United States
Securities and Exchange Commission
Washington, D.C. 20549
 
 
 
 
 
FORM 10-K
 
 
 
 
 
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended January 28, 2017
or
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)
 
 
 
 
 
 
Delaware
 
20-1920798
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
3333 Beverly Road, Hoffman Estates, Illinois
 
60179
(Address of principal executive offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (847) 286-2500
 
 
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of Each Exchange on Which Registered
Common Shares, par value $0.01 per share
 
The NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act:
None
 
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   ¨   No   x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   ¨   No   x
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 response) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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    ¨   Accelerated filer     x   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
On March 16, 2017 , the registrant had 107,151,038 common shares outstanding. The aggregate market value (based on the closing price of the Registrant's common shares for stocks quoted on the NASDAQ Global Select Market) of the Registrant's common shares owned by non-affiliates as of the last business day of the Registrant's most recently completed second fiscal quarter, was approximately $357 million .
Documents Incorporated By Reference
Part III of this Form 10-K incorporates by reference certain information from the Registrant’s definitive proxy statement relating to our Annual Meeting of Stockholders to be held on May 10, 2017 (the "2016 Proxy Statement"), which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Form 10-K relates.
 


PART I
Item  1.
Business
General
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 significant physical and intangible assets, as well as virtual capabilities enabled through technology. We operate a national network of stores with 1,430  full-line and specialty retail stores in 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 millions of 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. The Company is a leading home appliance retailer, as well as a leader in tools, lawn and garden, fitness equipment, automotive repair and maintenance, and is a significant player in the rapidly emerging Connected Solutions market. We offer key proprietary brands including Kenmore ® and DieHard ® , as well as Craftsman ® branded product offerings. We also maintain a broad apparel and home offering including such well-known labels as Jaclyn Smith ® , Joe Boxer ® , Route 66 ® , Cannon ® , Adam Levine ® and Levi's ® and also offer Lands' End ® merchandise in some of our Full-line stores. We are the nation's No. 1 provider of appliance and product repair services, with nearly seven million service calls made annually.
The retail industry is changing rapidly. The progression of the Internet, mobile technology, social networking and social media is fundamentally reshaping the way we interact with our core customers and members. As a result, we are transitioning to a member-centric company. Our focus continues to be on our core customers, our members, and finding ways to provide them value and convenience through Integrated Retail and our Shop Your Way membership platform. We have invested significantly in our online ecommerce platforms, our membership program and the technology needed to support these initiatives.
Business Segments
Through the third quarter of 2014, we operated three reportable segments: Kmart, Sears Domestic and Sears Canada. Since the de-consolidation of Sears Canada in October 2014, we have operated in two segments, Kmart and Sears Domestic. Financial information, including revenues, operating loss, total assets and capital expenditures for each of these business segments is contained in Note 17 of Notes to Consolidated Financial Statements. Information regarding the components of revenue for Holdings is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations as well as Note 17 of Notes to Consolidated Financial Statements.
Kmart     
At January 28, 2017 , the Company operated a total of 735 Kmart stores across 49 states, Guam, Puerto Rico and the U.S. Virgin Islands . This store count consists of 734 discount stores, averaging 95,000 square feet, and one Super Center, approximately 185,000 square feet. Most Kmart stores are one-floor, free-standing units that carry a wide array of products across many merchandise categories, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables and apparel, including products sold under such well-known labels as Craftsman , Jaclyn Smith, Joe Boxer, and certain proprietary Sears branded products (such as Kenmore and DieHard) and services. We also offer an assortment of major appliances, including Kenmore-branded products, in all of our locations. There are 451 Kmart stores that also operate in-store pharmacies. The Super Center combines a full-service grocery along with the merchandise selection of a discount store. There are also six Sears Auto Centers operating in Kmart stores, offering a variety of professional automotive repair and maintenance services, as well as a full assortment of automotive accessories. Kmart offers a layaway program, which allows members and customers to cost-effectively finance their purchases both in-store and online. In addition, our members and customers have the ability to buy online and pick up in store. This service is now

2

available in over 700 Kmart stores via mygofer.com, kmart.com or shopyourway.com. Kmart also sells its products through its kmart.com website and provides members and customers enhanced cross-channel options such as buying through a mobile app or online and picking up merchandise in one of our Kmart or Sears Full-line stores.
Sears Domestic
At January 28, 2017 , Sears Domestic operations consisted of the following:
•
Full-line Stores— 670 stores located across all 50 states and Puerto Rico , primarily mall-based locations averaging 139,000 square feet. Full-line stores offer a wide array of products and service offerings across many merchandise categories, including appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, certain automotive services and products, such as tires and batteries, home fashion products, as well as apparel, footwear, jewelry and accessories for the whole family. Our product offerings include our proprietary Kenmore, DieHard, Bongo, Covington, Simply Styled, Everlast, Metaphor, Roebuck & Co., Outdoor Life and Structure brand merchandise, and other brand merchandise such as Craftsman, Roadhandler, Levi's and WallyHome. Lands' End, Inc. continues to operate 215 "store within a store" departments inside Sears Domestic Full-line locations. We also have 588 Sears Auto Centers operating in association with Full-line stores. In addition, there are 23 free-standing Sears Auto Centers that operate independently of Full-line stores. Sears extends the availability of its product selection through the use of its sears.com and shopyourway.com website, which offers an assortment of home, apparel and accessory merchandise and provides members and customers the option of buying through a mobile app or online and picking up their merchandise in one of our Sears Full-line or Kmart stores.
•
Specialty Stores— 25 specialty stores (primarily consisting of the 23 free-standing Sears Auto Centers noted above) located in free-standing, off-mall locations or high-traffic neighborhood shopping centers. Specialty stores also include a Sears Appliances store in Ft. Collins, Colorado.
•
Commercial Sales—We sell Sears merchandise, parts and services to commercial customers through our business-to-business Sears Commercial Sales, which includes California Builder Appliances, Inc. (d/b/a Monark Premium Appliance Co. of California), Florida Builder Appliances, Inc.  (d/b/a Monark Premium Appliance Co.) and Starwest, LLC. (d/b/a Monark Premium Appliance Co. of Arizona).
•
Home Services—Product Repair Services, the nation's No. 1 provider of appliance and product repair services, is a key element in our active relationship with nearly 35 million households. With approximately 6,400 service technicians making nearly seven million service calls annually, this business delivers a broad range of retail-related residential and commercial services across all 50 states, Puerto Rico, Guam and the Virgin Islands under either the Sears Parts & Repair Services or A&E Factory Service trade names. Commercial and residential customers can obtain parts and repair services for all major brands of products within the appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems categories. We also provide repair parts with supporting instructions for "do-it-yourself" members and customers through our searspartsdirect.com website. This business also offers protection agreements, home warranties and Kenmore and Carrier brand residential heating and cooling systems. Home Services also includes home improvement services (primarily siding, windows, cabinet refacing, kitchen remodeling, roofing, carpet and upholstery cleaning, air duct cleaning, and garage door installation and repair) provided through Sears Home Improvement Services and Sears Home & Business Franchises.
•
Delivery and Installation—Provides both home delivery and retail installation services for Holdings' retail operations with over four million deliveries and installation calls made annually. Also includes Innovel Solutions, which provides delivery services for third party customers.
Craftsman Brand Sale
On January 5, 2017, Holdings announced that it had entered into a definitive agreement under which Stanley Black & Decker would purchase the Craftsman brand from Holdings (the "Craftsman Sale"). On March 8, 2017, the Company closed its sale of the Craftsman brand to Stanley Black & Decker. The transaction provides Stanley Black & Decker with the right to develop, manufacture and sell Craftsman-branded products outside of Holdings and Sears

3

Hometown & Outlet Stores, Inc. distribution channels. As part of the agreement, Holdings will continue to offer Craftsman-branded products, sourced from existing suppliers, through its current retail channels via a perpetual license from Stanley Black & Decker, which will be royalty-free for the first 15 years after closing and royalty-bearing thereafter.
The Company received an initial upfront payment of $525 million, subject to closing costs and an adjustment for working capital changes, at closing. In addition, Stanley Black & Decker will pay a further $250 million in cash in three years and Holdings will receive payments of between 2.5% and 3.5% on new Stanley Black & Decker sales of Craftsman products for the 15 year period following the closing of the transaction. See Note 1 of Notes to Consolidated Financial Statements for further information.
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 operating results for Sears Canada through October 16, 2014 are presented within the consolidated operations of Holdings and the Sears Canada segment in the accompanying Consolidated Financial Statements. The Company de-consolidated Sears Canada on October 16, 2014. See Note 2 of Notes to Consolidated Financial Statements for further information.
Separation of Lands' End, Inc.
On April 4, 2014, we completed the separation of our Lands' End business through a spin-off transaction. 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 Consolidated Financial Statements. See Note 1 of Notes to Consolidated Financial Statements for further information.
Real Estate Transactions
In the normal course of business, we consider opportunities to purchase leased operating properties, as well as offers to sell owned, or assign leased, operating and non-operating properties. These transactions may, individually or in the aggregate, result in material proceeds or outlays of cash. In addition, we review leases that will expire in the short term in order to determine the appropriate action to take with respect to them.
Further information concerning our real estate transactions is contained in Note 11 of Notes to Consolidated Financial Statements.
  Trademarks and Trade Names
The KMART ® and SEARS ® trade names, service marks and trademarks, used by us both in the United States and internationally, are material to our retail and other related businesses.
We sell proprietary branded merchandise under a number of brand names that are important to our operations. Our KENMORE ® and DIEHARD ® brands are among the most recognized proprietary brands in retailing. These marks are the subject of numerous United States and foreign trademark registrations. Other well recognized Company trademarks and service marks include BLUELIGHT ® , CANYON RIVER BLUES ® , COVINGTON ® , SHOP YOUR WAY ® , SMART SENSE ® , STRUCTURE ® , THOM MCAN ® , TOUGHSKINS ® , and WALLY ® , which also are registered or are the subject of pending registration applications in the United States. Generally, our rights in our trade names and marks continue so long as we use them.
Seasonality
The retail business is seasonal in nature, and we generate a high proportion of our revenues, operating income and operating cash flows during the fourth quarter of our year, which includes the holiday season. As a result, our overall profitability is heavily impacted by our fourth quarter operating results. Additionally, in preparation for the fourth quarter holiday season, we significantly increase our merchandise inventory levels, which are financed from operating cash flows, credit terms received from vendors and borrowings under our domestic credit agreement (described in the "Uses and Sources of Liquidity" section below). Fourth quarter reported revenues accounted for approximately 27% of total reported revenues in 2016 , 29% of total reported revenues in 2015 and 28% of total

4

reported revenues in 2014 , excluding the impact of transactions related to Sears Canada and Lands' End. See Note 19 of Notes to Consolidated Financial Statements for further information on revenues earned by quarter in 2016 and 2015 .
Competition
Our business is subject to highly competitive conditions. We compete with a wide variety of retailers, including other department stores, discounters, home improvement stores, consumer electronics dealers, auto service providers, specialty retailers, wholesale clubs, as well as many other retailers operating on a national, regional or local level in the U.S. and Canada. Online and catalog businesses, which handle similar lines of merchandise, also compete with us. Walmart, Target, Kohl's, J.C. Penney, Macy's, The Home Depot, Lowe's, Best Buy and Amazon are some of the national retailers and businesses with which we compete. The Home Depot and Lowe's are major competitors in relation to our home appliance business, which accounted for approximately 15% of our 2016 , 15% of our 2015 and 15% of our 2014 reported revenues. Success in these competitive marketplaces is based on factors such as price, product assortment and quality, service and convenience, including availability of retail-related services such as access to credit, product delivery, repair and installation. Additionally, we are influenced by a number of factors, including, but not limited to, the cost of goods, consumer debt availability and buying patterns, economic conditions, customer preferences, inflation, currency exchange fluctuations, weather patterns, and catastrophic events. Item 1A in this Annual Report on Form 10-K contains further information regarding risks to our business.
Employees
At January 28, 2017 , subsidiaries of Holdings had approximately 140,000 employees in the United States and U.S. territories. This employee count includes part-time employees.
  Our Website; Availability of SEC Reports and Other Information
Our corporate website is located at searsholdings.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports are available, free of charge, through the "SEC Filings" portion of the Investor Information section of our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission ("SEC").
The Corporate Governance Guidelines of our Board of Directors, the charters of the Audit, Compensation, Finance and Nominating and Corporate Governance Committees of the Board of Directors, our Code of Conduct and the Board of Directors Code of Conduct are available in the Corporate Governance section of searsholdings.com. References to our website address do not constitute incorporation by reference of the information contained on such website, and the information contained on the website is not part of this document.

5

Item 1A.
Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described below, which could adversely affect our business, results of operations and financial condition.
If we are unable to compete effectively in the highly competitive retail industry, our business and results of operations could be materially adversely affected.
The retail industry is highly competitive with few barriers to entry. We compete with a wide variety of retailers, including other department stores, discounters, home improvement stores, appliances and consumer electronics retailers, auto service providers, specialty retailers, wholesale clubs, online and catalog retailers and many other competitors operating on a national, regional or local level. Some of our competitors are actively engaged in new store expansion. Online and catalog businesses, which handle similar lines of merchandise, and some of which are not required to collect sales taxes on purchases made by their customers, also compete with us. Competition may intensify as competitors enter into business combinations or alliances. We also experience significant competition from promotional activities of our competitors, and some competitors may be able to devote greater resources to sourcing, promoting and selling their products. In this competitive marketplace, success is based on factors such as price, advertising, product assortment, quality, service, reputation and convenience.
Our success depends on our ability to differentiate ourselves from our competitors with respect to shopping convenience, a quality assortment of available merchandise, functionality of digital channels, and superior customer service and experience. We must also successfully respond to our members' and customers' changing tastes and expectations. The performance of our competitors, as well as changes in their pricing policies, marketing activities, new store openings and other business strategies, could have a material adverse effect on our business, financial condition and results of operations.
If we fail to offer merchandise and services that our members and customers want, our sales may be limited, which would reduce our revenues and profits.
In order for our business to be successful, we must identify, obtain supplies of, and offer to our members and customers, attractive, innovative and high-quality merchandise. Our products and services must satisfy the desires of our members and customers, whose preferences may change in the future. Our sales and operating results depend in part on our ability to predict consumer demand for products and services we sell, availability of merchandise, product trends, and our members' and customers' purchasing habits, tastes and preferences. If we misjudge these predictions, our relationship with our members and customers may be negatively impacted, and we may be faced with excess inventories of some products, which may impact our sales or require us to sell the merchandise we have obtained at lower prices, and missed opportunities for products and services we chose not to offer. In addition, merchandise misjudgments may adversely impact the perception or reputation of our company, which could result in declines in member and customer loyalty and vendor relationships. These factors could have a negative effect on our business, financial condition and results of operations.
If our integrated retail strategy to transform into a member-centric retailer is not successful, our business and results of operations could be adversely affected.
We are seeking to transform into a member-centric retailer through our integrated retail strategy, which is based on a number of initiatives, including our Shop Your Way program, that depend on, among other things, on our ability to respond quickly to ongoing technology developments and implement new ways to understand and rely on the data to interact with our members and customers and our ability to provide attractive, convenient and consistent online and mobile experiences for our members. We must anticipate and meet our members' and customers' evolving expectations, while counteracting developments by our competitors and striving to deliver a seamless experience across all of our sales channels. We may need to adjust our strategic initiatives depending on our members' and customers' reactions to and level of engagement with our initiatives. Failure to execute these initiatives or provide our members with positive experiences may result in a loss of active members, failure to attract new members and lower than anticipated sales. There is no assurance that our initiatives and strategies will improve our operating results.

6

If we do not successfully manage our inventory levels, our operating results will be adversely affected.
We must maintain sufficient inventory levels to operate our business successfully. However, we also must guard against accumulating excess inventory as we seek to minimize out-of-stock levels across all product categories and to maintain in-stock levels. We obtain a significant portion of our inventory from vendors located outside the United States. Some of these vendors require lengthy advance notice of our requirements in order to be able to supply products in the quantities we request. This usually requires us to order merchandise, and enter into purchase order contracts for the purchase and manufacture of such merchandise, well in advance of the time these products will be offered for sale. As a result, we may experience difficulty in responding quickly to a changing retail environment, which makes us vulnerable to changes in price and demand. If we do not accurately anticipate the future demand for a particular product or the time it will take to obtain new inventory, our inventory levels will not be appropriate and our results of operations may be negatively impacted.
Our business has been and will continue to be affected by worldwide economic conditions; an economic downturn, a renewed decline in consumer-spending levels and other conditions, including inflation and changing prices of energy, could lead to reduced revenues and gross margins, and negatively impact our liquidity.
Many economic and other factors are outside of our control, including consumer and commercial credit availability, consumer confidence and spending levels, as well as the impact of payroll tax and medical cost increases on U.S. consumers, recession, inflation, deflation, employment levels, housing sales and remodels, interest rates, tax rates, rates of economic growth, fiscal and monetary government policies, consumer debt levels, consumer debt payment behaviors, fuel costs and other challenges currently affecting the global economy, the full impact of which on our business, results of operations and financial condition cannot be predicted with certainty. These economic conditions adversely affect the disposable income levels of, and the credit available to, our members and customers, which could lead to reduced demand for our merchandise. Although fuel and energy costs have decreased in recent months, future increases may have a significant impact on our operations. We require significant quantities of fuel for the vehicles used by technicians in our home services business, and we are exposed to the risk associated with variations in the market price for petroleum products. We could experience a disruption in energy supplies, including our supply of gasoline, as a result of factors that are beyond our control, which could have an adverse effect on our business. Certain of our vendors also could experience increases in the cost of various raw materials, such as cotton, oil-related materials, steel and rubber, which could result in increases in the prices that we pay for merchandise, particularly apparel, appliances and tires. Domestic and international political events also affect consumer confidence. The threat, outbreak or escalation of terrorism, civil unrest, military conflicts or other hostilities could lead to a decrease in consumer spending. Any of these events and conditions could inhibit sales or cause us to increase inventory markdowns and promotional expenses, thereby reducing our gross margins.
The lack of willingness of our vendors to do business with us or to provide acceptable payment terms could negatively impact our liquidity and/or reduce the availability of products or services we seek to procure.
We depend on our vendors to provide us with financing on our purchases of inventory and services. Our vendors could seek to limit the availability of vendor credit to us or modify the other terms under which they sell to us, or both, which could negatively impact our liquidity. In addition, the inability of vendors to access liquidity, or the insolvency of vendors, could lead to their failure to deliver inventory or other services. Certain of our vendors finance their operations and/or reduce the risk associated with collecting accounts receivable from us by selling or "factoring" the receivables or by purchasing credit insurance or other forms of protection from loss associated with our credit risks. The ability of our vendors to do so is subject to the perceived credit quality of the Company. Such vendors could be limited in their ability to factor receivables or obtain credit protection in the future because of our perceived financial position and creditworthiness, which could reduce the availability of products or services we seek to procure, increase the cost to us of those products and services, or both.

7

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; however, there can be no assurance that one or more of our vendors may not slow or cease merchandise shipments or require or condition the sale or shipment of merchandise on new payment terms or other assurances. Such circumstances could have a negative effect on our business, financial condition and results of operations.
Certain factors, including changes in market conditions and our credit ratings, may limit our access to capital markets and other financing sources and materially increase our borrowing costs.
In addition to credit terms from vendors, our liquidity needs are funded by our operating cash flows and, to the extent necessary, borrowings under our credit agreements and commercial paper program, asset sales and access to capital markets. The availability of financing depends on numerous factors, including economic and market conditions, our operating performance, our credit ratings, and lenders' assessments of our prospects and the prospects of the retail industry in general. Changes in these factors may affect our cost of financing, liquidity and our ability to access financing sources, including our commercial paper program and possible second lien indebtedness that is permitted under the domestic revolving credit facility, with respect to each of which we have no lender commitments. Rating agencies revise their ratings for the companies that they follow from time to time. Several ratings agencies have downgraded the credit rating on certain of our outstanding debt instruments during the six months preceding the date of this report, and our ratings may be further revised or withdrawn in their entirety at any time.
The Company's domestic credit facility currently provides up to $2.8 billion of lender commitments, $1.5 billion of which are revolving commitments. Our ability to borrow funds under this facility is limited by a borrowing base determined by the value, from time to time, of eligible inventory, accounts receivable and certain other assets. If, through asset sales or other means, the value of these eligible assets is not sufficient to support borrowings of up to the full amount of the commitments under this facility, we will not have full access to the facility, but rather will have access to a lesser amount determined by the borrowing base. A decline in the value of eligible assets also could result in our inability to borrow up to the full amount of second lien indebtedness permitted by the domestic credit facility as our second-lien borrowings are limited by a borrowing base requirement under the indenture that governs our senior secured notes due 2018. The domestic revolving credit facility imposes various other requirements, which take effect if availability falls below designated thresholds, including a cash dominion requirement. The domestic credit facility also effectively limits full access to the facility if our fixed charge ratio at the last day of any quarter is less than 1.0 to 1.0. As of January 28, 2017, our fixed charge ratio was less than 1.0 to 1.0. If availability under the domestic revolving credit facility were to fall below 10%, the Company would be required to test the fixed charge coverage ratio, and would not comply with the facility, and the lenders under the facility could demand immediate payment in full of all amounts outstanding and terminate their obligations under the facility. In addition, the domestic credit facility provides that in the event we make certain prepayments of indebtedness, for a period of one year thereafter we must maintain availability under the facility of at least 12.5%, and it prohibits certain other prepayments of indebtedness.
The lenders under our various credit facilities may not be able to meet their commitments if they experience shortages of capital and liquidity. Disruptions or turmoil in the financial markets could reduce our ability to meet our capital requirements. There can be no assurance that our ability to otherwise access the credit markets will not be adversely affected by changes in the financial markets and the global economy.
We cannot predict whether our plans to enhance our financial flexibility and liquidity to fund our transformation will be successful.
We are continuing to pursue a transformation strategy and to explore potential initiatives to enhance our financial flexibility and liquidity. We have incurred significant losses and experienced negative operating cash flows for the past several years, and accordingly we have taken a number of actions to fund our continued transformation and meet our obligations, including the amendment and extension of our revolving credit facility, the first lien term loan facility due 2018, the entrance into the first lien term loan facility due 2020, the second lien term loan facility due 2020, the amendment of the senior secured letter of credit facility, the real estate term loan facility due July

8

2017 and the real estate term loan facility due 2020, the sale of the Craftsman brand, the rights offering and sale-leaseback transaction with Seritage Growth Properties, the separation of our Lands' End subsidiary, the Sears Canada rights offering, the rights offering for senior unsecured notes with warrants, and various real estate transactions. We also expect to pursue other near-term actions to bolster liquidity. If we continue to incur losses, additional actions may be required to further enhance our financial flexibility and liquidity. The success of our initiatives is subject to risks and uncertainties with respect to market conditions and other factors that may cause our actual results, performance or achievements to differ materially from our plans. We cannot assure that cash flows and other internal and external sources of liquidity will at all times be sufficient for our cash requirements. If necessary, we may need to consider actions and steps to improve our cash position, mitigate any potential liquidity shortfall, pursue additional sources of liquidity, and reduce costs. There can be no assurance that these actions would be successful. In addition, there can be no assurance that the evaluation and/or completion of any potential transactions will not have a negative impact on our other businesses.
We cannot predict the outcome of any actions to generate liquidity, whether such actions would generate the expected liquidity as currently planned, or the availability of additional debt financing. The specific actions taken or assets involved, the timing, and the overall amount will depend on a variety of factors, including market conditions, interest in specific assets, valuations of those assets and our underlying operating performance.
If we continue to experience operating losses and we are not able to generate additional liquidity through the mechanisms described above or through some combination of other actions, we may not be able to access additional funds under our domestic credit facility and we might need to secure additional sources of funds, which may or may not be available to us. Additionally, a failure to generate additional liquidity could negatively impact our access to inventory or services that are important to the operation of our business. 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 business results and ability to fund our transformation depend on our ability to achieve cost savings initiatives and complete our previously announced restructuring program.
In February 2017, we initiated a restructuring program targeted to deliver at least $1.0 billion in annualized cost savings. Under the restructuring program, we plan to reduce our corporate overhead, more closely integrate our Sears and Kmart operations and improve our merchandising, supply chain and inventory management. The anticipated savings also include cost reductions from the previously announced closure of 108 Kmart and 42 Sears stores. If we are unable to deliver the expected cost reductions or complete the restructuring program as planned, while continuing to invest in business growth, our financial results could be adversely impacted. Our ability to successfully manage and execute these initiatives and realize expected savings and benefits in the amounts and at the times anticipated is important to our business success, and any failure to do so, which could result from our inability to successfully execute plans, changes in global or regional economic conditions, competition, changes in the industries in which we compete, unanticipated costs or charges and other factors described herein, could adversely affect our business, financial condition and results of operations. As part of our overhead reduction, we have reduced our corporate and operations headcount, including management level, distribution and field employees. These reductions, as well as attrition could result in the potential loss of specific knowledge relating to our company, operations and industry that could be difficult to replace. Also, we now operate with fewer employees, who have assumed additional duties and responsibilities. The restructuring program and workforce changes may negatively impact communication, morale, management cohesiveness and effective decision-making, which could have an adverse impact on our business operations, customer experience, sales and results of operations.

9

Our business results may be negatively impacted as a result of the recapture rights included in the Master Leases in connection with the Seritage transaction and JV transactions.
In 2015, we entered into various sale-lease back transactions with respect to certain of our real properties with Seritage Growth Properties ("Seritage") and certain joint ventures we formed with affiliates of Simon Property Group, Inc., General Growth Properties, Inc. and the Macerich Company (collectively, the "JVs"). In connection with the Seritage transaction and JV transactions, Holdings entered into agreements with Seritage and the JVs pursuant to which Holdings leased 255 of the properties (the "Master Leases"). The Master Leases include recapture provisions that allow Seritage or the JVs, as applicable, to reclaim approximately 50% of the space within these properties (subject to certain exceptions, including reclamation rights as to 100% of the space at 21 properties, and further subject to a lease termination payment by Seritage), in addition to all of the automotive care centers which are free-standing or attached as "appendages," and all outparcels or outlots, as well as certain portions of parking areas and common areas. While we believe these provisions are generally beneficial for Holdings as they facilitate the transformation of our physical stores, potentially enable us to rationalize our footprint by reducing the space we occupy in a given location, and provide us with substantial flexibility in how we manage our store network moving forward, if we are unable to successfully manage and execute our plans to operate our stores in the smaller footprint, our business, financial condition and results of operations could be adversely impacted. Additionally, the recapture rights are within the control of Seritage and the JVs and we cannot predict the timing on which the recapture rights may be exercised, if at all, or whether the timing of any such exercise of these rights will align well with the timing of our transformation, which could create disruptions in our operations.
Potential liabilities in connection with the separation of Lands' End or other asset transactions may arise under fraudulent conveyance and transfer laws and legal capital requirements.
With respect to the separation of our Lands' End, Inc. subsidiary, the sale of real estate assets to real estate investment trusts and other third parties, the sale of the Craftsman brand, and any future dispositions of other similar assets, if the Company, Lands' End, or any asset purchaser subsequently fails to pay its creditors or enters insolvency proceedings, the transaction may be challenged under U.S. federal, U.S. state and foreign fraudulent conveyance and transfer laws, as well as legal capital requirements governing distributions and similar transactions. If a court were to determine under these laws that, (a) at the time of the transaction, the entity in question: (1) was insolvent; (2) was rendered insolvent by reason of the transaction; (3) had remaining assets constituting unreasonably small capital; (4) intended to incur, or believed it would incur, debts beyond its ability to pay these debts as they matured; or (b) the transaction in question failed to satisfy applicable legal capital requirements, the court could determine that the transaction was voidable, in whole or in part. Subject to various defenses, the court could then require the Company, Lands' End, the respective purchaser, or other recipients of value in connection with any such transaction, as the case may be, to turn over value to other entities involved in the transaction and contemplated transactions for the benefit of unpaid creditors. The measure of insolvency and applicable legal capital requirements will vary depending upon the jurisdiction whose law is being applied.
We rely extensively on computer systems to implement our integrated retail strategy, process transactions, summarize results and otherwise manage our business. Disruptions in these systems could harm our ability to run our business.
Given the significance of our online and mobile capabilities, our collection and use of data to create personalized experiences, and the number of individual transactions we have each year, including in our stores, it is critical that we maintain uninterrupted operation of our computer and communications hardware and software systems, some of which are based on end-of-life or legacy technology, operate with minimal or no vendor support and are otherwise difficult to maintain. Our systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, worms, other malicious computer programs, denial-of-service attacks, security breaches, catastrophic events such as fires, tornadoes, hurricanes, acts of terrorism and usage errors by our employees. If our systems are damaged, breached or cease to function properly, we may have to make a significant investment to repair or replace them, and we may suffer loss of critical data and interruptions or delays in our operations. Operating legacy systems subjects us to inherent costs and risks associated with maintaining, upgrading and replacing these systems and retaining sufficiently skilled personnel to maintain and operate the systems, demands on management time, and other risks and costs. Any material interruption in our

10

computer operations may have a material adverse effect on our business or results of operations, including on our Shop Your Way program and participation in or engagement with that program. We are pursuing initiatives to transform our information technology processes and systems. These initiatives are highly complex and include replacing legacy systems, upgrading existing systems, and acquiring new systems and hardware with updated functionality. The risk of disruption is increased in periods when such complex and significant systems changes are undertaken.
If we do not maintain the security of our member and customer, associate or company information, we could damage our reputation, incur substantial additional costs and become subject to litigation.
The protection of member, customer, employee, and company data is critical to the Company. We have systems and processes in place that are designed to protect information and protect against security and data breaches as well as fraudulent transactions and other activities. Nevertheless, cyber-security risks such as malicious software and attempts to gain unauthorized access to data are rapidly evolving and becoming increasingly sophisticated. Techniques or software used to gain unauthorized access, and/or disable, degrade or harm our systems may be difficult to detect or scope for prolonged periods of time, and we may be unable to anticipate these techniques or put in place protective or preventive measures. These attempts to gain unauthorized access could lead to disruptions in our systems, unauthorized release of confidential or otherwise protected information or corruption of data. If individuals are successful in infiltrating, breaking into, disrupting, damaging or otherwise stealing from the computer systems of the Company or its third-party providers we may have to make a significant investment to fix or replace them, we may suffer interruptions in our operations in the interim, we may face costly litigation, government investigations, government enforcement actions, fines and/or lawsuits, the ability for our members to earn or redeem points in our Shop Your Way program may be impacted or halted, and our reputation with our members and customers may be significantly harmed. There is no guarantee that the procedures that we have implemented to protect against unauthorized access to secured data are adequate to safeguard against all data security breaches. A data security breach or any failure by us to comply with applicable privacy and information security laws and regulations could result in a loss of customer or member confidence and negatively impact our business, including our Shop Your Way program, and our results of operations. Moreover, a data security breach could require us to devote significant management resources to address the problems created by the breach and to expend significant additional resources to upgrade further the security measures that we employ to guard against such breaches, which could disrupt our business, operations and financial condition. As publicly announced on October 10, 2014, Kmart’s information technology team detected on October 9, 2014 that the Kmart store payment data system had been criminally breached beginning in early September 2014, that the payment data systems at Kmart stores were purposely infected with a new form of malware, and that debit and credit card numbers were potentially compromised. The Company has settled a class-action lawsuit in the Northern District of Illinois alleging violations relating to, and harm resulting from this incident and is awaiting final court approval of the settlement.
We are subject to payment-related risks that could increase our operating costs, expose us to fraud or theft, subject us to potential liability and potentially disrupt our business operations.
As a retailer who accepts payments using a variety of methods, including credit and debit cards, PayPal, and gift cards, the Company is subject to rules, regulations, contractual obligations and compliance requirements, including payment network rules and operating guidelines, data security standards and certification requirements, and rules governing electronic funds transfers. The regulatory environment related to information security and privacy is increasingly rigorous, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs or accelerate these costs. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which could increase over time and raise our operating costs. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, and other forms of electronic payment. If these companies become unable to provide these services to us, or if their systems are compromised, it could disrupt our business.
The Payment Card Industry (PCI) has established standards for securing payment card data through the PCI Data Security Standards (DSS). The Company is required to conduct an annual assessment with a PCI Qualified Security Assessor to assess compliance with the PCI DSS. Based on the 2016 assessment, the Company was determined to be non-compliant with PCI DSS. The Company presently expects to address areas of non-compliance

11

prior to the deadline for the 2017 annual assessment in September 2017. A failure to achieve compliance with PCI DSS could result in the incurrence of fines, penalties or other liabilities by the Company.
Due to the seasonality of our business, our annual operating results would be adversely affected if our business performs poorly in the fourth quarter.
Due to the seasonality of our business, our operating results vary considerably from quarter to quarter. We generate a high proportion of revenues, operating income and operating cash flows during the fourth quarter of our year, which includes the holiday season. In addition, our Company incurs significant additional expenses for inventory, advertising and employees in the period leading up to the months of November and December in anticipation of higher sales volume in the fourth quarter. As a result, our fourth quarter operating results significantly impact our annual operating results. Our fourth quarter operating results may fluctuate significantly, based on many factors, including holiday spending patterns and weather conditions.
Our sales may fluctuate for a variety of reasons, which could adversely affect our results of operations.
Our business is sensitive to customers' spending patterns, which in turn are subject to prevailing economic conditions. Our sales and results of operations have fluctuated in the past, and we expect them to continue to fluctuate in the future. A variety of other factors affect our sales and financial performance, including:
•
actions by our competitors, including opening of new stores in our existing markets or changes to the way these competitors go to market online;
•
seasonal fluctuations due to weather conditions;
•
changes in our merchandise strategy and mix;
•
changes in population and other demographics; and
•
timing of our promotional events.
Accordingly, our results for any one quarter are not necessarily indicative of the results to be expected for any other quarter, and comparable store sales for any particular future period may increase or decrease. For more information on our results of operations, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Annual Report on Form 10-K.
We rely on foreign sources for significant amounts of our merchandise, and our business may therefore be negatively affected by the risks associated with international trade.
We depend on a large number of products produced in foreign markets. We face risks, including reputational risks, associated with sourcing, purchasing, and the delivery of merchandise originating outside the United States, including:
•
potential economic and political instability in countries where our suppliers are located;
•
increases in shipping costs;
•
manufacturing and transportation delays and interruptions, including without limitation, delays and interruptions resulting from labor slowdowns, strikes, or other disruptions at any port where merchandise we purchase enters the U.S.;
•
the availability of raw materials to suppliers;
•
supplier financial instability;
•
supplier compliance with applicable laws, including labor and environmental laws, and with our global compliance program for suppliers and factories;
•
merchandise safety and quality issues, adverse fluctuations in currency exchange rates; and
•
changes in U.S. and foreign laws affecting the importation and taxation of goods, including duties, tariffs and quotas, or changes in the enforcement of those laws.
U.S. foreign trade policies, trade restrictions, other impositions on imported goods, trade sanctions imposed on certain countries, the limitation on the importation of certain types of goods or of goods containing certain materials from other countries, and other factors relating to foreign trade are beyond our control. These and other factors affecting our suppliers and our access to products could adversely affect our results of operations.


12

We rely on third parties to provide us with services in connection with the administration of certain aspects of our business.
We have entered into agreements with third-party service providers (both domestic and overseas) to provide processing and administrative functions over a broad range of areas, and we may continue to do so in the future. These areas include finance and accounting, information technology, including IT development, call center, human resources and procurement functions. Services provided by third parties could be interrupted as a result of many factors, such as acts of God or contract disputes, and any failure by third parties to provide us with these services on a timely basis or within our service level expectations and performance standards could result in a disruption of our business. In addition, to the extent we are unable to maintain our outsourcing arrangements, we could incur substantial costs, including costs associated with hiring new employees or finding an alternative outsourced solution. Moreover, the Company cannot make any assurances that it would be able to arrange for alternate or replacement outsourcing arrangements on terms as favorable as the Company’s existing agreements, if at all. Any inability on the part of the Company to do so could negatively affect our results of operations. These outsourcing arrangements also carry the risk that the Company will fail to adequately retain the significant internal historical knowledge of our business and systems that is transferred to the service providers as the employment of the Company's personnel who possess such knowledge ends.
We could incur charges due to impairment of goodwill, intangible and long-lived assets.
At January 28, 2017 , we had goodwill and intangible asset balances of $1.8 billion , which are subject to periodic testing for impairment. Our long-lived assets, primarily stores, also are subject to periodic testing for impairment. A significant amount of judgment is involved in the periodic testing. Failure to achieve sufficient levels of cash flow within our reporting unit, or sales of our branded products or cash flow generated from operations at individual store locations could result in impairment charges for goodwill and intangible assets or fixed asset impairment for long-lived assets, which could have a material adverse effect on our reported results of operations. Impairment charges, if any, resulting from the periodic testing are non-cash. A significant decline in the property fair values could result in long-lived asset impairment charges. A significant and sustained decline in our stock price could result in goodwill and intangible asset impairment charges. During times of financial market volatility, significant judgment is used to determine the underlying cause of the decline and whether stock price declines are short-term in nature or indicative of an event or change in circumstances. See Notes 12 and 13 of Notes to Consolidated Financial Statements for further information.
Our failure to attract or retain employees, including key personnel, may disrupt our business and adversely affect our financial results.
Our business is dependent on our ability to attract, develop, and retain qualified employees, many of whom are entry-level or part-time positions with historically high turnover rates. Our ability to meet our labor needs and control labor costs is subject to external factors such as unemployment levels, prevailing wage rates, collective bargaining efforts, health care and other benefit costs, changing demographics, and our reputation within the labor market. If we are unable to attract and retain adequate numbers and an appropriate mix of qualified employees, the quality of service we provide to our customers may decrease and our financial performance may be adversely affected. Further, we depend on the contributions of key personnel, including Edward S. Lampert, our Chairman and Chief Executive Officer, and other key employees, for our future success. Although certain executives have employment agreements with us, changes in our senior management and any future departures of key employees may disrupt our business and materially adversely affect our results of operations.
Affiliates of our Chairman and Chief Executive Officer, whose interests may be different than your interests, exert substantial influence over our Company.
Affiliates of Edward S. Lampert, our Chairman and Chief Executive Officer, collectively own approximately 48% of the outstanding shares of our common stock at January 28, 2017. These affiliates are controlled, directly or indirectly, by Mr. Lampert. Accordingly, these affiliates, and thus Mr. Lampert, have substantial influence over many, if not all, actions to be taken or approved by our stockholders, including the election of directors and any transactions involving a change of control.

13

The interests of these affiliates, which have investments in other companies, including Seritage and our former subsidiaries, Sears Hometown and Outlet Stores, Inc., Lands' End, Inc. and Sears Canada, may from time to time diverge from the interests of our other stockholders, particularly with regard to new investment opportunities. This substantial influence may also have the effect of discouraging offers to acquire our Company because the consummation of any such acquisition would likely require the consent of these affiliates.
We may be unable to protect or preserve the image of our brands and our intellectual property rights, which could have a negative impact on our business.
We regard our copyrights, service marks, trademarks, trade dress, trade secrets, patents and similar intellectual property as critical to our success, particularly those that relate to our private branded merchandise. As such, we rely on trademark and copyright law, patent law, trade secret protection and confidentiality agreements with our associates, consultants, vendors, and others to protect our proprietary rights. Nevertheless, the steps we take to protect our proprietary rights may be inadequate. If we are unable to protect or preserve the value of our trademarks, copyrights, trade secrets, patents or other proprietary rights for any reason, or if we fail to maintain the image of our brands due to merchandise and service quality issues, actual or perceived, adverse publicity, governmental investigations or litigation, or other reasons, our brands and reputation could be damaged and we could lose members and customers.

