents.
1.3      Nature of Guaranty . This Guaranty is an irrevocable, absolute and continuing guaranty of payment and not a guaranty of collection. No exculpatory language contained in any of the other Loan Documents shall in any event or under any circumstances modify, qualify or affect the personal recourse obligations and liabilities of Guarantor hereunder. This Guaranty may not be revoked by Guarantor and shall continue to be effective with respect to the Guaranteed Obligations arising or created after any attempted revocation by Guarantor. It is the intent of Guarantor and Lender that the obligations and liabilities of Guarantor hereunder are absolute and unconditional under any and all circumstances and that so long as any portion of the Indebtedness shall be outstanding, such obligations and liabilities shall not be discharged or released in whole or in part, by any act or occurrence (including the fact that at any time or from time to time the Indebtedness or the Guaranteed Obligations may be increased or reduced) that might, but for the provisions of this Guaranty, be deemed a legal or equitable discharge or release of Guarantor. This Guaranty may be enforced by Lender and any subsequent holder of the Note or any part thereof and shall not be discharged by the assignment or negotiation of all or any part of the Note.
1.4      [RESERVED]
1.5      Guaranteed Obligations Not Reduced by Set-Off . The Guaranteed Obligations and the liabilities and obligations of Guarantor to Lender hereunder shall not be reduced, discharged or released because or by reason of any existing or future set-off, offset, claim or defense of any kind or nature that Borrower, Guarantor or any other Person has or may hereafter have against Lender or against payment of the Indebtedness or the Guaranteed Obligations, whether such set-off, offset, claim or defense arises in connection with the Guaranteed Obligations or otherwise.
1.6      No Duty to Pursue Others; No Duty to Mitigate . It shall not be necessary for Lender (and Guarantor hereby waives any rights that Guarantor may have to require Lender) to take any action, obtain any judgment or file any claim prior to enforcing this Guaranty, including to (i) institute suit or otherwise enforce Lender’s rights, or exhaust its remedies, against Borrower or any other Person liable on all or any part of the Indebtedness or the Guaranteed Obligations, or against any other Person, (ii) enforce Lender’s rights, or exhaust any remedies available to Lender, against any collateral that shall ever have been given to secure all or any part of the Indebtedness or the Guaranteed Obligations, (iii) join Borrower or any other Person liable on the Guaranteed Obligations in any action seeking to enforce this Guaranty or (iv) resort to any other means of obtaining payment of all or any part of the Indebtedness or the Guaranteed Obligations. Lender shall not be required to mitigate damages or take any other action to reduce, collect or enforce the Guaranteed Obligations.


1.7      Payment by Guarantor . If all or any part of the Guaranteed Obligations shall not be punctually paid or performed when due, whether at demand, maturity, acceleration or otherwise, Guarantor shall, immediately upon demand by Lender and without presentment, protest, notice of protest, notice of non-payment, notice of intention to accelerate the maturity, notice of acceleration of the maturity or any other notice whatsoever, pay in lawful money of the United States of America, the amount due thereon to Lender. Amounts not paid when due hereunder shall accrue interest at the Default Rate, unless such amounts already include interest at the Default Rate pursuant to the terms of the other Loan Documents. Such demands may be made at any time coincident with or after the time for payment of all or any part of the Guaranteed Obligations and may be made from time to time with respect to the same or different Guaranteed Obligations.
1.8      [RESERVED]
1.9      Waivers .
(a)      Guarantor hereby assents to all of the terms and agreements heretofore or hereafter made by Borrower with Lender (including the provisions of the Loan Documents) and hereby waives diligence, presentment, protest, demand on Borrower for payment or otherwise, filing of claims, requirement of a prior proceeding against Borrower and all notices (other than notices expressly provided for hereunder or required to be delivered under applicable law), including notice of:
(i)      the acceptance of this Guaranty;
(ii)      the present existence or future incurring of all or any part of the Indebtedness, or any future change to the time, manner or place of payment of, or in any other term of all or any part of the Indebtedness or the Guaranteed Obligations;
(iii)      any amendment, modification, replacement or extension of any of the Loan Documents;
(iv)      the execution and delivery by Borrower and Lender of any other loan or credit agreement or of Borrower’s execution and delivery of any promissory note or other documents arising under the Loan Documents or in connection with any Property;
(v)      Lender’s transfer, participation, componentization or other disposition of all or any part of the Loan or this Guaranty, or an interest therein;
(vi)      the sale or foreclosure (or posting or advertising for sale or foreclosure), or assignment-in-lieu of foreclosure, of any collateral for the Guaranteed Obligations;
(vii)      any protest, proof of non-payment or default by Borrower, or the occurrence of a breach or an Event of Default, or the intent to accelerate or of acceleration in relation to any instrument relating to the Indebtedness or the Guaranteed Obligations;