Our sales and operating results could be adversely affected by product safety concerns or claims concerning the services we offer.
If our merchandise offerings do not meet applicable safety standards or consumer expectations regarding safety, we could experience decreased sales, increased costs, and exposure to reputational risk and personal injury, death, or property damage claims related to such merchandise. Such matters may require us to take actions such as product recalls and could give rise to government enforcement actions. We also provide various services to our members and customers, which could also give rise to such claims and government actions. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. Reputational damage caused by and claims arising from real or perceived product safety concerns or from the services we offer could negatively affect our business and results of operations.
We may be subject to periodic litigation and other regulatory proceedings. These proceedings may be affected by changes in laws and government regulations or changes in the enforcement thereof.
From time to time, we may be involved in lawsuits and regulatory actions relating to our business, certain of which may be in jurisdictions with reputations for aggressive application of laws and procedures against corporate defendants. Some of these actions have the potential for significant statutory penalties, and compensatory, treble or punitive damages. Our pharmacy, home services and grocery businesses, in particular, are subject to numerous federal, state and local regulations, and a significant change in, or noncompliance with, these regulations could have a material adverse effect on our compliance costs and results of operations. We are impacted by trends in litigation, including class-action allegations brought under various consumer protection and employment laws, including wage and hour laws, patent infringement claims, and investigations and actions that are based on allegations of untimely compliance or noncompliance with applicable regulations or statutes. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have a material adverse impact on our business, financial condition, and results of operations. In addition, regardless of the outcome of any litigation or regulatory proceedings, these proceedings could result in substantial costs and may require that we devote substantial resources to defend our Company. Further, changes in governmental regulations both in the United States and in the other countries where we operate could have adverse effects on our business and subject us to additional regulatory actions. For a description of current legal proceedings, see Item 3, Legal Proceedings, as well as Note 18 of Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.

14

Our pension and postretirement benefit plan obligations are currently underfunded, and we may have to make significant cash payments to some or all of these plans, which would reduce the cash available for our businesses.
We have unfunded obligations under our domestic pension and postretirement benefit plans. The funded status of our pension plans is dependent upon many factors, including returns on invested assets, the level of certain market interest rates and the discount rate used to determine pension obligations. Unfavorable returns on the plan assets or unfavorable changes in applicable laws or regulations could materially change the timing and amount of required plan funding, which would reduce the cash available for our businesses. In addition, a decrease in the discount rate used to determine pension obligations could result in an increase in the valuation of pension obligations, which could affect the reported funding status of our pension plans and future contributions, as well as the periodic pension cost in subsequent years. Moreover, unfavorable regulatory action could materially change the timing and amount of required plan funding and negatively impact our business operations and impair our business strategy.
On March 18, 2016, we entered into a five-year pension plan protection and forbearance agreement with the Pension Benefit Guaranty Corporation ("PBGC"), pursuant to which the Company has agreed to continue to protect, or "ring-fence," pursuant to customary covenants, the assets of certain special purpose subsidiaries (the "Relevant Subsidiaries") holding real estate and/or intellectual property assets. Also under the agreement, the Relevant Subsidiaries granted PBGC a springing lien on the ring-fenced assets, which lien will be triggered only by (a) failure to make required contributions to the Company's pension plans (the "Plans"), (b) prohibited transfers of ownership interests in the Relevant Subsidiaries, (c) termination events with respect to the Plans, or (d) bankruptcy events with respect to the Company or certain of its material subsidiaries.
The Company will continue to make required contributions to the Plans, the scheduled amounts of which are not affected by the arrangement. Under the agreement, the PBGC has agreed to forbear from initiating an involuntary termination of the Plans, except upon the occurrence of specified conditions, one of which is based on the aggregate market value of the Company’s issued and outstanding stock. As of the date of this report, the Company’s stock price is such that the PBGC would be permitted to cease forbearance. The PBGC has been given notice in accordance with the terms of the agreement and has not communicated any intention to cease its forbearance; however, if the PBGC were to initiate an involuntary termination of the Plans, our financial condition could be materially and adversely affected.
We may not realize the full anticipated benefits of the recently closed Craftsman Sale transaction.
We may not realize the full anticipated benefits of the recently closed Craftsman Sale transaction (the "Craftsman Sale"), in which case our business, financial results or operations could be adversely affected. Under the Purchase Agreement, during the 15-year period following the closing of the Craftsman Sale, Holdings is entitled to receive additional contingent payments based on a specified percentage of aggregate worldwide net sales (as defined in the Purchase Agreement) of Stanley Black & Decker and its affiliates of Craftsman-branded products. These contingent payments are dependent upon Stanley successfully maintaining and increasing market demand for, and sales of, Craftsman-branded products, and there can be no assurance regarding the amount or timing of any such contingent payments. In addition, following the closing of the Craftsman Sale, we will have the right to continue to use the Licensed IP and sell Craftsman-branded products in certain distribution channels pursuant to a license agreement with Stanley. If the license is terminated, or if the terms of the license agreement are otherwise modified, we may not be able to continue to market, procure or sell Craftsman-branded products on favorable terms or at all, and our business may be adversely affected.
Our failure to comply with federal, state, local and international laws, or changes in these laws could adversely affect our results of operations.
Our business is subject to a wide array of laws and regulations. If we fail to comply with applicable laws and regulations, we could be subject to legal risk, including government enforcement action and class action civil litigation that could increase our cost of doing business. Changes in the regulatory environment regarding topics such as privacy and information security, product safety, environmental protection, payment methods and related fees, responsible sourcing, supply chain transparency, wage and hour laws, health care mandates and other

15

applicable laws and regulations could also cause our compliance costs to increase and adversely affect our results of operations.
Our performance could further be impacted by changes in legislation, trade policies and agreements, energy and environmental standards, and tax laws and regulations. The current U.S. Administration has signaled that it may alter trade agreements and terms with foreign countries, including limiting trade and/or imposing a tariff on imports from certain foreign countries. If any such restrictions or tariffs are imposed on products that we import, we may be required to raise our prices, which could result in decreased sales. Further, changes in environmental and energy efficiency standards and regulations applicable to products that we develop and/or sell, and potential changes in the size and availability of tax incentives applicable to such products, may impact the types, characteristics, and consumer interest in such products, which may negatively impact our results of operations. Moreover, future legislation or regulations, including environmental matters, product certification, product liability, tariffs, duties, taxes, tax incentives and other matters, may impact our results. Major developments in tax policy or trade relations, such as the disallowance of tax deductions for imported merchandise or the imposition of unilateral tariffs on imported products, could have a material adverse effect on our business, results of operations and liquidity. In addition, various corporate tax reform proposals being discussed on Capitol Hill and in the U.S. Administration could impact our Company. A reduction in corporate income tax rates at the Federal level could be favorable to our financial position, while other ideas such as a border tax could dramatically increase our tax burden and raise the costs of goods for our consumers.
Weather conditions and natural disasters may impact consumer shopping patterns and could adversely affect our results of operations.
Significant weather conditions where our stores are located could negatively affect the Company's business and results of operations. Heavy snowfall, ice storms, rainstorms or other extreme weather conditions over a prolonged period could make it difficult for our members and customers to travel to our stores, thus leading to decreased sales. Our business is also susceptible to unseasonable weather conditions, such as unseasonably warm temperatures during the winter season or cool weather during the summer season, which could reduce demand for certain inventory and compromise our efforts to predict and manage inventory levels effectively. In addition, extreme weather conditions could result in disruption or delay of production and delivery of materials and products in our supply chain. In addition, natural disasters such as hurricanes, tornadoes and earthquakes, or a combination of these or other factors, could damage or destroy our facilities or make it difficult for members and customers to travel to our stores, thereby negatively affecting our business and results of operations as well as causing us to incur significant expenses to repair or replace such facilities.
Our stock price has been and may continue to be volatile.
The market price of our common stock has fluctuated substantially and may continue to fluctuate significantly. Future announcements or disclosures concerning us or any of our competitors, our strategic initiatives, our sales and profitability, any quarterly variations in actual or anticipated operating results or comparable sales, any failure to meet analysts' expectations and sales of large blocks of our common stock, among other factors, could cause the market price of our common stock to fluctuate substantially.
Increases in the cost of employee benefits could impact our financial results and cash flow.
Our expenses relating to employee health benefits are significant. Unfavorable changes in the cost of such benefits could negatively affect our financial results and cash flow. Healthcare costs have risen significantly in recent years, and recent legislative and private sector initiatives regarding healthcare reform have resulted, and could continue to result in significant changes to the U.S. healthcare system. Due to the breadth and complexity of the healthcare reform legislation, and the potential for change in this regard under the current U.S. Administration, we are unable at this time to fully determine the impact that further healthcare reform will have on our employee health benefit plans.
Item 1B.
Unresolved Staff Comments
Not applicable.

16

Item 2.
Properties
The following table summarizes the locations of our Kmart and Sears Domestic stores at January 28, 2017 :
 
 

 
Sears Domestic
State / Territory
 
Kmart
 
Full-line Stores
 
Specialty Stores
Alabama
 
8

 
5

 
—

Alaska
 
—

 
3

 
—

Arizona
 
9

 
13

 
—

Arkansas
 
3

 
5

 
—

California
 
72

 
75

 
4

Colorado
 
8

 
10

 
1

Connecticut
 
5

 
7

 
—

Delaware
 
4

 
3

 
—

Florida
 
39

 
48

 
1

Georgia
 
18

 
18

 
—

Hawaii
 
5

 
4

 
—

Idaho
 
5

 
4

 
—

Illinois
 
19

 
24

 
5

Indiana
 
17

 
13

 
1

Iowa
 
15

 
5

 
1

Kansas
 
6

 
5

 
1

Kentucky
 
18

 
6

 
—

Louisiana
 
6

 
11

 
1

Maine
 
5

 
4

 
—

Maryland
 
16

 
18

 
—

Massachusetts
 
14

 
20

 
—

Michigan
 
38

 
19

 
—

Minnesota
 
7

 
10

 
—

Mississippi
 
2

 
4

 
—

Missouri
 
15

 
11

 
—

Montana
 
7

 
1

 
—

Nebraska
 
2

 
4

 
—

Nevada
 
10

 
5

 
1

New Hampshire
 
4

 
6

 
—

New Jersey
 
25

 
20

 
1

New Mexico
 
9

 
7

 
—

New York
 
42

 
35

 
4

North Carolina
 
21

 
18

 
—

North Dakota
 
5

 
4

 
—

Ohio
 
33

 
30

 
—

Oklahoma
 
6

 
6

 
—

Oregon
 
7

 
6

 
1

Pennsylvania
 
72

 
31

 
—

Rhode Island
 
1

 
2

 
—

South Carolina
 
14

 
9

 
—

South Dakota
 
3

 
2

 
—

Tennessee
 
14

 
14

 
—

Texas
 
11

 
56

 
1

Utah
 
5

 
5

 
1

Vermont
 
2

 
1

 
—

Virginia
 
19

 
19

 
—

Washington
 
9

 
17

 
1

West Virginia
 
14

 
6

 
—

Wisconsin
 
13

 
10

 
—

Wyoming
 
7

 
2

 
—

Puerto Rico
 
21

 
9

 
—

U.S. Virgin Islands
 
4

 
—

 
—

Guam
 
1

 
—

 
—

Totals
 
735

 
670

 
25


17

   
 
 

 
Sears Domestic
 
 
Kmart
 
Full-line Stores
 
Specialty Stores
Owned
 
67

 
293

 
20

Leased
 
668

 
377

 
5

January 28, 2017
 
735

 
670

 
25

In addition, at January 28, 2017 , we had 31 domestic supply chain distribution centers, of which 12 were owned and 19 were leased with remaining lease terms ranging up to 10  years. Of the total, six primarily support Kmart stores, 21 primarily support Sears stores and four support both Sears and Kmart stores. We also had 429 domestic store warehouses, customer call centers and service facilities (including 19 facilities related to our Monark Premium Appliance Co. of California, Monark Premium Appliance Co., and Monark Premium Appliance Co. of Arizona businesses), most of which are leased for terms ranging from one to six years or are part of other facilities included in the above table. Many of our facilities are also used to support our online channels.
Our principal executive offices are located on a 200-acre site owned by us at the Prairie Stone office park in Hoffman Estates, Illinois. The complex consists of six interconnected office buildings totaling approximately two million gross square feet of office space. We also own an 86,000 square foot office building in Troy, Michigan. We operate numerous buying offices throughout the world that procure product internationally, as well as an information technology center in Pune, India.
A description of our leasing arrangements and commitments appears in Note 14 of Notes to Consolidated Financial Statements.
Item 3.
Legal Proceedings
See Part II, Item 8, Financial Statements—Notes to Consolidated Financial Statements, Note 18—Legal Proceedings, for additional information regarding legal proceedings, which information is incorporated herein by this reference.
Item 4.
Mine Safety Disclosures
Not applicable.

18

EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and information sets forth the names of our executive officers, their current positions and offices with the Company, the date they first became executive officers of the Company, their current ages, and their principal employment during the past five years.
Name
 
Position
 
Date First Became an Executive Officer
 
Age
Edward S. Lampert
 
Chairman of the Board and Chief Executive Officer
 
2013
 
54
Jason M. Hollar
 
Chief Financial Officer
 
2016
 
43
Eric D. Jaffe
 
Senior Vice President, Shop Your Way
 
2016
 
29
Girish Lakshman

 
President, Fulfillment - Supply Chain and Sourcing

 
2015
 
52
Leena Munjal
 
Senior Vice President, Customer Experience and Integrated Retail
 
2013
 
40
David Pastrana
 
President, Apparel
 
2016
 
40
James Politeski
 
President, Home Appliances and Consumer Electronics
 
2016
 
49
Robert A. Riecker
 
Controller and Head of Capital Markets Activities
 
2012
 
52
Sean Skelley
 
President, Home Services
 
2016
 
50
Stephan Zoll
 
President, Online
 
2016
 
46
__________________
Mr. Lampert has served as Chairman of the Company's Board of Directors since 2004 and as our Chief Executive Officer since February 2013. He also is the Chairman and Chief Executive Officer of ESL Investments, Inc., which he founded in April 1988.
Mr. Hollar was appointed to his current position in October 2016, and had served as Senior Vice President, Finance of the Company since October 2014. Prior to joining the Company, he worked for Delphi Automotive PLC, serving from December 2013 to September 2014 as Vice President and Corporate Controller and from April 2011 to November 2013 as CFO, Powertrain Systems and Delphi Europe, Middle East and Africa.
Mr. Jaffe has served in his current position, as Senior Vice President, Shop Your Way, since January 2013. Prior to joining the Company, he served as an Investment Analyst at Rand Group from 2012-2013, and as an Investment Analyst at ESL Investments from 2010-2012.
Mr. Lakshman joined the Company as President, Fulfillment - Supply Chain and Sourcing in September 2015. Prior to joining the Company, he served in a variety of roles with Amazon.com, Inc. since July 1999, most recently as Vice President of Worldwide Transportation Strategy, Technology and Customer Returns. Mr. Lakshman serves as a director of Grubhub, Inc.
Ms. Munjal was appointed to her current position in October 2012. She was appointed as Divisional Vice President, Integrated Retail and Member Experience, in July 2011 and was promoted to Vice President in June 2012. From October 2009 to June 2011, she served as Divisional Vice President, and Chief of Staff, Office of the Chairman, and served as Chief of Staff, Office of the CEO, from November 2007 to November 2009. Ms. Munjal joined Sears as Director, Information Technology, in March 2003.
Mr. Pastrana was appointed to his current position in May 2015. He joined the Company as Chief of Staff in February 2014. Prior to joining the Company, he served as President, North America Region at Topshop USA from 2013-2014, and as Managing Director at Inditex USA from 2010-2013.
Mr. Politeski joined the Company as President, Home Appliances and Consumer Electronics in September 2016. Prior to joining the Company, he served as President of Samsung Electronics Canada from 2011-2015, and Senior Vice President of Samsung USA from 2009-2011.
Mr. Riecker was appointed to his current position in October 2016. He joined the Company as Assistant Controller in October 2005 and served as Vice President and Assistant Controller from May 2007 to October 2011. From October 2011 until his election as Vice President, Controller and Chief Accounting Officer in January 2012, he served as the Company's Vice President, Internal Audit.

19

Mr. Skelley joined the Company in October 2015 in his current role as President, Home Services. Prior to joining the Company, he served as Senior Vice President of Service Solutions at Asurion from 2011-2013.
Dr. Zoll joined the Company as President, Online in June 2016. Prior to joining the Company he held several positions at Ebay Germany, including Vice President from 2013-2016, and Senior Director prior to 2013.

20

PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Holdings' common stock is quoted on The NASDAQ Stock Market under the ticker symbol SHLD. There were 10,361 shareholders of record at March 16, 2017 . The quarterly high and low sales prices for Holdings' common stock are set forth below.
 
Fiscal Year 2016
 
Sears Holdings
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Common stock price
 
 
 
 
 
 
 
    High
$
19.12

 
$
16.55

 
$
18.18

 
$
13.84

    Low
$
14.05

 
$
10.52

 
$
10.50

 
$
7.08

 
 
 
Fiscal Year 2015
 
Sears Holdings
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Common stock price
 
 
 
 
 
 
 
    High
$
46.23

 
$
44.72

 
$
28.31

 
$
25.24

    Low
$
31.35

 
$
20.86

 
$
19.08

 
$
16.27

Holdings has not paid cash dividends over the two most recent fiscal years and does not expect to pay cash dividends in the foreseeable future.
Equity Compensation Plan Information
The following table reflects information about securities authorized for issuance under our equity compensation plans at January 28, 2017 .
Plan Category
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and
rights 
 
Weighted-average
exercise price of
outstanding
options,
warrants and
rights
 
Number of securities
remaining available for
future issuance
under equity
compensation plans*
Equity compensation plans approved by security holders
—
 
—
 
4,375,623
Equity compensation plans not approved by security holders
—
 
—
 
—
Total
—
 
—
 
4,375,623
 
__________________
*
Represents shares of common stock that may be issued pursuant to our 2013 Stock Plan (our 2006 Stock Plan has been closed). Awards under the 2013 Stock Plan may be restricted stock, stock unit awards, incentive stock options, nonqualified stock options, stock appreciation rights, or certain other stock-based awards. The 2013 Stock Plan also allows common stock of Holdings to be awarded in settlement of an incentive award under the Sears Holdings Corporation Umbrella Incentive Program (and any incentive program established thereunder). The shares shown exclude shares covered by an outstanding plan award that, subsequent to January 28, 2017 , ultimately are not delivered on an unrestricted basis (for example, because the award is forfeited, canceled, settled in cash or used to satisfy tax withholding obligations).

21

Stock Performance Graph
Comparison of Five-Year Cumulative Stockholder Return
The following graph compares the cumulative total return to stockholders on Holdings' common stock from January 27, 2012 through January 27, 2017, the last trading day before the end of fiscal year 2016 , based on the market prices at the last trading day before the end of each fiscal year through and including fiscal year 2016 , with the return on the S&P 500 Index, the S&P 500 Retailing Index and the S&P 500 Department Stores Index for the same period. The graph assumes an initial investment of $100 on January 27, 2012 in each of our common stock, the S&P 500 Index, the S&P Retailing Index and the S&P 500 Department Stores Index. The graph further assumes reinvestment of the value of: (i) subscription rights to purchase shares of common stock of Sears Hometown and Outlet Stores, Inc. on September 13, 2012, the ex-distribution date of the distribution of such rights to Holdings’ shareholders; (ii) common shares of Sears Canada on November 13, 2012, the distribution date of such shares to Holdings’ shareholders; (iii) shares of Lands' End on April 7, 2014, the ex-distribution date of the distribution of such shares to Holdings' shareholders; (iv) subscription rights to purchase shares of common stock of Sears Canada on October 17, 2014, the ex-distribution date of the distribution of such rights to Holdings' shareholders; (v) subscription rights to purchase up to $625 million in aggregate principal amount of 8% senior unsecured notes due 2019 and warrants to purchase shares of Holdings' common stock on November 3, 2014, the ex-distribution date of the distribution of such rights to Holdings' shareholders; and (vi) subscription rights to purchase shares of common stock of Seritage Growth Properties on June 12, 2015, the distribution date of such rights to Holdings’ shareholders.
The S&P 500 Retailing Index consists of companies included in the S&P 500 Index in the broadly defined retail sector, which includes competing retailers of softlines (apparel and domestics) and hardlines (appliances, electronics and home improvement products), as well as food and drug retailers. The S&P 500 Department Stores Index consists primarily of department stores that compete with our full-line stores.
SHLD201610K_CHART-42764.JPG
 
Jan 27, 2012
 
Feb 1, 2013
 
Jan 31, 2014
 
Jan 30, 2015
 
Jan 29, 2016
 
Jan 27, 2017
Sears Holdings
$
100.00

 
$
121.49

 
$
92.93

 
$
107.82

 
$
68.95

 
$
30.18

S&P 500 Index
$
100.00

 
$
117.59

 
$
141.45

 
$
161.56

 
$
160.47

 
$
193.94

S&P 500 Retailing Index
$
100.00

 
$
127.09

 
$
159.26

 
$
191.26

 
$
223.38

 
$
264.82

S&P 500 Department Stores Index
$
100.00

 
$
103.09

 
$
119.64

 
$
149.27

 
$
107.64

 
$
86.82


22

Purchase of Equity Securities
During the quarter ended January 28, 2017 , we did not repurchase any shares of our common stock under our common share repurchase program. At January 28, 2017 , 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
October 30, 2016 to November 26, 2016
—

 
$
—

 
—

 
$
—

 
 
November 27, 2016 to December 31, 2016
—

 
—

 
—

 
—

 
 
January 1, 2017 to January 28, 2017
—

 
—

 
—

 
—

 
 
Total
—

 
$
—

 
—

 
$
—

 
$
503,907,832

__________________
(1)  
Consists entirely of 0 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 Amended Domestic Credit Agreement (described in Management's Discussion and Analysis of Financial Condition and Results of Operations - Uses and Sources of Liquidity section below) 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%, exceptions that may be subject to certain maximum amounts and an exception that requires that the restricted payment is funded from cash on hand and not from borrowings under the credit facility. Further, the Amended Domestic Credit Agreement includes customary covenants that restrict our ability to make dispositions, prepay debt and make investments, subject, in each case, to various exceptions. The Amended 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.



23

Item 6.
Selected Financial Data
The table below summarizes our recent financial information. The data set forth below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and our Consolidated Financial Statements and notes thereto in Item 8.
 
Fiscal
dollars in millions, except per share and store data
2016
 
2015
 
2014
 
2013
 
2012
Summary of Operations
 
 
 
 
 
 
 
 
 
Revenues (1)
$
22,138

 
$
25,146

 
$
31,198

 
$
36,188

 
$
39,854

Domestic comparable store sales %
(7.4
)%
 
(9.2
)%
 
(1.8
)%
 
(3.8
)%
 
(2.5
)%
Net loss from continuing operations attributable to Holdings' shareholders (2)
(2,221
)
 
(1,129
)
 
(1,682
)
 
(1,365
)
 
(930
)
Per Common Share
 

 
 

 
 

 
 

 
 

Basic:
 

 
 

 
 

 
 

 
 

Net loss from continuing operations attributable to Holdings' shareholders
$
(20.78
)
 
$
(10.59
)
 
$
(15.82
)
 
$
(12.87
)
 
$
(8.78
)
Diluted:
 

 
 

 
 

 
 

 
 

Net loss from continuing operations attributable to Holdings' shareholders
$
(20.78
)
 
$
(10.59
)
 
$
(15.82
)
 
$
(12.87
)
 
$
(8.78
)
Holdings' book value per common share
$
(35.71
)
 
$
(18.40
)
 
$
(8.93
)
 
$
16.34

 
$
25.89

Financial Data
 
 
 

 
 

 
 

 
 

Total assets
$
9,362

 
$
11,337

 
$
13,185

 
$
18,234

 
$
19,320

Long-term debt
3,470

 
1,971

 
2,878

 
2,531

 
1,560

Long-term capital lease obligations
103

 
137

 
210

 
275

 
364

Capital expenditures
142

 
211

 
270

 
329

 
378

Adjusted EBITDA (3)
(808
)
 
(836
)
 
(718
)
 
(487
)
 
428

Domestic Adjusted EBITDA (3)
(808
)
 
(836
)
 
(647
)
 
(490
)
 
359

Number of stores
1,430

 
1,672

 
1,725

 
2,429

 
2,548

_________________
 
(1)  
We follow a retail-based financial reporting calendar. Accordingly, the fiscal year ended February 2, 2013 contained 53 weeks, while all other years presented contained 52 weeks.
(2)  
The periods presented were impacted by certain significant items, which affected the comparability of amounts reflected in the above selected financial data. For 2016 , 2015 and 2014 , these significant items are discussed within Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." 2013 results include the impact of domestic pension expense of $102 million, domestic store closings and severance of $180 million, domestic gain on the sales of assets of $41 million and the results of Lands' End and Sears Canada that were included in the results of our operations prior to the separations of $79 million and $244 million, respectively. 2012 results include the impact of non-cash charges of domestic pension settlements of $452 million, domestic pension expense of $103 million, domestic store closings and severance of $109 million, domestic transaction costs of $6 million, domestic gain on the sales of assets of $160 million and the results of the Lands' End, Sears Canada and Sears Hometown and Outlet businesses that were included in the results of our operations prior to the separations of $50 million, $(51) million and $51 million, respectively.
(3)  
See Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 for a reconciliation of this measure to GAAP and a discussion of management’s reasoning for using such measure.

24

Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
We have divided our Management's Discussion and Analysis of Financial Condition and Results of Operations into the following six sections:
•
Overview of Holdings
•
Results of Operations:
Fiscal Year
Holdings' Consolidated Results
Business Segment Results
•
Analysis of Consolidated Financial Condition
•
Contractual Obligations and Off-Balance Sheet Arrangements
•
Application of Critical Accounting Policies and Estimates
•
Cautionary Statement Regarding Forward-Looking Information
The discussion that follows should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Item 8.
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 operate a national network of stores, with 1,430 full-line and specialty retail stores in the United States, operating as Kmart and Sears. Further, we operate a number of websites under the Sears.com and Kmart.com banners which offer millions of 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. As a result of the de-consolidation of Sears Canada as described in Note 2 of Notes to the Consolidated Financial Statements, Sears Canada is no longer an operating or reportable segment. We now conduct our operations in two business segments: Kmart and Sears Domestic. The nature of operations conducted within each of these segments is discussed within the Business Segments section of Item 1 in this Annual Report on Form 10-K. Our business segments have been determined in accordance with accounting standards regarding the determination, and reporting, of business segments.
RESULTS OF OPERATIONS
Fiscal Year
Our fiscal year end is the Saturday closest to January 31 each year. Fiscal years 2016 , 2015 and 2014 consisted of 52 weeks. Unless otherwise stated, references to years in this report relate to fiscal years rather than to calendar years.

25

Holdings' Consolidated Results
Holdings' consolidated results of operations for 2016 , 2015 and 2014 are summarized as follows:
millions, except per share data
 
2016
 
2015
 
2014
REVENUES
 
 
 
 
 
 
Merchandise sales and services
 
$
22,138

 
$
25,146

 
$
31,198

COSTS AND EXPENSES
 
 
 
 
 
 
Cost of sales, buying and occupancy
 
17,452

 
19,336

 
24,049

Gross margin dollars
 
4,686

 
5,810

 
7,149

Gross margin rate
 
21.2
%
 
23.1
%
 
22.9
%
Selling and administrative
 
6,109

 
6,857

 
8,220

Selling and administrative expense as a percentage of revenues
 
27.6
%
 
27.3
%
 
26.3
%
Depreciation and amortization
 
375

 
422

 
581

Impairment charges
 
427

 
274

 
63

Gain on sales of assets
 
(247
)
 
(743
)
 
(207
)
Total costs and expenses
 
24,116

 
26,146

 
32,706

Operating loss
 
(1,978
)
 
(1,000
)
 
(1,508
)
Interest expense
 
(404
)
 
(323
)
 
(313
)
Interest and investment income (loss)
 
(26
)
 
(62
)
 
132

Other income
 
13

 
—

 
4

Loss before income taxes
 
(2,395
)
 
(1,385
)
 
(1,685
)
Income tax (expense) benefit
 
174

 
257

 
(125
)
Net loss
 
(2,221
)
 
(1,128
)
 
(1,810
)
(Income) loss attributable to noncontrolling interests
 
—

 
(1
)
 
128

NET LOSS ATTRIBUTABLE TO HOLDINGS’ SHAREHOLDERS
 
$
(2,221
)
 
$
(1,129
)
 
$
(1,682
)
NET LOSS PER COMMON SHARE ATTRIBUTABLE TO HOLDINGS’ SHAREHOLDERS
 
 
 
 
 
 
Diluted loss per share
 
$
(20.78
)
 
$
(10.59
)
 
$
(15.82
)
Diluted weighted average common shares outstanding
 
106.9

 
106.6

 
106.3


26

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. Comparable store sales amounts include sales from sears.com and kmart.com shipped directly to customers. These online sales resulted in a negative impact to our comparable store sales results of approximately 20 basis points and 10 basis points for 2016 and 2015 , respectively. In addition, comparable store sales have been adjusted for the change in the unshipped sales reserves recorded at the end of each reporting period, which did not have any impact in 2016 and resulted in a negative impact of 10 basis points for 2015 .
Comparable store sales results for 2016 were calculated based on the 52-week period ended January 28, 2017 as compared to the comparable 52-week period in the prior year, while comparable store sales results for 2015 were calculated based on the 52-week period ended January 30, 2016 as compared to the comparable 52-week period in the prior year.
2016 Compared to 2015
Net Loss Attributable to Holdings' Shareholders
We recorded a net loss attributable to Holdings' shareholders of $2.2 billion ( $20.78 loss per diluted share) and $1.1 billion ( $10.59 loss per diluted share) for 2016 and 2015 , respectively. Our results for 2016 and 2015 were affected by a number of significant items. Our net loss as adjusted for these significant items, which are further discussed below, was $887 million ( $8.30 loss per diluted share) for 2016 and $953 million ( $8.94 loss per diluted share) for 2015 . The decrease in adjusted net loss for the year primarily reflected a decrease in selling and administrative expenses, partially offset by a decline in gross margin, which was driven by the decline in revenues and a decline in gross margin rate.
In addition to our net loss attributable to Holdings' shareholders determined in accordance with Generally Accepted Accounting Principles ("GAAP"), for purposes of evaluating operating performance, we use Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") and Domestic Adjusted EBITDA, as well as Adjusted Earnings per Share ("Adjusted EPS").

27

Adjusted EBITDA and Domestic Adjusted EBITDA were determined as follows:
millions
2016
 
2015
 
2014
Net loss attributable to Holdings per statement of operations
$
(2,221
)
 
$
(1,129
)
 
$
(1,682
)
Income (loss) attributable to noncontrolling interests
—

 
1

 
(128
)
Income tax expense (benefit)
(174
)
 
(257
)
 
125

Interest expense
404

 
323

 
313

Interest and investment (income) loss
26

 
62

 
(132
)
Other income
(13
)
 
—

 
(4
)
Operating loss
(1,978
)
 
(1,000
)
 
(1,508
)
Depreciation and amortization
375

 
422

 
581

Gain on sales of assets
(247
)
 
(743
)
 
(207
)
Before excluded items
(1,850
)
 
(1,321
)
 
(1,134
)
 
 
 
 
 
 
Closed store reserve and severance
384

 
98

 
224

Domestic pension expense
288

 
229

 
89

Other (1)
31

 
(64
)
 
50

Amortization of deferred Seritage gain
(88
)
 
(52
)
 
—

Impairment charges
427

 
274

 
63

Adjusted EBITDA
(808
)
 
(836
)
 
(708
)
 
 
 
 
 
 
Lands' End
—

 
—

 
(10
)
Adjusted EBITDA as defined (2)
$
(808
)
 
$
(836
)
 
$
(718
)
 
 
 
 
 
 
Sears Canada
—

 
—

 
71

Domestic Adjusted EBITDA as defined (2)
$
(808
)
 
$
(836
)
 
$
(647
)

(1) Consists of one-time credits from vendors, expenses associated with legal matters, transaction costs associated with strategic initiatives and other expenses.
(2) Adjusted to reflect the results of the Lands' End and Sears Canada businesses that were included in our results of operations prior to the separation/disposition.

28

Adjusted EBITDA for our segments was as follows:
 
2016
 
2015
 
2014
millions
Kmart
Sears Domestic
Sears Holdings
 
Kmart
Sears Domestic
Sears Holdings
 
Kmart
Sears Domestic
Sears Canada
Sears Holdings
Operating loss per statement of operations
$
(530
)
$
(1,448
)
$
(1,978
)
 
$
(292
)
$
(708
)
$
(1,000
)
 
$
(422
)
$
(920
)
$
(166
)
$
(1,508
)
Depreciation and amortization
71

304

375

 
72

350

422

 
95

437

49

581

(Gain) loss on sales of assets
(181
)
(66
)
(247
)
 
(185
)
(558
)
(743
)
 
(103
)
(105
)
1

(207
)
Before excluded items
(640
)
(1,210
)
(1,850
)
 
(405
)
(916
)
(1,321
)
 
(430
)
(588
)
(116
)
(1,134
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Closed store reserve, severance and other
318

66

384

 
86

12

98

 
142

55

27

224

Domestic pension expense
—

288

288

 
—

229

229

 
—

89

—

89

Other (1)
15

16

31

 
43

(107
)
(64
)
 
43

4

3

50

Amortization of deferred Seritage gain
(17
)
(71
)
(88
)
 
(11
)
(41
)
(52
)
 
—

—

—

—

Impairment charges
22

405

427

 
14

260

274

 
29

19

15

63

Adjusted EBITDA
(302
)
(506
)
(808
)
 
(273
)
(563
)
(836
)
 
(216
)
(421
)
(71
)
(708
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Lands' End separation
—

—

—

 
—

—

—

 
—

(10
)
—

(10
)
Adjusted EBITDA as defined (2)
$
(302
)
$
(506
)
$
(808
)
 
$
(273
)
$
(563
)
$
(836
)
 
$
(216
)
$
(431
)
$
(71
)
$
(718
)
% to revenues (3)
(3.5
)%
(3.8
)%
(3.6
)%
 
(2.7
)%
(3.8
)%
(3.3
)%
 
(1.8
)%
(2.6
)%
(3.4
)%
(2.3
)%

(1) Consists of one-time credits from vendors, expenses associated with legal matters, transaction costs associated with strategic initiatives and other expenses.
(2) Adjusted to reflect the results of the Lands' End business that were included in our results of operations prior to the separation.
(3) Excludes revenues of the Lands' End business that were included in our results of operations prior to the separation.

29

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 Consolidated Statements of Operations during the years 2016 , 2015 and 2014 .
 
Year Ended January 28, 2017
 
 
Adjustments
 
millions, except per share data
GAAP
Domestic Pension
Expense
Closed Store Reserve, Store Impairments and Severance
Trade name Impairment
Gain on Sales of Assets
Mark-to-Market Adjustments
Amortization of Deferred Seritage Gain
Other (1)
Tax Matters
As
Adjusted
Gross margin impact
$
4,686

$
—

$
226

$
—

$
—

$
—

$
(88
)
$
(33
)
$
—

$
4,791

Selling and administrative impact
6,109

(288
)
(158
)
—

—

—

—

(64
)
—

5,599

Depreciation and amortization impact
375

—

(20
)
—

—

—

—

—

—

355

Impairment charges impact
427

—

(46
)
(381
)
—

—

—

—

—

—

Gain on sales of assets impact
(247
)
—

—

—

109

—

—

—

—

(138
)
Operating loss impact
(1,978
)
288

450

381

(109
)
—

(88
)
31

—

(1,025
)
Interest and investment loss impact
(26
)
—

—

—

—

35

—

—

—

9

Other income impact
13

—

—

—

—

—

—

(13
)
—

—

Income tax benefit impact
174

(108
)
(169
)
(143
)
41

(13
)
33

(7
)
725

533

After tax and noncontrolling interests impact
(2,221
)
180

281

238

(68
)
22

(55
)
11

725

(887
)
Diluted loss per share impact
$
(20.78
)
$
1.68

$
2.63

$
2.23

$
(0.64
)
$
0.21

$
(0.51
)
$
0.10

$
6.78

$
(8.30
)
 
Year Ended January 30, 2016
 
 
Adjustments
 
millions, except per share data
GAAP
Domestic Pension
Expense
Closed Store Reserve, Store Impairments and Severance
Trade name Impairment
Gain on Sales of Assets
Mark-to-Market Adjustments
Amortization of Deferred Seritage Gain
Other (2)
Tax Matters
As Adjusted
Gross margin impact
$
5,810

$
—

$
44

$
—

$
—

$
—

$
(52
)
$
(146
)
$
—

$
5,656

Selling and administrative impact
6,857

(229
)
(54
)
—

—

—

—

(82
)
—

6,492

Depreciation and amortization impact
422

—

(3
)
—

—

—

—

—

—

419

Impairment charges impact
274

—

(94
)
(180
)
—

—

—

—

—

—

Gain on sales of assets impact
(743
)
—

—

—

687

—

—

—

—

(56
)
Operating loss impact
(1,000
)
229

195

180

(687
)
—

(52
)
(64
)
—

(1,199
)
Interest and investment loss impact
(62
)
—

—

—

—

59

—

—

—

(3
)
Income tax benefit impact
257

(86
)
(73
)
(68
)
258

(22
)
20

24

263

573

After tax and noncontrolling interests impact
(1,129
)
143

122

112

(429
)
37

(32
)
(40
)
263

(953
)
Diluted loss per share impact
$
(10.59
)
$
1.34

$
1.14

$
1.05

$
(4.02
)
$
0.35

$
(0.30
)
$
(0.38
)
$
2.47

$
(8.94
)
(1) Consists of one-time credits from vendors, expenses associated with legal matters, transaction costs associated with strategic initiatives, other expenses and other income.
(2) Consists of one-time credits from vendors, expenses associated with legal matters, transaction costs associated with strategic initiatives and other expenses.