(viii)      the obtaining or release of any guaranty or surety agreement, pledge, assignment or other security for the Indebtedness or the Guaranteed Obligations, or any part thereof; or
(ix)      any other action at any time taken or omitted to be taken by Lender generally and any and all demands and notices of every kind in connection with this Guaranty, the other Loan Documents and any other documents or agreements evidencing, securing or relating to the Indebtedness or the Guaranteed Obligations, or any part thereof.
(b)      Guarantor hereby waives any and all rights it may now or hereafter have to, and covenants and agrees that it shall not at any time, insist upon, plead or in any manner whatsoever claim or take the benefit or advantage of, any and all appraisal, valuation, stay, extension, marshaling-of-assets or redemption laws, or right of homestead or exemption, whether now or at any time hereafter in force, that may delay, prevent or otherwise affect the performance by Guarantor of its obligations under, or the enforcement by Lender of, this Guaranty. Guarantor hereby further waives any and all rights it may now or hereafter have to, and covenants and agrees that it shall not, set up or claim any defense, counterclaim, cross-claim, set-off, offset, right of recoupment or other objection of any kind to any action, suit or proceeding in law, equity or otherwise, or to any demand or claim that may be instituted or made by Lender hereunder, except for the defense of the actual timely performance of the Guaranteed Obligations hereunder.
(c)      Guarantor specifically acknowledges and agrees that the waivers made by it in this Section and in the other provisions of this Guaranty are of the essence of the Loan transaction and that, but for this Guaranty and such waivers, Lender would not make the Loan to Borrower.
1.10      Waiver of Subrogation, Reimbursement and Contribution . Notwithstanding anything to the contrary contained herein, until the repayment in full of the Indebtedness, Guarantor hereby unconditionally and irrevocably waives, releases and abrogates any and all rights it may now or hereafter have under any agreement, at law or in equity (including any law subrogating the Guarantor to the rights of Lender), to assert any claim against or seek contribution, indemnification or any other form of reimbursement from Borrower or any other Person liable for payment of any or all of the Guaranteed Obligations for any payment made by Guarantor under this Guaranty.
1.11      Reinstatement; Effect of Bankruptcy . Guarantor agrees that if at any time all or any part of any payment at any time received by Lender from, or on behalf of, Borrower or Guarantor under or with respect to this Guaranty is held to constitute a Preferential Payment (as defined in Section 4.4 ), or if Lender is required to rescind, restore or return all or part of any such payment or pay the amount thereof to another Person for any reason (including the insolvency, bankruptcy reorganization, receivership or other debtor relief law or any judgment, order or decision thereunder), then the Guaranteed Obligations hereunder shall, to the extent of the payment rescinded, restored or returned, be deemed to have continued in existence notwithstanding such previous receipt by Lender, and the Guaranteed Obligations hereunder


shall continue to be effective or reinstated, as the case may be, as to such payment as though such previous payment to Lender had never been made.
ARTICLE II     
EVENTS AND CIRCUMSTANCES NOT
REDUCING OR DISCHARGING GUARANTOR’S OBLIGATIONS
2.1           Events and Circumstances Not Reducing or Discharging Guarantor’s Obligations . Guarantor hereby consents and agrees to each of the following and agrees that Guarantor’s obligations under this Guaranty shall not be released, diminished, impaired, reduced or adversely affected in any way by any of the following, although without notice to or the further consent of Guarantor, and waives any common law, equitable, statutory or other rights (including rights to notice) or defenses that Guarantor might otherwise have as a result of or in connection with any of the following:
(a)      Modifications . Any change in the time, manner or place of payment of all or any part of the Indebtedness or the Guaranteed Obligations, or in any other term thereof, or any renewal, extension, increase, alteration, rearrangement, amendment or other modification to any provision of any of the Loan Documents or any other document, instrument, contract or understanding between Borrower and Lender or any other Person pertaining to the Indebtedness or the Guaranteed Obligations.
(b)      Adjustment . Any adjustment, indulgence, forbearance, waiver, consent or compromise that Lender might extend, grant or give to Borrower, Guarantor or any other Person with respect to any provision of this Guaranty or any of the other Loan Documents.
(c)      Condition of Borrower or Guarantor . Borrower’s or Guarantor’s voluntary or involuntary liquidation, dissolution, sale of all or substantially all of their respective assets and liabilities, appointment of a trustee, receiver, liquidator, sequestrator or conservator for all or any part of Borrower’s or Guarantor’s assets, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, consolidation, merger arrangement, composition, readjustment or the commencement of any other similar proceedings affecting Borrower or Guarantor or any of the assets of either of them, including (A) the release or discharge of Borrower from the payment and performance of its obligations under any of the Loan Documents by operation of law or (B) the impairment, limitation or modification of the liability of Borrower, its partners or Guarantor, or of any remedy for the enforcement of Lender’s rights, under this Guaranty or any of the other Loan Documents, resulting from the operation of any present or future provisions of the Bankruptcy Code or other present or future federal, state or applicable statute of law or from the decision in any court.
(d)      Invalidity of Guaranteed Obligations . The invalidity, illegality, irregularity or unenforceability of all or any part of this Guaranty or of any of the Loan Documents, or of any other document or agreement executed in connection with the Indebtedness or the Guaranteed Obligations for any reason whatsoever, including the fact that (i) the Indebtedness or the Guaranteed Obligations, or any part thereof, exceeds the amount


permitted by law, (ii) the act of creating the Indebtedness or the Guaranteed Obligations, or any part thereof, is ultra vires , (iii) the officers or representatives executing the Loan Documents or any other document or agreement executed in connection with the creating of the Indebtedness or the Guaranteed Obligations, or any part thereof, acted in excess of their authority, (iv) the Indebtedness or the Guaranteed Obligations, or any part thereof, violates applicable usury laws, (v) Borrower or Guarantor has valid defenses, claims or offsets (whether at law, in equity or by agreement) that render the Indebtedness or the Guaranteed Obligations wholly or partially uncollectible, (vi) the creation, performance or repayment of the Indebtedness or the Guaranteed Obligations, or any part thereof (or the execution, delivery and performance of any document or instrument representing the Indebtedness or the Guaranteed Obligations, or any part thereof, or executed in connection with the Indebtedness or the Guaranteed Obligations, or given to secure the repayment of the Indebtedness or the Guaranteed Obligations, or any part thereof), is illegal, uncollectible, legally impossible or unenforceable or (vii) any of the Loan Documents or any other document or agreement executed in connection with the Indebtedness or the Guaranteed Obligations, or any part thereof, has been forged or otherwise are irregular or not genuine or authentic.
(e)      Release of Obligors . Any compromise or full or partial release of the liability of Borrower or any other Person now or hereafter liable, whether directly or indirectly, jointly, severally, or jointly and severally, to pay, perform, guarantee or assure the payment of the obligations under this Guaranty or any of the other Loan Documents.
(f)      Release of Collateral; Other Collateral . Any release, surrender, exchange, subordination, deterioration, waste, loss or impairment by Lender (including negligent, willful, unreasonable or unjustifiable impairment) of, or failure to perfect or obtain protection of, any collateral, property or security at any time existing in connection with, or assuring or securing payment of, all or any part of the Indebtedness or the Guaranteed Obligations; or the taking or accepting of any other security, collateral or guaranty or other assurance of payment for all or any part of the Indebtedness or the Guaranteed Obligations.
(g)      Offset . Any existing or future right of set-off, offset, claim, counterclaim or defense of any kind or nature against Lender or any other Person, which may be available to or asserted by Guarantor or Borrower.
(h)      Change in Law . Any change in the laws, rules or regulations of any jurisdiction or any present or future action of any Governmental Authority or court amending, varying, reducing or otherwise affecting, or purporting to amend, vary, reduce or otherwise affect, any of the obligations of Borrower under any of the Loan Documents or Guarantor under this Guaranty.
(i)      Event of Default . The occurrence of any Event of Default or any potential Event of Default under any of the Loan Documents, whether or not Lender has exercised any of its rights and remedies under the Loan Documents upon the happening of any such Event of Default or potential Event of Default.


(j)      Actions Omitted . The absence of any action to enforce any of Lender’s rights under the Loan Documents or available to Lender at law, equity or otherwise, to recover any judgment against Borrower or to enforce a judgment against Borrower under any of the Loan Documents.
(k)      Other Dealings . The occurrence of any other dealing, transaction, matter or thing between Guarantor and Lender.
(l)      Application of Sums . The application of any sums by whomsoever paid or however realized to any amounts owing by Guarantor or Borrower to Lender in such manner as Lender shall determine in its sole discretion, subject to, and otherwise in accordance with, the terms of the Loan Agreement and the other Loan Documents.
(m)      Ownership Interest . Any change in or termination of the ownership interest of Guarantor (whether direct or indirect).
(n)      Other Circumstances . Any other circumstance that might otherwise constitute a legal or equitable discharge or defense of a guarantor generally, it being the unambiguous and unequivocal intention of Guarantor and Lender that the liability of Guarantor hereunder shall be direct and immediate and that Guarantor shall be obligated to pay the Guaranteed Obligations when due, notwithstanding any occurrence, circumstance, event, action, or omission whatsoever, whether contemplated or uncontemplated, and whether or not otherwise or particularly described herein, except for the full and final payment and satisfaction of the Guaranteed Obligations.
2.2      Indebtedness or Other Obligations of Guarantor . If Guarantor is or becomes liable for any Indebtedness owed by Borrower to Lender by endorsement or otherwise, other than under this Guaranty, such liability shall not be in any manner impaired or affected by this Guaranty and the rights of Lender hereunder shall be cumulative of any and all other rights that Lender may ever have against Guarantor. The exercise by Lender of any right or remedy hereunder or under any other instrument or at law or in equity shall not preclude the concurrent or subsequent exercise of any right or remedy under any other instrument or at law or in equity, including the making of multiple demands hereunder. Further, without in any way diminishing or limiting the generality of the foregoing, it is specifically understood and agreed that this Guaranty is given by Guarantor as an additional guaranty to any and all guarantees as may heretofore have been or may hereafter be executed and delivered by Guarantor in favor of Lender, whether relating to the obligations of Borrower under the Loan Documents or otherwise, and nothing herein shall ever be deemed to replace or be in-lieu of any other such previous or subsequent guarantees.