30

 
Year Ended January 31, 2015
 
 
Adjustments
 
millions, except per share data
GAAP
Domestic Pension
Expense
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
$
7,149

$
—

$
68

$
—

$
—

$
—

$
—

$
(502
)
$
(87
)
$
6,628

Selling and administrative impact
8,220

(89
)
(129
)
—

(47
)
—

—

(603
)
(77
)
7,275

Depreciation and amortization impact
581

—

(8
)
—

—

—

—

(49
)
(3
)
521

Impairment charges impact
63

—

(48
)
—

—

—

—

(15
)
—

—

Gain on sales of assets impact
(207
)
—

—

87

—

—

—

(1
)
—

(121
)
Operating loss impact
(1,508
)
89

253

(87
)
47

—

—

166

(7
)
(1,047
)
Interest expense impact
(313
)
—

—

—

—

—

—

5

—

(308
)
Interest and investment income impact
132

—

—

—

—

(70
)
—

(38
)
—

24

Other income impact
4

—

—

—

—

—

—

(4
)
—

—

Income tax expense impact
(125
)
(33
)
(95
)
33

(18
)
26

574

136

3

501

Income attributable to noncontrolling interests impact
128

—

—

—

—

—

—

(128
)
—

—

After tax and noncontrolling interests impact
(1,682
)
56

158

(54
)
29

(44
)
574

137

(4
)
(830
)
Diluted loss per share impact
$
(15.82
)
$
0.53

$
1.48

$
(0.51
)
$
0.27

$
(0.41
)
$
5.40

$
1.29

$
(0.04
)
$
(7.81
)
(1) Adjusted to reflect the results of the Lands' End and Sears Canada businesses that were included in our results of operations prior to the separation/disposition.
Adjusted EBITDA is computed as net loss attributable to Sears Holdings Corporation appearing on the Statements of Operations excluding income (loss) attributable to noncontrolling interests, income tax (expense) benefit, interest expense, interest and investment income (loss), 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 important indicators of ongoing operating performance, and useful to investors, 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. 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.
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

31

representative of our ongoing performance. Therefore, we have adjusted our results for significant items 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.
These other significant items included in Adjusted EBITDA, Domestic Adjusted EBITDA and Adjusted EPS are further explained as follows:
•
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, and the resulting abnormally low interest rates, which continue to persist, our domestic pension expense was $288 million in 2016 , $229 million in 2015 and $89 million in 2014 . Pension expense is comprised of interest cost, expected return on plan assets and recognized net loss and other. This adjustment eliminates the entire pension expense from the statement of operations to improve comparability. Pension expense is included in the determination of net loss.
The components of the adjustments to EBITDA related to domestic pension expense were as follows:
millions
2016
 
2015
 
2014
Components of net periodic expense:
 
 
 
 
 
Interest cost
$
227

 
$
210

 
$
221

Expected return on plan assets
(202
)
 
(249
)
 
(247
)
Recognized net loss and other
263

 
268

 
115

Net periodic expense
$
288

 
$
229

 
$
89

In accordance with 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 and Analysis of Financial Condition and Results of Operations - Application of Critical Accounting Policies and Estimates - Defined Benefit Pension Plans, and Note 7 of Notes to Consolidated Financial Statements.
•
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.

32

•
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 and indefinite-lived intangible asset balances.
•
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 sales of assets to result from investing decisions rather than ongoing operations.
•
Mark-to-market adjustments – We elected the fair value option for the equity method investment in Sears Canada, and the change in fair value is recorded in interest and investment income in the Consolidated Statements of Operations. Management considers activity related to our retained investment in Sears Canada to result from investing decisions rather than ongoing operations. Furthermore, we do not consider the short term fluctuations in Sears Canada's stock price useful in assessing our operating performance.
•
Amortization of deferred Seritage gain – A portion of the gain on the Seritage transaction was deferred and will be recognized in proportion to the related rent expense, which is a component of cost of sales, buying and occupancy in the Consolidated Statements of Operations, over the lease term. Management considers the amortization of the deferred Seritage gain to result from investing decisions rather than ongoing operations.
•
Other – Consists of one-time credits from vendors, transaction costs associated with strategic initiatives, expenses associated with legal matters, other expenses and other income.
•
Domestic tax matters – In 2011, 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.
•
Gain on Sears Canada disposition – We recognized a gain upon de-consolidation of Sears Canada. Management considers the gain to result from investing decisions rather than ongoing operations.
•
Sears Canada segment – Reflects the results of the Sears Canada business that were included in our results of operations prior to the disposition. The adjustment also includes the valuation allowance that was recorded in the third quarter of 2014 prior to the de-consolidation of Sears Canada.
•
Lands' End separation – Reflects the results of the Lands' End business that were included in our results of operations prior to the separation.
Revenues and Comparable Store Sales
Revenues decreased $3.0 billion , or 12.0% , to $22.1 billion in 2016 , as compared to revenues of $25.1 billion in 2015 . The decline in revenues included a decrease of $1.3 billion as a result of having fewer Kmart and Sears Full-line stores in operation. For the full year, comparable store sales declined 7.4% , which contributed to $1.4 billion of the revenue decline relative to the prior year. In addition, we also experienced a decline in revenues from Sears Hometown and Outlet Stores, Inc. ("SHO") of approximately $238 million during 2016 as compared to 2015.
Kmart comparable store sales declined 5.3% for the full year primarily driven by declines in the grocery & household, consumer electronics and pharmacy categories. Sears Domestic comparable store sales for the year declined 9.3% primarily driven by decreases in the home appliances, apparel and consumer electronics categories.
Gross Margin
Gross margin declined $1.1 billion to $ 4.7 billion in 2016 from $ 5.8 billion in 2015 as a result of the above noted decline in sales, as well as a decline in gross margin rate. Gross margin for 2016 included one-time vendor credits of $33 million , as well as a credit of $88 million related to the amortization of the deferred gain on sale of

33

assets associated with the Seritage transaction, while 2015 included one-time vendor credits of $146 million , as well as a credit of $52 million related to the amortization of the deferred gain on sale of assets associated with the Seritage transaction. Gross margin for 2016 and 2015 also included charges of $226 million and $44 million , respectively, related to store closures.
As compared to the prior year, Kmart's gross margin rate for 2016 declined 310 basis points. Excluding the impact of significant items primarily related to store closures as noted in our Adjusted Earnings Per Share tables, Kmart's gross margin rate would have declined 130 basis points with margin rate declines experienced across most categories, most notably in the apparel, grocery & household, drugstore, home and pharmacy categories. Sears Domestic's gross margin rate for 2016 decreased 130 basis points. Excluding the impact of significant items in both years primarily related to the amortization of the deferred gain on sale of assets associated with the Seritage transaction, one-time vendor credits and store closures, Sears Domestic's gross margin rate declined 60 basis points, with the most notable decreases experienced in the apparel, home appliances and footwear categories. The decline in margin rate experienced in both Kmart and Sears Domestic is primarily attributable to increased markdowns, including an increase in Shop Your Way points expense.
In addition, as a result of the Seritage and JV transactions, 2016 and 2015 included additional rent expense and assigned sub-tenant rental income of approximately $197 million and $133 million, respectively. Due to the structure of the leases, we expect that our cash rent obligations to Seritage and the joint venture partners will decline, over time, as space in these stores is recaptured. From the inception of the Seritage transaction to date, we have received recapture notices on 25 properties, which is estimated to reduce the rent expense by approximately $14 million on an annual basis. We have also exercised our right to terminate the lease on 36 properties, which is estimated to reduce rent expense by approximately $12 million on an annual basis.
Selling and Administrative Expenses
Selling and administrative expenses decreased $748 million to $6.1 billion in 2016 from $6.9 billion in 2015 and included significant items which aggregated to an expense of $510 million and $365 million for 2016 and 2015 , respectively. Excluding these items, selling and administrative expenses declined $893 million , primarily due to a decrease in payroll expense. In addition, advertising expense also declined as we continued to shift away from traditional advertising to use of Shop Your Way points expense, which is included within gross margin.
Selling and administrative expenses as a percentage of revenues ("selling and administrative expense rate") were 27.6% and 27.3% for 2016 and 2015 , respectively, as the decreases in overall selling and administrative expenses were more than offset by the above noted decline in revenues.
Depreciation and Amortization
Depreciation and amortization expense decreased by $47 million during 2016 to $375 million , as compared to 2015, primarily due to having fewer assets to depreciate.
Impairment Charges
We recorded impairment charges of $427 million in 2016 , which consisted of impairment of $381 million related to the Sears trade name, as well as $46 million related to the impairment of long-lived assets. We recorded impairment charges of $274 million in 2015 , which consisted of impairment of $180 million related to the Sears trade name, as well as $94 million related to the impairment of long-lived assets. Impairment charges recorded in both years are described further in Notes 1 and 13 of Notes to Consolidated Financial Statements.
Gain on Sales of Assets
We recorded total gains on sales of assets of $247 million in 2016 and $743 million in 2015 , which were primarily attributable to several significant real estate transactions. The gains recorded in 2015 included $508 million recognized in connection with the joint venture transactions and the sale-leaseback transaction with Seritage. Gains on sales of assets recorded in both years are described further in Note 11 of Notes to Consolidated Financial Statements.

34

Operating Loss
We recorded an operating loss of $2.0 billion and $1.0 billion in 2016 and 2015 , respectively. The operating loss for 2016 included significant items which aggregated to operating expense of $953 million , while operating loss for 2015 included significant items which aggregated to operating income of $199 million . Excluding these items, we would have reported an adjusted operating loss of $1.0 billion and $1.2 billion in 2016 and 2015 , respectively. The decrease in adjusted operating loss in 2016 was primarily driven by the decrease in selling and administrative expenses, partially offset by the decline in gross margin noted above.
Interest Expense
We incurred $404 million and $323 million in interest expense during 2016 and 2015 , respectively. The increase is due to an increase in average outstanding borrowings in 2016 .
Interest and Investment Loss
We recorded interest and investment loss of $26 million during 2016 compared to interest and investment loss of $62 million during 2015 . Interest and investment income loss is described further in Note 6 of Notes to Consolidated Financial Statements.
Income Taxes
We recorded an income tax benefit of $174 million in 2016 compared with an income tax benefit of $257 million in 2015 . Our effective tax rate for 2016 was a benefit of 7.3% compared to a benefit of 18.6% for 2015. During 2016, the Company realized a significant tax benefit on the deferred taxes related to the partial impairment of the Sears trade name. I n addition, the Company recorded a tax benefit related to the net gain on pension and other postretirement benefits in continuing operations and a corresponding tax expense of the same amount in other comprehensive income. A lso, the application of the requirements for accounting for income taxes, after consideration of our valuation allowance, causes a significant variation in the typical relationship between income tax expense and pretax income. Our tax rate in 2016 continues to reflect the effect of not recognizing the benefit of current period losses in certain domestic and foreign jurisdictions where it is not more likely than not that such benefits would be realized. In addition, 2016 was negatively impacted by foreign branch taxes and state income taxes. 
The 2015 rate was favorably impacted by the significant tax benefit realized on the deferred taxes related to indefinite-life assets associated with the property sold in the transaction with Seritage and the tax benefit realized on the deferred taxes related to the partial impairment of the Sears trade name. These items were partially offset by foreign branch taxes and state income taxes. 
2015 Compared to 2014
Net Loss Attributable to Holdings' Shareholders
We recorded a net loss attributable to Holdings' shareholders of $1.1 billion ($10.59 loss per diluted share) and $1.7 billion ($15.82 loss per diluted share) for 2015 and 2014, respectively. Our results for 2015 and 2014 were affected by a number of significant items. Our net loss as adjusted for these significant items, which are further discussed below, was $953 million ($8.94 loss per diluted share) for 2015 and $830 million ($7.81 loss per diluted share) for 2014. The increase in net loss as adjusted for the year primarily reflected a decline in gross margin, which was driven by the decline in revenues, partially offset by a decrease in selling and administrative expenses.



35

Revenues and Comparable Store Sales
Revenues decreased $6.1 billion, or 19.4%, to $25.1 billion in 2015, as compared to revenues of $31.2 billion in 2014. Much of the decline related to actions we took during 2014 to streamline our operations and focus on our transformation into a member-centric retailer. The decrease in revenue included a decrease of $2.1 billion associated with Sears Canada, which was de-consolidated in October 2014, $222 million from the separation of the Lands’ End business, which was completed on April 4, 2014, and $1.5 billion from fewer Kmart and Sears Full-line stores. In addition, domestic comparable store sales declined 9.2%, which contributed to $2.0 billion of the decline. The decline in comparable store sales was driven by reduced, but more highly targeted promotional and marketing spend to better align with member needs and a shift away from low margin categories, such as consumer electronics. Comparable store sales in the latter part of the year, particularly in the apparel and softlines businesses, were negatively impacted by unseasonably warm weather and a highly promotional environment.
Kmart comparable store sales declined 7.3% with increases in the home appliances, mattresses and seasonal categories, which were more than offset by declines in the consumer electronics, apparel, grocery & household and drugstore categories. Excluding the impact of the consumer electronics business, which is a business we continue to alter to meet our members' needs, Kmart comparable store sales would have decreased 5.5%. Sears Domestic comparable store sales decreased 11.1%, and were also negatively impacted by consumer electronics. Excluding the impact of consumer electronics, Sears Domestic comparable store sales would have decreased 9.5%, primarily driven by decreases in apparel, home appliances, lawn & garden and Sears Auto Centers, which were partially offset by an increase in the mattresses category.
Gross Margin
Gross margin declined $1.3 billion to $5.8 billion in 2015 from $7.1 billion in 2014 as the above noted decline in sales was partially offset by an improvement in gross margin rate. Gross margin for 2015 included one-time vendor credits of $146 million, as well as a credit of $52 million related to the amortization of the deferred gain on sale of assets associated with the Seritage transaction, while 2014 included gross margin of $502 million from Sears Canada and $87 million from the Lands' End business. Gross margin for 2015 and 2014 also included charges of $44 million and $68 million, respectively, related to store closures.
As compared to the prior year, Kmart's gross margin rate for 2015 declined 10 basis points, as increases experienced in a majority of categories, most notably consumer electronics, grocery & household, drugstore and toys, were more than offset by decreases in the apparel and pharmacy categories. Sears Domestic's gross margin rate for 2015 improved 50 basis points. Excluding the impact of significant items, Sears Domestic's gross margin rate declined 60 basis points, with the most notable decreases experienced in the apparel and home appliances categories driven by an increase in promotional activities, particularly during the fourth quarter of 2015 as a result of the highly competitive promotional environment.
In addition, as a result of the Seritage and JV transactions, 2015 included additional rent expense and assigned sub-tenant income of approximately $133 million.
Selling and Administrative Expenses
Selling and administrative expenses decreased $1.4 billion to $6.9 billion in 2015 from $8.2 billion in 2014 and included significant items which aggregated to expense of $365 million and $945 million for 2015 and 2014, respectively, with 2014 including expenses of $603 million from Sears Canada and $77 million from the Lands' End business. Excluding these items, selling and administrative expenses declined $783 million, primarily due to decreases in payroll and advertising expenses.
Selling and administrative expenses as a percentage of revenues ("selling and administrative expense rate") were 27.3% and 26.3% for 2015 and 2014, respectively, as the decreases in overall selling and administrative expenses were more than offset by the above noted decline in revenues.

36

Depreciation and Amortization
Depreciation and amortization expense decreased by $159 million during 2015 to $422 million, primarily due to having fewer assets to depreciate. Depreciation and amortization expense during 2014 included expense of $52 million related to Sears Canada and the Lands' End business.
Impairment Charges
We recorded impairment charges of $274 million in 2015, which consisted of impairment of $180 million related to the Sears trade name, as well as $94 million related to the impairment of long-lived assets. We recorded impairment charges of $63 million in 2014, which were related to the impairment of long-lived assets. Impairment charges recorded in both years are described further in Notes 1 and 13 of Notes to Consolidated Financial Statements.
Gain on Sales of Assets
We recorded total gains on sales of assets of $743 million in 2015 and $207 million in 2014, which were primarily attributable to several significant real estate transactions. The gains recorded in 2015 included $508 million recognized in connection with the joint venture transactions and the sale-leaseback transaction with Seritage. Gains on sales of assets recorded in both years are described further in Note 11 of Notes to Consolidated Financial Statements.
Operating Loss
We recorded an operating loss of $1.0 billion and $1.5 billion in 2015 and 2014, respectively. The operating loss for 2015 included significant items which aggregated to operating income of $199 million, while operating loss for 2014 included significant items which aggregated to operating expense of $461 million. Excluding these items, we would have reported an adjusted operating loss of $1.2 billion and $1.0 billion in 2015 and 2014, respectively. The increase in adjusted operating loss in 2015 was primarily driven by the decrease in gross margin, partially offset by the decline in selling and administrative expenses.
Interest Expense
We incurred $323 million and $313 million in interest expense during 2015 and 2014, respectively. The increase is due to an increase in average outstanding borrowings in 2015.
Interest and Investment Income (Loss)
We recorded interest and investment loss of $62 million during 2015 compared to interest and investment income of $132 million during 2014. Interest and investment income (loss) is described further in Note 6 of Notes to Consolidated Financial Statements.
Income Taxes
We recorded an income tax benefit of $257 million in 2015 compared with income tax expense of $125 million in 2014. During 2015, the Company realized a significant tax benefit on the deferred taxes related to indefinite-life assets associated with the property sold in the transaction with Seritage. As a result, our effective tax rate for 2015 was a benefit of 18.6% compared to expense of 7.4% for 2014. Also, the application of the requirements for accounting for income taxes, after consideration of our valuation allowance, causes a significant variation in the typical relationship between income tax expense and pretax income. Our tax rate in 2015 continued to reflect the effect of not recognizing the benefit of current period losses in certain domestic and foreign jurisdictions where it is not more likely than not that such benefits would be realized. In addition, 2015 was negatively impacted by foreign branch taxes and state income taxes.
The 2014 rate 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

37

audit settlements and statute expirations. In addition, the 2014 rate was favorably impacted by the book to tax difference for the original issue discount relating to the $625 million 8% senior unsecured notes issued in November 2014, which resulted in the creation of a deferred tax liability through additional paid-in capital and a valuation allowance reversal through continuing operations.
Business Segment Results
Kmart
Kmart results and key statistics were as follows:
millions, except number of stores
2016
 
2015
 
2014
Merchandise sales and services
$
8,650

 
$
10,188

 
$
12,074

Comparable store sales %
(5.3
)%
 
(7.3
)%
 
(1.4
)%
Cost of sales, buying and occupancy
7,093

 
8,042

 
9,513

Gross margin dollars
1,557

 
2,146

 
2,561

Gross margin rate
18.0
 %
 
21.1
 %
 
21.2
 %
Selling and administrative
2,175

 
2,537

 
2,962

Selling and administrative expense as a percentage of total revenues
25.1
 %
 
24.9
 %
 
24.5
 %
Depreciation and amortization
71

 
72

 
95

Impairment charges
22

 
14

 
29

Gain on sales of assets
(181
)
 
(185
)
 
(103
)
Total costs and expenses
9,180

 
10,480

 
12,496

Operating loss
$
(530
)
 
$
(292
)
 
$
(422
)
Adjusted EBITDA
$
(302
)
 
$
(273
)
 
$
(216
)
Total Kmart stores
735

 
941

 
979

2016 Compared to 2015
Revenues and Comparable Store Sales
Kmart’s revenues decreased by $1.5 billion to $8.7 billion in 2016 , primarily due to the effect of having fewer stores in operation, which accounted for approximately $1.0 billion of the decline. Revenues were also impacted by a decrease in comparable store sales of 5.3% , which accounted for approximately $477 million of the decline. The decline in comparable store sales was primarily driven by declines in the grocery & household, consumer electronics and pharmacy categories.
Gross Margin
Kmart generated $1.6 billion in gross margin in 2016 compared to $2.1 billion in 2015 . The decrease in Kmart’s gross margin is due to the above noted decrease in sales, as well as a decline in gross margin rate. Gross margin included significant items which aggregated to expense of $170 million and $28 million for 2016 and 2015 , respectively.
Kmart's gross margin rate declined 310 basis points to 18.0% in 2016 from 21.1% in 2015 . Excluding the impact of significant items primarily related to store closures as noted in our Adjusted Earnings Per Share tables, Kmart's gross margin rate would have declined 130 basis points due to margin rate declines experienced across most categories, most notably in the apparel, grocery & household, drugstore, home and pharmacy categories driven by increased markdowns, including an increase in Shop Your Way points expense.
In addition, as a result of the Seritage and JV transactions, 2016 and 2015 included additional rent expense and assigned sub-tenant rental income of approximately $35 million and $25 million, respectively.

38

Selling and Administrative Expenses
Kmart's selling and administrative expenses decreased $362 million in 2016 . Selling and administrative expenses included significant items which aggregated to expense of $146 million and $90 million for 2016 and 2015 , respectively. Excluding these items, selling and administrative expenses decreased $418 million primarily due to decreases in payroll and advertising expenses.
Kmart's selling and administrative expense rate was 25.1% in 2016 and 24.9% in 2015 and increased primarily as a result of lower expense leverage due to the sales decline noted above.
Impairment charges
Kmart recorded impairment charges of $22 million and $14 million in 2016 and 2015 , respectively, related to the impairment of long-lived assets. Impairment charges recorded during 2016 and 2015 are further described in Note 13 of Notes to Consolidated Financial Statements.
Gain on Sales of Assets
Kmart recorded total gains on sales of assets of $181 million and $185 million in 2016 and 2015 , respectively. Gains on sales of assets recorded in both years are described further in Note 11 of Notes to Consolidated Financial Statements.
Operating Loss
Kmart recorded an operating loss of $530 million in 2016 as compared to $292 million in 2015 . Operating loss for 2016 included significant items which aggregated to operating expense of $280 million, while operating loss for 2015 included significant items which aggregated to operating income of $14 million. Excluding these items, Kmart would have reported an adjusted operating loss of $250 million and $306 million for 2016 and 2015 , respectively. The decrease in Kmart's adjusted operating loss was primarily driven by the decrease in selling and administrative expenses, partially offset by a decline in gross margin.
2015 Compared to 2014
Revenues and Comparable Store Sales
Kmart’s revenues decreased by $1.9 billion to $10.2 billion in 2015, primarily due to the effect of having fewer stores in operation, which accounted for approximately $1.1 billion of the decline. Revenues were also impacted by a decrease in comparable store sales of 7.3%, which accounted for approximately $787 million of the decline.
The decline in comparable store sales was primarily driven by declines in the consumer electronics, apparel, grocery & household and drugstore categories, partially offset by increases in the home appliances, mattresses and seasonal categories. Excluding the impact of the consumer electronics business, which is a business we continue to alter to meet our members' needs, Kmart comparable store sales would have decreased 5.5%.
Gross Margin
Kmart generated $2.1 billion in gross margin in 2015 compared to $2.6 billion in 2014. The decrease in Kmart’s gross margin is due to the above noted decrease in sales, as well as a slight decrease in gross margin rate. Gross margin included significant items which aggregated to $28 million and $54 million for 2015 and 2014, respectively. Excluding these items, gross margin decreased $441 million.
Kmart's gross margin rate declined 10 basis points to 21.1% in 2015 from 21.2% in 2014, as increases experienced in a majority of categories, most notably grocery & household, consumer electronics, drugstore and toys, were more than offset by decreases in the apparel and pharmacy categories.
In addition, as a result of the Seritage and JV transactions, 2015 included additional rent expense and assigned sub-tenant rental income of approximately $25 million.

39

Selling and Administrative Expenses
Kmart's selling and administrative expenses decreased $425 million in 2015. Selling and administrative expenses included significant items which aggregated to expense of $90 million and $131 million for 2015 and 2014, respectively. Excluding these items, selling and administrative expenses decreased $384 million primarily due to decreases in payroll and advertising expenses.
Kmart's selling and administrative expense rate was 24.9% in 2015 and 24.5% in 2014 and increased primarily as a result of lower expense leverage due to the sales decline noted above.
Depreciation and Amortization
Depreciation and amortization expense decreased by $23 million during 2015 to $72 million, as compared to 2014, primarily due to having fewer assets to depreciate.
Impairment charges
Kmart recorded impairment charges of $14 million and $29 million in 2015 and 2014, respectively, related to the impairment of long-lived assets. Impairment charges recorded during 2015 and 2014 are further described in Note 13 of Notes to Consolidated Financial Statements.
Gain on Sales of Assets
Kmart recorded total gains on sales of assets of $185 million and $103 million in 2015 and 2014, respectively. Gains recorded in 2015 included gains of $137 million recognized in connection with the sale-leaseback transaction with Seritage. Gains on sales of assets recorded in both years are described further in Note 11 of Notes to Consolidated Financial Statements.
Operating Loss
Kmart recorded an operating loss of $292 million in 2015 as compared to $422 million in 2014. Operating loss for 2015 included significant items which aggregated to operating income of $14 million, while operating loss for 2014 included significant items which aggregated to operating expense of $208 million. Excluding these items, Kmart would have reported an adjusted operating loss of $306 million and $214 million for 2015 and 2014, respectively. The increase in Kmart's adjusted operating loss was primarily driven by the decrease in gross margin, partially offset by the decrease in selling and administrative expenses.

40

Sears Domestic
Sears Domestic results and key statistics were as follows:
millions, except number of stores
2016
 
2015
 
2014
Merchandise sales and services
$
13,488

 
$
14,958

 
$
17,036

Comparable store sales %
(9.3
)%
 
(11.1
)%
 
(2.1
)%
Cost of sales, buying and occupancy
10,359

 
11,294

 
12,950

Gross margin dollars
3,129

 
3,664

 
4,086

Gross margin rate
23.2
 %
 
24.5
 %
 
24.0
 %
Selling and administrative
3,934

 
4,320

 
4,655

Selling and administrative expense as a percentage of total revenues
29.2
 %
 
28.9
 %
 
27.3
 %
Depreciation and amortization
304

 
350

 
437

Impairment charges
405

 
260

 
19

Gain on sales of assets
(66
)
 
(558
)
 
(105
)
Total costs and expenses
14,936

 
15,666

 
17,956

Operating loss
$
(1,448
)
 
$
(708
)
 
$
(920
)
Adjusted EBITDA
$
(506
)
 
$
(563
)
 
$
(421
)
Lands' End separation
—

 
—

 
(10
)
Adjusted EBITDA as defined (1)
$
(506
)
 
$
(563
)
 
$
(431
)
Number of:
 
 
 
 
 
Full-line stores
670

 
705

 
717

Specialty stores
25

 
26

 
29

Total Sears Stores
695

 
731

 
746

__________________
(1) Adjusted to reflect the results of the Lands' End business that were included in our results of operations prior to the separation.
2016 Compared to 2015
Revenues and Comparable Store Sales
Sears Domestic's revenues decreased by $1.5 billion to $13.5 billion in 2016 as compared to 2015. This decline in revenues was primarily driven by a decrease in comparable store sales of 9.3% , which accounted for $890 million of the decline, and the effect of having fewer Full-line stores in operation, which accounted for $241 million of the decline. The decline in Sears Domestic comparable store sales was primarily driven by decreases in the home appliances, apparel and consumer electronics categories. In addition, we also experienced a decline in revenues from SHO of approximately $238 million during 2016 as compared to 2015.
Gross Margin
Sears Domestic generated gross margin of $3.1 billion and $3.7 billion in 2016 and 2015 , respectively, and included significant items which aggregated to additional gross margin of $65 million and $182 million for 2016 and 2015 , respectively.
Sears Domestic's gross margin rate for the year declined 130 basis points to 23.2% in 2016 from 24.5% in 2015 . Excluding the impact of significant items in both years primarily related to the amortization of the deferred gain on sales of assets associated with the Seritage transaction, one-time vendor credits and store closures, Sears Domestic's gross margin rate declined 60 basis points, with the most notable decreases experienced in the apparel, home appliances and footwear categories driven by increased markdowns, including an increase in Shop Your Way points expense.

41

In addition, as a result of the Seritage and JV transactions, 2016 and 2015 included additional rent expense and assigned sub-tenant rental income of approximately $162 million and $108 million, respectively.
Selling and Administrative Expenses
Sears Domestic’s selling and administrative expenses decreased $386 million in 2016 as compared to 2015 and included significant items which aggregated to $364 million and $275 million for 2016 and 2015 , respectively. Excluding these items, selling and administrative expenses decreased $475 million, primarily due to decreases in payroll and advertising expenses.
Sears Domestic's selling and administrative expense rate was 29.2% in 2016 and 28.9% in 2015 and increased as the above noted expense reduction was more than offset by the decline in sales noted above.
Depreciation and Amortization
Depreciation and amortization expense decreased by $46 million during 2016 to $304 million , as compared to 2015, primarily due to having fewer assets to depreciate.
Impairment Charges
Sears Domestic recorded impairment charges of $405 million in 2016 which consisted of impairment of $381 million related to the Sears trade name, as well as $24 million related to the impairment of long-lived assets. We recorded impairment charges of $260 million in 2015 which consisted of impairment of $180 million related to the Sears trade name, as well as $80 million related to the impairment of long-lived assets. Impairment charges recorded in both years are described further in Notes 1 and 13 of Notes to Consolidated Financial Statements.
Gain on Sales of Assets
Sears Domestic recorded total gains on sales of assets of $66 million and $558 million in 2016 and 2015 , respectively. The gains recorded in 2015 included $371 million recognized in connection with the joint venture transactions and the sale-leaseback transaction with Seritage. Gains on sales of assets recorded in both years are described further in Note 11 of Notes to Consolidated Financial Statements.
Operating Loss
Sears Domestic reported an operating loss of $1.4 billion in 2016 compared to $708 million in 2015 . Sears Domestic's operating loss in 2016 included significant items which aggregated to expense of $673 million, while Sears Domestic's operating loss for 2015 included significant items which aggregated to operating income of $185 million. Excluding these items, we would have reported an adjusted operating loss of $775 million and $893 million for 2016 and 2015 , respectively. The decrease in adjusted operating loss in 2016 was driven by the decrease in selling and administrative expenses, partially offset by the above noted decline in gross margin.
2015 Compared to 2014
Revenues and Comparable Store Sales
Sears Domestic's revenues decreased by $2.1 billion to $15.0 billion in 2015 as compared to 2014. This decline in revenues was primarily driven by a decrease in comparable store sales of 11.1%, which accounted for $1.2 billion of the decline, and the effect of having fewer Full-line stores in operation, which accounted for $433 million of the decline. The revenue decline also included $222 million lower revenue as a result of the separation of the Lands' End business, which occurred in the first quarter of 2014, as well as lower revenues from our Home Services business of approximately $110 million. The decline in comparable store sales was driven by reduced, but more highly targeted promotional and marketing spend to better align with member needs and a shift away from low margin categories, such as consumer electronics. Comparable store sales in the latter part of the year, particularly in the apparel and softlines businesses, were negatively impacted by unseasonably warm weather and a highly promotional environment.

42

Sears Domestic comparable store sales were also negatively impacted by consumer electronics. Excluding the impact of consumer electronics, Sears Domestic comparable store sales would have decreased 9.5%, primarily driven by decreases in apparel, home appliances, lawn & garden and Sears Auto Centers, which were partially offset by an increase in the mattresses category.
Gross Margin
Sears Domestic generated gross margin of $3.7 billion and $4.1 billion in 2015 and 2014, respectively, and included significant items which aggregated to additional gross margin of $182 million and $73 million for 2015 and 2014, respectively. Excluding these items, gross margin decreased $531 million.
Sears Domestic's gross margin rate for the year improved 50 basis points to 24.5% in 2015 from 24.0% in 2014. Excluding the impact of significant items recorded in gross margin during the year, Sears Domestic's gross margin rate declined 60 basis points, with the most notable decreases experienced in the apparel and home appliances categories, primarily driven by increased promotional activities, particularly during the fourth quarter of 2015 as a result of the highly competitive promotional environment.
In addition, as a result of the Seritage and JV transactions, 2015 includes additional rent expense and assigned sub-tenant rental income of approximately $108 million.
Selling and Administrative Expenses
Sears Domestic’s selling and administrative expenses decreased $335 million in 2015 as compared to 2014 and included significant items which aggregated to $275 million and $211 million for 2015 and 2014, respectively. Excluding these items, selling and administrative expenses decreased $399 million, primarily due to a decrease in payroll expense.
Sears Domestic’s selling and administrative expense rate was 28.9% in 2015 and 27.3% in 2014 and increased as the above noted expense reduction was more than offset by the decline in sales noted above.
Depreciation and Amortization
Depreciation and amortization expense decreased by $87 million during 2015 to $350 million, primarily due to having fewer assets to depreciate.
Impairment Charges
Sears Domestic recorded impairment charges of $260 million which consisted of impairment of $180 million related to the Sears trade name, as well as $80 million related to the impairment of long-lived assets. We recorded impairment charges of $19 million in 2014 related to the impairment of long-lived assets. Impairment charges recorded in both years are described further in Notes 1 and 13 of Notes to Consolidated Financial Statements.
Gain on Sales of Assets
Sears Domestic recorded total gains on sales of assets of $558 million and $105 million in 2015 and 2014, respectively. The gains recorded in 2015 included $371 million recognized in connection with the joint venture transactions and the sale-leaseback transaction with Seritage. Gains on sales of assets recorded in both years are described further in Note 11 of Notes to Consolidated Financial Statements.
Operating Loss
Sears Domestic reported an operating loss of $708 million in 2015 compared to $920 million in 2014. Sears Domestic’s operating loss in 2015 included significant items which aggregated to operating income of $185 million, while Sears Domestic's operating loss for 2014 included significant items which aggregated to operating expense of $87 million. Excluding these items, we would have reported an adjusted operating loss of $893 million and $833 million for 2015 and 2014, respectively. The increase in adjusted operating loss in 2015 was driven by the above noted decrease in gross margin, partially offset by the decline in selling and administrative expenses.


43

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 through the date of de-consolidation were as follows:
millions
2014
Merchandise sales and services
$
2,088

Comparable sales %
(8.0
)%
Cost of sales, buying and occupancy
1,586

Gross margin dollars
502

Gross margin rate
24.0
 %
Selling and administrative
603

Selling and administrative expense as a percentage of total revenues
28.9
 %
Depreciation and amortization
49

Impairment charges
15

Loss on sales of assets
1

Total costs and expenses
2,254

Operating loss
$
(166
)
Adjusted EBITDA
$
(71
)
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 January 28, 2017 and January 30, 2016 are detailed in the following table.
millions
January 28,
2017
 
January 30,
2016
Cash and equivalents
$
196

 
$
141

Cash posted as collateral
3

 
2

Credit card deposits in transit
87

 
95

Total cash balances
$
286

 
$
238

We had total cash balances of $286 million and $238 million at January 28, 2017 and January 30, 2016 , respectively. During 2016, the Company received net proceeds from various financing transactions of $2.0 billion, which included approximately $722 million from the 2016 Term Loan, approximately $485 million from the 2016 Secured Loan Facility, approximately $291 million from the Second Lien Term Loan and approximately $486 million from the 2017 Secured Loan Facility. In addition, the Company generated approximately $386 million from the sale of properties and investments. These proceeds were primarily used for general corporate purposes and to reduce outstanding borrowings under the Company's asset-based revolving credit facility.
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.

44

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.
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 $29 million and $59 million as of January 28, 2017 and January 30, 2016 , respectively.
Operating Activities
The Company used $1.4 billion of cash in its operations during 2016 , $2.2 billion during 2015 and $1.4 billion during 2014 . 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 and the payment of operating expenses. We used less cash in operations in 2016 compared to the prior year primarily due to a decrease in our net inventory. We used more cash in operations in 2015 compared to 2014 primarily driven by the increase in inventory balances experienced in 2015 as compared to the significant decrease in inventory balances experienced during 2014.
Merchandise inventories were $4.0 billion and $5.2 billion , respectively, at January 28, 2017 and January 30, 2016 , while merchandise payables were approximately $1.0 billion and $1.6 billion , respectively, at January 28, 2017 and January 30, 2016 . Our inventory balances decreased approximately $1.2 billion primarily due to both improved productivity and store closures. Sears Domestic inventory decreased in virtually all categories, with the most notable decreases in the home appliances, apparel and consumer electronics. Kmart inventory also decreased in virtually all categories with the most notable decreases in the apparel, grocery & household goods, drugstore and home categories.
Investing Activities
We generated net cash flows from investing activities of $244 million in 2016 , $2.5 billion in 2015 and $327 million in 2014 .
For 2016, net cash flows from investing activities primarily consisted of cash proceeds from the sale of properties and investments of $386 million , partially offset by cash used for capital expenditures of $142 million . For 2015, net cash flows from investing activities primarily consisted of cash proceeds from the sale of properties and investments of $2.7 billion, partially offset by cash used for capital expenditures of $211 million. Proceeds from the sales of properties and investments included approximately $2.6 billion of net proceeds from the Seritage transaction. For 2014, net cash flows generated from investing activities primarily consisted of cash proceeds from the sale of properties and investments of $424 million, partially offset by cash used for capital expenditures of $270 million. Additionally, 2014 included proceeds from the Sears Canada rights offering of $380 million, partially offset by $207 million resulting from the de-consolidation of Sears Canada cash.
We spent $142 million , $211 million and $270 million during 2016 , 2015 and 2014 , respectively, for capital expenditures. Capital expenditures during 2014 included expenditures by Sears Canada of $32 million . Capital expenditures during all three years primarily included investments in online and mobile shopping capabilities, enhancements to the Shop Your Way platform, information technology infrastructure and store maintenance.
We anticipate 2017 capital expenditure levels to be similar to 2016 levels. In the normal course of business, we consider opportunities to purchase leased operating properties, as well as offers to sell owned, or assign leased, operating and non-operating properties. These transactions may, individually or in the aggregate, result in material proceeds or outlays of cash and cause our capital expenditure levels to vary from period to period. In addition, we review leases that will expire in the short term in order to determine the appropriate action to take with respect to them.
Financing Activities
During 2016, we generated net cash flows from financing activities of $1.2 billion , which consisted of proceeds from debt issuances of $2.0 billion and $71 million of net cash proceeds received during the fourth quarter

45

of 2016 from a sale-leaseback financing transaction for five Sears Full-line stores and two Sears Auto Centers that have continuing involvement, partially offset by a decrease in short-term borrowings of $797 million , debt repayments of $66 million and the payment of debt issuance costs of $51 million .
During 2015, the Company used net cash flows in financing activities of $364 million, which consisted of debt repayments of $1.4 billion, of which $927 million was the purchase of Senior Secured Notes pursuant to the tender offer and $400 million was the repayment of the secured short-term loan, the payment of debt issuance costs of $50 million related to the amendment and extension of our Domestic Credit Facility and fees related to the tender offer related to our Senior Secured Notes. These uses of cash were partially offset by an increase in short-term borrowings of $583 million and $508 million of net cash proceeds from sale-leaseback financing, which consisted of $426 million of proceeds from the JV transactions received during 2015 and $82 million of proceeds received in 2015 related to four joint venture properties that have continuing involvement.
During 2014, the Company generated net cash from financing activities of $285 million, which primarily consisted of Lands' End pre-separation funding of $515 million and proceeds from debt issuances of $1.0 billion, consisting of $400 million from the secured short-term loan entered into in September 2014 and $625 million from the 8% senior unsecured notes due 2019 issued in November 2014. For further information, see Note 3 of Notes to Consolidated Financial Statements. The cash generated from financing activities was primarily used to pay down existing revolver borrowings.
During 2016 , 2015 and 2014 , we did not repurchase any of our common shares under our share repurchase program. 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 January 28, 2017 , we had approximately $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.
Uses and Sources of 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. We have incurred losses and experienced negative operating cash flows for the past several years, and accordingly, the Company has taken a number of actions to continue to support its operations and meet its obligations.
During 2015, we undertook actions to monetize the value of certain of our real estate assets, which included entering into three different real estate joint ventures with General Growth Properties, Inc., Simon Property Group, Inc. and The Macerich Company, in which we contributed a total of 31 properties to the joint ventures in exchange for a 50% interest in each of the joint ventures and $429 million in gross cash proceeds, as well as the completion of the rights offering and sale-leaseback transaction with Seritage in which we received aggregate gross proceeds of $2.7 billion. Also during 2015, the Company completed an amendment and extension of the $3.275 billion revolving portion of our domestic credit facility, with approximately $2.0 billion maturing in 2020 and the remaining  approximately $1.3 billion of the existing domestic credit facility expiring on the original maturity date in April 2016. Finally, during 2015, the Company completed a tender offer (the "Tender Offer") to purchase for cash up to $1.0 billion principal amount of its outstanding 6 5/8% Senior Secured Notes Due 2018 (the "Senior Secured Notes"). Approximately $936 million principal amount of the Senior Secured Notes were validly tendered in the Tender Offer.
During 2016, the Company completed various financing transactions, including the closing of the $750 million Senior Secured Term Loan under its domestic credit facility (the "2016 Term Loan") maturing in July 2020, which generated net proceeds of approximately $722 million, the completion of a $500 million real estate loan facility in April 2016 (the "2016 Secured Loan Facility") maturing in July 2017 which generated net proceeds of approximately $485 million, the completion of an additional $500 million real estate loan facility in January 2017 (the "2017 Secured Loan Facility") maturing in July 2020 which generated net proceeds of approximately $486 million, and also entering into a $300 million Second Lien Credit Agreement in September 2016 (the “Second Lien Term Loan”) maturing in 2020 which generated net proceeds of approximately $291 million. Additionally, the

46

Company generated nearly $460 million in cash proceeds from the sale of real estate and other asset sales, including $71 million from a sale-leaseback transaction for five Sears Full-line stores and two Sears Auto Centers.
Other actions announced during the fourth quarter of 2016 included a new Letter of Credit and Reimbursement Agreement (the "LC Facility Agreement") providing for up to a $500 million (of which $200 million is presently committed) secured standby letter of credit facility (the "LC Facility") from certain affiliates of ESL Investments, Inc., and the establishment of a Special Committee of the Board of Directors to market certain real estate properties targeting at least $1.0 billion of asset sales. The specific assets involved, the timing and the overall amount will depend on a variety of factors, including market conditions, interest in specific assets, valuations of those assets and our underlying operating performance. A portion of the cash proceeds generated from these asset sales will be utilized to repay amounts outstanding under both the 2016 Secured Loan Facility and 2017 Secured Loan Facility.
In addition, in February 2017, the Company entered into an amendment to our existing domestic credit facility. The amendment reduced the aggregate revolver commitments from $1.971 billion to $1.5 billion, but also implemented other modifications to covenants and reserves against the domestic credit facility borrowing base that improved net liquidity. The amended credit facility is smaller in size, reflecting the Company's reduced needs consistent with lower inventory levels associated with our transforming business model, which has fewer physical stores and a greater online presence. The amendment also provides additional flexibility in the form of a $250 million increase in the general debt basket from $750 million to $1.0 billion. Our domestic credit facility permits us up to $500 million of FILO loan capacity under the credit agreement and up to $2.0 billion of second lien loan capacity (of which $604 million is currently utilized) outside the credit agreement, all depending on the applicable and available borrowing base as defined in our applicable debt agreements, as well as our ability to secure commitments from lenders. We also have the ability to obtain longer-term secured financing maturing outside of the domestic credit facility maturity date which would not be subject to borrowing base limitations (see Note 3 of Notes to Consolidated Financial Statements). The options available to us include securitizing assets and real estate loans, which we have successfully executed in the past. Further, in February and March 2017, t he Company issued commercial paper to meet short-term liquidity needs, with the maximum amount outstanding during this time of $100 million, of which all has been repaid.
Also in February 2017, the Company initiated a restructuring program targeted to deliver at least $1.0 billion in annualized cost savings in 2017, which includes cost reductions from the previously announced store closures. Under the restructuring program, we intend to simplify Holdings' organizational structure, including greater consolidation of the Sears and Kmart corporate and support functions, as well as implement a streamlined operating model to drive greater accountability and profitability. We also intend to transition to an integrated value chain model to drive efficiencies in pricing, sourcing, supply chain and inventory management, optimize product assortment at Sears and Kmart stores to better align with preferences of our Best Members focusing on profitable, high-return Best Categories and actively manage our real estate portfolio to identify additional opportunities for reconfiguration and reduction of capital obligations. We are primarily focusing on profitability instead of revenues, market share and other metrics each of which relate to, but do not necessarily drive profit. This approach may negatively impact our sales, however, it is aimed at returning the Company to profitability.
Finally, in March 2017, the Company closed its previously-announced sale of the Craftsman brand to Stanley Black & Decker. The Company received an initial upfront payment of $525 million, subject to closing costs and an adjustment for working capital changes, at closing. A portion of these proceeds were used to reduce outstanding borrowings under both the Company's domestic credit facility and term loans outstanding, as well as for general corporate purposes. In addition, Stanley Black & Decker will pay a further $250 million in cash in three years and Holdings will receive payments of between 2.5% and 3.5% on new Stanley Black & Decker sales of Craftsman products for the next 15 years. As described in Note 1 of Notes to Consolidated Financial Statements, the Pension Benefit Guaranty Corporation ("PBGC") consented to the sale of the Craftsman-related assets that had been "ring-fenced" under the pension plan protection and forbearance agreement (the "PPPFA") with the PBGC.
We acknowledge that we continue to face a challenging competitive environment and while we continue to focus on our overall profitability, including managing expenses, we reported a loss in 2016 and were required to fund cash used in operating activities with cash from investing and financing activities. We expect that the actions taken in 2016 and early 2017 will enhance our liquidity and financial flexibility. In addition, as previously discussed, we expect to generate additional liquidity through the monetization of our real estate and additional debt financing actions. We expect that these actions will be executed in alignment with the anticipated timing of our liquidity needs.

47

We also continue to explore ways to unlock value across a range of assets, including exploring ways to maximize the value of our Home Services and Sears Auto Centers businesses, as well as our Kenmore and DieHard brands through partnerships or other means of externalization that could expand distribution of our brands and service offerings to realize significant growth. We expect to continue to right-size, redeploy and highlight the value of our assets, including our real estate portfolio, in our transition from an asset intensive, historically "store-only" based retailer to a more asset light, integrated membership-focused company.
Our historical operating results indicate substantial doubt exists related to the Company's ability to continue as a going concern. We believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs 12 months from the issuance of the financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned. In addition, the PPPFA, contains certain limitations on our ability to sell assets, which could impact our ability to complete asset sale transactions or our ability to use proceeds from those transactions to fund our operations. Therefore, the planned actions take into account the applicable restrictions under the PPPFA.
If we continue to experience operating losses, and we are not able to generate additional liquidity through the mechanisms described above or through some combination of other actions, while not expected, we may not be able to access additional funds under our amended Domestic Credit Agreement and we might need to secure additional sources of funds, which may or may not be available to us. Additionally, a failure to generate additional liquidity could negatively impact our access to inventory or services that are important to the operation of our business. 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 January 28, 2017 and January 30, 2016 were as follows:
millions
January 28,
2017
 
January 30,
2016
Short-term borrowings:
 
 
 
Secured borrowings
$
—

 
$
797

Long-term debt, including current portion:
 
 
 
Notes, term loan and debentures outstanding
4,018

 
1,984

Capitalized lease obligations
145

 
195

Total borrowings
$
4,163

 
$
2,976


48

We fund our peak sales season working capital needs through our domestic revolving credit facility and commercial paper markets and secured short-term debt.
millions
2016
 
2015
Secured borrowings:
 
 
 
Maximum daily amount outstanding during the period
$
1,150

 
$
876

Average amount outstanding during the period
334

 
416

Amount outstanding at period-end
—

 
797

Weighted average interest rate
4.6
%
 
3.2
%
 
 
 
 
Unsecured commercial paper:
 
 
 
Maximum daily amount outstanding during the period
$
250

 
$
104

Average amount outstanding during the period
106

 
15

Amount outstanding at period-end
—

 
—

Weighted average interest rate
7.9
%
 
4.1
%
 
 
 
 
Secured short-term loan:
 
 
 
Maximum daily amount outstanding during the period
$
—

 
$
400

Average amount outstanding during the period
—

 
84

Amount outstanding at period-end
—

 
—

Weighted average interest rate
—
%
 
5.0
%
Information about our Domestic Credit Agreement, Senior Secured Notes, Senior Unsecured Notes, Debt Repurchase Authorization, Unsecured Commercial Paper, Secured Short-Term Loan, and Wholly-owned Insurance Subsidiary and Intercompany Securities is included in Note 3 of Notes to Consolidated Financial Statements.
Domestic Pension Plans Funding
Contributions to our pension plans remain a significant use of our cash on an annual basis. While the Company's pension plans are frozen, and thus associates do not currently earn pension benefits, the Company has a legacy pension obligation for past service performed by Kmart and Sears associates. During 2016, we contributed $314 million to our domestic pension plans. We estimate that the domestic pension contributions will be approximately $312 million in 2017 and approximately $297 million in 2018. As previously noted, the Company agreed to grant the PBGC a lien on, and subsequently contribute to the Company's pension plans, the value of the $250 million cash payment payable to the Company on the third anniversary of the Craftsman closing with the value of such payment being fully credited against the Company's minimum pension funding obligations in 2017, 2018 and 2019. The Company also agreed to grant a lien to the PBGC on the 15-year income stream relating to new Stanley Black & Decker sales of Craftsman products, and agreed to contribute the payments from Stanley Black & Decker under such income stream to the Company's pension plans, with such payments to be credited against the Company's minimum pension funding obligations starting no later than five years from the closing date. The Company also agreed to grant the PBGC a lien on $100 million of real estate assets to secure the Company's minimum pension obligations through the end of 2019. The ultimate amount of pension contributions could be affected by changes in applicable regulations, as well as financial market and investment performance.

49

Contractual Obligations and Off-Balance Sheet Arrangements
Information concerning our obligations and commitments to make future payments under contracts such as debt and lease agreements, and under contingent commitments, is aggregated in the following tables.
 
Total
 
Payments Due by Period
Contractual Obligations
 
Within 1  Year
 
1-3 Years
 
3-5 Years 
 
After 5  Years
 
Other
millions
 
 
 
 
 
 
 
 
 
 
 
Operating leases
$
3,675

 
$
650

 
$
997

 
$
697

 
$
1,331

 
$
—

Capital lease obligations
198

 
52

 
62

 
22

 
62

 
—

Royalty license fees (1)
83

 
39

 
35

 
9

 
—

 
—

Other
14

 
14

 
—

 
—

 
—

 
—

Pension funding obligations
1,777

 
312

 
568

 
446

 
451

 
—

Long-term debt including current portion and interest
5,399

 
876

 
2,337

 
1,653

 
533

 
—

Liability and interest related to uncertain tax positions (2)
203

 
—

 
—

 
—

 
—

 
203

Total contractual obligations
$
11,349

 
$
1,943

 
$
3,999

 
$
2,827

 
$
2,377

 
$
203


(1)  
We pay royalties under various merchandise license agreements, which are generally based on sales of products covered under these agreements. We currently have license agreements for which we pay royalties, including those to use Joe Boxer and Everlast. Royalty license fees represent the minimum the Company is obligated to pay, regardless of sales, as guaranteed royalties under these license agreements.
(2)  
At January 28, 2017 , our uncertain tax position liability and gross interest payable were $142 million and $61 million , respectively. We are unable to reasonably estimate the timing of liabilities and interest payments arising from uncertain tax positions in individual years due to the uncertainties in the timing of the effective settlement of tax positions.
Other Commercial Commitments
We issue various types of guarantees in the normal course of business. We had the following guarantees outstanding at January 28, 2017 :  
millions
Bank
Issued
 
SRAC
Issued  
 
Other
 
Total
Standby letters of credit
$
665

 
$
7

 
$
—

 
$
672

Commercial letters of credit
—

 
54

 
—

 
54

Secondary lease obligations and performance guarantee
—

 
—

 
122

 
122

The secondary lease obligations relate to certain store leases that have been assigned and previously divested Sears businesses. The secondary lease obligations represent the maximum potential amount of future payments, including renewal option periods pursuant to the lease agreements. We remain secondarily liable if the primary obligor defaults.


50

Application of Critical Accounting Policies and Estimates
In preparing the financial statements, certain accounting policies require considerable judgment to select the appropriate assumptions to calculate financial estimates. These estimates are complex and subject to an inherent degree of uncertainty. We base our estimates on historical experience, terms of existing contracts, evaluation of trends and other assumptions that we believe to be reasonable under the circumstances. We continually evaluate the information used to make these estimates as our business and the economic environment change. Although the use of estimates is pervasive throughout the financial statements, we consider an accounting estimate to be critical if:
•
it requires assumptions to be made about matters that were highly uncertain at the time the estimate was made; and
•
changes in the estimate that are reasonably likely to occur from period to period or different estimates that could have been selected would have a material effect on our financial condition, cash flows or results of operations.
Management believes the current assumptions and other considerations used to estimate amounts reflected in the financial statements are appropriate. However, if actual experience differs from the assumptions and the considerations used in estimating amounts, the resulting changes could have a material adverse effect on our consolidated results of operations, and in certain situations, could have a material adverse effect on our financial condition.
Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed the disclosure presented below relating to the selection of these estimates.
The following is a summary of our most critical policies and estimates. See Note 1 of Notes to Consolidated Financial Statements for a listing of our other significant accounting policies.
Valuation of Inventory
Our inventory is valued at the lower of cost or market determined primarily using the retail inventory method ("RIM"). RIM is an averaging method that is commonly used in the retail industry. To determine inventory cost under RIM, inventory at its retail selling value is segregated into groupings of merchandise having similar characteristics, which are then converted to a cost basis by applying specific average cost factors for each grouping of merchandise. Cost factors represent the average cost-to-retail ratio for each merchandise group based upon the year purchasing activity for each store location. Accordingly, a significant assumption under the retail method is that inventory in each group is similar in terms of its cost-to-retail relationship and has similar turnover rates. Management monitors the content of merchandise in these groupings to prevent distortions that would have a material effect on inventory valuation.
RIM inherently requires management judgment and certain estimates that may significantly affect the ending inventory valuation, as well as gross margin. Among others, two significant estimates used in inventory valuation are the level and timing of permanent markdowns (clearance markdowns used to clear unproductive or slow-moving inventory) and shrinkage. Amounts are charged to cost of sales, buying and occupancy at the time the retail value of inventory is reduced through the use of permanent markdowns.
Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age of the merchandise, fashion trends and weather conditions. In addition, inventory is also evaluated against corporate pre-determined historical markdown cadences. When a decision is made to permanently markdown merchandise, the resulting gross margin reduction is recognized in the period the markdown is recorded. The timing of the decision, particularly surrounding the balance sheet date, can have a significant effect on the results of operations.
Shrinkage is estimated as a percentage of sales for the period from the date of the last physical inventory to the end of the year. Physical inventories are taken annually for all stores and inventory records are adjusted accordingly. The shrinkage rate from the most recent physical inventory, in combination with historical experience, is used as the basis for the shrinkage accrual following the physical inventory.

51

Self-insurance Reserves
We use a combination of third-party insurance and/or self-insurance for a number of risks including workers' compensation, asbestos, environmental, automobile, warranty, product and general liability claims. General liability costs relate primarily to litigation that arises from store operations. Self-insurance reserves include actuarial estimates of both claims filed and carried at their expected ultimate settlement value and claims incurred but not yet reported. Our estimated claim amounts are discounted using a rate with a duration that approximates the duration of our self-insurance reserve portfolio. Our liability reflected in the Consolidated Balance Sheets represents an estimate of the ultimate cost of claims incurred at the balance sheet date. In estimating this liability, we utilize loss development factors based on Company-specific data to project the future development of incurred losses. Loss estimates are adjusted based upon actual claims settlements and reported claims. These projections are subject to a high degree of variability based upon future inflation rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns. Although we do not expect the amounts ultimately paid to differ significantly from our estimates, self-insurance reserves could be affected if future claim experience differs significantly from the historical trends and the actuarial assumptions. A 10% change in our self-insurance reserves would have impacted net loss by approximately $72 million.
Defined Benefit Pension Plans
The fundamental components of accounting for defined benefit pension plans consist of the compensation cost of the benefits earned, the interest cost from deferring payment of those benefits into the future and the results of investing any assets set aside to fund the obligation. Such retirement benefits were earned by associates ratably over their service careers. Therefore, the amounts reported in the income statement for these retirement plans have historically followed the same pattern. Accordingly, changes in the obligations or the value of assets to fund them have been recognized systematically and gradually over the associate's estimated period of service. The largest drivers of losses or charges in recent years have been the discount rate used to determine the present value of the obligation and the actual return on pension assets. We recognize the changes by amortizing experience gains/losses in excess of the 10% corridor into expense over the associated service period.
The Company's actuarial valuations utilize key assumptions including discount rates and expected returns on plan assets. We are required to consider current market conditions, including changes in interest rates and plan asset investment returns, in determining these assumptions. The determination of our obligations and expense for pension benefits is dependent upon certain assumptions used in calculating such amounts. Key assumptions used in the actuarial valuations include the discount rate, expected long-term rate of return on plan assets and mortality rate assumptions. To determine the discount rate used in the development of the benefit obligation and net periodic benefit cost, a cash flow matching analysis of the expected future benefit payments is performed. In addition to considering the results that cash flow matching produces, the Company gives consideration to changes in industry benchmark yield curve rates. Actuarial assumptions may differ materially from actual results due to changing market and economic conditions, changes in investment strategies, higher or lower withdrawal rates, and longer or shorter life spans of participants. For further information, see Note 7 of Notes to Consolidated Financial Statements.
The actual and expected return on plan assets for 2016 , 2015 and 2014 were as follows:

 
2016
 
2015
 
2014
Actual return on plan assets
 
16.08
%
 
(7.35
)%
 
1.49
%
Expected return on plan assets
 
6.50
%
 
7.00
 %
 
7.00
%
The Sears Holdings Corporation Investment Committee is responsible for the investment of the assets of Holdings' domestic pension plans. The Investment Committee, made up primarily of select members of senior management, has appointed a non-affiliated third party professional to advise the Investment Committee with respect to the assets of Holdings' domestic pension plans. The plans' overall investment objective is to provide a long-term return that, along with Company contributions, is expected to meet future benefit payment requirements. A long-term horizon has been adopted in establishing investment policy such that the likelihood and duration of investment losses are carefully weighed against the long-term potential for appreciation of assets. The plans' investment policies require investments to be diversified across individual securities, industries, market

52

capitalization and valuation characteristics. In addition, various techniques are utilized to monitor, measure and manage risk.
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. A one-percentage-point change in the assumed discount rate would have the following effects on the pension liabilities:
millions
1 percentage-point
Increase
 
1 percentage-point
Decrease
Effect on interest cost component
$
24

 
$
(31
)
Effect on pension benefit obligation
$
(487
)
 
$
583

Income Taxes
We account for income taxes according to accounting standards for such taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the book basis and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If future utilization of deferred tax assets is uncertain, the Company may record a valuation allowance against its deferred tax assets. Our accounting policies related to the valuation allowance are further described in Note 1 of Notes to Consolidated Financial Statements. After consideration of evidence regarding the ability to realize our deferred tax assets, we established a valuation allowance against deferred income tax assets in 2016 , 2015 and 2014 . For the year ended January 28, 2017 , the valuation allowance increased by $762 million of which a decrease of $3 million was recorded through other comprehensive income. The Company continues to monitor its operating performance and evaluate the likelihood of the future realization of these deferred tax assets.
Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets, if any. Management considers estimates of the amount and character of future taxable income in assessing the likelihood of realization of deferred tax assets. Our actual effective tax rate and income tax expense could vary from estimated amounts due to the future impacts of various items, including changes in income tax laws, tax planning and the Company's forecasted financial condition and results of operations in future periods. Although management believes current estimates are reasonable, actual results could differ from these estimates.
Domestic and foreign tax authorities periodically audit our income tax returns. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposures associated with our various tax filing positions, we record reserves in accordance with accounting standards for uncertain tax positions. A number of years may elapse before a particular matter, for which we have established a reserve, is audited and fully resolved. Management's estimates at the date of the financial statements reflect our best judgment, giving consideration to all currently available facts and circumstances. As such, these estimates may require adjustment in the future, as additional facts become known or as circumstances change. For further information, see Note 10 of Notes to Consolidated Financial Statements.
Goodwill and Intangible Asset Impairment Assessments
At both January 28, 2017 and January 30, 2016 , we had goodwill balances of $269 million , and intangible asset balances of $1.5 billion and $1.9 billion , respectively. The Company evaluates the carrying value of goodwill and intangible assets for possible impairment under accounting standards governing goodwill and other intangible assets. Our accounting policies related to goodwill and intangible asset impairment assessments are further described in Note 1 of Notes to Consolidated Financial Statements.
Goodwill Impairment Assessments
Our goodwill balance relates to our Home Services business. We did not record any goodwill impairment charges in 2016 , 2015 or 2014 .

53

The use of different assumptions, estimates or judgments in either step of the goodwill impairment testing process, such as the estimated future cash flows of the reporting unit, the discount rate used to discount such cash flows, or the estimated fair value of the reporting unit's tangible and intangible assets and liabilities, could significantly increase or decrease the estimated fair value of the reporting unit or its net assets. At the 2016 annual impairment test date, the conclusion that no indication of goodwill impairment existed for the reporting unit would not have changed had the test been conducted assuming: (1) a 100 basis point increase in the discount rate used to discount the aggregate estimated cash flows of the reporting unit to its net present value in determining their estimated fair values; and/or (2) a 100 basis point decrease in the estimated sales growth rate and/or terminal period growth rate.
Based on our sensitivity analysis, we do not believe that the remaining recorded goodwill balance is at risk of impairment at the reporting unit at the end of the year because the fair value is in excess of the carrying value and not at risk of failing step one. However, goodwill impairment charges may be recognized in future periods in the reporting unit to the extent changes in factors or circumstances occur, including deterioration in the macroeconomic environment, retail industry or in the equity markets, which includes the market value of our common shares, deterioration in our performance or our future projections, or changes in our plans for the reporting unit.
Intangible Asset Impairment Assessments
The majority of our indefinite-lived intangible assets relate to the Sears, Kenmore, Craftsman and DieHard trade names. In 2016 and 2015, we recorded impairment related to the Sears trade name of $381 million and $180 million , respectively, which reduced the carrying value to $431 million at January 28, 2017. We did not record any intangible asset impairment charges in 2014 .
The use of different assumptions, estimates or judgments in our intangible asset impairment testing process, such as the estimated future cash flows of assets and the discount rate used to discount such cash flows, could significantly increase or decrease the estimated fair value of an asset, and therefore, impact the related impairment charge. At the 2016 annual impairment test date, the above-noted conclusion that no indication of intangible asset impairment existed at the test date for the Kenmore, Craftsman and DieHard trade names would have changed had the test been conducted assuming: (1) a 100 basis point increase in the discount rate used to discount the aggregate estimated cash flows of our assets to their net present value in determining their estimated fair values (without any change in the aggregate estimated cash flows of our intangibles); (2) a 100 basis point decrease in the terminal period growth rate; (3) a 10% decrease in the revenue growth rate for fiscal year 2017; or (4) a 10 basis point decrease in the royalty rate applied to the forecasted net sales stream of our assets and would have resulted in a potential impairment of up to $163 million under any combination of those scenarios. Also, the above-noted impairment related to the Sears trade name would have changed under any combination of those scenarios and would have resulted in potential incremental impairment of up to $125 million.
We believe the impairment charges of $381 million and $180 million in 2016 and 2015, respectively, are appropriate based on the judgments and estimates used in our analysis. We do not believe that the other indefinite-lived intangible balances are impaired at the end of the year because the fair values are in excess of the carrying values based on our analysis. However, further indefinite-lived intangible impairment charges may be recognized in future periods to the extent changes in factors or circumstances occur, including deterioration in the macroeconomic environment, retail industry, deterioration in our performance or our future projections, if actual results are not consistent with our estimates and assumptions used in the analysis, or changes in our plans for one or more indefinite-lived intangible assets. We will continue to monitor for such changes in facts or circumstances, which may be indicators of potential impairment triggers, and may result in impairment charges in the future, which could be material to our results of operations.
Impairment of Long-Lived Assets
In accordance with accounting standards governing the impairment or disposal of long-lived assets, the carrying value of long-lived assets, including property and equipment and definite-lived intangible assets, is evaluated whenever events or changes in circumstances indicate that a potential impairment has occurred relative to a given asset or assets. Our accounting policies related to long-lived asset impairment assessments are further described in Note 1 of Notes to Consolidated Financial Statements. As a result of this impairment testing, the

54

Company recorded impairment charges of $46 million , $94 million and $34 million during 2016 , 2015 and 2014 , respectively. Our impairment testing includes uncertainty because it requires management to make assumptions and to apply judgment to estimate future cash flows and asset fair values. If actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to additional impairment charges in the future, which could be material to our results of operations.
New Accounting Pronouncements
See Note 1 of Notes to Consolidated Financial Statements for information regarding new accounting pronouncements.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements made in this Annual Report on Form 10-K and in other public announcements by us contain forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. 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, many of which are beyond the Company's control, 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. 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 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; 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; our ability to achieve cost savings initiatives; potential liabilities in connection with the separation of Lands’ End and disposition of a portion of our ownership interest in Sears Canada or other transactions; payment-related risks that could increase our operating costs, expose us to fraud or theft, subject us to potential liability and potentially disrupt our business operations; the impact of seasonal buying patterns, including seasonal fluctuations due to weather conditions, which are difficult to forecast with certainty; fluctuations in our sales due to changes in customers’ spending patterns and prevailing economic conditions; risks and uncertainties related to the Seritage transaction and the amendment and extension of our credit facility, such as the impact of the evaluation of any such transaction on our other businesses; 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; the substantial influence exerted over the Company by affiliates of our Chairman and Chief Executive Officer, whose interests may diverge from other stockholders’ interests; our ability to protect or preserve the image of our brands; the outcome of pending and/or future legal proceedings, including shareholder litigation, product liability, patent infringement and qui tam claims and proceedings with respect to which the parties have reached a preliminary settlement; our failure to comply with federal, state, local and international laws, or changes in these laws; and the timing, amount and other risks related to required pension plan funding.
Certain of these and other factors are discussed in more detail in Part I, Item 1A of this Annual Report on Form 10-K. While we believe that our forecasts and assumptions are reasonable, we caution that actual results may

55

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 7A.
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.
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 January 28, 2017 , 49% of our debt portfolio was variable rate. Based on the size of this variable rate debt portfolio at January 28, 2017 , which totaled approximately $2.0 billion, an immediate 100 basis point change in interest rates would have affected annual pretax funding costs by $20 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.

56


Item 8. Financial Statements and Supplementary Data
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

57



SEARS HOLDINGS CORPORATION
Consolidated Statements of Operations
millions, except per share data
2016
 
2015
 
2014
REVENUES
 
 
 
 
 
Merchandise sales and services (1)(2)
$
22,138

 
$
25,146

 
$
31,198

COSTS AND EXPENSES
 
 
 
 
 
Cost of sales, buying and occupancy (1)(3)
17,452

 
19,336

 
24,049

Selling and administrative
6,109

 
6,857

 
8,220

Depreciation and amortization
375

 
422

 
581

Impairment charges
427

 
274

 
63

Gain on sales of assets
(247
)
 
(743
)
 
(207
)
Total costs and expenses
24,116

 
26,146

 
32,706

Operating loss
(1,978
)
 
(1,000
)
 
(1,508
)
Interest expense
(404
)
 
(323
)
 
(313
)
Interest and investment income (loss)
(26
)
 
(62
)
 
132

Other income
13

 
—

 
4

Loss before income taxes
(2,395
)
 
(1,385
)
 
(1,685
)
Income tax (expense) benefit
174

 
257

 
(125
)
Net loss
(2,221
)
 
(1,128
)
 
(1,810
)
(Income) loss attributable to noncontrolling interests
—

 
(1
)
 
128

NET LOSS ATTRIBUTABLE TO HOLDINGS’ SHAREHOLDERS
$
(2,221
)
 
$
(1,129
)
 
$
(1,682
)
NET LOSS PER COMMON SHARE ATTRIBUTABLE TO HOLDINGS’ SHAREHOLDERS
 
 
 
 
 
Basic loss per share
$
(20.78
)
 
$
(10.59
)
 
$
(15.82
)
Diluted loss per share
$
(20.78
)
 
$
(10.59
)
 
$
(15.82
)
Basic weighted average common shares outstanding
106.9

 
106.6

 
106.3

Diluted weighted average common shares outstanding
106.9

 
106.6

 
106.3

(1)  
Includes merchandise sales to Sears Hometown and Outlet Stores, Inc. ("SHO") of $1.1 billion , $1.3 billion and $1.4 billion in 2016 , 2015 and 2014 , respectively. Pursuant to the terms of the separation, merchandise is sold to SHO at cost.
(2) Includes revenue from Lands' End, Inc. ("Lands' End") for retail services and rent for Lands' End Shops at Sears, participation in the Shop Your Way program and corporate shared services of $52 million , $59 million and $59 million in 2016 , 2015 and 2014 , respectively.
(3) Includes rent expense (consisting of straight-line rent expense offset by amortization of a deferred gain on sale-leaseback) of $83 million and $49 million in 2016 and 2015 , respectively, and installment expenses of $64 million and $40 million in 2016 and 2015 , respectively, pursuant to the master lease with Seritage Growth Properties ("Seritage"). There were no such rent or installment expenses paid to Seritage in 2014 .










See accompanying Notes to Consolidated Financial Statements.

58

SEARS HOLDINGS CORPORATION
Consolidated Statements of Comprehensive Loss
 
millions
2016
 
2015
 
2014
Net loss
$
(2,221
)
 
$
(1,128
)
 
$
(1,810
)
Other comprehensive income (loss)
 
 
 
 
 
Pension and postretirement adjustments, net of tax
366

 
113

 
(1,040
)
Deferred loss on derivatives, net of tax
—

 
—

 
(2
)
Currency translation adjustments, net of tax
—

 
(1
)
 
3

Sears Canada de-consolidation
—

 
—

 
(186
)
Dissolution of noncontrolling interest
(7
)
 
—

 
—

Total other comprehensive income (loss)
359

 
112

 
(1,225
)
Comprehensive loss
(1,862
)
 
(1,016
)
 
(3,035
)
Comprehensive (income) loss attributable to noncontrolling interests
7

 
(1
)
 
438

Comprehensive loss attributable to Holdings' shareholders
$
(1,855
)
 
$
(1,017
)
 
$
(2,597
)


































See accompanying Notes to Consolidated Financial Statements.

59

SEARS HOLDINGS CORPORATION
Consolidated Balance Sheets
millions
January 28,
2017
 
January 30,
2016
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
286

 
$
238

Accounts receivable (1)
466

 
419

Merchandise inventories
3,959

 
5,172

Prepaid expenses and other current assets (2)
285

 
216

Total current assets
4,996

 
6,045

 
 
 
 
Property and equipment
 
 
 
Land
770

 
827

Buildings and improvements
2,954

 
3,140

Furniture, fixtures and equipment
1,133

 
1,352

Capital leases
224

 
272

Gross property and equipment
5,081

 
5,591

Less accumulated depreciation and amortization
(2,841
)
 
(2,960
)
Total property and equipment, net
2,240

 
2,631

Goodwill
269

 
269

Trade names and other intangible assets
1,521

 
1,909

Other assets
336

 
483

TOTAL ASSETS
$
9,362

 
$
11,337

 
 
 
 
LIABILITIES
 
 
 
Current liabilities
 
 
 
Short-term borrowings
$
—

 
$
797

Current portion of long-term debt and capitalized lease obligations (3)
590

 
71

Merchandise payables
1,048

 
1,574

Other current liabilities (4)
1,956

 
1,925

Unearned revenues
748

 
787

Other taxes
339

 
284

Total current liabilities
4,681

 
5,438

Long-term debt and capitalized lease obligations (5)
3,573

 
2,108

Pension and postretirement benefits
1,750

 
2,206

Deferred gain on sale-leaseback
563

 
753

Sale-leaseback financing obligation
235

 
164

Other long-term liabilities
1,641

 
1,731

Long-term deferred tax liabilities
743

 
893

Total Liabilities
13,186

 
13,293

Commitments and contingencies


 


DEFICIT
 
 
 
Sears Holdings Corporation deficit
 
 
 
Preferred stock, 20 shares authorized; no shares outstanding
—

 
—

Common stock $0.01 par value; 500 shares authorized; 107 and 107 shares outstanding, respectively
1

 
1

Treasury stock—at cost
(5,891
)
 
(5,928
)
Capital in excess of par value
9,130

 
9,173

Retained deficit
(5,512
)
 
(3,291
)
Accumulated other comprehensive loss
(1,552
)
 
(1,918
)
Total Sears Holdings Corporation deficit
(3,824
)
 
(1,963
)
Noncontrolling interest
—

 
7

Total Deficit
(3,824
)
 
(1,956
)
TOTAL LIABILITIES AND DEFICIT
$
9,362

 
$
11,337

(1)  
Includes $81 million and $51 million at January 28, 2017 and January 30, 2016 , respectively, of net amounts receivable from SHO, and $14 million and $7 million of amounts receivable from Seritage at January 28, 2017 and January 30, 2016 , respectively.
(2)  
Includes $9 million of prepaid rent to Seritage at January 30, 2016 .
(3) Includes balances held by related parties of $216 million at January 28, 2017 related to our 2016 Secured Loan Facility.
(4) Includes $1 million and $1 million of net amounts payable to Lands' End at January 28, 2017 and January 30, 2016 , respectively, and $11 million of amounts payable to Seritage at January 28, 2017 .
(5) Includes balances held by related parties of $1.7 billion and $603 million at January 28, 2017 and January 30, 2016 , respectively, related to our Senior Secured Notes, Subsidiary Notes, Senior Unsecured Notes, Second Lien Term Loan, 2016 Term Loan and 2017 Secured Loan Facility. See Note 15 for further information.
See accompanying Notes to Consolidated Financial Statements.

60

SEARS HOLDINGS CORPORATION
Consolidated Statements of Cash Flows
millions
2016
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
Net loss
(2,221
)
 
(1,128
)
 
(1,810
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
Deferred tax valuation allowance
836

 
217

 
835

Tax benefit resulting from Other Comprehensive Income allocation
(71
)
 
—

 
—

Depreciation and amortization
375

 
422

 
581

Impairment charges
427

 
274

 
63

Gain on sales of assets
(247
)
 
(743
)
 
(207
)
Gain on sales of investments
—

 
—

 
(105
)
Pension and postretirement plan contributions
(334
)
 
(311
)
 
(450
)
Mark-to-market adjustments of financial instruments
15

 
66

 
(3
)
Amortization of deferred gain on sale-leaseback
(88
)
 
(52
)
 
—

Amortization of debt issuance costs and accretion of debt discount
81

 
60

 
38

Settlement of Canadian dollar hedges
—

 
—

 
8

Change in operating assets and liabilities (net of acquisitions and dispositions):
 
 
 
 
 
Deferred income taxes
(987
)
 
(519
)
 
(719
)
Merchandise inventories
1,213

 
(229
)
 
1,091

Merchandise payables
(526
)
 
(47
)
 
(528
)
Income and other taxes
80

 
(95
)
 
(110
)
Other operating assets
(52
)
 
54

 
(66
)
Other operating liabilities
118

 
(136
)
 
(5
)
Net cash used in operating activities
(1,381
)
 
(2,167
)
 
(1,387
)
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
Proceeds from sales of property and investments (1)
386

 
2,730

 
424

Purchases of property and equipment
(142
)
 
(211
)
 
(270
)
De-consolidation of Sears Canada cash
—

 
—

 
(207
)
Proceeds from Sears Canada rights offering (2)
—

 
—

 
380

Net cash provided by investing activities
244

 
2,519

 
327

 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
Proceeds from debt issuances (3)
2,028

 
—

 
1,025

Repayments of debt (4)
(66
)
 
(1,405
)
 
(80
)
Increase (decrease) in short-term borrowings, primarily 90 days or less
(797
)
 
583

 
(1,117
)
Proceeds from sale-leaseback financing (1)
71

 
508

 
—

Lands' End, Inc. pre-separation funding
—

 
—

 
515

Separation of Lands' End, Inc.
—

 
—

 
(31
)
Debt issuance costs
(51
)
 
(50
)
 
(27
)
Net cash provided by (used in) financing activities
1,185

 
(364
)
 
285

Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
(3
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
48

 
(12
)
 
(778
)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
238

 
250

 
1,028

CASH AND CASH EQUIVALENTS, END OF YEAR
$
286

 
$
238

 
$
250

 
 
 
 
 
 
SUPPLEMENTAL INFORMATION:
 
 
 
 
 
Capital lease obligation incurred
$
25

 
$
6

 
$
45

Supplemental Cash Flow Data:
 
 
 
 
 
Income taxes paid, net of refunds
$
23

 
$
45

 
$
119

Cash interest paid (5)
275

 
252

 
230

Unpaid liability to acquire equipment and software
18

 
27

 
25

(1) Holdings received cash proceeds of $2.7 billion ( $2.6 billion , net of closing costs) from the Seritage transaction (including $745 million and $297 million , respectively, received from ESL Investments, Inc. and its affiliates ("ESL") and Fairholme Capital Management, LLC and its affiliates ("Fairholme")), and $429 million ( $426 million , net of closing costs) from the JV transactions. Proceeds from the Seritage transaction are included in proceeds from sales of property and investments ( $2.6 billion ), and proceeds from sale-leaseback financing ( $82 million ) for 2015. Proceeds from the JV transactions are included in proceeds from sale-leaseback financing ( $426 million ) for 2015. See Note 11 for further information and defined terms.
(2) Includes proceeds of $212 million received from ESL and its affiliates and $93 million received from Fairholme and its affiliates.
(3) Proceeds in 2016 and 2014, respectively, include amounts from related parties of $1.3 billion received from the 2017 Secured Loan Facility, 2016 Secured Loan Facility, 2016 Term Loan and Second Lien Term Loan, and $878 million received from the Secured Short-Term Loan and Senior Unsecured Notes. See Notes 3 and 15 for further information and defined terms.
(4) Repayments in 2015 include $400 million of the Secured Short-Term Loan with related parties and $482 million of Senior Secured Notes tendered by related parties, respectively. See Notes 3 and 15 for further information and defined terms.
(5) Cash interest paid includes $94 million , $83 million and $30 million interest paid to related parties related to our borrowings in 2016 , 2015 and 2014 , respectively. See Notes 3 and 15 for further information.


See accompanying Notes to Consolidated Financial Statements.