ARTICLE III     
REPRESENTATIONS AND WARRANTIES
3.1           Representations and Warranties . To induce Lender to enter into the Loan Documents and extend credit to Borrower, Guarantor hereby represents and warrants to Lender that, on the date hereof:
(a)      Due Formation, Authorization and Enforceability . Guarantor is duly organized and validly existing under the laws of the jurisdiction of its incorporation or formation, as the case may be, and has full power and legal right to execute and deliver this Guaranty and to perform under this Guaranty and the transactions contemplated hereunder. Guarantor has taken all necessary action to authorize the execution, delivery and performance of this Guaranty and the transactions contemplated hereunder. This Guaranty has been duly authorized, executed and delivered by Guarantor and constitutes a legal, valid and binding obligation of Guarantor, enforceable against Guarantor in accordance with its terms, subject to bankruptcy, insolvency and similar laws of general applicability relating to or affecting creditors’ rights and general equity principles (whether enforcement is sought by proceedings in equity or at law.)
(b)      Benefit to Guarantor . Guarantor hereby acknowledges that Lender would not make the Loan but for the personal liability undertaken by Guarantor under this Guaranty. Guarantor (i) is an affiliate of Borrower, (ii) has received, or will receive, direct and/or indirect benefit from the making of the Loan to Borrower and (iii) has received, or will receive, direct and/or indirect benefit from the making of this Guaranty with respect to the Guaranteed Obligations.
(c)      Familiarity and Reliance . Guarantor is familiar with, and has independently reviewed books and records regarding, the financial condition of Borrower and is familiar with the value of any and all collateral granted, or intended to be granted, as security for the Indebtedness or the Guaranteed Obligations; provided , however , Guarantor is not relying on such financial condition or such collateral as an inducement to enter into this Guaranty.
(d)      No Representation by Lender . Neither Lender nor any other Person has made any representation, warranty or statement to Guarantor or to any other Person in order to induce the Guarantor to execute this Guaranty.
(e)      Solvency . On the Closing Date, the fair salable value of Guarantor’s aggregate assets is and will, immediately following the making of the Loan and the use and disbursement of the proceeds thereof, be greater than Guarantor’s probable aggregate liabilities (including subordinated, unliquidated, disputed and Contingent Obligations). Guarantor’s aggregate assets do not and, immediately following the making of the Loan and the use and disbursement of the proceeds thereof will not, constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted. Guarantor does not intend to, and does not believe that it will, incur debts and liabilities (including Contingent Obligations and other commitments) beyond its ability to pay such debts as they mature (taking into account the timing and amounts to be payable on or in respect of obligations of Guarantor).


(f)      No Conflicts . The execution and delivery of this Guaranty by Guarantor, and the performance of transactions contemplated hereunder do not and will not (i) conflict with or violate any Legal Requirements or any governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions of Governmental Authorities (including Environmental Laws) affecting Guarantor or any of its assets or property, (ii) conflict with, result in a breach of, or constitute a default (including any circumstance or event that would be a default but for the lack of due notice or lapse of time or both) under any of the terms, conditions or provisions of any of Guarantor’s organizational documents or any agreement or instrument to which Guarantor is a party, or by which Guarantor or its assets or property are bound or (iii) result in the creation or imposition of any Lien on any of Guarantor’s assets or property, except, in the case of clauses (i), (ii) and (iii) as would not affect Guarantor’s performance of its obligations under this Guaranty.
(g)      Litigation . There is no action, suit, proceeding, arbitration or investigation pending or, to Guarantor’s knowledge after due and diligent inquiry, threatened against Guarantor in any court or by or before any other Governmental Authority, in each case, which might have consequences that would materially and adversely affect the performance of Guarantor’s obligations and duties under this Guaranty. There are no outstanding or unpaid judgments against Guarantor.
(h)      Consents . No consent, approval, authorization, order or filings of or with any court or Governmental Authority is required for the execution, delivery and performance by Guarantor of, or compliance by Guarantor with, this Guaranty or the consummation of the transactions contemplated hereunder, other than those that have been obtained by Guarantor and those which, if not obtained, would not affect Guarantor’s performance of its obligations under this Guaranty.
(i)      Compliance . Guarantor is not in default or violation of any regulation, order, writ, injunction, decree or demand of any Governmental Authority, the violation or default of which might have consequences that would materially and adversely affect its performance hereunder.
(j)      No Defenses . This Guaranty and the obligations of Guarantor hereunder are not subject to, and Guarantor has not asserted, any right of rescission, offset, counterclaim, cross-claim, recoupment or affirmative or other defense of any kind and neither the operation of any of the terms of this Guaranty nor the exercise of any right hereunder will render the Guaranty unenforceable in whole or in part.
(k)      Tax Filings . Guarantor has filed all material tax returns (federal, state, local and foreign) required to be filed (taking into account any applicable extensions) and paid all material amounts of taxes due (including interest and penalties) except for taxes that are not yet delinquent and taxes the amount or validity of which are currently being contested in good faith by appropriate proceedings.
(l)      Survival . All representations and warranties made by Guarantor herein shall survive the execution hereof.