61

SEARS HOLDINGS CORPORATION
Consolidated Statements of Deficit
 
Deficit Attributable to Holdings’ Shareholders
 
 
dollars and shares in millions
Number
of
Shares
Common
Stock
Treasury
Stock
Capital in
Excess of
Par Value
Retained Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Noncontrolling
Interests
Total
Balance at February 1, 2014
106

$
1

$
(5,963
)
$
9,298

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

$
2,183

Comprehensive loss
 
 
 
 
 
 
 
 
Net loss
—

—

—

—

(1,682
)
—

(128
)
(1,810
)
Pension and postretirement adjustments, net of tax
—

—

—

—

—

(1,045
)
5

(1,040
)
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
 
 
 
 
 
 
 
(3,035
)
Stock awards
1

—

9

(5
)
—

—

—

4

Separation of Lands' End, Inc.
—

—

—

(323
)
—

2

—

(321
)
Issuance of warrants
—

—

—

219

—

—

—

219

Associate stock purchase
—

—

5

—

—

—

—

5

Balance at January 31, 2015
107

$
1

$
(5,949
)
$
9,189

$
(2,162
)
$
(2,030
)
$
6

$
(945
)
Comprehensive loss
 
 
 
 
 
 
 
 
Net loss
—

—

—

—

(1,129
)
—

1

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

—

—

—

—

113

—

113

Currency translation adjustments, net of tax
—

—

—

—

—

(1
)
—

(1
)
Total Comprehensive Loss
 
 
 
 
 
 
 
(1,016
)
Stock awards
—

—

16

(16
)
—

—

—

—

Associate stock purchase
—

—

5

—

—

—

—

5

Balance at January 30, 2016
107

$
1

$
(5,928
)
$
9,173

$
(3,291
)
$
(1,918
)
$
7

$
(1,956
)
Comprehensive loss
 
 
 
 
 
 
 
 
Net loss
—

—

—

—

(2,221
)
—

—

(2,221
)
Pension and postretirement adjustments, net of tax
—

—

—

—

—

366

—

366

Dissolution of noncontrolling interest
—

—

—

—

—

—

(7
)
(7
)
Total Comprehensive Loss
 
 
 
 
 
 
 
(1,862
)
Stock awards
—

—

29

(30
)
—

—

—

(1
)
Reclassification of warrants
—

—

—

(13
)
—

—

—

(13
)
Associate stock purchase
—

—

8

—

—

—

—

8

Balance at January 28, 2017
107

$
1

$
(5,891
)
$
9,130

$
(5,512
)
$
(1,552
)
$
—

$
(3,824
)

See accompanying Notes to Consolidated Financial Statements.

62


SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements



NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations, Consolidation and 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 1,430 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. Following the de-consolidation of Sears Canada discussed in Note 2, we have operated under two reportable segments: Kmart and Sears Domestic.
The consolidated financial statements include all majority-owned subsidiaries in which Holdings exercises control. Investments in companies in which Holdings exercises significant influence, but which we do not control (generally 20% to 50% ownership interest), are accounted for under the equity method of accounting. Investments in companies in which we have less than a 20% ownership interest and do not exercise significant influence are accounted for at cost. All intercompany transactions and balances have been eliminated.
Fiscal Year
Our fiscal year ends on the Saturday closest to January 31 each year. Fiscal years 2016 , 2015 and 2014 consisted of 52 weeks. Unless otherwise stated, references to years in this report relate to fiscal years rather than to calendar years.
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 provided 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 Consolidated Statement of Equity (Deficit) for the year ended January 31, 2015.
Additionally, as a result of Mr. Lampert's role as our Chairman and Chief Executive Officer, and Chairman and Chief Executive Officer of ESL Investments, Inc. (together with its affiliated fund, "ESL"), and the continuing arrangements between Holdings and Lands' End (as further described in Note 15), 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 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 15.
Pension Benefit Guaranty Corporation Agreement
On March 18, 2016, we entered into a five-year pension plan protection and forbearance agreement with the Pension Benefit Guaranty Corporation ("PBGC") (the "PPPFA"), pursuant to which the Company has agreed to continue to protect, or "ring-fence," pursuant to customary covenants, the assets of certain special purpose subsidiaries (the "Relevant Subsidiaries") holding real estate and/or intellectual property assets. Also under the agreement, the Relevant Subsidiaries granted the PBGC a springing lien on the ring-fenced assets, which lien will be triggered only by (a) failure to make required contributions to the Company's pension plans (the "Plans"), (b) prohibited transfers of ownership interests in the Relevant Subsidiaries, (c) termination events with respect to the Plans, or (d) bankruptcy events with respect to the Company or certain of its material subsidiaries. Under the

63


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

agreement, the PBGC has agreed to forbear from initiating an involuntary termination of the Plans, except upon the occurrence of specified conditions, one of which is based on the aggregate market value of the Company’s issued and outstanding stock. As of the date of this report, the Company's stock price is such that the PBGC would be permitted to cease forbearance. The PBGC has been given notice in accordance with the terms of the agreement and has not communicated any intention to cease its forbearance.
Craftsman Brand Sale
On January 5, 2017, Holdings announced that it had entered into a definitive agreement under which Stanley Black & Decker would purchase the Craftsman brand from Holdings (the "Craftsman Sale"). On March 8, 2017, the Company closed its sale of the Craftsman brand to Stanley Black & Decker. The transaction provides Stanley Black & Decker with the right to develop, manufacture and sell Craftsman-branded products outside of Holdings and Sears Hometown & Outlet Stores, Inc. distribution channels. As part of the agreement, Holdings will continue to offer Craftsman-branded products, sourced from existing suppliers, through its current retail channels via a perpetual license from Stanley Black & Decker, which will be royalty-free for the first 15 years after closing and royalty-bearing thereafter.
The Company received an initial upfront payment of $525 million , subject to closing costs and an adjustment for working capital changes, at closing. In addition, Stanley Black & Decker will pay a further $250 million in cash in three years and Holdings will receive payments of between 2.5% and 3.5% on new Stanley Black & Decker sales of Craftsman products for the 15 years following the closing.
In connection with the closing of the Craftsman transaction, Holdings reached an agreement with the PBGC pursuant to which the PBGC has consented to the sale of the Craftsman-related assets that had been "ring-fenced" under the PPPFA and certain related transactions. As a condition to obtaining this consent, the Company agreed to grant the PBGC a lien on, and subsequently contribute to the Company's pension plans, the value of the $250 million cash payment payable to the Company on the third anniversary of the Craftsman closing with the value of such payment being fully credited against certain of the Company's minimum pension funding obligations in 2017, 2018 and 2019. The Company also granted a lien to the PBGC on the 15 -year income stream relating to new Stanley Black & Decker sales of Craftsman products, and agreed to contribute the payments from Stanley Black & Decker under such income stream to the Company's pension plans, with such payments to be credited against the Company's minimum pension funding obligations starting no later than five years from the closing date. The Company also agreed to grant the PBGC a lien on $100 million of real estate assets to secure the Company's minimum pension funding obligations through the end of 2019, and agreed to certain other amendments to the PPPFA.
Uses and Sources of 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. We have incurred losses and experienced negative operating cash flows for the past several years, and accordingly, the Company has taken a number of actions to continue to support its operations and meet its obligations.
During 2015, the Company completed its previously announced rights offering and sale-leaseback transaction with Seritage Growth Properties and received aggregate gross proceeds from the transaction of $2.7 billion . In addition, as discussed in Note 3, the Company completed an amendment and extension of its existing domestic credit facility in which the maturity date for $1.971 billion of the revolving tranche of our domestic credit facility has been extended to July 2020, while $1.304 billion retained the existing maturity date of April 2016. Finally, as also discussed in Note 3, the Company completed a tender offer for $936 million principal amount of its outstanding 6 5/8% Senior Secured Notes Due 2018.
During 2016, the Company completed various financing transactions, including the closing of the $750 million Senior Secured Term Loan under its domestic credit facility (the "2016 Term Loan") maturing in July 2020, which generated net proceeds of approximately $722 million , the completion of a  $500 million  real estate loan facility in April 2016 (the "2016 Secured Loan Facility") maturing in July 2017 which generated net proceeds of approximately $485 million , the completion of an additional $500 million real estate loan facility in January 2017 (the "2017 Secured Loan Facility") maturing in July 2020 which generated net proceeds of approximately $486 million , and also entering into a $300 million Second Lien Credit Agreement in September 2016 (the “Second Lien

64


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

Term Loan”) maturing in 2020 which generated net proceeds of approximately $291 million . Additionally, the Company generated nearly $460 million in cash proceeds from the sale of real estate and other asset sales, including $71 million from a sale-leaseback transaction for five Sears Full-line stores and two Sears Auto Centers. The funds received from these actions were used to reduce outstanding borrowings under the Company's domestic credit facility and for general corporate purposes.
Other actions announced in 2016 included a new Letter of Credit and Reimbursement Agreement (the "LC Facility Agreement") providing for up to a $500 million secured standby letter of credit facility (the "LC Facility") from certain affiliates of ESL Investments, Inc., and the establishment of a Special Committee of the Board of Directors to market certain real estate properties targeting at least $1.0 billion of asset sales. The specific assets involved, the timing and the overall amount will depend on a variety of factors, including market conditions, interest in specific assets, valuations of those assets and our underlying operating performance. A portion of the cash proceeds generated from these asset sales will be utilized to repay amounts outstanding under both the 2016 Secured Loan Facility and 2017 Secured Loan Facility.
In addition, in February 2017, the Company entered into an amendment to our existing domestic credit facility. The amendment reduced the aggregate revolver commitments from  $1.971 billion to $1.5 billion , but also implemented other modifications to covenants and reserves against the domestic credit facility borrowing base that improved net liquidity. The amendment also provides additional flexibility in the form of a  $250 million  increase in the general debt basket from  $750 million  to  $1.0 billion . Our domestic credit facility permits us up to $500 million of FILO loan capacity under the credit agreement and up to $2.0 billion of second lien loan capacity (of which $604 million is currently utilized) outside the credit agreement, all depending on the applicable and available borrowing base as defined in our applicable debt agreements, as well as our ability to secure commitments from lenders. We also have the ability to obtain longer-term secured financing maturing outside of the domestic credit facility maturity date which would not be subject to borrowing base limitations (see Note 3). The options available to us include securitizing assets and real estate loans, which we have successfully executed in the past. Further, in February and March 2017, the Company issued commercial paper to meet short-term liquidity needs, with the maximum amount outstanding during this time of $100 million , of which all has been repaid.
Also in February 2017, the Company initiated a restructuring program targeted to deliver cost savings in 2017 and beyond. Under the restructuring program, the Company intends to simplify its organizational structure, including greater consolidation of the Sears and Kmart corporate and support functions, as well as transition to an integrated value chain model to drive efficiencies in pricing, sourcing, supply chain and inventory management, optimize product assortment at Sears and Kmart stores to better align with preferences of our Best Members focusing on profitable, high-return Best Categories and actively manage our real estate portfolio to identify additional opportunities for reconfiguration and reduction of capital obligations. We are primarily focusing on profitability instead of revenues, market share and other metrics each of which relate to, but do not necessarily drive profit. This approach may negatively impact our sales, however, it is aimed at returning the Company to profitability.
Finally, in March 2017, the Company closed its previously-announced sale of the Craftsman brand to Stanley Black & Decker. The Company received an initial upfront payment of $525 million , subject to closing costs and an adjustment for working capital changes, at closing. A portion of these proceeds were used to reduce outstanding borrowings under both the Company's domestic credit facility and term loans outstanding, as well as for general corporate purposes. In addition, Stanley Black & Decker will pay a further $250 million in cash on the third anniversary of the closing of the transaction and Holdings will receive payments of between 2.5% and 3.5% on new Stanley Black & Decker sales of Craftsman products for the 15 years following the closing.
As described above, the PBGC consented to the sale of the Craftsman-related assets that had been "ring-fenced" under the PPPFA. As a condition to obtaining this consent, the Company agreed to grant the PBGC a lien on, and subsequently contribute to the Company's pension plans, the value of the $250 million cash payment payable to the Company on the third anniversary of the Craftsman closing, with the value of such payment being fully credited against certain of the Company's minimum pension funding obligations in 2017, 2018 and 2019. The Company also granted a lien to the PBGC on the 15 -year income stream relating to new Stanley Black & Decker sales of Craftsman products, and agreed to contribute such payments from Stanley Black & Decker under such income stream to the Company's pension plans, with such payments being credited against the Company's minimum pension funding obligations starting no later than five years from the closing of the transaction. The Company also

65


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

agreed to grant the PBGC a lien on $100 million of real estate assets to secure the Company's minimum pension funding obligations through the end of 2019.
We acknowledge that we continue to face a challenging competitive environment and while we continue to focus on our overall profitability, including managing expenses, we reported a loss in 2016 and were required to fund cash used in operating activities with cash from investing and financing activities. We expect that the actions taken in 2016 and early 2017 will enhance our liquidity and financial flexibility. In addition, as previously discussed, we expect to generate additional liquidity through the monetization of our real estate and additional debt financing actions. We expect that these actions will be executed in alignment with the anticipated timing of our liquidity needs. We also continue to explore ways to unlock value across a range of assets, including exploring ways to maximize the value of our Home Services and Sears Auto Centers businesses, as well as our Kenmore and DieHard brands through partnerships or other means of externalization that could expand distribution of our brands and service offerings to realize significant growth. We expect to continue to right-size, redeploy and highlight the value of our assets, including our real estate portfolio, in our transition from an asset intensive, historically "store-only" based retailer to a more asset light, integrated membership-focused company.
Our historical operating results indicate substantial doubt exists related to the Company's ability to continue as a going concern. We believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs 12 months from the issuance of the financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned. In addition, the PPPFA contains certain limitations on our ability to sell assets, which could impact our ability to complete asset sale transactions or our ability to use proceeds from those transactions to fund our operations. Therefore, the planned actions take into account the applicable restrictions under the PPPFA.
If we continue to experience operating losses, and we are not able to generate additional liquidity through the mechanisms described above or through some combination of other actions, while not expected, we may not be able to access additional funds under our amended Domestic Credit Agreement and we might need to secure additional sources of funds, which may or may not be available to us. Additionally, a failure to generate additional liquidity could negatively impact our access to inventory or services that are important to the operation of our business. 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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. The estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors that management believes to be reasonable under the circumstances. Adjustments to estimates and assumptions are made when facts and circumstances dictate. As future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates used in preparing the accompanying consolidated financial statements. Significant estimates and assumptions are required as part of determining inventory and accounts receivable valuation, estimating depreciation, amortization and recoverability of long-lived assets, establishing self-insurance, warranty, legal and other reserves, performing goodwill and intangible impairment analyses, and in establishing valuation allowances on deferred income tax assets and reserves for tax examination exposures, and calculating retirement benefits.
Cash and Cash Equivalents
Cash equivalents include all highly liquid investments with original maturities of three months or less at the date of purchase. We also include deposits in-transit from banks for payments related to third-party credit card and

66


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

debit card transactions within cash equivalents. The deposits in-transit balances included within cash equivalents were $87 million and $95 million at January 28, 2017 and January 30, 2016 , respectively.
 
We classify outstanding checks in excess of funds on deposit within other current liabilities and reduce cash and cash equivalents when these checks clear the bank on which they were drawn. Outstanding checks in excess of funds on deposit included in other current liabilities were $29 million and $59 million at January 28, 2017 and January 30, 2016 , respectively.
Allowance for Doubtful Accounts
We provide an allowance for doubtful accounts based on both historical experience and a specific identification basis. Allowances for doubtful accounts on accounts receivable balances were $37 million and $34 million at January 28, 2017 and January 30, 2016 , respectively. Our accounts receivable balance on our Consolidated Balance Sheet is presented net of our allowance for doubtful accounts and is comprised of various vendor-related and customer-related accounts receivable, including receivables related to our pharmacy operations.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market. For Kmart and Sears Domestic, cost is primarily determined using the retail inventory method ("RIM"). Kmart merchandise inventories are valued under the RIM using primarily a first-in, first-out ("FIFO") cost flow assumption. Sears Domestic merchandise inventories are valued under the RIM using primarily a last-in, first-out ("LIFO") cost flow assumption.
Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, merchandise markons, markups, markdowns and shrinkage, which significantly impact the ending inventory valuation at cost, as well as resulting gross margins. The methodologies utilized by us in our application of the RIM are consistent for all periods presented. Such methodologies include the development of the cost-to-retail ratios, the groupings of homogenous classes of merchandise, the development of shrinkage and obsolescence reserves, the accounting for price changes and the computations inherent in the LIFO adjustment (where applicable). Management believes that the RIM provides an inventory valuation that reasonably approximates cost and results in carrying inventory at the lower of cost or market.
Approximately 54% of consolidated merchandise inventories are valued using LIFO. To estimate the effects of inflation on inventories, we utilize external price indices determined by an outside source, the Bureau of Labor Statistics. If the FIFO method of inventory valuation had been used instead of the LIFO method, merchandise inventories would have been $33 million higher at January 28, 2017 and $35 million higher at January 30, 2016 . During 2016 and 2015 , a reduction in inventory quantities resulted in a liquidation of applicable LIFO inventory quantities carried at lower costs in prior years. This LIFO liquidation resulted in a decrease in cost of sales of approximately $12 million and $2 million in 2016 and 2015 , respectively.
Vendor Rebates and Allowances
We receive rebates and allowances from certain vendors through a variety of programs and arrangements intended to offset our costs of promoting and selling certain vendor products. These vendor payments are recognized and recorded as a reduction to the cost of merchandise inventories when earned and, thereafter, as a reduction of cost of sales, buying and occupancy as the merchandise is sold. Upfront consideration received from vendors linked to purchases or other commitments is initially deferred and amortized ratably to cost of sales, buying and occupancy over the life of the contract or as performance of the activities specified by the vendor to earn the fee is completed.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation. Additions and substantial improvements are capitalized and include expenditures that materially extend the useful lives of existing facilities and equipment. Maintenance and repairs that do not materially improve or extend the lives of the respective assets are expensed as incurred.
Depreciation expense, which includes depreciation on assets under capital leases, is recorded over the estimated useful lives of the respective assets using the straight-line method for financial statement purposes, and

67


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

accelerated methods for tax purposes. The range of lives are generally 20 to 50  years for buildings, 3 to 10  years for furniture, fixtures and equipment, and 3 to 5  years for computer systems and computer equipment. Leasehold improvements are depreciated over the shorter of the associated lease term or the estimated useful life of the asset. Depreciation expense included within depreciation and amortization expense reported in the Consolidated Statements of Operations was $370 million , $415 million and $563 million for the years ended January 28, 2017 , January 30, 2016 and January 31, 2015 , respectively.
Primarily as a result of store closing actions, certain property and equipment are considered held for sale. The value of assets held for sale was $96 million and $31 million at January 28, 2017 and January 30, 2016 , respectively. These assets were included in prepaid expenses and other current assets in the Consolidated Balance Sheets at January 28, 2017 and January 30, 2016 at the lower of their historical net book value or their estimated fair value, less estimated costs to sell. We expect to sell the properties within a year and we continually remarket them. The majority of assets held for sale are held within the Sears Domestic segment.
Impairment of Long-Lived Assets and Costs Associated with Exit Activities
In accordance with accounting standards governing the impairment or disposal of long-lived assets, the carrying value of long-lived assets, including property and equipment and definite-lived intangible assets, is evaluated whenever events or changes in circumstances indicate that a potential impairment has occurred relative to a given asset or assets. Factors that could result in an impairment review include, but are not limited to, a current period cash flow loss combined with a history of cash flow losses, current cash flows that may be insufficient to recover the investment in the property over the remaining useful life, or a projection that demonstrates continuing losses associated with the use of a long-lived asset, significant changes in the manner of use of the asset or significant changes in business strategies. An impairment loss is recognized when the estimated undiscounted cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value as determined based on quoted market prices or through the use of other valuation techniques. See Note 13 for further information regarding long-lived asset impairment charges recorded.
We account for costs associated with location closings in accordance with accounting standards pertaining to accounting for costs associated with exit or disposal activities. As such, we record a liability for costs associated with location closings, which includes employee severance, inventory markdowns and other liquidation fees when management makes the decision to exit a location. We record a liability for future lease costs (net of estimated sublease income) when we cease to use the location.
Goodwill, Trade Names and Related Impairments
Trade names acquired as part of the Merger account for the majority of our intangible assets recognized in the Consolidated Balance Sheet. The majority of these trade name assets, such as Sears, Kenmore and Craftsman, are expected to generate cash flows indefinitely, do not have estimable or finite useful lives and, therefore, are accounted for as indefinite-lived assets not subject to amortization. Certain intangible assets, including favorable lease rights, contractual arrangements and customer lists, have estimable, finite useful lives, which are used as the basis for their amortization. The estimated useful lives of such assets are determined using a number of factors, including the demand for the asset, competition and the level of expenditure required to maintain the cash flows associated with the asset.
Our goodwill results from the Merger. We perform annual goodwill and indefinite-lived intangible asset impairment tests at the last day of our November accounting period each year and assess the need to update the tests between annual tests if events or circumstances occur that would more likely than not reduce the fair value of the reporting unit or an indefinite-lived intangible asset below its carrying amount. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; and the testing for recoverability of a significant asset group within the reporting unit. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements.

68


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

Goodwill Impairment Assessments
Our goodwill balance relates to our Home Services business. The goodwill impairment test involves a two-step process. The first step is a comparison of the reporting unit's fair value to its carrying value. We estimate fair value using the best information available, using a discounted cash flow model, commonly referred to as the income approach. The income approach uses the reporting unit's projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions appropriate for the reporting unit. The projection uses management's best estimates of economic and market conditions over the projected period, including growth rates in sales, costs, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements. We were unable to use a market approach due to there being no market comparables.
If the carrying value of the reporting unit is higher than its fair value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss, if any. The amount of impairment is determined by comparing the implied fair value of reporting unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. See Note 12 for further information.
Intangible Asset Impairment Assessments
We consider the income approach when testing intangible assets with indefinite lives for impairment on an annual basis. We utilize the income approach, specifically the relief from royalty method, for analyzing our indefinite-lived assets. This method is based on the assumption that, in lieu of ownership, a firm would be willing to pay a royalty in order to exploit the related benefits of this asset class. The relief from royalty method involves two steps: (1) estimation of reasonable royalty rates for the assets; and (2) the application of these royalty rates to a net sales stream and discounting the resulting cash flows to determine a value. We multiplied the selected royalty rate by the forecasted net sales stream to calculate the cost savings (relief from royalty payment) associated with the assets. The cash flows are then discounted to present value by the selected discount rate and compared to the carrying value of the assets.
In our quarterly reports on Form 10-Q filed during 2016, the Company disclosed that if its results continued to decline it could result in revisions in management's estimates of the fair value of the Company's trade names and may result in impairment charges. As a result of recently announced store closures and the further decline in revenue experienced in the fourth quarter at Sears Domestic, our analysis indicated that the fair value of the Sears trade name was less than its carrying value. Accordingly, we recorded impairment related to the Sears trade name during 2016 of $381 million , which reduced the carrying value to $431 million at January 28, 2017. During 2015, we recorded impairment related to the Sears trade name of $180 million , which reduced the carrying value to $812 million at January 30, 2016. See Note 12 for further information.
Fair Value of Financial Instruments
We determine the fair value of financial instruments in accordance with standards pertaining to fair value measurements. Such standards define fair value and establish a framework for measuring fair value in GAAP. Under fair value measurement accounting standards, fair value is considered to be the exchange price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. We report the fair value of financial assets and liabilities based on the fair value hierarchy prescribed by accounting standards for fair value measurements, which prioritizes the inputs to valuation techniques used to measure fair value into three levels.
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of temporary cash investments and accounts receivable. We place our cash and cash equivalents in investment-grade, short-term instruments with high quality financial institutions and, by policy, limit the amount of credit exposure in any one financial instrument.

69


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

Self-insurance Reserves
We are self-insured for certain costs related to workers' compensation, asbestos, environmental, automobile, warranty, product and general liability claims. We obtain third-party insurance coverage to limit our exposure to certain of these self-insured risks. A portion of these self-insured risks is managed through a wholly-owned insurance subsidiary. Our liability reflected in the Consolidated Balance Sheet, classified within other liabilities (current and long-term), represents an estimate of the ultimate cost of claims incurred at the balance sheet date. In estimating this liability, we utilize loss development factors based on Company-specific data to project the future development of incurred losses. Loss estimates are adjusted based upon actual claims settlements and reported claims. The liabilities for self-insured risks are discounted to their net present values using an interest rate which is based upon the expected duration of the liabilities. Expected payments as of January 28, 2017 were as follows:
millions
 
2017
$
175

2018
113

2019
83

2020
60

2021
47

Later years
326

Total undiscounted obligation
804

Less—discount
(89
)
Net obligation
$
715

Loss Contingencies
Under accounting standards, loss contingency provisions are recorded for probable losses at management's best estimate of a loss, or when a best estimate cannot be made, the minimum amount in the estimated range is recorded. These estimates are often initially developed substantially earlier than the ultimate loss is known, and the estimates are refined each accounting period, as additional information is known.
Revenue Recognition
Revenues include sales of merchandise, services and extended service contracts, net commissions earned from leased departments in retail stores, delivery and handling revenues related to merchandise sold, and fees earned from co-branded credit card programs. We recognize revenues from retail operations at the later of the point of sale or the delivery of goods to the customer. Direct to customer revenues are recognized when the merchandise is delivered to the customer. Revenues from product installation and repair services are recognized at the time the services are provided. Revenues from the sale of service contracts and the related direct acquisition costs are deferred and amortized over the lives of the associated contracts, while the associated service costs are expensed as incurred.
We earn revenues through arrangements with third-party financial institutions that manage and directly extend credit relative to our co-branded credit card programs. The third-party financial institutions pay us for generating new accounts and sales activity on co-branded cards, as well as for selling other financial products to cardholders. We recognize these revenues in the period earned, which is when our related performance obligations have been met. We sell gift cards to customers at our retail stores and through our direct to customer operations. The gift cards generally do not have expiration dates. Revenues from gift cards are recognized when (i) the gift card is redeemed by the customer, or (ii) the likelihood of the gift card being redeemed by the customer is remote (gift card breakage) based on historical redemption patterns and we determine that we do not have a legal obligation to remit the value of the unredeemed gift cards to the relevant jurisdictions.
Revenues from merchandise sales and services are reported net of estimated returns and allowances and exclude sales taxes. The reserve for returns and allowances is calculated as a percentage of sales based on historical return percentages. Estimated returns are recorded as a reduction of sales and cost of sales. We defer the recognition of layaway sales and profit until the period in which the customer takes possession of the merchandise.

70


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

Cost of Sales, Buying and Occupancy
Cost of sales, buying and occupancy are comprised principally of the costs of merchandise, buying, warehousing and distribution (including receiving and store delivery costs), retail store occupancy costs, product repair, and home service and installation costs, customer shipping and handling costs, vendor allowances, markdowns and physical inventory losses.
The Company has a Shop Your Way program in which customers earn points on purchases which may be redeemed to pay for future purchases. The expense for customer points earned is recognized as customers earn them and recorded in cost of sales.
During 2016 and 2015 , respectively, the Company received $33 million and $146 million related to one-time credits from vendors associated with prior supply arrangements, which have been reflected as credits within cost of sales, buying and occupancy in the Consolidated Statements of Operations.
Selling and Administrative Expenses
Selling and administrative expenses are comprised principally of payroll and benefits costs for retail and corporate employees, occupancy costs of corporate facilities, advertising, pre-opening costs and other administrative expenses.
Pre-Opening Costs
Pre-opening and start-up activity costs are expensed in the period in which they occur.
Advertising Costs
Advertising costs are expensed as incurred, generally the first time the advertising occurs, and amounted to $684 million , $850 million and $1.1 billion for 2016 , 2015 and 2014 , respectively. These costs are included within selling and administrative expenses in the Consolidated Statements of Operations.
Income Taxes
We provide deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax basis of assets and liabilities based on currently enacted tax laws in effect for the year in which the differences are expected to reverse. The tax balances and income tax expense recognized by us are based on management's interpretation of the tax laws of multiple jurisdictions. Income tax expense also reflects our best estimates and assumptions regarding, among other things, the level of future taxable income, tax planning, and any valuation allowance. Future changes in tax laws, changes in projected levels of taxable income, tax planning, and adoption and implementation of new accounting standards could impact the effective tax rate and tax balances recorded by us. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and changes in accounting policies and incorporate assumptions including the amount of future state, federal and foreign pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. In evaluating the objective evidence that historical results provide, we consider cumulative operating income (loss) over the past three years. These assumptions require significant judgment about the forecasts of future taxable income.
Income tax expense or benefit from continuing operations is generally determined without regard to other categories of earnings, such as discontinued operations and other comprehensive income ("OCI"). An exception is provided in the authoritative accounting guidance when there is income from categories other than continuing operations and a loss from continuing operations in the current year. In this case, the tax benefit allocated to continuing operations is the amount by which the loss from continuing operations reduces the tax expense recorded with respect to the other categories of earnings, even when a valuation allowance has been established against the deferred tax assets. In instances where a valuation allowance is established against current year losses, income from other sources, including gain from pension and other postretirement benefits recorded as a component of OCI or the

71


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

creation of a deferred tax liability through additional paid-in capital for the book to tax difference for the original issue discount relating to the $625 million 8% senior unsecured notes due 2019 , is considered when determining whether sufficient future taxable income exists to realize the deferred tax assets.
Stock-based Compensation
We account for stock-based compensation arrangements in accordance with accounting standards pertaining to share-based payment transactions, which requires us to both recognize as expense the fair value of all stock-based compensation awards (which includes stock options, although there were no options outstanding in 2016 ) and to classify excess tax benefits associated with share-based compensation deductions as cash from financing activities rather than cash from operating activities. We recognize compensation expense as awards vest on a straight-line basis over the requisite service period of the award.
Earnings Per Common Share
Basic earnings per common share is calculated by dividing net income attributable to Holdings' shareholders by the weighted average number of common shares outstanding for each period. Diluted earnings per common share also includes the dilutive effect of potential common shares, exercise of stock options, warrants and the effect of restricted stock when dilutive.
New Accounting Pronouncements
Goodwill
In January 2017, the Financial Accounting Standards Board ("FASB") issued an accounting standards update which simplifies the test for goodwill impairment. To address concerns over the cost and complexity of the two-step goodwill impairment test, the amendments in this update remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This update is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the effect the updates will have on our consolidated financial statements.
Business Combinations
In January 2017, the FASB issued an accounting standards update which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. The amendments in this update provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this update require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. This update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The amendments in the update must be applied prospectively. We are currently evaluating the effect the updates will have on our consolidated financial statements.
Statement of Cash Flows
In November 2016 and August 2016, respectively, the FASB issued accounting standards updates which address diversity in practice in the classification and presentation of changes in restricted cash in the statement of cash flows and in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. These updates are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The amendments in the updates must be applied using a retrospective transition method to each period presented. If an entity early adopts the amendments in an interim

72


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

period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. We are currently evaluating the effect the updates will have on our consolidated financial statements.
Consolidation - Interests held through related parties that are under common control
In October 2016, the FASB issued an accounting standards update to amend the accounting standards on how a reporting entity that is the single decision maker of a variable interest entity ("VIE") should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. Under the amendments, a single decision maker is not required to consider indirect interests held through related parties that are under common control with the single decision maker to be the equivalent of direct interests in their entirety. Instead, a single decision maker is required to include those interests on a proportionate basis consistent with indirect interests held through other related parties. The update is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the effect the update will have on our consolidated financial statements.
Income Taxes - Intra-entity transfers of assets other than inventory
In October 2016, the FASB issued an accounting standards update to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current accounting standards prohibit the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. In addition, interpretations of this guidance have developed in practice for transfers of certain intangible and tangible assets. This prohibition on recognition is an exception to the principle of comprehensive recognition of current and deferred income taxes in accounting standards. To more faithfully represent the economics of intra-entity asset transfers, the amendments in this update require that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this update do not change accounting standards for the pre-tax effects of an intra-entity asset transfer under accounting standards applicable to consolidation, or for an intra-entity transfer of inventory. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted as of the beginning of an annual reporting period. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We are currently evaluating the effect the update will have on our consolidated financial statements.
Leases
In February 2016, the FASB issued an accounting standards update which replaces the current lease accounting standard. The update will require, among other items, lessees to recognize a right-of-use asset and a lease liability for most leases. Extensive quantitative and qualitative disclosures, including significant judgments made by management, will be required to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing contracts. The update is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently evaluating the effect the update will have on our consolidated financial statements, and expect the update will have a material impact on our consolidated financial statements.
Fair Value Measurements
In May 2015, the FASB issued an accounting standards update which requires certain investments measured at net asset value to be removed from the fair value hierarchy categorization and presented as a single reconciling line item between the fair value of the pension plans assets and the amounts reported in the fair value hierarchy table.

73


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

The Company adopted the update in fiscal 2016. The adoption of the new standard did not have an impact on the Company’s consolidated financial position, results of operations, or cash flows.

Presentation of Financial Statements - Going Concern
In August 2014, the FASB issued an accounting standards update which requires management to assess whether there are conditions or events, considered in the aggregate, that raise 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 was effective for the Company's annual period ended January 28, 2017. The Company's assessment of our ability to continue as a going concern is further discussed in the "Uses and Sources of Liquidity" paragraph above. The adoption of the new standard did not 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. Subsequently, the FASB has also issued accounting standards updates which clarify the guidance. 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 standard was initially released as effective for fiscal years beginning after December 15, 2016, however, the FASB has decided to defer the effective date of this accounting standard update for one year. Early adoption of the update is permitted, but not before the original date for fiscal years beginning after December 15, 2016. The update may be applied retrospectively for each period presented or as a cumulative-effect adjustment at the date of adoption. The Company continues to evaluate the adoption of this standard. Based on our preliminary assessment, we determined the adoption will impact the accounting for our Shop Your Way program and revenues from gift cards. The expense for Shop Your Way points is currently recognized as customers earn them and recorded in cost of sales. The new guidance will require the Company to allocate the transaction price to products and points on a relative standalone selling price basis, deferring the portion of revenue allocated to the points and recognizing a contract liability for unredeemed points. The new guidance will also change the timing of recognition of the unredeemed portion of our gift cards, which is currently recognized using the remote method. The new guidance will require application of the proportional method. We continue to evaluate the impact of this standard on revenues from other sources, including: sales of services; extended service contracts; net commissions earned from leased departments in retail stores and co-branded credit card programs.
NOTE 2—SEARS CANADA
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 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

74


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

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.
The Sears Canada rights offering closed on November 7, 2014 and was oversubscribed. Accordingly, the Company sold a total of 40 million common shares of Sears Canada and received total aggregate proceeds of $380 million for the rights offering by the closing date, including $212 million received from ESL and $93 million received from Fairholme and its affiliates. Proceeds from the rights offering provided additional liquidity to Holdings during the 2014 holiday period and were used for general corporate purposes.
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 in the Consolidated Statements of Operations and within gain on sales of investments in the Consolidated Statements of Cash Flows for the year ended January 31, 2015, 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 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 recorded in other assets in the Consolidated Balance Sheet, and the change in fair value is recorded in interest and investment income in the Consolidated Statements of Operations, and is disclosed in Note 6.
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 consolidated operations of Holdings and the Sears Canada segment in the accompanying Consolidated Financial Statements in accordance with accounting standards applicable to presentation of financial statements.
At both January 28, 2017 and January 30, 2016 , the Company was the beneficial holder of approximately 12 million , or 12% , of the common shares of Sears Canada. Our equity method investment in Sears Canada was $17 million and $52 million at January 28, 2017 and January 30, 2016 , respectively, and is included within other assets in the Consolidated Balance Sheets. The fair value of our equity method investment in Sears Canada was determined based on quoted market prices for its common stock. Our equity method investment in Sears Canada is valued using Level 1 measurements as defined in Note 5.

75


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

NOTE 3—BORROWINGS
Total borrowings outstanding at January 28, 2017 and January 30, 2016 were $4.2 billion and $3.0 billion , respectively. At January 28, 2017 , we had no short-term borrowings outstanding. At January 30, 2016 , total short-term borrowings were $797 million , consisting of secured borrowings. The weighted-average annual interest rate paid on short-term debt was 5.4% in 2016 and 3.5% in 2015 .
Long-term debt was as follows:
ISSUE
 
January 28,
2017
 
January 30,
2016
millions
 
 
 
SEARS ROEBUCK ACCEPTANCE CORP.
 
 
 
6.50% to 7.50% Notes, due 2017 to 2043
$
327

 
$
327

Term Loan (Credit Facility), $1.0B due 2018
963

 
968

Term Loan (Credit Facility), $750M due 2020
726

 
—

Term Loan (Credit Facility), $300M due 2020
292

 
—

SEARS HOLDINGS CORP.
 