ARTICLE IV     
SUBORDINATION OF CERTAIN DEBT
4.1           Subordination of Guarantor’s Conditional Rights . As used herein, the term “ Guarantor’s Conditional Rights ” shall mean any and all debts and liabilities of Borrower owed to Guarantor, whether such debts and liabilities now exist or are hereafter incurred or arise, or whether the obligations of Borrower thereon be direct, contingent, primary, secondary, several, joint and several or otherwise, and irrespective of whether such debts or liabilities be evidenced by note, contract, open account or otherwise, and irrespective of the Person or Persons in whose favor such debts or liabilities may, at their inception, have been or may hereafter be created or the manner in which they have been or may hereafter be acquired by Guarantor.
4.2           Liens Subordinate; Standstill . Notwithstanding any other provision of this Guaranty to the contrary, until the repayment in full of the Indebtedness, Guarantor hereby agrees that, while any Event of Default has occurred and is continuing, (i) all Guarantor’s Conditional Rights and any and all liens, security interests, judgment liens, charges or other encumbrances upon Borrower’s assets securing payment of the Guarantor’s Conditional Rights shall be and remain, at all times, inferior and subordinate in all respects to the payment and performance in full of the Indebtedness and any and all liens, security interests, judgment liens, charges or other encumbrances upon Borrower’s assets securing payment of the Indebtedness, regardless of whether such encumbrances in favor of Guarantor or Lender presently exist or are hereafter created or attach, (ii) Guarantor shall not be entitled to, and shall not, receive or collect, directly or indirectly, from Borrower or any other Person any amount pursuant to or in satisfaction of any of the Guarantor’s Conditional Rights and (iii) Guarantor shall not, without the prior written consent of Lender, (x) exercise or enforce any creditor’s right it may have against Borrower in respect of any of the Guarantor’s Conditional Rights or (y) foreclose, repossess, sequester or otherwise take steps or institute any action or proceedings (judicial or otherwise, including the commencement of, or joinder in, any liquidation, bankruptcy, rearrangement, debtor’s relief or insolvency proceeding) to enforce any liens, mortgages, deeds of trust, security interests, collateral rights, judgments or other encumbrances on assets of Borrower held by Guarantor.
4.3           Claims in Bankruptcy . In the event of receivership, bankruptcy, reorganization, arrangement, debtor’s relief or other insolvency proceedings involving Guarantor as debtor, Lender shall have the right and authority, either in its own name or as an attorney-in-fact for Guarantor, to prove its claim in any such proceeding and to take such other steps as may be necessary so as to establish its rights hereunder and receive directly from the receiver, trustee or other court custodian, payments that would otherwise be payable pursuant to or in satisfaction of any of the Guarantor’s Conditional Rights. Guarantor hereby assigns any and all such payments to Lender.
4.4           Payments Held in Trust . In the event that, notwithstanding anything to the contrary in this Guaranty, Guarantor should receive any funds, payment, claim or distribution that is prohibited by this Guaranty on account of any of the Guarantor’s Conditional Rights and either (i) such amount is paid to Guarantor at any time when any part of the Indebtedness or the


Guaranteed Obligations shall not have been paid or performed in full or, (ii) regardless of when such amount is paid to Guarantor, any payment made by, or on behalf of, Borrower to Lender is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid by Lender or paid over to a trustee, receiver or any other Person, whether under any bankruptcy act or otherwise (such payment, a “ Preferential Payment ”), then such amount paid to Guarantor shall be held in trust for the benefit of Lender and shall forthwith be paid to Lender to be credited and applied upon the Indebtedness or the Guaranteed Obligations, whether matured or unmatured, in such order as Lender, in its sole and absolute discretion, shall determine. To the extent that any of the provisions of this Article 4 shall not be enforceable, Guarantor agrees that until such time as the Indebtedness and the Guaranteed Obligations have been paid and performed in full and the period of time has expired during which any payment made by Borrower to Lender may be determined to be a Preferential Payment, all of the Guarantor’s Conditional Rights, to the extent not validly waived, shall be subordinate to Lender’s right to full payment and performance of the Indebtedness and the Guaranteed Obligations and Guarantor shall not enforce any of the Guarantor’s Conditional Rights during such period.
ARTICLE V     
MISCELLANEOUS
5.1      Lender’s Benefit; No Impairment of Loan Documents . This Guaranty is for the benefit of Lender and its successors and assigns and nothing contained herein shall impair, as between Borrower and Lender, the obligations of Borrower under the Loan Documents. Lender and its successors and assigns shall have the right to assign, in whole or in part, this Guaranty and the other Loan Documents to any Person and to participate all or any portion of the Loan, including any servicer or trustee in connection with a Securitization.
5.2      Successors and Assigns; Binding Effect . This Guaranty shall be binding upon Guarantor and its heirs, executors, legal representatives, successors and assigns, whether by voluntary action of the parties or by operation of law. Notwithstanding anything to the contrary herein, Guarantor may in no event delegate or transfer its obligations under, or be released from, this Guaranty, except in accordance with the terms of the Loan Agreement and this Guaranty.
5.3      Borrower . The term “ Borrower ” as used herein shall include any new or successor corporation, association, partnership (general or limited), limited liability company, joint venture, trust or other individual or organization formed as a result of any merger, reorganization, sale, transfer, devise, gift or bequest of or by Borrower or any interest in Borrower.
5.4      Costs and Expenses . If Guarantor should breach or fail to timely perform any provision of this Guaranty, Guarantor shall, immediately upon demand by Lender, pay to Lender any and all costs and expenses (including court costs and attorneys’ fees and expenses) incurred by Lender in connection with the enforcement hereof or the preservation of Lender’s rights hereunder. The covenant contained in this Section shall survive the payment and performance of the Guaranteed Obligations.