 
 
8% Secured Loan Facility, due 2017
494

 
—

6.625% Senior Secured Notes, due 2018
303

 
302

8% Senior Unsecured Notes, due 2019
428

 
383

8% Secured Loan Facility, due 2020
485

 
—

CAPITALIZED LEASE OBLIGATIONS
145

 
195

OTHER NOTES AND MORTGAGES
—

 
4

Total long-term borrowings
4,163

 
2,179

Current maturities
(590
)
 
(71
)
Long-term debt and capitalized lease obligations
$
3,573

 
$
2,108

Weighted-average annual interest rate on long-term debt
7.2
%
 
6.6
%
The fair value of long-term debt, excluding capitalized lease obligations, was $4.0 billion at January 28, 2017 and $1.9 billion at January 30, 2016 . 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 5.
At January 28, 2017 , long-term debt maturities for the next five years and thereafter were as follows:
millions
 
2017
$
596

2018
1,294

2019
644

2020
1,563

2021
5

Thereafter
320

Total maturities
4,422

Unamortized debt discount
(217
)
Unamortized debt issuance costs
(42
)
Long-term debt, net of discount & debt issuance costs
$
4,163


76


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

Interest
Interest expense for years 2016 , 2015 and 2014 was as follows:
millions
 
2016
 
2015
 
2014
COMPONENTS OF INTEREST EXPENSE
 
 
 
 
 
 
Interest expense
 
$
288

 
$
223

 
$
238

Amortization of debt issuance costs
 
31

 
25

 
33

Accretion of debt discount
 
50

 
35

 
5

Accretion of self-insurance obligations at net present value
 
16

 
19

 
22

Accretion of lease obligations at net present value
 
19

 
21

 
15

Interest expense
 
$
404

 
$
323

 
$
313

Debt Repurchase Authorization
During the second quarter of 2015, the Board of Directors authorized the repurchase, subject to market conditions and other factors, of up to $1.0 billion of our outstanding indebtedness in open market or privately negotiated transactions, superseding the previously disclosed debt repurchase authorization from 2005. The Company completed the Tender Offer discussed below pursuant to the debt repurchase authorization.
Unsecured Commercial Paper
We borrow through the commercial paper markets. At both January 28, 2017 and January 30, 2016 , we had no commercial paper borrowings outstanding.
Secured Short-Term Loan
On September 15, 2014, the Company, through Sears, Sears Development Co. and Kmart Corporation ("Short-Term Borrowers"), entities wholly-owned and controlled, directly or indirectly by the Company, entered into a $400 million secured short-term loan (the "Short-Term Loan'") with JPP II, LLC and JPP, LLC (together, the "Short-Term Lender"), entities affiliated with ESL and Fairholme. The first $200 million of the Short-Term Loan was funded at the closing on September 15, 2014 and the remaining $200 million was funded on September 30, 2014. Proceeds of the Short-Term Loan were used for general corporate purposes.
The Short-Term Loan was originally scheduled to mature on December 31, 2014. As permitted by the Short-Term Loan agreement, the Company paid an extension fee equal to 0.5% of the principal amount to extend the maturity date to February 28, 2015. The Short-Term Loan had an annual base interest rate of 5% . The Short-Term Borrowers paid an upfront fee of 1.75% of the full principal amount. The Short-Term Loan was guaranteed by the Company and was secured by a first priority lien on certain real properties owned by the Short-Term Borrowers.
On February 25, 2015, we entered into an agreement effective February 28, 2015, to amend and extend the $400 million secured short-term loan. Under the terms of the amendment, we repaid $200 million of the $400 million on March 2, 2015 and the remaining $200 million on June 1, 2015, resulting in no balance outstanding at January 30, 2016 or January 28, 2017. During 2015, the Short-Term Borrowers paid interest of $6 million to the Short-Term Lender. During 2014, the Short-Term Borrowers paid an upfront fee of $7 million , an extension fee of $2 million and interest of $6 million to the Short-Term Lender.
Letter of Credit Facility
On December 28, 2016, the Company, through Sears Roebuck Acceptance Corp. ("SRAC") and Kmart Corporation (together with SRAC, the "Borrowers"), entities wholly-owned and controlled, directly or indirectly by the Company, entered into a Letter of Credit and Reimbursement Agreement (the "LC Facility Agreement") providing for a $500 million secured standby letter of credit facility (the "LC Facility") from JPP, LLC and JPP II, LLC, entities affiliated with ESL (collectively, the "Lenders"), with Citibank, N.A., serving as administrative agent and issuing bank. On December 28, 2016, $200 million of commitments were made available under the LC Facility,

77


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

and, subject to approval of the Lenders, up to an additional $300 million in commitments may be obtained by the Company from the Lenders (or other lenders) prior to December 28, 2017, the maturity date of the LC Facility.
The LC Facility is guaranteed by the same subsidiaries of the Company that guarantee the obligations under the Amended Domestic Credit Agreement, as defined below, as well as by certain other subsidiaries that own real estate collateral. The LC Facility is secured by the same collateral as the Amended Domestic Credit Agreement, as well as by certain real estate.
The Borrowers are required to reduce commitments under the LC Facility upon the occurrence of certain events, including certain asset sales and other financing transactions. To secure their obligation to participate in letters of credit issued under the LC Facility, the Lenders are required to maintain cash collateral on deposit with the Issuing Bank in an amount equal to 102% of the commitments under the LC Facility (the "Lender Deposit").
The Borrowers were required to pay the Lenders an upfront fee equal to 1.50% of the amount of commitments provided under the LC Facility. In addition, the Borrowers are required to pay a commitment fee of 5.75% per annum on the amount of the Lender Deposit (as such amount may be increased from time to time in connection with establishing additional commitments), as well as certain other fees.
The LC Facility Agreement includes certain representations and warranties, affirmative and negative covenants and other undertakings, which are subject to important qualifications and limitations set forth in the LC Facility Agreement. The LC Facility Agreement also contains certain 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 an event of default occurs, the Lenders may terminate all or any portion of the commitments under the LC Facility, require the Borrowers to cash collateralize the LC Facility and/or exercise any rights they might have under any of the related facility documents (including against the collateral), subject to certain limitations. At January 28, 2017 , we had $200 million of letters of credit outstanding under the LC Facility.
2017 Secured Loan Facility
On January 3, 2017, the Company, through Sears, Kmart Stores of Illinois LLC, Kmart of Washington LLC and Kmart Corporation (collectively, "2017 Secured Loan Borrowers"), entities wholly-owned and controlled, directly or indirectly by the Company, obtained a $500 million real estate loan facility (the "2017 Secured Loan Facility") from the Lenders, entities affiliated with ESL. On January 3, 2017, $321 million was funded under the 2017 Secured Loan Facility, and an additional $179 million was drawn by the Company prior to January 28, 2017. The 2017 Secured Loan Facility matures on July 20, 2020. The Company expects to use the proceeds of the 2017 Secured Loan Facility for general corporate purposes.
The 2017 Secured Loan Facility will have an annual base interest rate of 8% , with accrued interest payable monthly during the term of the 2017 Secured Loan Facility. The Borrowers paid an upfront commitment fee equal to 1.0% of the full principal amount of the 2017 Secured Loan Facility and paid a funding fee equal to 1.0% of the amounts drawn under the 2017 Secured Loan Facility at the time such amounts were drawn.
The 2017 Secured Loan Facility is guaranteed by the Company and certain of its subsidiaries, was secured by a first priority lien on 69 real properties owned by the 2017 Secured Loan Borrowers and guarantors at inception. In certain circumstances, the Lenders and the 2017 Secured Loan Borrowers may elect to substitute one or more properties as collateral. To the extent permitted under other debt of the Company or its affiliates, the 2017 Secured Loan Facility may be prepaid at any time in whole or in part, without penalty or premium. The 2017 Secured Loan Borrowers are required to apply the net proceeds of the sale of any real property collateral for the 2017 Secured Loan Facility to repay the loan.
The 2017 Secured Loan Facility includes certain representations and warranties, indemnities and covenants, including with respect to the condition and maintenance of the real property collateral. The 2017 Secured Loan Facility has certain 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 Lenders may declare all or any portion of the outstanding indebtedness to be immediately due and payable, exercise any rights they might have under any of the 2017 Secured

78


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

Loan Facility documents (including against the collateral), and require the 2017 Secured Loan Borrowers to pay a default interest rate equal to the greater of (i) 2.5% in excess of the base interest rate and (ii) the prime rate plus 1% .
The carrying value of the 2017 Secured Loan Facility, net of the remaining debt issuance costs, was $485 million at January 28, 2017 .
2016 Secured Loan Facility
On April 8, 2016, the Company, through Sears, Sears Development Co., Innovel Solutions, Inc., Big Beaver of Florida Development, LLC and Kmart Corporation (collectively, "2016 Secured Loan Borrowers"), entities wholly-owned and controlled, directly or indirectly by the Company, obtained a $500 million real estate loan facility (the "2016 Secured Loan Facility") from JPP, LLC, JPP II, LLC, and Cascade Investment, LLC (collectively, the "2016 Secured Loan Lenders"). JPP, LLC and JPP II, LLC are entities affiliated with ESL. The first $250 million of the Secured Loan Facility was funded on April 8, 2016 and the remaining $250 million was funded on April 22, 2016. The 2016 Secured Loan Facility has a maturity date of July 7, 2017, and is included within current portion of long-term debt on the Condensed Consolidated Balance Sheets at January 28, 2017 . The Company used the proceeds of the 2016 Secured Loan Facility to reduce outstanding borrowings under the Company's asset-based revolving credit facility and for general corporate purposes. The carrying value of the 2016 Secured Loan Facility, net of the remaining debt issuance costs, was $494 million at January 28, 2017 .
The 2016 Secured Loan Facility has an annual base interest rate of 8% , with accrued interest payable monthly during the term of the 2016 Secured Loan Facility. The 2016 Secured Loan Borrowers paid an upfront commitment fee equal to 1.0% of the full principal amount of the 2016 Secured Loan Facility and also are required to pay a funding fee equal to 1.0% of the amounts drawn under the 2016 Secured Loan Facility at the time such amounts are drawn. If amounts remain outstanding or committed under the 2016 Secured Loan Facility after nine months, a delayed origination fee equal to 0.5% of such amounts becomes payable, and if amounts remain outstanding or committed under the Secured Loan Facility after 12 months, an additional delayed origination fee equal to 0.5% of such amounts becomes payable.
The 2016 Secured Loan Facility is guaranteed by the Company and is secured by a first priority lien on 21 real properties owned by the 2016 Secured Loan Borrowers. The 2016 Secured Loan Facility includes customary representations and warranties, indemnities and covenants, including with respect to the condition and maintenance of the real property collateral.
The 2016 Secured Loan Facility 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 2016 Secured Loan Lenders may declare all or any portion of the outstanding indebtedness to be immediately due and payable, exercise any rights they might have under any of the 2016 Secured Loan Facility documents (including against the collateral), and require the 2016 Secured Loan Borrowers to pay a default interest 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 Facility may be prepaid at any time in whole or in part, without penalty or premium. The funds were used to reduce outstanding borrowings under the Company's asset-based revolving credit facility and for general corporate purposes.
Domestic Credit Agreement
During the first quarter of 2011, the Borrowers and Holdings entered into an amended credit agreement (the "Domestic Credit Agreement"). 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 new senior secured term loan facility (the "Term Loan"). On July 21, 2015, the Borrowers and Holdings entered into an amended and restated credit agreement (the "Amended Domestic Credit Agreement") with a syndicate of lenders that amended and restated the then-existing Domestic Credit Agreement, and on April 8, 2016, the Amended Domestic Credit Agreement was further amended in connection with the 2016 Term Loan as described below. The Amended Domestic Credit Agreement provided for a $3.275 billion asset-based revolving credit facility (the "Revolving Facility") with a $1.0 billion letter of credit sub-facility. The maturity date for $1.971 billion of the Revolving Facility was extended to July 20, 2020, while $1.304 billion expired on April 8, 2016. The Amended Domestic Credit Agreement also governs the Term Loan, which retains its maturity date of

79


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

June 30, 2018. The Amended Domestic Credit Agreement includes an accordion feature that allows the Borrowers to use, subject to borrowing base requirements, existing collateral for the facility to obtain up to $1.0 billion of additional borrowing capacity, of which $750 million was utilized for the 2016 Term Loan (described below). The Amended Domestic Credit Agreement also includes a "FILO" ("first in last out") tranche feature that allows up to an additional $500 million of borrowing capacity, and increased Holdings' ability to undertake short-term borrowings from $750 million to $1 billion .
Revolving advances under the Amended 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 dependent on Holdings' consolidated leverage ratio (as measured under the Amended Domestic Credit Agreement). The margin with respect to borrowings under the extended commitments ranges from 3.25% to 3.75% for LIBOR loans and from 2.25% to 2.75% for base rate loans. The margin with respect to borrowings under the non-extended commitments remains 2.00% to 2.50% for LIBOR loans and 1.00% to 1.50% for base rate loans. The Amended Domestic Credit Agreement also provides for the payment of fees with respect to issued and undrawn letters of credit at a rate equal to the margin applicable to LIBOR loans and a commitment fee with respect to unused amounts of the Revolving Facility at a rate, depending on facility usage, between 0.375% to 0.625% , per annum, with a minimum of 0.50% applicable to commitments under the extended tranche. From and after April 8, 2016, such commitment fees with respect to the extended tranche are a flat 0.50% . As a result of the February 2017 amendment to the Amended Domestic Credit Agreement, interest rate on loans under the revolving tranche of the domestic credit facility increased by 25 basis points per annum (with the interest rate varying based on the Company's consolidated leverage ratio) and increased the commitment fee on undrawn amounts under the revolving tranche of the domestic credit facility increased by 12.5 basis points. From and after February 10, 2017, such commitment fees with respect to the extended tranche are a flat 0.625% .
The Revolving Facility is in place as a funding source for general corporate purposes and is secured by a first lien on substantially all of our domestic inventory and credit card and pharmacy receivables, and is subject to a borrowing base formula to determine availability. The Revolving Facility is guaranteed by all domestic subsidiaries of Holdings that own inventory or credit card or pharmacy receivables. The Revolving Facility also permits aggregate second lien indebtedness of up to $2.0 billion , of which $604 million in second lien notes were outstanding at January 28, 2017 , resulting in $1.4 billion 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. If, through asset sales or other means, the value of the above eligible assets is not sufficient to support borrowings of up to the full amount of the commitments under this facility, we will not have full access to the facility, but rather could have access to a lesser amount determined by the borrowing base. Such a decline in the value of eligible assets also could result in our inability to borrow up to the full amount of second lien indebtedness permitted by the domestic credit facility, but rather we could be limited to borrowing a lesser amount determined by the borrowing base as calculated pursuant to the terms of such indenture.
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% . Currently, 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. Additionally, the Borrowers are required to make certain mandatory repayments of the Term Loan from excess cash flow (as defined in the Amended Domestic Credit Agreement). The Term Loan may be prepaid in whole or part without penalty. 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. At January 28, 2017 and January 30, 2016 , respectively, we had borrowings of $970 million and $980 million under the Term Loan, and carrying value, net of the remaining discount and debt issuance costs, of $963 million and $968 million . As disclosed in Note 1, a portion of the proceeds received from the Craftsman Sale were used to reduce outstanding borrowings under the Term Loan, reducing the carrying value, net of the remaining discount and debt issuance costs, to $724 million at March 8, 2017.
The Amended 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

80


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

that require that projected availability under the credit facility, as defined, is at least 15% , exceptions that may be subject to certain maximum amounts and an exception that requires that the restricted payment is funded from cash on hand and not from borrowings under the credit facility. Further, the Amended Domestic Credit Agreement includes customary covenants that restrict our ability to make dispositions, prepay debt, and make investments, subject, in each case, to various exceptions. The Amended 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. As of January 28, 2017, our fixed charge ratio was less than 1.0 to 1.0. If availability under the domestic revolving credit facility were to fall below 10% , the Company would be required to test the fixed charge coverage ratio, and would not comply with the facility, and the lenders under the facility could demand immediate payment in full of all amounts outstanding and terminate their obligations under the facility. In addition, the domestic credit facility provides that in the event we make certain prepayments of indebtedness, for a period of one year thereafter we must maintain availability under the facility of at least 12.5% , and it prohibits certain other prepayments of indebtedness.
At January 28, 2017 , we had no borrowings outstanding under the Revolving Facility. At January 30, 2016 , we had $797 million of Revolving Facility borrowings outstanding under the Revolving Facility. At January 28, 2017 and January 30, 2016 , we had $464 million and $652 million of letters of credit outstanding under the Revolving Facility, respectively. At January 28, 2017 and January 30, 2016 , the amount available to borrow under the Revolving Facility was $165 million and $316 million , respectively, which reflects the effect of the springing fixed charge coverage ratio covenant and the borrowing base limitation. The majority of the letters of credit outstanding are used to provide collateral for our insurance programs.
2016 Term Loan
On April 8, 2016, the Company, SRAC, and Kmart Corporation (together with SRAC, the "ABL Borrowers") entered into an amendment to the Amended Domestic Credit Agreement, with a syndicate of lenders, including Bank of America, N.A., as agent. The amendment to the Amended Domestic Credit Agreement was executed in connection with the closing of a new $750 million senior secured term loan under the Amended Domestic Credit Agreement (the "2016 Term Loan").
Amounts borrowed pursuant to the 2016 Term Loan bears interest at a rate equal to the London Interbank Offered Rate ("LIBOR") plus 750 basis points, subject to a 1.00% LIBOR floor. The Company received approximately $722 million in net proceeds from the 2016 Term Loan, which proceeds were used to reduce outstanding borrowings under its asset-based revolving credit facility. The 2016 Term Loan has a maturity date of July 20, 2020, which is the same maturity date as the Company’s $1.971 billion revolving credit facility commitments, and does not amortize. The 2016 Term Loan is subject to a prepayment premium of 2% of the aggregate principal amount of the 2016 Term Loan prepaid on or prior to April 8, 2017 and 1% of the aggregate principal amount of the 2016 Term Loan prepaid after April 8, 2017 and on or prior to April 8, 2018. The obligations under the Amended Domestic Credit Agreement, including the 2016 Term Loan, are secured by a first lien on substantially all of the domestic inventory and credit card and pharmacy receivables of the Company and its subsidiaries and aggregate advances under the Amended Domestic Credit Agreement are subject to a borrowing base formula. The Amended Domestic Credit Agreement is guaranteed by all domestic subsidiaries of the Company that own inventory or credit card or pharmacy receivables. The other material terms of the Amended Domestic Credit Agreement were not modified by the amendment. The carrying value of the 2016 Term Loan, net of the remaining discount and debt issuance costs, was $726 million at January 28, 2017 . As disclosed in Note 1, a portion of the proceeds received from the Craftsman Sale were used to reduce outstanding borrowings under the 2016 Term Loan, reducing the carrying value, net of the remaining discount and debt issuance costs, to $553 million at March 8, 2017.
Second Lien Term Loan
On September 1, 2016, the ABL Borrowers entered into a Second Lien Credit Agreement (the "Second Lien Credit Agreement") with the Lenders thereunder, entities affiliated with ESL, pursuant to which the ABL Borrowers borrowed $300 million under a term loan (the "Second Lien Term Loan"). The Company received net proceeds of $291 million , which were used for general corporate purposes.

81


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

The maturity date for the Second Lien Term Loan is July 20, 2020 and the Second Lien Term Loan will not amortize. The Second Lien Credit Agreement includes an accordion feature that allows the ABL Borrowers to seek to obtain from third parties up to $200 million of additional loans under the Second Lien Credit Agreement on the same terms as the Second Lien Term Loan. The Second Lien Term Loan bears interest at a rate equal to, at the election of the ABL Borrowers, either LIBOR (subject to a 1.00% floor) or a specified prime rate ("Base Rate"), in either case plus an applicable margin. The margin with respect to the Second Lien Term Loan is 7.50% for LIBOR loans and 6.50% for Base Rate loans.
The Company’s obligations under the Second Lien Credit Agreement are secured on a pari passu basis with the Company’s obligations under that certain Indenture, dated as of October 12, 2010, pursuant to which the Company issued its Senior Secured Notes (defined below). The collateral includes inventory, receivables and other related assets of the Company and its subsidiaries which are obligated on the Second Lien Term Loan and the Senior Secured Notes. The Second Lien Credit Agreement is guaranteed by all domestic subsidiaries of the Company that guarantee the Company’s obligations under its existing Revolving Facility.
The Second Lien Credit Agreement includes representations and warranties, covenants and other undertakings, which representations and warranties, covenants and other undertakings and events of default that are substantially similar to those contained in the Amended Domestic Credit Agreement. The carrying value of the Second Lien Term Loan, net of the remaining debt issuance costs, was $292 million at January 28, 2017 .
Senior Secured Notes
In October 2010, we sold $1.0 billion aggregate principal amount of senior secured notes (the "Senior Secured 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 Senior Secured Notes, the Company sold $250 million aggregate principal amount of Senior Secured Notes to the Company's domestic pension plan in a private placement, none of which remain in the domestic pension plan as a result of the Tender Offer discussed below. The Senior Secured 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 Senior Secured Notes is junior in priority to the lien on such assets that secures obligations under the Amended 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 Senior Secured 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 Senior Secured Notes to be due and payable immediately. Generally, the Company is required to offer to repurchase all outstanding Senior Secured Notes at a purchase price equal to 101% of the principal amount if the borrowing base (as calculated pursuant to the indenture) falls below the principal value of the Senior Secured Notes plus any other indebtedness for borrowed money that is secured by liens on the Collateral for two consecutive quarters or upon the occurrence of certain change of control triggering events. The Company may call the Senior Secured 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 Senior Secured Notes held by nonaffiliates for a new issue of substantially identical notes registered under the Securities Act of 1933, as amended.
On August 3, 2015, the Company commenced a tender offer (the "Tender Offer") to purchase for cash up to $1.0 billion  principal amount of its Senior Secured Notes, which expired on August 28, 2015. Approximately $936 million principal amount of the Senior Secured Notes were validly tendered and not validly withdrawn in the Tender Offer. Holders who validly tendered and did not validly withdraw Senior Secured Notes at or prior to the early tender date of August 14, 2015 received total consideration of $990 per $1,000 principal amount of Senior Secured Notes that were accepted for purchase, which included an early tender payment of $30 per $1,000 principal amount of Senior Secured Notes accepted for purchase, plus accrued and unpaid interest up to, but excluding, the settlement date. Holders who validly tendered and did not validly withdraw Senior Secured Notes after the early tender date but at or prior to the expiration date of August 28, 2015 received total consideration of $960 per $1,000 principal

82


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

amount of Senior Secured Notes accepted for purchase, plus accrued and unpaid interest up to, but excluding, the settlement date.
We accounted for the Tender Offer in accordance with accounting standards applicable to extinguishment of liabilities and debt modifications and extinguishments. Accordingly, we de-recognized the net carrying amount of Senior Secured Notes of $929 million (comprised of the principal amount of $936 million , offset by unamortized debt issuance costs and discount of $7 million ), and the reacquisition cost was $929 million .
The carrying value of Senior Secured Notes, net of the remaining discount and debt issuance costs, was $303 million and $302 million at January 28, 2017 and January 30, 2016 , respectively.
Senior Unsecured Notes
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 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 was unvested as of the record date received cash awards in lieu of subscription rights. This rights offering closed on November 18, 2014 and was oversubscribed.
Accordingly, on November 21, 2014, the Company issued $625 million aggregate original principal amount of 8% senior unsecured notes due 2019 (the "Senior Unsecured Notes") and received proceeds of $625 million which were used for general corporate purposes. The Senior Unsecured Notes are the unsecured and unsubordinated obligations of the Company and rank equal in right of payment with the existing and future unsecured and unsubordinated indebtedness of the Company. The Senior Unsecured Notes bear interest at a rate of 8% per annum and the Company will pay interest semi-annually on June 15 and December 15 of each year. The Senior Unsecured Notes are not guaranteed.
We accounted for the Senior Unsecured Notes in accordance with accounting standards applicable to distinguishing liabilities from equity and debt with conversion and other options. Accordingly, we allocated the proceeds received for the Senior Unsecured Notes based on the relative fair values of the Senior Unsecured Notes and warrants, which resulted in a discount to the notes of approximately $278 million . The fair value of the Senior Unsecured Notes and warrants was estimated based on quoted market prices for the same issues using Level 1 measurements as defined in Note 5. The discount is being amortized over the life of the Senior Unsecured Notes using the effective interest method with an effective interest rate of 11.55% . Approximately $44 million and $35 million of the discount was amortized during 2016 and 2015 , respectively. The remaining discount was approximately $195 million and $238 million at January 28, 2017 and January 30, 2016 , respectively. The carrying value of the Senior Unsecured Notes net of the remaining discount and debt issuance costs was approximately $428 million and $383 million at January 28, 2017 and January 30, 2016 , respectively.
Cash Collateral
We post cash collateral for certain self-insurance programs. We continue to classify the cash collateral posted for self-insurance programs as cash and cash equivalents due to our ability to substitute letters of credit for the cash at any time at our discretion. At January 28, 2017 and January 30, 2016 , $3 million and $2 million of cash, respectively, was posted as collateral for self-insurance programs.
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 majority of 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

83


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

Sears Re has invested its capital to fund its insurance obligations. In November 2003, Sears formed a Real Estate Mortgage Investment Conduit, or 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 "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. In connection with the Craftsman transaction, KCD Securities with par value of $900 million were redeemed in March 2017. 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 both January 28, 2017 and January 30, 2016 , 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 $0.6 billion at both January 28, 2017 and January 30, 2016 .
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 4—FINANCIAL GUARANTEES
Financial Guarantees
We issue various types of guarantees in the normal course of business. We had the following guarantees outstanding at January 28, 2017 :
millions
 
Bank
Issued 
 
SRAC
Issued 
 
Other 
 
Total 
Standby letters of credit
 
$
665

 
$
7

 
$
—

 
$
672

Commercial letters of credit
 
—

 
54

 
—

 
54

Secondary lease obligations
 
—

 
—

 
122

 
122

The secondary lease obligations related to certain store leases that have been assigned and previously divested Sears businesses. The secondary lease obligations represent the maximum potential amount of future payments, including renewal option periods pursuant to the lease agreements. We remain secondarily liable if the primary obligor defaults.
NOTE 5—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.

84


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

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.
Cash and cash equivalents, accounts receivable, merchandise payables, short-term borrowings and accrued liabilities are reflected in the Consolidated Balance Sheets at cost, which approximates fair value due to the short-term nature of these instruments. The fair value of our equity method investment in Sears Canada is disclosed in Note 2. The fair value of our long-term debt is disclosed in Note 3. The fair value of pension and other postretirement benefit plan assets is disclosed in Note 7.
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 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 as discussed in Note 1. With the exception of the indefinite-lived intangible asset impairments and fixed asset impairments described in Note 12 and Note 13, respectively, we had no significant remeasurements of such assets or liabilities to fair value during 2016 and 2015 .
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. Inputs for the goodwill and intangible asset analyses included discounted cash flow analyses, comparable marketplace fair value data, as well as management's assumptions in valuing significant tangible and intangible assets, as described in Note 1, Summary of Significant Accounting Policies.
NOTE 6—INTEREST AND INVESTMENT INCOME (LOSS)
The following table sets forth the components of interest and investment income (loss) as reported in our Consolidated Statements of Operations:
millions
 
2016
 
2015
 
2014
Interest income on cash and cash equivalents
 
$
1

 
$
1

 
$
3

Gain on de-consolidation of Sears Canada
 
—

 
—

 
70

Other investment income (loss)
 
(27
)
 
(63
)
 
59

Total
 
$
(26
)
 
$
(62
)
 
$
132

Interest Income on Cash and Cash Equivalents
We recorded interest income of $1 million , $1 million and $3 million in 2016 , 2015 and 2014 , respectively, primarily related to interest earned on cash and cash equivalents. These cash and cash equivalents consist of highly liquid investments with original maturities of three months or less at the date of purchase. 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. All invested cash amounts are readily available to us.
Gain on de-consolidation of Sears Canada
During 2014, as further described in Note 2, interest and investment income included a gain of $70 million on the de-consolidation of Sears Canada as a result of the rights offering.

85


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

Other Investment Income (Loss)
Other investment income (loss) primarily includes income or loss generated by (and sales of investments in) certain real estate joint ventures and other equity investments in which we do not have a controlling interest. During 2016 and 2015, respectively, the investment loss from equity investments included a loss of $35 million and $59 million related to our equity investment in Sears Canada. Investment income from equity investments was $37 million in 2014 .
During 2014, the investment income from equity investments included 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.
NOTE 7—BENEFIT PLANS
We sponsor a number of pension and postretirement benefit plans. We account for our retirement programs in accordance with employers' accounting for defined benefit pension and other postretirement plans under Generally Accepted Accounting Principles ("GAAP"). GAAP requires that amounts recognized in financial statements be determined using an actuarial basis. As a result, our pension benefit programs are based on a number of statistical and judgmental assumptions that attempt to anticipate future events and are used in calculating the expense and liability related to our plans each year at January 31. These assumptions include, but are not limited to, discount rates used to value liabilities, assumed rates of return on plan assets, actuarial assumptions relating to retirement age and participant turnover, and mortality rates. The actuarial assumptions we use may differ significantly from actual results. These differences may result in a material impact to the amount of net periodic benefit cost to be recorded in our consolidated financial statements in the future.
Assumed mortality rates of plan participants are a critical estimate in measuring the expected payments a participant will receive over their lifetime and the amount of liability and expense we recognize. On October 27, 2014, the Society of Actuaries ("SOA") published updated mortality tables and an updated mortality improvement scale, which both reflect improved longevity. In determining the appropriate mortality assumptions as of January 31, 2015, we considered the SOA’s updated mortality tables, as well as other mortality information available from the Social Security Administration to develop assumptions aligned with our expectation of future improvement rates. The change to the mortality rate assumptions resulted in an increase in the 2014 year-end pension obligation of approximately $300 million .
Expenses for retirement and savings-related benefit plans were as follows:
millions
 
2016
 
2015
 
2014
Retirement/401(k) savings plans
 
$
—

 
$
—

 
$
4

Pension plans
 
289

 
230

 
82

Postretirement benefits
 
28

 
(2
)
 
9

Total
 
$
317

 
$
228

 
$
95

Retirement Savings Plans
Holdings sponsors retirement savings plans for employees meeting service eligibility requirements. The Company does not match employee contributions.
Other Benefit Plans
Certain full-time and part-time employees of Kmart and Sears are eligible to participate in noncontributory defined benefit plans after meeting age and service requirements. Effective January 31, 1996 and January 1, 2006, respectively, the Kmart tax-qualified defined benefit pension plan and the Sears domestic pension plan were frozen and associates no longer earn additional benefits under the plan. The Kmart tax-qualified defined benefit pension plan was merged with and into the Sears domestic pension plan effective as of January 30, 2008. The merged plan was renamed as the Sears Holdings Pension Plan ("SHC Domestic plan") and Holdings accepted sponsorship of the SHC Domestic plan effective as of that date.

86


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

Pension benefits are based on length of service, compensation and, in certain plans, social security or other benefits. Funding for the various plans is determined using various actuarial cost methods.
In addition to providing pension benefits, Sears provides employees and retirees certain medical benefits. These benefits provide access to medical plans. Certain Sears retirees are also provided life insurance benefits. To the extent we share the cost of the retiree medical benefits with retirees, such cost sharing is based on years of service and year of retirement. Sears' postretirement benefit plans are not funded. We have the right to modify or terminate these plans.
Effective December 31, 2014, the Company amended its retiree medical plan to eliminate Company subsidies to the plan. This resulted in a reduction to the postretirement benefit obligation of $48 million .
Pension Plan Amendment
Effective December 1, 2016, the SHC Domestic plan was amended to change its plan year from a calendar year end to a November 30th year end, to spin off a new SHC Pension Plan No. 2 ("Plan No. 2") and to rename the Sears Holdings Pension Plan as Sears Holdings Pension Plan 1 (“Plan No. 1). In conjunction with these amendments, the Company requested that the Internal Revenue Service ("IRS") approve the foregoing change in plan year and to approve a change in actuarial funding method in connection with the spin-off and change in plan year. The Company has received IRS approval of the change in plan year and the request for approval of the change in actuarial funding method remains pending with IRS.
Pension Plans
 
 
2016
 
2015
millions
 
SHC
Domestic 
 
SHC
Domestic 
Change in projected benefit obligation:
 
 
 
 
Beginning balance
 
$
5,265

 
$
5,874

Interest cost
 
227

 
211

Actuarial (gain) loss
 
108

 
(354
)
Benefits paid
 
(435
)
 
(468
)
Other
 
—

 
2

Balance at the measurement date
 
$
5,165

 
$
5,265

 
 
 

 
 

Change in assets at fair value:
 
 

 
 

Beginning balance
 
$
3,189

 
$
3,616

Actual return on plan assets
 
499

 
(258
)
Company contributions
 
314

 
299

Benefits paid
 
(435
)
 
(468
)
Balance at the measurement date
 
$
3,567

 
$
3,189

Net amount recognized
 
$
(1,598
)
 
$
(2,076
)
The accumulated benefit obligation for the SHC Domestic pension plan was $5.2 billion at January 28, 2017 and $5.3 billion at January 30, 2016 .

87


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

Postretirement Benefit Obligations
 
 
2016
 
2015
millions
 
SHC
Domestic
 
SHC
Domestic
Change in accumulated postretirement benefit obligation:
 
 
 
 
Beginning balance
 
$
143

 
$
156

Interest cost
 
5

 
5

Plan participants' contributions
 
—

 
1

Benefits paid
 
(19
)
 
(13
)
Actuarial (gain) loss
 
9

 
(6
)
Other
 
30

 
—

Balance at the measurement date
 
$
168

 
$
143

 
 
 
 
 
Change in plan assets at fair value:
 
 
 
 
Beginning of year balance
 
$
—

 
$
—

Company contributions
 
19

 
12

Plan participants' contributions
 
—

 
1

Benefits paid
 
(19
)
 
(13
)
Balance at the measurement date
 
$
—

 
$
—

Funded status
 
$
(168
)
 
$
(143
)
The current portion of our liability for postretirement benefit obligations is $18 million , which we expect to pay during fiscal 2017.
Weighted-average assumptions used to determine plan obligations were as follows:
 
 
2016
 
2015
 
2014
 
 
SHC
Domestic
 
SHC
Domestic
 
SHC
Domestic
Pension benefits:
 
 
 
 
 
 
Discount Rate
 
4.15%
 
4.50%
 
3.70%
Postretirement benefits:
 
 
 
 
 
 
Discount Rate
 
3.85%
 
4.00%
 
3.30%
The decrease in the discount rate in 2016 resulted in an increase in the 2016 year-end pension obligation of approximately $181 million .







88


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

Net Periodic Benefit Cost
The components of net periodic benefit cost were as follows:
 
 
2016
 
2015
 
2014
millions
 
SHC
Domestic
 
SHC
Domestic
 
SHC
Domestic
 
Sears
Canada 
 
Total  
Pension benefits:
 
 
 
 
 
 
 
 
 
 
Interest cost
 
$
227

 
$
211

 
$
221

 
$
36

 
$
257

Expected return on plan assets
 
(202
)
 
(249
)
 
(246
)
 
(52
)
 
(298
)
Recognized net loss and other
 
264

 
268

 
115

 
8

 
123

Net periodic benefit cost
 
$
289

 
$
230

 
$
90

 
$
(8
)
 
$
82

 
 
 
 
 
 
 
 
 
 
 
Postretirement benefits:
 
 
 
 
 
 
 
 
 
 
Interest cost
 
$
5

 
$
5

 
$
8

 
$
3

 
$
11

Recognized net loss and other
 
23

 
(7
)
 
(1
)
 
(1
)
 
(2
)
Net periodic benefit cost
 
$
28

 
$
(2
)
 
$
7

 
$
2

 
$
9

Weighted-average assumptions used to determine net cost were as follows:
 
 
2016
 
2015
 
2014
 
 
SHC
Domestic
 
SHC
Domestic
 
SHC
Domestic
 
Sears
Canada 
Pension benefits:
 
 
 
 
 
 
 
 
Discount Rate
 
4.50%
 
3.70%
 
4.60%
 
4.20%
Return of plan assets
 
6.50%
 
7.00%
 
7.00%
 
6.50%
Rate of compensation increases
 
N/A
 
N/A
 
N/A
 
3.50%
Postretirement benefits:
 
 
 
 
 
 
 
 
Discount Rate
 
4.00%
 
3.30%
 
4.00%
 
3.90%
Return of plan assets
 
N/A
 
N/A
 
N/A
 
1.00%
Rate of compensation increases
 
N/A
 
N/A
 
N/A
 
3.50%
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. A one-percentage-point change in the assumed discount rate would have the following effects on the pension liability:
millions
 
1 percentage-point
Increase
 
1 percentage-point
Decrease
Effect on interest cost component
 
$
24

 
$
(31
)
Effect on pension benefit obligation
 
$
(487
)
 
$
583

Approximately $199 million of the unrecognized net losses in accumulated other comprehensive income are expected to be amortized as a component of net periodic benefit cost during 2017.
Investment Strategy
The Investment Committee, made up of select members of senior management, has appointed a non-affiliated third party professional to advise the Committee with respect to the assets of Holdings' domestic pension plans. The plans' overall investment objective is to provide a long-term return that, along with Company contributions, is expected to meet future benefit payment requirements. A long-term horizon has been adopted in establishing investment policy such that the likelihood and duration of investment losses are carefully weighed against the long-

89


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

term potential for appreciation of assets. The plans' investment policy requires investments to be diversified across individual securities, industries, market capitalization and valuation characteristics. In addition, various techniques are utilized to monitor, measure and manage risk.
Domestic plan assets were invested in the following classes of securities:  
 
 
Plan Assets at 
 
 
January 28,
2017
 
January 30,
2016
Equity securities
 
35
%
 
34
%
Fixed income and other debt securities
 
63

 
63

Other
 
2

 
3

Total
 
100
%
 
100
%
The domestic plans' target allocation is determined by taking into consideration the amounts and timing of projected liabilities, our funding policies and expected returns on various asset classes. At January 28, 2017 , the plans' target asset allocation was 35% equity and 65% fixed income. To develop the expected long-term rate of return on assets assumption, we considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio.
Future Cash Flows of Benefit Plans
Information regarding expected future cash flows for the SHC Domestic benefit plan is as follows:
millions
 
SHC
Domestic
Pension benefits:
 
 
Employer contributions:
 
 
2017 (expected)
 
$
312

Expected benefit payments:
 
 

2017
 
$
400

2018
 
381

2019
 
382

2020
 
398

2021
 
385

2022-2026
 
1,750

Postretirement benefits:
 
 

Employer contributions:
 
 

2017 (expected)
 
$
18

Expected employer contribution for benefit payments:
 
 

2017
 
$
18

2018
 
18

2019
 
17

2020
 
16

2021
 
15

2022-2026
 
63


90


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

Domestic Pension Plans Funding
Contributions to our pension plans remain a significant use of our cash on an annual basis. While the Company's pension plan is frozen, and thus associates do not currently earn pension benefits, the Company has a legacy pension obligation for past service performed by Kmart and Sears associates. During 2016 , we contributed $314 million to our domestic pension plans. We estimate that the domestic pension contribution will be $312 million in 2017 and approximately $297 million in 2018 . As discussed in Note 1, the Company agreed to grant the PBGC a lien on, and subsequently contribute to the Company's pension plans, the value of the $250 million cash payment payable to the Company on the third anniversary of the Craftsman closing with the value of such payment being fully credited against the Company's minimum pension funding obligations in 2017, 2018 and 2019. The Company also agreed to grant a lien to the PBGC on the 15 -year income stream relating to new Stanley Black & Decker sales of Craftsman products, and agreed to contribute the payments from Stanley Black & Decker under such income stream to the Company's pension plans, with such payments to be credited against the Company's minimum pension funding obligations starting no later than five years from the closing date. The Company also agreed to grant the PBGC a lien on $100 million of real estate assets to secure the Company's minimum pension obligations through the end of 2019. The ultimate amount of pension contributions could be affected by changes in applicable regulations, as well as financial market and investment performance.
Fair Value of Pension Plan Assets
The following table presents our plan assets using the fair value hierarchy at January 28, 2017 and January 30, 2016 :
 
 
Investment Assets at Fair Value at
SHC Domestic
 
January 28, 2017
millions
 
Total 
 
Level 1 
 
Level 2 
 
Level 3 
Equity securities:
 
 

 
 

 
 

 
 

U.S. companies
 
$
980

 
$
978

 
$
—

 
$
2

International companies
 
224

 
224

 
—

 
—

U.S. registered investment companies
 
3

 
3

 
—

 
—

Fixed income securities:
 
 
 
 
 
 
 
 
Corporate bonds and notes
 
1,994

 
—

 
1,994

 
—

Sears Holdings Corporation 2016 Term Loan
 
100

 
—

 
100

 
—

Mortgage-backed and asset-backed
 
3

 
—

 
1

 
2

Other
 
1

 
—

 
1

 
—

Ventures and partnerships
 
1

 
—

 
—

 
1

Total investment assets at fair value
 
$
3,306

 
$
1,205

 
$
2,096

 
$
5

Cash
 
8

 
 
 
 
 
 
Accounts receivable
 
65

 
 
 
 

 
 
Accounts payable
 
(69
)
 
 
 
 

 
 
Investments measured at NAV:
 
 
 
 
 
 
 
 
Cash equivalents and short-term investments
 
257

 
 
 
 
 
 
Net assets available for plan benefits
 
$
3,567

 
 

 
 

 
 
 

91


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

 
 
Investment Assets at Fair Value at
SHC Domestic
 
January 30, 2016
millions
 
Total 
 
Level 1 
 
Level 2 
 
Level 3 
Equity securities:
 
 

 
 

 
 

 
 

U.S. companies
 
$
861

 
$
861

 
$
—

 
$
—

International companies
 
140

 
140

 
—

 
—

U.S. registered investment companies
 
5

 
5

 
—

 
—

Fixed income securities:
 
 
 
 
 
 
 
 
Corporate bonds and notes
 
1,848

 
—

 
1,848

 
—

Mortgage-backed and asset-backed
 
4

 
—

 
1

 
3

Other
 
1

 
—

 
1

 
—

Ventures and partnerships
 
4

 
—

 
—

 
4

Total investment assets at fair value
 
$
2,863

 
$
1,006

 
$
1,850

 
$
7

Cash
 
1

 
 
 
 
 
 
Accounts receivable
 
63

 
 
 
 

 
 
Accounts payable
 
(45
)
 
 
 
 

 
 
Investments measured at NAV:
 
 
 
 
 
 
 
 
Cash equivalents and short-term investments
 
307

 
 
 
 
 
 
Net assets available for plan benefits
 
$
3,189

 
 

 
 

 
 
Equity securities, which include common and preferred stocks, are actively traded and valued at the closing price reported in the active market in which the security is traded and are assigned to Level 1.
Fixed income securities are assigned to Level 2 as they are primarily valued by institutional bid evaluation, which determines the estimated price a dealer would pay for a security and which is developed using proprietary models established by the pricing vendors for this purpose.
Certain mortgage-backed and other asset-backed debt securities are assigned to Level 3 based on the relatively low position in the preferred hierarchy of the pricing source. Valuation of the Plan's non-public limited partnerships requires significant judgment by the general partners due to the absence of quoted market value, inherent lack of liquidity, and the long-term nature of the assets, and may result in fair value measurements that are not indicative of ultimate realizable value. Our Level 3 assets, including activity related to our Level 3 assets, are immaterial.
Common collective trusts are portfolios of underlying investments held by investment managers and are valued at the unit value reported by the investment managers as of the end of each period presented. Collective short-term investment funds are stated at net asset value (NAV) as determined by the investment managers and have not been classified in the fair value hierarchy. Investment managers value the underlying investments of the funds at amortized cost, which approximates fair value.