5.5      Not a Waiver; No Set-Off . The failure of any party to enforce any right or remedy hereunder, or to promptly enforce any such right or remedy, shall not constitute a waiver thereof, nor give rise to any estoppel against such party, nor excuse any other party from its obligations hereunder, nor shall a single or partial exercise thereof preclude any other future exercise, or the exercise of any other right, power, remedy or privilege. In particular, and not by way of limitation, by accepting payment after the due date of any amount payable under this Guaranty, Lender shall not be deemed to have waived any right either to require prompt payment when due of all other amounts due under this Guaranty or to declare a default for failure to effect prompt payment of any such other amount. Lender shall not be required to mitigate damages or take any other action to reduce, collect or enforce any of the Indebtedness or the Guaranteed Obligations. No set‑off, counterclaim (other than compulsory counterclaims), reduction, diminution of any obligations or any defense of any kind or nature that Guarantor has or may hereafter have against Borrower or Lender shall be available hereunder to Guarantor.
5.6      PRIOR AGREEMENTS . THIS GUARANTY CONTAINS THE ENTIRE AGREEMENT OF THE PARTIES HERETO IN RESPECT OF THE GUARANTY DESCRIBED HEREIN, AND ALL PRIOR AGREEMENTS AMONG OR BETWEEN SUCH PARTIES, WHETHER ORAL OR WRITTEN, INCLUDING ANY TERM SHEETS, CONFIDENTIALITY AGREEMENTS AND COMMITMENT LETTERS, ARE SUPERSEDED BY THE TERMS OF THIS GUARANTY AS THEY RELATE TO THE GUARANTY DESCRIBED HEREIN.
5.7      No Oral Change . No modification, amendment, extension, discharge, termination or waiver of any provision of this Guaranty, nor consent to any departure by Guarantor therefrom, shall in any event be effective unless the same shall be in a writing signed by Lender, and then such waiver or consent shall be effective only in the specific instance, and for the purpose, for which given. Except as otherwise expressly provided herein, no notice to, or demand on, Guarantor, shall entitle Guarantor to any other or future notice or demand in the same, similar or other circumstances.
5.8      Separate Remedies . Each and all of Lender’s rights and remedies under this Guaranty and each of the other Loan Documents are intended to be distinct, separate and cumulative and no such right or remedy herein or therein mentioned is intended to be in exclusion of or a waiver of any other right or remedy available to Lender.
5.9      Severability . Wherever possible, each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty.
5.10      Rules of Construction . All references to sections and exhibits are to sections and exhibits in or to this Guaranty unless otherwise specified. Unless otherwise specified: (i) all meanings attributed to defined terms in this Guaranty shall be equally applicable to both the singular and plural forms of the terms so defined, (ii) “including” means “including, but not limited to” and “including, without limitation” and (iii) the words “hereof,” “herein,”


“hereby,” “hereunder” and words of similar import when used in this Guaranty shall refer to this Guaranty as a whole and not to any particular provision, article, section or other subdivision of this Guaranty. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms and the singular form of nouns and pronouns shall include the plural and vice versa.
5.11      Headings . The Section headings in this Guaranty are included in this Guaranty for convenience of reference only and shall not constitute a part of this Guaranty for any other purpose.
5.12      Recitals . The recitals and introductory paragraphs of this Guaranty are incorporated herein, and made a part hereof, by this reference.
5.13      Counterparts; Facsimile Signatures . This Guaranty may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. Any counterpart delivered by facsimile, pdf or other electronic means shall have the same import and effect as original counterparts and shall be valid, enforceable and binding for the purposes of this Guaranty.
5.14      Notices . All notices, consents, approvals and requests required or permitted hereunder shall be given in writing by expedited prepaid delivery service, either commercial or United States Postal Service, with proof of delivery or attempted delivery, addressed as follows (or at such other address and person as shall be designated from time to time by any party to this Guaranty, as the case may be, in a written notice to the other parties to this Guaranty in the manner provided for in this Section). A notice shall be deemed to have been given when delivered or upon refusal to accept delivery.
If to Lender:     c/o ESL Investments, Inc.
1170 Kane Concourse, Suite 200
Bay Harbor Islands, FL 33154
Attention: Edward S. Lampert, CEO

with copies to:

ESL Investments, Inc.
1170 Kane Concourse, Suite 200
Bay Harbor Islands, FL 33154
Attention: Harold R. Talisman
    
and
Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza
New York, New York 10006


Attention: Steven G. Horowitz, Esq.
If to Guarantor:    c/o Kmart Corporation
            3333 Beverly Road
            Hoffman Estates, Illinois 60179
            Attention: General Counsel    
 
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Scott Charles, Esq.
 
5.15      GOVERNING LAW . (A)     THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES THEREOF, WITHOUT REGARD TO CHOICE OF LAW RULES, TO THE EXTENT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
(B)    ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST GUARANTOR OR LENDER ARISING OUT OF OR RELATING TO THIS GUARANTY OR ANY OF THE OTHER LOAN DOCUMENTS (OTHER THAN ANY ACTION IN RESPECT OF THE CREATION, PERFECTION OR ENFORCEMENT OF A LIEN OR SECURITY INTEREST CREATED PURSUANT TO ANY LOAN DOCUMENTS NOT GOVERNED BY THE LAWS OF THE STATE OF NEW YORK) MAY BE INSTITUTED IN ANY FEDERAL OR STATE COURT IN NEW YORK, NEW YORK. GUARANTOR AND, BY ACCEPTANCE OF THIS GUARANTY, LENDER HEREBY EACH (i) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM, (ii) IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUCH SUIT, ACTION OR PROCEEDING AND (iii) IRREVOCABLY CONSENTS TO SERVICE OF PROCESS BY MAIL, PERSONAL SERVICE OR IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW, AT THE RESPECTIVE ADDRESS SPECIFIED HEREIN (AND AGREES THAT SUCH SERVICE AT SUCH ADDRESS IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER ITSELF IN ANY SUCH SUIT, ACTION OR PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT).


5.16      TRIAL BY JURY . GUARANTOR AND, BY ACCEPTANCE OF THIS GUARANTY, LENDER, TO THE FULLEST EXTENT THAT EACH MAY LAWFULLY DO SO, HEREBY AGREE NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVE ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THIS GUARANTY OR ANY OF THE OTHER LOAN DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY GUARANTOR AND LENDER AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY GUARANTOR AND LENDER.
5.17      Brokers and Financial Advisors . Guarantor hereby represents that none of Borrower, Guarantor or any of their respective affiliates has dealt with any financial advisors, brokers, underwriters, placement agents, agents or finders in connection with the transactions contemplated by this Guaranty and/or the other Loan Documents. Guarantor agrees to indemnify and hold Lender harmless from and against any and all claims, liabilities, costs and expenses of any kind in any way relating to or arising from a claim by any Person that such Person acted on behalf of Borrower, Guarantor or any of their respective affiliates in connection with the transactions contemplated in this Guaranty and/or the other Loan Documents. The provisions of this Section shall survive the expiration and termination of this Guaranty and the repayment of the Indebtedness.
5.18      Impairment of Subrogation Rights; Waivers of Rights Under the Anti-Deficiency Rules . Without limiting any of the other waivers and provisions set forth in this Guaranty, Guarantor hereby irrevocably and unconditionally waives all rights and defenses that Guarantor may have because the Indebtedness is secured in whole or in part by real property, including any rights or defenses that Guarantor may have or be entitled to assert based on or arising out of any one or more of California Code of Civil Procedure Sections 580a, 580b, 580d or 726 or California Civil Code Section 2848. This means, among other things that:
(a) Guarantor hereby agrees that during the continuation of an Event of Default, Lender may elect to foreclose either judicially or nonjudicially against any real or personal property collateral or security it holds for all or any part of the Indebtedness or the Guaranteed Obligations, or accept an assignment of any such collateral or security in-lieu of foreclosure, or compromise or adjust any part of such obligations, or make any other accommodation with Borrower or Guarantor, or exercise any other remedy against Borrower, Guarantor or any collateral or security. No such action by Lender will release or limit the liability of Guarantor to Lender, who shall remain liable under this Guaranty after any such action, even if the effect of any such action is to deprive Guarantor of the right to collect reimbursement from Borrower or any other Person for any sums paid to Lender or of its rights of subrogation, contribution or indemnity against Borrower or any other Person.