92


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

NOTE 8—EARNINGS PER SHARE
The following table sets forth the components used to calculate basic and diluted loss per share attributable to Holdings' shareholders. Warrants, restricted stock awards and restricted stock units, totaling 2 thousand shares in 2016 and 5 million shares in each of 2015 and 2014 were not included in the computation of diluted loss per share attributable to Holdings' shareholders because the effect of their inclusion would have been anti-dilutive.
millions, except earnings per share
 
2016
 
2015
 
2014
Basic weighted average shares
 
106.9

 
106.6

 
106.3

Dilutive effect of restricted stock awards, restricted stock units and warrants
 
—

 
—

 
—

Diluted weighted average shares
 
106.9

 
106.6

 
106.3

 
 
 
 
 
 
 
Net loss attributable to Holdings' shareholders
 
$
(2,221
)
 
$
(1,129
)
 
$
(1,682
)
Loss per share attributable to Holdings' shareholders:
 
 

 
 

 
 

Basic
 
$
(20.78
)
 
$
(10.59
)
 
$
(15.82
)
Diluted
 
$
(20.78
)
 
$
(10.59
)
 
$
(15.82
)
NOTE 9—EQUITY
Stock-based Compensation
We account for stock-based compensation using the fair value method in accordance with accounting standards regarding share-based payment transactions. We do not currently have an employee stock option plan and at January 28, 2017 , there are no outstanding options. Compensation expense related to stock-based compensation arrangements was immaterial during 2016 , 2015 and 2014 .
We granted restricted stock awards and restricted stock units to certain associates. These restricted stock awards and restricted stock units typically vest in zero to three years from the date of grant, provided the grantee remains employed by us at the vesting date. The fair value of these awards and units is equal to the market price of our common stock on the date of grant. We do not currently have a broad-based program that provides for restricted stock awards or restricted stock units on an annual basis. Changes in restricted stock awards and restricted stock units for 2016 , 2015 and 2014 were as follows:
 
 
2016
 
2015
 
2014
(Shares in thousands)
 
Shares 
 
Weighted-
Average
Fair Value
on Date
of Grant
 
Shares
 
Weighted-
Average
Fair Value
on Date
of Grant
 
Shares 
 
Weighted-
Average
Fair Value
on Date
of Grant 
Beginning of year balance
 
60

 
$
42.88

 
73

 
$
45.82

 
205

 
$
48.24

Granted
 
384

 
16.87

 
198

 
31.26

 
168

 
38.35

Vested
 
(293
)
 
16.00

 
(200
)
 
32.01

 
(248
)
 
41.17

Forfeited
 
—

 
—

 
(11
)
 
51.39

 
(52
)
 
53.44

End of year balance
 
151

 
$
28.89

 
60

 
$
42.88

 
73

 
$
45.82

millions
 
2016
 
2015
 
2014
Aggregate fair value of shares granted based on weighted average fair value at date of grant
 
$
6

 
$
6

 
$
6

Aggregate fair value of shares vesting during period
 
4

 
6

 
9

Aggregate fair value of shares forfeited during period
 
—

 
—

 
2


93


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

A pproximately 76,000 shares of the 151,000 shares of unvested restricted stock and restricted stock units outstanding at January 28, 2017 are scheduled to vest during 2017 , subject to satisfaction of applicable vesting conditions.
Common Share Repurchase Program
From time to time, we repurchase shares of our common stock under a common share repurchase program authorized by our Board of Directors. The common share repurchase program was initially announced in 2005 with a total authorization since inception of the program of $6.5 billion . During 2016 , 2015 and 2014 , we repurchased no shares of our common stock under our common share repurchase program. At January 28, 2017 , we had approximately $504 million of remaining authorization under our common share repurchase program.
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.
  Accumulated Other Comprehensive Loss
The following table displays the components of accumulated other comprehensive loss:
millions
January 28,
2017
 
January 30,
2016
 
January 31,
2015
Pension and postretirement adjustments (net of tax of $(225), $(296) and $(296), respectively)
$
(1,549
)
 
$
(1,915
)
 
$
(2,028
)
Currency translation adjustments (net of tax of $0 for all periods presented)
(3
)
 
(3
)
 
(2
)
Accumulated other comprehensive loss
$
(1,552
)
 
$
(1,918
)
 
$
(2,030
)
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.
Income Tax Expense Allocated to Each Component of Other Comprehensive Income (Loss)
Income tax expense allocated to each component of other comprehensive income (loss) was as follows:
 
2016
millions
Before
Tax
Amount
 
Tax
Expense
 
Net of
Tax
Amount
Other comprehensive income
 
 
 
 
 
Pension and postretirement adjustments
 
 
 
 
 
Experience gain
$
181

 
$
(71
)
 
$
110

Less: recognized net loss and other included in net periodic benefit cost (1)
256

 
—

 
256

Pension and postretirement adjustments, net of tax
437

 
(71
)
 
366

Dissolution of noncontrolling interest
(7
)
 
—

 
(7
)
Total other comprehensive income
$
430

 
$
(71
)
 
$
359


94


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

 
2015
millions
Before
Tax
Amount
 
Tax Expense
 
Net of
Tax
Amount
Other comprehensive income
 
 
 
 
 
Pension and postretirement adjustments
 
 
 
 
 
Experience loss
$
(148
)
 
$
—

 
$
(148
)
Less: recognized net loss and other included in net periodic benefit cost (1)
261

 
—

 
261

Pension and postretirement adjustments, net of tax
113

 
—

 
113

Currency translation adjustments
(1
)
 
—

 
(1
)
Total other comprehensive income
$
112

 
$
—

 
$
112

 
2014
millions
Before
Tax
Amount
 
Tax Expense
 
Net of
Tax
Amount
Other comprehensive loss
 
 
 
 
 
Pension and postretirement adjustments
 
 
 
 
 
Experience loss
$
(1,163
)
 
$
—

 
$
(1,163
)
Less: recognized net loss and other included in net periodic benefit cost (1)
126

 
(3
)
 
123

Pension and postretirement adjustments, net of tax
(1,037
)
 
(3
)
 
(1,040
)
Deferred loss on derivatives
(2
)
 
—

 
(2
)
Currency translation adjustments
4

 
(1
)
 
3

Sears Canada de-consolidation
(186
)
 
—

 
(186
)
Total other comprehensive loss
$
(1,221
)
 
$
(4
)
 
$
(1,225
)
(1)  
Included in the computation of net periodic benefit expense. See Note 7 to the Consolidated Financial Statements.

Issuance of Warrants to Purchase Common Stock
On November 21, 2014, the Company issued an aggregate of approximately 22 million warrants pursuant to the exercise of rights in the rights offering for $625 million in aggregate principal amount of 8% Senior Unsecured Notes due 2019 and warrants to purchase shares of its common stock. The exercise price and the number of shares of common stock issuable upon exercise of a warrant are both subject to adjustment in certain circumstances. As of October 31, 2015, each warrant, when exercised, will entitle the holder thereof to purchase 1.11 shares of the Company's common stock at an exercise price of $25.686 per share under the terms of the warrant agreement, adjusted from the previously disclosed one share of the Company's common stock at an exercise price of $28.41 per share. The exercise price is payable in cash or by surrendering 8% senior unsecured notes due 2019 with a principal amount at least equal to the exercise price. The warrants may be exercised at any time after November 24, 2014. Unless earlier exercised, the warrants will expire on December 15, 2019.
We accounted for the warrants in accordance with accounting standards applicable to distinguishing liabilities from equity and debt with conversion and other options. Accordingly, the warrants have been classified as additional paid-in capital in the Consolidated Balance Sheets based on the relative fair value of the warrants and the related 8% Senior Unsecured Notes due 2019 at the time of issuance. We monitor changes in circumstances that could cause the classification of the warrants to change. The fair value of the warrants and the related 8% Senior Unsecured Notes due 2019 was estimated based on quoted market prices for the same issues using Level 1 measurements as defined in Note 5.

95


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

NOTE 10—INCOME TAXES
millions
 
2016
 
2015
 
2014
Loss before income taxes:
 
 
 
 
 
 
U.S.
 
$
(2,429
)
 
$
(1,420
)
 
$
(1,560
)
Foreign
 
34

 
35

 
(125
)
Total
 
$
(2,395
)
 
$
(1,385
)
 
$
(1,685
)
 
 
 

 
 

 
 

Income tax expense (benefit):
 
 

 
 

 
 

Current:
 
 

 
 

 
 

Federal
 
$
13

 
$
11

 
$
19

State and local
 
16

 
20

 
19

Foreign
 
18

 
17

 
21

Total current
 
47

 
48

 
59

 
 
 
 
 

 
 

Deferred:
 
 
 
 

 
 

Federal
 
(87
)
 
(239
)
 
70

State and local
 
(134
)
 
(66
)
 
(139
)
Foreign
 
—

 
—

 
135

Total deferred
 
(221
)
 
(305
)
 
66

Total
 
$
(174
)
 
$
(257
)
 
$
125

 
 
2016
 
2015
 
2014
Effective tax rate reconciliation:
 
 
 
 
 
 
Federal income tax rate (benefit rate)
 
(35.0
)%
 
(35.0
)%
 
(35.0
)%
State and local tax (benefit) net of federal tax benefit
 
(3.0
)
 
(1.8
)
 
(4.6
)
Federal and state valuation allowance
 
41.1

 
37.4

 
44.1

Long-lived land and intangibles
 
(0.2
)
 
(16.9
)
 
(0.4
)
Impairment of indefinite-lived trade names
 
(6.0
)
 
(4.9
)
 
—

Loss disallowance
 
—

 
3.5

 
—

Tax credits
 
(0.3
)
 
(0.7
)
 
(0.9
)
Resolution of income tax matters
 
—

 
(0.3
)
 
(2.7
)
Adjust foreign statutory rates
 
0.1

 
(0.3
)
 
0.5

Sears Canada valuation allowance
 
—

 
—

 
9.0

Sears Canada rights offering
 
—

 
—

 
1.4

Tax benefit resulting from additional paid-in capital income allocation
 
—

 
—

 
(3.5
)
Tax benefit resulting from other comprehensive income allocation
 
(2.9
)
 
—

 
—

Canadian repatriation cost on Sears Canada dividend received
 
—

 
—

 
(0.7
)
Other
 
(1.1
)
 
0.4

 
0.2

 
 
(7.3
)%
 
(18.6
)%
 
7.4
 %

96


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

millions
 
January 28,
2017
 
January 30,
2016
Deferred tax assets and liabilities:
 
 
 
 
Deferred tax assets:
 
 
 
 
Federal benefit for state and foreign taxes
 
$
148

 
$
147

Accruals and other liabilities
 
135

 
180

Capital leases
 
25

 
54

Net operating loss carryforwards
 
2,255

 
1,583

Postretirement benefit plans
 
89

 
86

Pension
 
1,155

 
1,241

Property and equipment
 
231

 
226

Deferred income
 
479

 
514

Credit carryforwards
 
875

 
832

Other
 
193

 
164

Total deferred tax assets
 
5,585

 
5,027

Valuation allowance
 
(5,519
)
 
(4,757
)
Net deferred tax assets
 
66

 
270

 
 
 

 
 

Deferred tax liabilities:
 
 

 
 

Trade names/Intangibles
 
573

 
722

Inventory
 
193

 
338

Other
 
43

 
103

Total deferred tax liabilities
 
809

 
1,163

Net deferred tax liability
 
$
(743
)
 
$
(893
)
Income tax expense or benefit from continuing operations is generally determined without regard to other categories of earnings, such as discontinued operations and other comprehensive income ("OCI"). An exception is provided in the authoritative accounting guidance when there is income from categories other than continuing operations and a loss from continuing operations in the current year. In this case, the tax benefit allocated to continuing operations is the amount by which the loss from continuing operations reduces the tax expense recorded with respect to the other categories of earnings, even when a valuation allowance has been established against the deferred tax assets. In instances where a valuation allowance is established against current year losses, income from other sources, including gain from pension and other postretirement benefits recorded as a component of OCI and creation of a deferred tax liability through additional paid in capital, is considered when determining whether sufficient future taxable income exists to realize the deferred tax assets. As a result, for the year ended January 28, 2017, the Company recorded a tax expense of $71 million in OCI related to the net gain on pension and other postretirement benefits, and recorded a corresponding tax benefit of $71 million in continuing operations. For the year ended January 31, 2015, the Company recorded a charge of $59 million through additional paid in capital relating to the book to tax difference for the original issue discount ("OID") relating to the Senior Unsecured Notes, and recorded a valuation allowance reversal of $59 million in continuing operations.
We account for income taxes in accordance with accounting standards for income taxes, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the financial reporting and tax bases of recorded assets and liabilities. Accounting standards also require that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion of or all of the deferred tax asset will not be realized.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year periods ended January 28, 2017, January 30, 2016,

97


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

and January 31, 2015. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future income.
On the basis of this analysis and the significant negative objective evidence, for the year ended January 28, 2012, a valuation allowance of $2.1 billion was added to record only the portion of the deferred tax asset that more likely than not will be realized. Of the total valuation allowance recorded, $317 million was recorded through other comprehensive income. For the year ended January 31, 2015, the valuation allowance increased by $1.1 billion of which $454 million was recorded through other comprehensive income. For the year ended January 30, 2016, the valuation allowance increased by $279 million of which $63 million was recorded through other comprehensive income and paid in capital. For the year ended January 28, 2017, the valuation allowance increased by $762 million of which a decrease of $3 million was recorded through other comprehensive income.
During the quarterly assessment of deferred tax assets for the year ended January 31, 2015, management determined that it was no longer probable that sufficient future taxable income would be available to allow the deferred tax assets of Sears Canada to be realized. A significant piece of negative evidence evaluated was that the recent and anticipated profitability were lower than previously projected. 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. Therefore, 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 $152 million valuation allowance charge during the third quarter of 2014 in continuing operations. This $152 million valuation allowance was de-recognized in the third quarter of 2014 as part of the Sears Canada de-consolidation.
At January 28, 2017 and January 30, 2016 , we had a valuation allowance of $5.5 billion and $4.8 billion , respectively, 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 the 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 in future years for any change in circumstances that causes a change in judgment about the realizability of the deferred tax asset.
At the end of 2016 and 2015, respectively, we had a federal and state net operating loss ("NOL") deferred tax asset of $2.3 billion and $1.6 billion , which will expire predominately between 2019 and 2036. We have credit carryforwards of $875 million , which will expire between 2017 and 2036.
In July, 2016, the Company sold shares of an investment for $106 million . The sale resulted in a U.S. taxable gain of $105 million , but no current income tax is payable due to the utilization of NOL attributes of $37 million with a valuation allowance release of the same amount.
On July 7, 2015, Holdings completed the Seritage transaction. As part of the transaction, Holdings sold 235 properties to Seritage along with Holdings' 50% interests in the JVs, which hold an additional 31 properties (See Note 11 for additional information and defined terms).
In connection with the Seritage transaction and the JV transactions, the Company realized a tax benefit of $229 million on the deferred taxes related to the indefinite-life assets associated with the property sold. In addition, the Company incurred a taxable gain of approximately $2.2 billion , taking into account any related party loss disallowance, on these transactions. There was no federal income tax payable resulting from the taxable gain due to the utilization of NOL tax attributes of approximately $856 million with a valuation allowance release of the same amount. However, there was a minor amount of state and city income tax payable of $4 million after the utilization of state and city tax attributes. As a result of all the effects from the Seritage transaction and the JV transactions in 2015, the impact to the net valuation allowance was a release of approximately $500 million .
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

98


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

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.
In connection with the Sears Canada Rights Offering in 2014, the Company incurred a taxable gain of approximately $107 million on the subscription rights exercised and common shares sold during the fiscal year. There was no income tax payable balance resulting from the taxable gain due to the utilization of NOL attributes of approximately $38 million and a valuation allowance release of the same amount. In addition, a foreign tax credit carryover of $15 million was generated and the valuation allowance increased by the same amount.
Accounting for Uncertainties in Income Taxes
We are present in a large number of taxable jurisdictions, and at any point in time, can have audits underway at various stages of completion in any of these jurisdictions. We evaluate our tax positions and establish liabilities for uncertain tax positions that may be challenged by federal, foreign and/or local authorities and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable. Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law, and closing of statute of limitations. Such adjustments are reflected in the tax provision as appropriate. While we do not expect material changes, it is possible that the amount of unrecognized benefit with respect to our uncertain tax positions will significantly increase or decrease within the next 12 months related to the audits described above. At this time, our estimated range of impact on the balance of unrecognized tax benefits for 2017 is a change of $2 million to $15 million , which would impact the effective tax rate by $1 million to $10 million . A reconciliation of the beginning and ending amount of gross unrecognized tax benefits ("UTB") is as follows:
 
 
Federal, State and Foreign Tax  
millions
 
January 28,
2017
 
January 30,
2016
 
January 31, 2015
Gross UTB Balance at Beginning of Period
 
$
137

 
$
131

 
$
150

Tax positions related to the current period:
 
 

 
 

 
 

Gross increases
 
12

 
14

 
15

Gross decreases
 
—

 
—

 
—

Tax positions related to prior periods:
 
 
 
 

 
 

Gross increases
 
—

 
—

 
—

Gross decreases
 
—

 
—

 
(27
)
Settlements
 
—

 
—

 
(5
)
Lapse of statute of limitations
 
(7
)
 
(8
)
 
(4
)
Exchange rate fluctuations
 
—

 
—

 
2

Gross UTB Balance at End of Period
 
$
142

 
$
137

 
$
131

At the end of 2016, we had gross unrecognized tax benefits of $142 million . Of this amount, $92 million would, if recognized, impact our effective tax rate, with the remaining amount being comprised of unrecognized tax benefits related to indirect tax benefits. During 2016, the gross unrecognized tax benefits increased by $12 million due to current year accruals for existing tax positions. During 2015, the gross unrecognized tax benefits increased by $14 million due to current year accruals for existing tax positions. We expect that our unrecognized tax benefits could decrease up to $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 January 28, 2017 and January 30, 2016 , the total amount of interest and penalties recognized within the related tax liability in our Consolidated Balance Sheet was $61 million ( $40 million net of federal benefit) and $56 million ( $36 million net of federal benefit), respectively. The total amount of net interest expense recognized in our Consolidated Statements of Operations for 2016 , 2015 and 2014 was $3 million , $4 million and $4 million , respectively.

99


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

We file income tax returns in both the United States and various foreign jurisdictions. The U.S. Internal Revenue Service ("IRS") has completed its examination of all federal 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 2003 through 2014, and Kmart is under examination by such jurisdictions for the years 2006 through 2014.
NOTE 11—REAL ESTATE TRANSACTIONS
Gain on Sales of Assets
We recognized $247 million , $743 million and $207 million in gains on sales of assets during 2016 , 2015 and 2014 , respectively. These gains were primarily a result of several large real estate transactions.
On April 1, 2015, April 13, 2015, and April 30, 2015, Holdings and General Growth Properties, Inc. ("GGP"), Simon Property Group, Inc. ("Simon") and The Macerich Company ("Macerich"), respectively, announced that they entered into three distinct real estate joint ventures (collectively, the "JVs"). Holdings contributed 31 properties to the JVs where Holdings currently operates stores (the "JV properties"), in exchange for a 50% interest in the JVs and $429 million in cash ( $426 million , net of closing costs) (the "JV transactions"). The JV transactions valued the JV properties at $858 million in the aggregate.
On July 7, 2015, Holdings completed its rights offering and sale-leaseback transaction (the "Seritage transaction") with Seritage Growth Properties ("Seritage"), a recently formed, independent publicly traded real estate investment trust ("REIT"). As part of the Seritage transaction, Holdings sold 235 properties to Seritage (the "REIT properties") along with Holdings' 50% interest in the JVs. Holdings received aggregate gross proceeds from the Seritage transaction of $2.7 billion ( $2.6 billion , net of closing costs). The Seritage transaction was partially financed through the sale of common shares and limited partnership units, totaling $1.6 billion , including $745 million received from ESL and its affiliates and $297 million received from Fairholme and its affiliates as further described in Note 15. The Seritage transaction valued the REIT properties at $2.3 billion in the aggregate.
In connection with the Seritage transaction and JV transactions, Holdings has entered into agreements with Seritage and the JVs under which Holdings leases 255 of the properties (the "Master Leases"), with the remaining properties being leased by Seritage to third parties. Holdings has closed six stores pursuant to recapture notices from Seritage and 17 stores pursuant to lease terminations.
Holdings recorded rent expense of $96 million and $68 million in 2016 and 2015 , respectively, in cost of sales, buying and occupancy in the Consolidated Statements of Operations. Rent expense consisted of straight-line rent expense offset by amortization of a deferred gain on sale-leaseback, as shown in the table below.
 
2016
 
2015
millions
Kmart
 
Sears Domestic
 
Sears Holdings
 
Kmart
 
Sears Domestic
 
Sears Holdings
Straight-line rent expense
$
32

 
$
152

 
$
184

 
$
20

 
$
100

 
$
120

Amortization of deferred gain on sale-leaseback
(17
)
 
(71
)
 
(88
)
 
(11
)
 
(41
)
 
(52
)
Rent expense
$
15

 
$
81

 
$
96

 
$
9

 
$
59

 
$
68

We accounted for the Seritage transaction and JV transactions in accordance with accounting standards applicable to real estate sales and sale-leaseback transactions. We determined that the Seritage transaction qualifies for sales recognition and sale-leaseback accounting. Because of our initial ownership interest in the JVs and continuing involvement in the properties, we determined that the JV transactions, which occurred in the first quarter of 2015, did not initially qualify for sale-leaseback accounting and, therefore, accounted for the JV transactions as financing transactions and, accordingly, recorded a sale-leaseback financing obligation of $426 million and continued to report the real property assets on our Condensed Consolidated Balance Sheets at May 2, 2015. Upon the sale of our 50% interest in the JVs to Seritage, the continuing involvement through an ownership interest in the buyer-lessor no longer existed, and Holdings determined that the JV transactions then qualified for sales recognition and sale-leaseback accounting, with the exception of four properties for which we still have continuing involvement

100


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

as a result of an obligation to redevelop the stores for a third-party tenant and pay rent on behalf of the third-party tenant until it commences rent payments to the JVs.
With the exception of the four properties that have continuing involvement, in accordance with accounting standards related to sale-leaseback transactions, Holdings recognized any loss on sale immediately, any gain on sale in excess of the present value of minimum lease payments immediately, and any remaining gain was deferred and will be recognized in proportion to the related rent expense over the lease term. Holdings received aggregate net proceeds of $3.1 billion for the Seritage transaction and JV transactions. The carrying amount of property and equipment, net and lease balances related to third-party leases that were assigned to Seritage and the JVs was $1.5 billion at July 7, 2015, of which $1.3 billion was recorded in our Sears Domestic segment and $175 million in our Kmart segment. Accordingly, during the second quarter of 2015, Holdings recognized an immediate net gain of $508 million within gain on sales of assets in the Consolidated Statements of Operations for 2015, comprised of a gain for the amount of gain on sale in excess of the present value of minimum lease payments, offset by a loss for properties where the fair value was less than the carrying value and the write-off of lease balances related to third-party leases that were assigned to Seritage and the JVs, as shown in the table below.
 
2015
millions
Kmart
 
Sears Domestic
 
Sears Holdings
Gain
$
154

 
$
471

 
$
625

Loss
(17
)
 
(100
)
 
(117
)
Immediate Net Gain
$
137

 
$
371

 
$
508

The remaining gain of $894 million was deferred and will be recognized in proportion to the related rent expense, which is a component of cost of sales, buying and occupancy, in the Consolidated Statements of Operations, over the lease term. At January 28, 2017 and January 30, 2016 , respectively, $132 million and $89 million of the deferred gain on sale-leaseback is classified as current within other current liabilities and $563 million and $753 million is classified as long-term as deferred gain on sale-leaseback in the Consolidated Balance Sheets.
During 2016, Holdings recorded gains of $29 million related to the 100% recapture of four stores that closed pursuant to recapture notices from Seritage, of which $16 million related to the gain that had previously been deferred as we no longer have continuing involvement in those properties, and $13 million related to lease termination proceeds. In addition, the Master Leases provide Seritage and the JVs a recapture right with respect to approximately 50% of the space within the stores at the REIT properties and JV properties (subject to certain exceptions), in addition to all of the automotive care centers, and all outparcels or outlots, as well as certain portions of parking areas and common areas, except as set forth in the Master Leases, for no additional consideration. As space is recaptured pursuant to the recapture right, Holdings' obligation to pay rent is reduced proportionately. Accordingly, Holdings recognizes gains equal to the unamortized portion of the gain that had previously been deferred which exceeds the present value of minimum lease payments, as reduced due to recapture activity. During 2016, Holdings recorded gains as a result of recapture activity of $16 million that had previously been deferred. The Master Leases also provide Holdings certain rights to terminate the Master Leases with respect to REIT properties or JV properties that cease to be profitable for operation by Holdings. In order to terminate the Master Lease with respect to a certain property, Holdings must make a payment to Seritage or the JV of an amount equal to one year of rent (together with taxes and other expenses) with respect to such property. Holdings recorded gains related to stores that closed pursuant to lease terminations of $27 million that had previously been deferred. Holdings also recorded expenses of $21 million for termination payments to Seritage, of which $11 million is reported as an amount payable to Seritage at January 28, 2017 .
Holdings accounted for the four properties that have continuing involvement as a financing transaction in accordance with accounting standards related to sale-leaseback transactions. Accordingly, Holdings recorded a sale-leaseback financing obligation of $164 million , which is classified as sale-leaseback financing obligation on the Consolidated Balance Sheets at both January 28, 2017 and January 30, 2016 . The decrease in the sale-leaseback financing obligation from $426 million at May 2, 2015 to $164 million at January 30, 2016 represents a noncash change. We continued to report the real property assets of $62 million and $56 million at January 28, 2017 and

101


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

January 30, 2016 , respectively, on our Consolidated Balance Sheets, which are included in our Sears Domestic segment.
The obligation for future minimum lease payments at January 28, 2017 for the four properties that have continuing involvement is $69 million over the remaining lease term, and is $8 million for each of 2017, 2018, 2019, 2020 and 2021, and $29 million thereafter. This obligation for future minimum lease payments includes $29 million of rent on behalf of a third-party tenant over the remaining lease term. We will no longer have the obligation to pay rent on behalf of the third-party tenant when it commences rent payments to the JVs, which we expect to occur within one year.
On January 27, 2017, Holdings and CBL and Associates Properties, Inc. ("CBL") completed a sale-leaseback transaction pursuant to which Holdings sold five Sears Full-line stores and two Sears Auto Centers located at CBL malls for net proceeds of $71 million (the "CBL transaction"). In connection with the CBL transaction, Holdings entered into 10 -year leaseback agreements. The agreements provide both CBL and Holdings the right to terminate each lease, and provide Holdings the option to relocate its operations at each mall to a location of up to 15,000 square feet. The agreement also contains an earn-out provision pursuant to which Holdings would receive a maximum amount of $14.5 million additional consideration if CBL redevelops any of the properties within a specified time period and achieves more than a specified return on investment. We accounted for the CBL transaction as a financing transaction in accordance with accounting standards applicable to sale-leaseback transactions as a result of continuing involvement through the earn-out provision. Accordingly, Holdings recorded a sale-leaseback financing obligation of $71 million , which is classified as sale-leaseback financing obligation on the Consolidated Balance Sheet at January 28, 2017. We continued to report real property assets of $34 million at January 28, 2017 on our Consolidated Balance Sheet, which are included in our Sears Domestic segment. The obligation for future minimum lease payments at January 28, 2017, is $44 million over the 10 -year lease term, and is $5 million for each of 2017, 2018, 2019, 2020 and 2021, and $19 million thereafter.
In addition to the Seritage transaction and JV transactions, we recorded gains on the sales of assets for other significant items described as follows. During 2016, we recorded gains on the sales of assets of $15 million recognized on the sale of two Sears Full-line stores for which we received $27 million of cash proceeds, $12 million recognized on the sale of one distribution center for which we received $23 million of cash proceeds and $10 million on the sale of one Kmart store for which we received $10 million of cash proceeds.
During 2015, we recorded gains on the sales of assets of $83 million recognized on the sale of one Sears Full-line store for which we received $102 million of cash proceeds, $90 million of which was received during the third quarter of 2014. As the leaseback ended and the remaining cash proceeds of $12 million were received during 2015, we recognized the gain that had previously been deferred. We also recorded gains on the sales of assets of $86 million recognized on the sale of two Sears Full-line stores for which we received $96 million of cash proceeds, and $10 million recognized on the surrender and early termination of one Kmart store lease.
During 2014, we recorded gains on the sales of assets of $64 million recognized on the sale of three Sears Full-line stores for which we received $106 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.
In connection with the other transactions, we surrendered substantially all of our rights and obligations under our preexisting lease agreements and agreed to surrender each of the premises in periods ranging up to 23 months from the date of closing to facilitate an orderly wind down of operations, and, therefore, immediate gain recognition is appropriate on these transactions.

102


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

NOTE 12—GOODWILL AND INTANGIBLE ASSETS

The following summarizes our intangible assets at January 28, 2017 and January 30, 2016 , respectively, the amortization expenses recorded for the years then ended, as well as our estimated amortization expense for the next five years and thereafter.  
 
 
January 28, 2017
 
January 30, 2016
millions
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Amortizing intangible assets:
 
 
 
 
 
 
 
 
Favorable lease rights
 
$
143

 
$
52

 
$
155

 
$
57

Contractual arrangements and customer lists
 
—

 
—

 
96

 
96

 
 
143

 
52

 
251

 
153

Non-amortizing intangible assets:
 
 

 
 

 
 

 
 

Trade names
 
1,430

 
—

 
1,811

 
—

Total
 
$
1,573

 
$
52

 
$
2,062

 
$
153

Annual Amortization Expense 
 
2016
$
5

2015
7

2014
18

Estimated Amortization 
 
2017
$
4

2018
4

2019
4

2020
4

2021
3

Thereafter
72

Goodwill is the excess of the purchase price over the fair value of the net assets acquired in business combinations accounted for under the purchase method. Goodwill is recorded at Sears Domestic and had a balance of $269 million at both January 28, 2017 and January 30, 2016 .
As described in Summary of Significant Accounting Policies in Note 1, goodwill and indefinite-lived intangible assets are not amortized but require testing for potential impairment, at a minimum on an annual basis, or when indications of potential impairment exist. As a result of our annual testing of indefinite-lived intangible assets, we recorded impairment related to the Sears trade name of $381 million and $180 million in 2016 and 2015, respectively, which reduced the carrying value to $431 million at January 28, 2017 and $812 million at January 30, 2016 . The impairment is recorded at Sears Domestic and included within impairment charges on our Consolidated Statements of Operations. We did not record any goodwill or indefinite-lived intangible asset impairment in 2014.
NOTE 13—STORE CLOSING CHARGES, SEVERANCE COSTS AND IMPAIRMENTS
Store Closings and Severance
During 2016 , 2015 and 2014 , respectively, we closed 206 , 38 and 173 stores in our Kmart segment and 37 , 12 and 61 stores in our Sears Domestic segment that we previously announced would close. We made the decision to close 271 , 78 and 118 stores in our Kmart segment and 76 , 14 and 47 stores in our Sears Domestic segment during 2016 , 2015 and 2014 , respectively; and we also made the decision to close 6 domestic supply chain distribution

103


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

centers in our Kmart segment during 2014 and 1 domestic supply chain distribution center in our Sears Domestic segment during both 2016 and 2014.
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 estimated sublease income.
We expect to record additional charges of approximately $44 million during 2017 related to stores and distribution centers we had previously made the decision to close.
Store closing costs and severance recorded for 2016 , 2015 and 2014 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
$
187

 
$
28

 
$
71

 
$
32

 
$
13

 
$
331

Sears Domestic
39

 
13

 
5

 
9

 
7

 
73

Total 2016 costs
$
226

 
$
41

 
$
76

 
$
41

 
$
20

 
$
404

 
 
 
 
 
 
 
 
 
 
 
 
Kmart
$
39

 
$
16

 
$
21

 
$
10

 
$
1

 
$
87

Sears Domestic
5

 
21

 
(15
)
 
1

 
2

 
14

Total 2015 costs
$
44

 
$
37

 
$
6

 
$
11

 
$
3

 
$
101

 
 
 
 
 
 
 
 
 
 
 
 
Kmart
$
54

 
$
32

 
$
42

 
$
14

 
$
23

 
$
165

Sears Domestic
14

 
14

 
21

 
6

 
14

 
69

Sears Canada
1

 
10

 
5

 
—

 
—

 
16

Total 2014 costs
$
69

 
$
56

 
$
68

 
$
20

 
$
37

 
$
250

_____________
(1)  
Recorded within cost of sales, buying and occupancy in the Consolidated Statements of Operations.
(2)  
Recorded within selling and administrative in the 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)  
2016 and 2015 costs are recorded within depreciation and amortization on the Consolidated Statements of Operations. 2014 costs include $29 million recorded within impairment charges and $8 million recorded within depreciation and amortization on the Consolidated Statements of Operations.
 
Store closing cost accruals of $216 million , $180 million and $207 million at January 28, 2017 , January 30, 2016 and January 31, 2015 , respectively, were as shown in the table below. Store closing accruals included $122 million , $81 million and $99 million within other current liabilities and $94 million , $99 million and $108 million within other long-term liabilities in the Consolidated Balance Sheets at January 28, 2017 , January 30, 2016 and January 31, 2015 , respectively.
millions
Severance
Costs
 
Lease
Termination
Costs
 
Other
Charges
 
Total
Balance at January 31, 2015
$
43

 
$
156

 
$
8

 
$
207

Store closing costs
37

 
8

 
11

 
56

Payments/utilizations/other
(22
)
 
(50
)
 
(11
)
 
(83
)
Balance at January 30, 2016
58

 
114

 
8

 
180

Store closing costs
41

 
85

 
41

 
167

Payments/utilizations/other
(45
)
 
(55
)
 
(31
)
 
(131
)
Balance at January 28, 2017
$
54

 
$
144

 
$
18

 
$
216


104


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

Impairment of Long-Lived Assets
As described in the Summary of Significant Accounting Policies in Note 1, we performed impairment tests of certain of our long-lived assets during 2016 , 2015 and 2014 (principally the value of land, buildings and other fixed assets associated with our stores). As a result of this impairment testing, the Company recorded impairment charges as shown in the table below.
millions
2016
 
2015
 
2014
Kmart
$
22

 
$
14

 
$
10

Sears Domestic
24

 
80

 
9

Sears Canada
—

 
—

 
15

Sears Holdings
$
46

 
$
94

 
$
34

NOTE 14—LEASES
We lease certain stores, office facilities, warehouses, computers and transportation equipment.
Operating and capital lease obligations are based upon contractual minimum rents and, for certain stores, amounts in excess of these minimum rents are payable based upon specified percentages of sales. Contingent rent is accrued over the lease term, provided that the achievement of the specified sales level that triggers the contingent rental is probable. Certain leases include renewal or purchase options.
Rental expense for operating leases was as follows:  
millions
 
2016
 
2015
 
2014
Minimum rentals
 
$
739

 
$
713

 
$
710

Percentage rentals
 
7

 
8

 
12

Less-Sublease rentals
 
(51
)
 
(46
)
 
(45
)
Less-Amortization of deferred gain on sale-leaseback
 
(88
)
 
(52
)
 
—

Total
 
$
607

 
$
623

 
$
677


105


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

Minimum lease obligations, excluding taxes, insurance and other expenses payable directly by us, for leases in effect at January 28, 2017 , were as follows:  
 
 
Minimum Lease Commitments 
millions
 
Capital 
 
Operating 
2017
 
$
52

 
$
650

2018
 
38

 
548

2019
 
24

 
449

2020
 
16

 
379

2021
 
6

 
318

Later years
 
62

 
1,331

Total minimum lease payments
 
198

 
3,675

Less-minimum sublease income
 
 

 
(126
)
Net minimum lease payments
 
 

 
$
3,549

Less:
 
 

 
 

Estimated executory costs
 
(6
)
 
 

Interest at a weighted average rate of 5.3%
 
(47
)
 
 

Capital lease obligations
 
145

 
 

Less current portion of capital lease obligations
 
(42
)
 
 

Long-term capital lease obligations
 
$
103

 
 

NOTE 15—RELATED PARTY DISCLOSURE
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. ESL owned approximately 48% of our outstanding common stock at January 28, 2017 (excluding shares of common stock that ESL may acquire within 60 days upon the exercise of warrants to purchase shares of our common stock).
On February 25, 2016, Holdings announced the election of Bruce R. Berkowitz to membership on our Board of Directors. Mr. Berkowitz serves as the Chief Investment Officer of Fairholme Capital Management, LLC, an investment adviser registered with the U.S. Securities and Exchange Commission ("SEC"), and is the President and a Director of Fairholme Funds, Inc., a SEC-registered investment company providing investment management services to three mutual funds (together with Fairholme Capital Management, LLC and other affiliates, "Fairholme"). Fairholme owned approximately 26% of our outstanding common stock at January 28, 2017 (excluding shares of common stock that Fairholme may acquire within 60 days upon the exercise of warrants to purchase shares of our common stock).
Unsecured Commercial Paper
During 2016 and 2015 , ESL and its affiliates held unsecured commercial paper issued by SRAC, an indirect wholly-owned subsidiary of Holdings. For the commercial paper outstanding to ESL, the weighted average of each maturity, annual interest rate, and principal amount outstanding for this commercial paper was 21 days, 7.87% and $100 million and 32 days, 4.55% and $8.8 million , respectively, in 2016 and 2015 . The largest aggregate amount of principal outstanding to ESL at any time since the beginning of 2016 was $245 million and the aggregate amount of interest paid by SRAC to ESL during 2016 was $8 million .