Without limiting the foregoing, Guarantor hereby waives all rights and defenses arising out of an election of remedies by Lender, even though such an election of remedies, such as nonjudicial foreclosure with respect to security for any of the Guaranteed Obligations, has impaired or destroyed any right or ability that Guarantor may have to seek reimbursement, contribution, or indemnification for any amounts paid by Guarantor under this Guaranty, by the operation of Section 580d of the California Code of Civil Procedure. Guarantor further understands and acknowledges that in the absence of this waiver such potential impairment or destruction of Guarantor’s rights, if any, may entitle Guarantor to assert a defense to this Guaranty based on California Code of Civil Procedure Section 580d as interpreted in Union Bank v. Gradsky , 265 Cal. App. 2d 40, 71 Cal. Rptr. 64 (1968), on the grounds, among others, that Lender should be estopped from pursuing Guarantor because Lender’s election to foreclose may have impaired or destroyed such subrogation, reimbursement, contribution, or indemnification rights of Guarantor. By execution of this Guaranty, Guarantor hereby intentionally, freely, irrevocably, and unconditionally waives and relinquishes any such defense and agrees that (i) Guarantor will be liable under this Guaranty even though Lender has foreclosed judicially or nonjudicially against any real or personal property collateral or security for Borrower’s obligations, (ii) Guarantor will not assert any such defense in any action or proceeding that Lender may begin to enforce this Guaranty and (iii) Guarantor shall in no event be deemed to have any right, title, interest or claim under any circumstance in or to any real or personal property held by Lender or any third party following any foreclosure or assignment-in-lieu thereof of any such collateral or security.
(a)      Guarantor hereby intentionally, freely, irrevocably and unconditionally waives and relinquishes all rights that may be available to Guarantor under any provision of California law or under any California judicial decision, including Sections 580a and 726(b) of the California Code of Civil Procedure, to limit the amount of any deficiency judgment or other judgment that may be obtained against Guarantor under this Guaranty to not more than the amount by which the unpaid Guaranteed Obligations, plus all other Indebtedness due from Borrower under the Loan Documents, exceeds the fair market value or fair value of any real or personal property securing such obligations and any other Indebtedness due from Borrower under the Loan Documents, including all rights to an appraisement of, judicial or other hearing on, or other determination of the value of such property. Guarantor understands and agrees that, as a result of the waiver of the foregoing rights, privileges, benefits and defenses, and without limiting the effect of the foregoing waiver, (i) Lender may have the ability to pursue Guarantor or any other guarantor for a judgment on the Guaranteed Obligations without having first foreclosed on the real or personal property collateral or security for all or any part of the Indebtedness or the Guaranteed Obligations, (ii) Lender may have the ability to sue Guarantor or any other guarantor for a deficiency judgment on the Indebtedness or the Guaranteed Obligations after a non-judicial foreclosure sale or, regardless of any election of remedies by Lender, if the Guaranteed Obligations or any of the other Indebtedness of Borrower to Lender under the Loan Documents is considered to have been provided by a vendor to a buyer and to evidence part of the purchase price for the real or personal property collateral or security and (iii) Lender may be entitled to recover from Guarantor an amount that, when combined with the value of any real or personal property foreclosed upon by Lender (or the proceeds of the sale of which have been received by Lender) and any sums collected by Lender from Borrower or other Person, might


exceed the amount of the Guaranteed Obligations plus all other Indebtedness due from Borrower under the Loan Documents.
(b)      Notwithstanding the foregoing, nothing contained in this Section shall in any way be deemed to imply that California law or any other state’s law other than New York shall govern this Guaranty or any of the Loan Documents in any respect, except as may be expressly set forth therein, including with respect to the exercise of Lender’s remedies under the Loan Documents.
5.19      Release . Subject to the provisions of Section 1.11 , upon payment in full of the Indebtedness and performance in full of all of the outstanding obligations (other than contingent obligations such as environmental or other indemnities under the Loan Agreement that have not matured at the time of payment in full of the Indebtedness), this Guaranty shall automatically be released and terminate and Lender, at Guarantor’s expense, shall take such actions and execute such documentation as Guarantor shall reasonably request to evidence or effect such release and termination.
[No Further Text on this Page; Signature Page Follows]


IN WITNESS WHEREOF, the undersigned has executed this Guaranty all as of the day and year first above written.
 
GUARANTOR :
SEARS HOLDING CORPORATION,
a Delaware corporation
 
By: /s/ Robert A. Schriesheim
      Name: Robert A. Schriesheim
Title: Executive Vice President and Chief
Financial Officer
 
 




Schedule A

Borrowers

1.
Sears, Roebuck and Co.
2.
Sears Development Co.
3.
Kmart Corporation


EXHIBIT 31.1


CERTIFICATIONS

I, Edward S. Lampert, certify that:
1.
 
I have reviewed this quarterly report on Form 10-Q of Sears Holdings Corporation;
2.
 
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
 
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
 
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
 
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 4, 2014

/s/ Edward S. Lampert       
Edward S. Lampert
Chairman of the Board and Chief Executive Officer
Sears Holdings Corporation

EXHIBIT 31.2



CERTIFICATIONS

I, Robert A. Schriesheim, certify that:
1.
 
I have reviewed this quarterly report on Form 10-Q of Sears Holdings Corporation;
2.
 
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
 
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
 
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
 
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: December 4, 2014

/s/ Robert A. Schriesheim           
Robert A. Schriesheim
Executive Vice President and Chief Financial Officer
Sears Holdings Corporation

EXHIBIT 32.1

CERTIFICATION
Pursuant to 18 U.S.C. 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

Edward S. Lampert, Chairman of the Board and Chief Executive Officer of Sears Holdings Corporation (the “Company”), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 1, 2014 (the “Report”).

The undersigned hereby certifies that:

1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

December 4, 2014


/s/ Edward S. Lampert
Edward S. Lampert
Chairman of the Board and Chief Executive Officer

EXHIBIT 32.2

CERTIFICATION
Pursuant to 18 U.S.C. 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

Robert A. Schriesheim, Executive Vice President and Chief Financial Officer of the Company, has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 1, 2014 (the “Report”).

The undersigned hereby certifies that:

1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

December 4, 2014


/s/ Robert A. Schriesheim
Robert A. Schriesheim
Executive Vice President and
Chief Financial Officer