106


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

During 2016 and 2015 , Fairholme and its affiliates held unsecured commercial paper issued by SRAC. For the commercial paper outstanding to Fairholme, the weighted average of each maturity, annual interest rate, and principal amount outstanding for this commercial paper was 63 days, 7.42% and $1.3 million and 7 days, 3.70% and $4.5 million , respectively, in 2016 and 2015 . The largest aggregate amount of principal outstanding to Fairholme at any time since the beginning of 2016 was $5 million and the aggregate amount of interest paid by SRAC to Fairholme during 2016 was $109 thousand .
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 the Short-Term Borrowers, entities wholly-owned and controlled, directly or indirectly by the Company, entered into the $400 million Short-Term Loan with the Short-Term Lender, entities affiliated with ESL and Fairholme. The Company repaid the Short-Term Loan during 2015, resulting in no balance outstanding at January 28, 2017 or January 30, 2016. See Note 3 for additional information regarding the Short-Term Loan.
LC Facility
On December 28, 2016, the Company, through the Borrowers, entered into the LC Facility Agreement providing for the $500 million LC Facility with the Lenders, entities affiliated with ESL. On December 28, 2016, $200 million of commitments were made available under the LC Facility, and, subject to approval of the Lenders, up to an additional $300 million in commitments may be obtained by the Company from the Lenders (or other lenders) prior to December 28, 2017, the maturity date of the LC Facility. At January 28, 2017 , we had $200 million of letters of credit outstanding under the LC Facility, and the Lenders maintain cash collateral on deposit with the Issuing Bank of $204 million . See Note 3 for additional information regarding the LC Facility.
2017 Secured Loan Facility
On January 3, 2017, the Company, through the 2017 Secured Loan Borrowers, obtained a $500 million real estate loan facility from the Lenders, entities affiliated with ESL. At January 28, 2017 , JPP LLC and JPP II, LLC, entities affiliated with ESL, held $500 million of principal amount of the 2017 Secured Loan Facility. See Note 3 for additional information regarding the 2017 Secured Loan Facility.
2016 Secured Loan Facility
In April 2016, the Company, through the 2016 Secured Loan Borrowers, obtained a $500 million real estate loan facility from the 2016 Secured Loan Lenders, some of which are entities affiliated with ESL. At January 28, 2017 , entities affiliated with ESL held $216 million of principal amount of the 2016 Secured Loan Facility. See Note 3 for additional information regarding the 2016 Secured Loan Facility.
2016 Term Loan
In April 2016, the Company, through the ABL Borrowers, obtained a $750 million senior secured term loan under the Amended Domestic Credit Agreement with a syndicate of lenders, including $146 million (net of original issue discount) from JPP, LLC and JPP II, LLC, entities affiliated with ESL, and $100 million from the Company's domestic pension plan. At January 28, 2017 , JPP LLC and JPP II, LLC, and the Company's domestic pension plans held $150 million and $100 million , respectively, of principal amount of the 2016 Term Loan. See Note 3 for additional information regarding the 2016 Term Loan.
Second Lien Term Loan
In September 2016, the Company, through the ABL Borrowers, obtained a $300 million Second Lien Term Loan from the Lenders, entities affiliated with ESL. At January 28, 2017 , JPP LLC and JPP II, LLC, entities

107


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

affiliated with ESL, held $300 million of principal amount of the Second Lien Term Loan. See Note 3 for additional information regarding the Second Lien Term Loan.
Senior Secured Notes
At both January 28, 2017 and January 30, 2016 , Mr. Lampert and ESL held an aggregate of approximately $11 million of principal amount of the Company's Senior Secured Notes. Mr. Lampert and ESL tendered approximately $165 million of the Company's Senior Secured Notes in the Offer, which is further discussed in Note 3.
At January 28, 2017 and January 30, 2016 , Fairholme held an aggregate of approximately $46 million and $22 million of principal amount of the Company's Senior Secured Notes, respectively. Fairholme tendered approximately $207 million of the Company's Senior Secured Notes in the Tender Offer, which is further discussed in Note 3.
Subsidiary Notes
At both January 28, 2017 and January 30, 2016 , Mr. Lampert and ESL held an aggregate of $3 million of principal amount of unsecured notes issued by SRAC (the "Subsidiary Notes").
At both January 28, 2017 and January 30, 2016 , Fairholme held an aggregate of $14 million of principal amount of the Subsidiary Notes.
Senior Unsecured Notes and Warrants
At January 28, 2017 and January 30, 2016 , respectively, Mr. Lampert and ESL held an aggregate of approximately $188 million and $193 million of principal amount of the Company's Senior Unsecured Notes, and 10,033,472 warrants to purchase shares of Holdings' common stock at both January 28, 2017 and January 30, 2016 .
At January 28, 2017 and January 30, 2016 , respectively, Fairholme held an aggregate of approximately $357 million and $360 million of principal amount of the Company's Senior Unsecured Notes, and 6,713,725 and 6,839,379 warrants to purchase shares of Holdings' common stock.
Sears Canada
ESL owns approximately 45% of the outstanding common shares of Sears Canada (based on publicly available information as of January 4, 2016 ). Fairholme owns approximately 20% of the outstanding common shares of Sears Canada (based on publicly available information as of November 29, 2016 ).
Lands' End
ESL owns approximately 59% of the outstanding common stock of Lands' End (based on publicly available information as of January 5, 2017 ). Fairholme owns approximately 11% of the outstanding common shares of Lands' End (based on publicly available information as of October 11, 2016 ). 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 agreed to provide, on an interim, transitional basis, various services, including but 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. The majority of the services under the transition services agreement with Lands' End have expired or been terminated.
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 both January 28, 2017 and January 30, 2016 , Holdings reported a net amount payable to Lands' End of $1 million in other current liabilities in the 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 $65 million , $69 million and $63 million , respectively, during 2016 , 2015 and 2014 . The amounts Lands' End earned related to call center services and commissions were $10 million , $10 million and $9 million , respectively, during 2016 , 2015 and 2014 .

108


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

SHO
ESL owns approximately 57% of the outstanding common stock of SHO (based on publicly available information as of December 1, 2016 ). 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.
These agreements were made in the context of a parent-subsidiary relationship and were negotiated in the overall context of the separation. 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 at cost. 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 amounts 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, 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 January 28, 2017 and January 30, 2016 , Holdings reported a net amount receivable from SHO of $81 million and $51 million , respectively, within accounts receivable in the Consolidated Balance Sheets. Amounts related to the sale of inventory and related services, royalties, and corporate shared services were $1.2 billion , $1.5 billion and $1.6 billion , respectively, during 2016 , 2015 and 2014 . The net amounts SHO earned related to commissions were $82 million , $91 million and $99 million , respectively, during 2016 , 2015 and 2014 . Additionally, the Company has guaranteed lease obligations for certain SHO store leases that were assigned as a result of the separation. See Note 4 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 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.
Seritage
ESL owns approximately 7.9% of the total voting power of Seritage, and approximately 43.5% of the limited partnership units of Seritage Growth Properties, L.P. (the “Operating Partnership”), the entity that now owns the properties sold by the Company in the Seritage transaction and through which Seritage conducts its operations (based on publicly available information as of August 14, 2015 ). Mr. Lampert is also currently the Chairman of the Board of Trustees of Seritage. Fairholme owns approximately 14% of the outstanding Class A common shares of Seritage and 100% of the outstanding Class C non-voting common shares of Seritage (based on publicly available information as of February 16, 2016 ).
In connection with the Seritage transaction as described in Note 11, Holdings entered into a Master Lease agreement with Seritage. The initial amount of aggregate annual base rent under the Master Lease is $134 million for the REIT properties, with increases of 2% per year beginning in the second lease year. At January 30, 2016 , Holdings reported prepaid rent of $9 million in prepaid expenses and other current assets in the Consolidated Balance Sheet. Holdings recorded rent expense of $83 million and $49 million in cost of sales, buying and occupancy for 2016 and 2015 , respectively. Rent expense consists of straight-line rent expense of $142 million and $84 million , offset by amortization of a deferred gain recognized pursuant to the sale and leaseback of properties from Seritage of $59 million and $35 million for 2016 and 2015 , respectively.

109


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

In addition to base rent under the Master Lease, Holdings pays monthly installment expenses for property taxes and insurance at all REIT properties where Holdings is a tenant and installment expenses for common area maintenance, utilities and other operating expenses at REIT properties that are multi-tenant locations where Holdings and other third parties are tenants. The initial amount of aggregate installment expenses under the Master Lease was $70 million , based on estimated installment expenses, and currently is $52 million as a result of reconciling actual installment expenses and recapture activity. Holdings paid $64 million and $40 million for 2016 and 2015 , respectively, recorded in cost of sales, buying and occupancy.
At January 28, 2017 and January 30, 2016 , Holdings reported an amount receivable from Seritage of $14 million and $7 million , respectively, in accounts receivable in the Consolidated Balance Sheets. Holdings reported an amount payable to Seritage of $11 million in other current liabilities in the Consolidated Balance Sheets at January 28, 2017 .
Holdings and Seritage entered into a transition services agreement pursuant to which Holdings will provide certain limited services to Seritage for up to 18 months . The services include specified facilities management, accounting, treasury, tax, information technology, risk management, human resources, and related support services. Under the terms of the transition services agreement, the scope and level of the facilities management services will be substantially consistent with the scope and level of the services provided in connection with the operation of the transferred properties held by Holdings prior to the closing of the Seritage transaction. The majority of the services under the transition services agreement with Seritage have expired or have been terminated. Amounts due from Seritage are generally settled on a net basis. Holdings invoices Seritage on at least a monthly basis. Revenues recognized related to the transition services agreement were not material for 2016 or 2015.
NOTE 16—SUPPLEMENTAL FINANCIAL INFORMATION
Other long-term liabilities at January 28, 2017 and  January 30, 2016 consisted of the following:  
millions
January 28,
2017
 
January 30,
2016
Unearned revenues
$
639

 
$
694

Self-insurance reserves
535

 
567

Other
467

 
470

Total
$
1,641

 
$
1,731


110


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

NOTE 17—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 2, 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.
 
 
2016
millions
 
Kmart
 
Sears Domestic
 
Sears Holdings
Merchandise sales and services:
 
 
 
 
 
 
Hardlines
 
$
2,445

 
$
7,126

 
$
9,571

Apparel and Soft Home
 
3,044

 
2,522

 
5,566

Food and Drug
 
3,088

 
11

 
3,099

Service
 
9

 
2,101

 
2,110

Other
 
64

 
1,728

 
1,792

Total merchandise sales and services
 
8,650

 
13,488

 
22,138

Costs and expenses:
 
 
 
 
 
 
Cost of sales, buying and occupancy
 
7,093

 
10,359

 
17,452

Selling and administrative
 
2,175

 
3,934

 
6,109

Depreciation and amortization
 
71

 
304

 
375

Impairment charges
 
22

 
405

 
427

Gain on sales of assets
 
(181
)
 
(66
)
 
(247
)
Total costs and expenses
 
9,180

 
14,936

 
24,116

Operating loss
 
$
(530
)
 
$
(1,448
)
 
$
(1,978
)
Total assets
 
$
2,134

 
$
7,228

 
$
9,362

Capital expenditures
 
$
43

 
$
99

 
$
142


111


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

 
 
2015
millions
 
Kmart
 
Sears Domestic
 
Sears Holdings
Merchandise sales and services:
 
 
 
 
 
 
Hardlines
 
$
2,936

 
$
7,915

 
$
10,851

Apparel and Soft Home
 
3,434

 
2,907

 
6,341

Food and Drug
 
3,735

 
9

 
3,744

Service
 
13

 
2,127

 
2,140

Other
 
70

 
2,000

 
2,070

Total merchandise sales and services
 
10,188

 
14,958

 
25,146

Costs and expenses:
 
 
 
 
 
 
Cost of sales, buying and occupancy
 
8,042

 
11,294

 
19,336

Selling and administrative
 
2,537

 
4,320

 
6,857

Depreciation and amortization
 
72

 
350

 
422

Impairment charges
 
14

 
260

 
274

Gain on sales of assets
 
(185
)
 
(558
)
 
(743
)
Total costs and expenses
 
10,480

 
15,666

 
26,146

Operating loss
 
$
(292
)
 
$
(708
)
 
$
(1,000
)
Total assets
 
$
3,059

 
$
8,278

 
$
11,337

Capital expenditures
 
$
42

 
$
169

 
$
211

 
 
2014
millions
 
Kmart
 
Sears Domestic
 
Sears Canada
 
Sears Holdings
Merchandise sales and services:
 
 
 
 
 
 
 
 
Hardlines
 
$
3,605

 
$
8,903

 
$
1,100

 
$
13,608

Apparel and Soft Home
 
4,049

 
3,673

 
880

 
8,602

Food and Drug
 
4,326

 
12

 
—

 
4,338

Service
 
17

 
2,318

 
77

 
2,412

Other
 
77

 
2,130

 
31

 
2,238

Total merchandise sales and services
 
12,074

 
17,036

 
2,088

 
31,198

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales, buying and occupancy
 
9,513

 
12,950

 
1,586

 
24,049

Selling and administrative
 
2,962

 
4,655

 
603

 
8,220

Depreciation and amortization
 
95

 
437

 
49

 
581

Impairment charges
 
29

 
19

 
15

 
63

(Gain) loss on sales of assets
 
(103
)
 
(105
)
 
1

 
(207
)
Total costs and expenses
 
12,496

 
17,956

 
2,254

 
32,706

Operating loss
 
$
(422
)
 
$
(920
)
 
$
(166
)
 
$
(1,508
)
Total assets
 
$
3,142

 
$
10,043

 
$
—

 
$
13,185

Capital expenditures
 
$
45

 
$
193

 
$
32

 
$
270


112


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

NOTE 18—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, the failure to pay overtime, and/or the failure to pay for missed meal and rest periods, and other payroll violations. 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 pricing 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. 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 these lawsuits.
In May and June of 2015, four shareholder lawsuits were filed in the Delaware Chancery Court, which have since been consolidated into a single action. A consolidated complaint then was filed, naming Holdings, the members of our Board of Directors, ESL Investments, Inc., Seritage, our CEO, and Fairholme, alleging, among other things, breaches of fiduciary duties in connection with the Seritage transaction. Among other forms of relief, the plaintiffs are seeking damages in unspecified amounts. As the plaintiffs are suing derivatively, Holdings is only a nominal defendant in the complaint. The Company believes that the Seritage transaction has provided substantial benefits to Holdings and its shareholders and believes further that the plaintiffs' claims are legally without merit. In October 2016, a settlement in principle was reached with plaintiffs, subject to court approval. Given Holdings was only a nominal defendant in the complaint, Holdings will not be obligated to fund any portion of the settlement, and may receive some portion of any settlement achieved.
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.

113


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

NOTE 19—QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
 
2016
millions, except per share data
 
First
Quarter 
 
Second
Quarter 
 
Third
Quarter 
 
Fourth
Quarter
Revenues
 
$
5,394

 
$
5,663

 
$
5,029

 
$
6,052

Cost of sales, buying and occupancy
 
4,217

 
4,403

 
4,067

 
4,765

Selling and administrative
 
1,503

 
1,484

 
1,543

 
1,579

Net loss attributable to Holdings' shareholders
 
(471
)
 
(395
)
 
(748
)
 
(607
)
Basic net loss per share attributable to Holdings' shareholders
 
(4.41
)
 
(3.70
)
 
(6.99
)
 
(5.67
)
Diluted net loss per share attributable to Holdings' shareholders
 
(4.41
)
 
(3.70
)
 
(6.99
)
 
(5.67
)
 
 
2015
millions, except per share data
 
First
Quarter 
 
Second
Quarter 
 
Third
Quarter 
 
Fourth
Quarter
Revenues
 
$
5,882

 
$
6,211

 
$
5,750

 
$
7,303

Cost of sales, buying and occupancy
 
4,364

 
4,776

 
4,488

 
5,708

Selling and administrative
 
1,681

 
1,694

 
1,630

 
1,852

Net income (loss) attributable to Holdings' shareholders
 
(303
)
 
208

 
(454
)
 
(580
)
Basic net income (loss) per share attributable to Holdings' shareholders
 
(2.85
)
 
1.95

 
(4.26
)
 
(5.44
)
Diluted net income (loss) per share attributable to Holdings' shareholders
 
(2.85
)
 
1.84

 
(4.26
)
 
(5.44
)
Per share amounts for each quarter are required to be computed independently and may not equal the amount computed for the total year. In the fourth quarter of 2016 and 2015 , we recorded impairment related to the Sears trade name of $381 million and $180 million , respectively. Refer to Note 12 for more information related to our impairment charges. In the second quarter of 2015, we recorded an immediate net gain of $508 million related to the Seritage and JVs transactions. Refer to Note 11 for more information related to our real estate transactions.
NOTE 20—GUARANTOR/NON-GUARANTOR SUBSIDIARY FINANCIAL INFORMATION
At January 28, 2017 , the principal amount outstanding of the Company’s 6   5/8% senior secured notes due 2018 was $303 million . These notes were issued in 2010 by Sears Holdings Corporation ("Parent"). The Senior Secured Notes are guaranteed by certain of our 100% owned domestic subsidiaries that own the collateral for the Senior Secured Notes, as well as by Sears Holdings Management Corporation and SRAC (the "guarantor subsidiaries"). The following condensed consolidated financial information presents the Condensed Consolidating Balance Sheets at January 28, 2017 and January 30, 2016 , and the Condensed Consolidating Statements of Operations, the Consolidating Statements of Comprehensive Income (Loss) and the Condensed Consolidating Statements of Cash flows for 2016 , 2015 and 2014 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. Merchandise sales and services included revenues of approximately $183 million from the Lands' End domestic business in 2014 . Net loss attributable to Holdings' shareholders included net income of approximately $2 million from the Lands' End domestic business in 2014 . 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.

114


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

On October 16, 2014, we de-consolidated Sears Canada pursuant to a rights offering transaction. Merchandise sales and services included revenues of approximately $2.1 billion in 2014 . Net loss attributable to Holdings' shareholders included net loss of approximately $137 million in 2014. 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.


115


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

  Condensed Consolidating Balance Sheet
January 28, 2017
 
millions
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Current assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
—

 
$
260

 
$
26

 
$
—

 
$
286

Intercompany receivables
 
—

 
—

 
27,415

 
(27,415
)
 
—

Accounts receivable
 
—

 
441

 
25

 


 
466

Merchandise inventories
 
—

 
3,959

 
—

 
—

 
3,959

Prepaid expenses and other current assets
 
23

 
692

 
856

 
(1,286
)
 
285

Total current assets
 
23

 
5,352

 
28,322

 
(28,701
)
 
4,996

Total property and equipment, net
 
—

 
1,504

 
736

 
—

 
2,240

Goodwill and intangible assets
 
—

 
360

 
1,528

 
(98
)
 
1,790

Other assets
 
4

 
285

 
931

 
(884
)
 
336

Investment in subsidiaries
 
9,110

 
26,703

 
—

 
(35,813
)
 
—

TOTAL ASSETS
 
$
9,137

 
$
34,204

 
$
31,517

 
$
(65,496
)
 
$
9,362

Current liabilities
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
 
$
—

 
$
108

 
$
—

 
$
(108
)
 
$
—

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

 
1,189

 
—

 
(599
)
 
590

Merchandise payables
 
—

 
1,048

 
—

 
—

 
1,048

Intercompany payables
 
11,830

 
15,585

 
—

 
(27,415
)
 
—

Other current liabilities
 
17

 
2,479

 
1,219

 
(672
)
 
3,043

Total current liabilities
 
11,847

 
20,409

 
1,219

 
(28,794
)
 
4,681

Long-term debt and capitalized lease obligations
 
1,215

 
3,160

 
—

 
(802
)
 
3,573

Pension and postretirement benefits
 
—

 
1,746

 
4

 
—

 
1,750

Deferred gain on sale-leaseback
 
—

 
563

 
—

 
—

 
563

Sale-leaseback financing obligation
 
—

 
235

 
—

 
—

 
235

Long-term deferred tax liabilities
 
48

 
—

 
724

 
(29
)
 
743

Other long-term liabilities
 
—

 
808

 
1,038

 
(205
)
 
1,641

Total Liabilities
 
13,110

 
26,921

 
2,985

 
(29,830
)
 
13,186

EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
 
Shareholder's equity (deficit)
 
(3,973
)
 
7,283

 
28,532

 
(35,666
)
 
(3,824
)
Noncontrolling interest
 
—

 
—

 
—

 
—

 
—

Total Equity (Deficit)
 
(3,973
)
 
7,283

 
28,532

 
(35,666
)
 
(3,824
)
TOTAL LIABILITIES AND EQUITY (DEFICIT)
 
$
9,137

 
$
34,204

 
$
31,517

 
$
(65,496
)
 
$
9,362

 

116


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

Condensed Consolidating Balance Sheet
January 30, 2016
 
millions
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Current assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
—

 
$
200

 
$
38

 
$
—

 
$
238

Intercompany receivables
 
—

 
—

 
26,935

 
(26,935
)
 
—

Accounts receivable
 
7

 
383

 
29

 
—

 
419

Merchandise inventories
 
—

 
5,172

 
—

 
—

 
5,172

Prepaid expenses and other current assets
 
114

 
453

 
257

 
(608
)
 
216

Total current assets
 
121

 
6,208

 
27,259

 
(27,543
)
 
6,045

Total property and equipment, net
 
—

 
1,829

 
802

 
—

 
2,631

Goodwill and intangible assets
 
—

 
269

 
1,909

 
—

 
2,178

Other assets
 
—

 
265

 
1,910

 
(1,692
)
 
483

Investment in subsidiaries
 
10,419

 
26,616

 
—

 
(37,035
)
 
—

TOTAL ASSETS
 
$
10,540

 
$
35,187

 
$
31,880

 
$
(66,270
)
 
$
11,337

Current liabilities
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
 
$
—

 
$
797

 
$
—

 
$
—

 
$
797

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

 
70

 
1

 
—

 
71

Merchandise payables
 
—

 
1,574

 
—

 
—

 
1,574

Intercompany payables
 
11,892

 
15,043

 
—

 
(26,935
)
 
—

Other current liabilities
 
20

 
2,273

 
1,311

 
(608
)
 
2,996

Total current liabilities
 
11,912

 
19,757

 
1,312

 
(27,543
)
 
5,438

Long-term debt and capitalized lease obligations
 
685

 
2,998

 
1

 
(1,576
)
 
2,108

Pension and postretirement benefits
 
—

 
2,201

 
5

 
—

 
2,206

Deferred gain on sale-leaseback
 
—

 
753

 
—

 
—

 
753

Sale-leaseback financing obligation
 
—

 
164

 
—

 
—

 
164

Long-term deferred tax liabilities
 
58

 
—

 
873

 
(38
)
 
893

Other long-term liabilities
 
—

 
832

 
1,128

 
(229
)
 
1,731

Total Liabilities
 
12,655

 
26,705

 
3,319

 
(29,386
)
 
13,293

EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
 
Shareholder's equity (deficit)
 
(2,115
)
 
8,482

 
28,561

 
(36,891
)
 
(1,963
)
Noncontrolling interest
 
—

 
—

 
—

 
7

 
7

Total Equity (Deficit)
 
(2,115
)
 
8,482

 
28,561

 
(36,884
)
 
(1,956
)
TOTAL LIABILITIES AND EQUITY (DEFICIT)
 
$
10,540

 
$
35,187

 
$
31,880

 
$
(66,270
)
 
$
11,337

 

117


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

Condensed Consolidating Statement of Operations
For the Year Ended January 28, 2017
 
millions
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Merchandise sales and services
$
—

 
$
22,203

 
$
2,796

 
$
(2,861
)
 
$
22,138

Cost of sales, buying and occupancy
—

 
17,928

 
1,056

 
(1,532
)
 
17,452

Selling and administrative
6

 
6,506

 
926

 
(1,329
)
 
6,109

Depreciation and amortization
—

 
303

 
72

 
—

 
375

Impairment charges
—

 
46

 
381

 
—

 
427

Gain on sales of assets
—

 
(343
)
 
(2
)
 
98

 
(247
)
Total costs and expenses
6

 
24,440

 
2,433

 
(2,763
)
 
24,116

Operating income (loss)
(6
)
 
(2,237
)
 
363

 
(98
)
 
(1,978
)
Interest expense
(385
)
 
(645
)
 
(13
)
 
639

 
(404
)
Interest and investment income (loss)
20

 
152

 
441

 
(639
)
 
(26
)
Other income (loss)
13

 
—

 
(217
)
 
217

 
13

Income (loss) before income taxes
(358
)
 
(2,730
)
 
574

 
119

 
(2,395
)
Income tax (expense) benefit
28

 
529

 
(383
)
 
—

 
174

Equity (deficit) in earnings in subsidiaries
(2,010
)
 
5

 
—

 
2,005

 
—

NET INCOME (LOSS) ATTRIBUTABLE TO HOLDINGS' SHAREHOLDERS
$
(2,340
)
 
$
(2,196
)
 
$
191

 
$
2,124

 
$
(2,221
)

 

118


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

Condensed Consolidating Statement of Operations
For the Year Ended January 30, 2016
 
millions
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Merchandise sales and services
$
—

 
$
25,264

 
$
2,861

 
$
(2,979
)
 
$
25,146

Cost of sales, buying and occupancy
—

 
19,819

 
1,131

 
(1,614
)
 
19,336

Selling and administrative
3

 
7,322

 
897

 
(1,365
)
 
6,857

Depreciation and amortization
—

 
350

 
72

 
—

 
422

Impairment charges
—

 
94

 
180

 
—

 
274

Gain on sales of assets
—

 
(735
)
 
(8
)
 
—

 
(743
)
Total costs and expenses
3

 
26,850

 
2,272

 
(2,979
)
 
26,146

Operating income (loss)
(3
)
 
(1,586
)
 
589

 
—

 
(1,000
)
Interest expense
(265
)
 
(481
)
 
(83
)
 
506

 
(323
)
Interest and investment income (loss)
(19
)
 
44

 
419

 
(506
)
 
(62
)
Income (loss) before income taxes
(287
)
 
(2,023
)
 
925

 
—

 
(1,385
)
Income tax (expense) benefit
115

 
480

 
(338
)
 
—

 
257

Equity (deficit) in earnings in subsidiaries
(956
)
 
158

 
—

 
798

 
—

Net income (loss)
(1,128
)
 
(1,385
)
 
587

 
798

 
(1,128
)
Income attributable to noncontrolling interests
—

 
—

 
—

 
(1
)
 
(1
)
NET INCOME (LOSS) ATTRIBUTABLE TO HOLDINGS' SHAREHOLDERS
$
(1,128
)
 
$
(1,385
)
 
$
587

 
$
797

 
$
(1,129
)



119


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

Condensed Consolidating Statement of Operations
For the Year Ended January 31, 2015
 
millions
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Merchandise sales and services
$
—

 
$
29,277

 
$
5,187

 
$
(3,266
)
 
$
31,198

Cost of sales, buying and occupancy
—

 
22,917

 
2,820

 
(1,688
)
 
24,049

Selling and administrative
2

 
8,283

 
1,513

 
(1,578
)
 
8,220

Depreciation and amortization
—

 
454

 
127

 
—

 
581

Impairment charges
—

 
48

 
15

 
—

 
63

Gain on sales of assets
—

 
(180
)
 
(27
)
 
—

 
(207
)
Total costs and expenses
2

 
31,522

 
4,448

 
(3,266
)
 
32,706

Operating income (loss)
(2
)
 
(2,245
)
 
739

 
—

 
(1,508
)
Interest expense
(223
)
 
(469
)
 
(92
)
 
471

 
(313
)
Interest and investment income
92

 
28

 
483

 
(471
)
 
132

Other income
—

 
—

 
4

 
—

 
4

Income (loss) before income taxes
(133
)
 
(2,686
)
 
1,134

 
—

 
(1,685
)
Income tax (expense) benefit
40

 
489

 
(654
)
 
—

 
(125
)
Deficit in earnings in subsidiaries
(1,717
)
 
(53
)
 
—

 
1,770

 
—

Net income (loss)
(1,810
)
 
(2,250
)
 
480

 
1,770

 
(1,810
)
Loss attributable to noncontrolling interests
—

 
—

 
—

 
128

 
128

NET INCOME (LOSS) ATTRIBUTABLE TO HOLDINGS' SHAREHOLDERS
$
(1,810
)
 
$
(2,250
)
 
$
480

 
$
1,898

 
$
(1,682
)



120


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

Consolidating Statement of Comprehensive Income (Loss)
For the Year Ended January 28, 2017
 
millions
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
$
(2,340
)
 
$
(2,196
)
 
$
191

 
$
2,124

 
$
(2,221
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
Pension and postretirement adjustments, net of tax
—

 
366

 
—

 
—

 
366

Unrealized net gain, net of tax
—

 
—

 
122

 
(122
)
 
—

Dissolution of noncontrolling interest
—

 
—

 
(7
)
 
—

 
(7
)
Total other comprehensive income
—

 
366

 
115

 
(122
)
 
359

Comprehensive income (loss)
(2,340
)
 
(1,830
)
 
306

 
2,002

 
(1,862
)
Comprehensive loss attributable to noncontrolling interest
—

 
—

 
—

 
7

 
7

Comprehensive income (loss) attributable to Holdings' shareholders
$
(2,340
)
 
$
(1,830
)
 
$
306

 
$
2,009

 
$
(1,855
)
 

121


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

Consolidating Statement of Comprehensive Income (Loss)
For the Year Ended January 30, 2016
 
millions
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
$
(1,128
)
 
$
(1,385
)
 
$
587

 
$
798

 
$
(1,128
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Pension and postretirement adjustments, net of tax
—

 
113

 
—

 
—

 
113

Currency translation adjustments, net of tax
—

 
—

 
(1
)
 
—

 
(1
)
Unrealized net loss, net of tax
—

 
(3
)
 
(65
)
 
68

 
—

Total other comprehensive income (loss)
—

 
110

 
(66
)
 
68

 
112

Comprehensive income (loss)
(1,128
)
 
(1,275
)
 
521

 
866

 
(1,016
)
Comprehensive loss attributable to noncontrolling interest
—

 
—

 
—

 
(1
)
 
(1
)
Comprehensive income (loss) attributable to Holdings' shareholders
$
(1,128
)
 
$
(1,275
)
 
$
521

 
$
865

 
$
(1,017
)


122


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

Consolidating Statement of Comprehensive Income (Loss)
For the Year Ended January 31, 2015
 
millions
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
$
(1,810
)
 
$
(2,250
)
 
$
480

 
$
1,770

 
$
(1,810
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Pension and postretirement adjustments, net of tax
—

 
(1,050
)
 
10

 
—

 
(1,040
)
Deferred gain 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
—

 
2

 
222

 
(224
)
 
—

Total other comprehensive income (loss)
57

 
(1,038
)
 
(20
)
 
(224
)
 
(1,225
)
Comprehensive income (loss)
(1,753
)
 
(3,288
)
 
460

 
1,546

 
(3,035
)
Comprehensive loss attributable to noncontrolling interest
—

 
—

 
—

 
438

 
438

Comprehensive income (loss) attributable to Holdings' shareholders
$
(1,753
)
 
$
(3,288
)
 
$
460

 
$
1,984

 
$
(2,597
)

123


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

Condensed Consolidating Statement of Cash Flows
For the Year Ended January 28, 2017
 
millions
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
 
$
244

 
$
(2,137
)
 
$
820

 
$
(308
)
 
$
(1,381
)
Proceeds from sales of property and investments
 
—

 
273

 
113

 
—

 
386

Purchases of property and equipment
 
—

 
(133
)
 
(9
)
 
—

 
(142
)
Net investing with Affiliates
 
(239
)
 
—

 
(627
)
 
866

 
—

Net cash provided by (used in) investing activities
 
(239
)
 
140

 
(523
)
 
866

 
244

Proceeds from debt issuances
 
—

 
2,028

 
—

 
—

 
2,028

Repayments of long-term debt
 
—

 
(65
)
 
(1
)
 
—

 
(66
)
Decrease in short-term borrowings, primarily 90 days or less
 
—

 
(797
)
 
—

 
—

 
(797
)
Proceeds from sale-leaseback financing
 
—

 
71

 
—

 
—

 
71

Debt issuance costs
 
(5
)
 
(46
)
 
—

 
—

 
(51
)
Intercompany dividend
 
—

 
—

 
(308
)
 
308

 
—

Net borrowing with Affiliates
 
—

 
866

 
—

 
(866
)
 
—

Net cash provided by (used in) financing activities
 
(5
)
 
2,057

 
(309
)
 
(558
)
 
1,185

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
—

 
60

 
(12
)
 
—

 
48

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
 
—

 
200

 
38

 
—

 
238

CASH AND CASH EQUIVALENTS, END OF YEAR
 
$
—

 
$
260

 
$
26

 
$
—

 
$
286




 

124


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

Condensed Consolidating Statement of Cash Flows
For the Year Ended January 30, 2016
 
millions
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
 
$
395

 
$
(3,021
)
 
$
938

 
$
(479
)
 
$
(2,167
)
Proceeds from sales of property and investments
 
—

 
2,725

 
5

 
—

 
2,730

Purchases of property and equipment
 
—

 
(202
)
 
(9
)
 
—

 
(211
)
Net investing with Affiliates
 
(395
)
 
—

 
(446
)
 
841

 
—

Net cash provided by (used in) investing activities
 
(395
)
 
2,523

 
(450
)
 
841

 
2,519

Repayments of long-term debt
 
—

 
(1,403
)
 
(2
)
 
—

 
(1,405
)
Increase in short-term borrowings, primarily 90 days or less
 
—

 
583

 
—

 
—

 
583

Proceeds from sale-leaseback financing
 
—

 
508

 
—

 
—

 
508

Debt issuance costs
 
—

 
(50
)
 
—

 
—

 
(50
)
Intercompany dividend
 
—

 


 
(479
)
 
479

 
—

Net borrowing with Affiliates
 
—

 
841

 
—

 
(841
)
 
—

Net cash provided by (used in) financing activities
 
—

 
479

 
(481
)
 
(362
)
 
(364
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
—

 
(19
)
 
7

 
—

 
(12
)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
 
—

 
219

 
31

 
—

 
250

CASH AND CASH EQUIVALENTS, END OF YEAR
 
$
—

 
$
200

 
$
38

 
$
—

 
$
238

 



125


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

Condensed Consolidating Statement of Cash Flows
For the Year Ended January 31, 2015
millions
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
 
$
386

 
$
(2,229
)
 
$
897

 
$
(441
)
 
$
(1,387
)
Proceeds from sales of property and investments
 
—

 
358

 
66

 
—

 
424

Purchases of property and equipment
 
—

 
(229
)
 
(41
)
 
—

 
(270
)
Sears Canada de-consolidation
 
—

 
—

 
(207
)
 
—

 
(207
)
Proceeds from Sears Canada rights offering
 
380

 
—

 
—

 
—

 
380

Net investing with Affiliates
 
(1,391
)
 
—

 
(720
)
 
2,111

 
—

Net cash provided by (used in) investing activities
 
(1,011
)
 
129

 
(902
)
 
2,111

 
327

Proceeds from debt issuances
 
625

 
400

 
—

 
—

 
1,025

Repayments of long-term debt
 
—

 
(69
)
 
(11
)
 
—

 
(80
)
Decrease in short-term borrowings, primarily 90 days or less
 
—

 
(1,117
)
 
—

 
—

 
(1,117
)
Lands' End pre-separation funding
 
—

 
515

 
—

 
—

 
515

Separation of Lands' End, Inc.
 
—

 
(31
)
 
—

 
 
 
(31
)
Debt issuance costs
 
—

 
(27
)
 
—

 
—

 
(27
)
Intercompany dividend
 
—

 
—

 
(441
)
 
441

 
—

Net borrowing with Affiliates
 
—

 
2,111

 
—

 
(2,111
)
 
—

Net cash provided by (used in) financing activities
 
625

 
1,782

 
(452
)
 
(1,670
)
 
285

Effect of exchange rate changes on cash and cash equivalents
 
—

 
—

 
(3
)
 
—

 
(3
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
 
—

 
(318
)
 
(460
)
 
—

 
(778
)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
 
—

 
537

 
491

 
—

 
1,028

CASH AND CASH EQUIVALENTS, END OF YEAR
 
$
—

 
$
219

 
$
31

 
$
—

 
$
250



126

Sears Holdings Corporation
Schedule II-Valuation and Qualifying Accounts
Years 2016 , 2015 and 2014
 
millions
 
Balance at
beginning
of period
 
Additions
charged to
costs and
expenses 
 
(Deductions) 
 
Balance at
end of period
 
 
 
 
 
 
 
 
 
Allowance for Doubtful Accounts (1) :
 
 
 
 
 
 
 
 
2016
 
$
34

 
$
9

 
$
(6
)
 
$
37

2015
 
25

 
10

 
(1
)
 
34

2014
 
32

 
2

 
(9
)
 
25

 
 
 
 
 
 
 
 
 
Allowance for Deferred Tax Assets (2) :
 
 

 
 

 
 

 
 

2016
 
4,757

 
1,000

 
(238
)
 
5,519

2015
 
4,478

 
603

 
(324
)
 
4,757

2014
 
3,366

 
1,392

 
(280
)
 
4,478

__________________

(1)  
Charges to the account are for the purposes for which the reserves were created.
(2)  
The valuation allowance increased primarily due to federal and state net operating losses incurred in 2016 and decreased primarily due to pension liability and other federal and state deferred tax assets.


127

MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Sears Holdings Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's Board of Directors, management and other personnel 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 and includes those policies and procedures that:
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over financial reporting at January 28, 2017 . In making its assessment, management used the criteria set forth in the Internal Control -Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The assessment included the documentation and understanding of the Company's internal control over financial reporting. Management evaluated the design effectiveness and tested the operating effectiveness of internal controls over financial reporting to form its conclusion.
Based on this evaluation, management concluded that, at January 28, 2017 , the Company's internal control over financial reporting is effective to provide reasonable assurance that the Company's financial statements are fairly presented in conformity with generally accepted accounting principles.
Deloitte & Touche LLP, independent registered public accounting firm, has reported on the effectiveness of the Company's internal control over financial reporting at January 28, 2017 , as stated in their report included herein.

128

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Sears Holdings Corporation
Hoffman Estates, Illinois

We have audited the accompanying consolidated balance sheets of Sears Holdings Corporation and subsidiaries (the "Company") as of January 28, 2017 and January 30, 2016, and the related consolidated statements of operations, comprehensive loss, equity (deficit), and cash flows for each of the three fiscal years in the period ended January 28, 2017. Our audits also included the financial statement schedule listed in the Index at Item 8. We also have audited the Company's internal control over financial reporting as of January 28, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sears Holdings Corporation and subsidiaries as of January 28, 2017 and January 30, 2016, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 28, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated

129

financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ DELOITTE & TOUCHE LLP 
Deloitte & Touche LLP
Chicago, Illinois
March 21, 2017

130

SEARS HOLDINGS CORPORATION


Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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 quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management's annual report on internal control over financial reporting and the report of our independent registered public accounting firm appears in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Item  9B.
Other Information

Not applicable.

 


131

PART III
Item  10.
Directors, Executive Officers and Corporate Governance
Information required by this Item 10 with respect to members of our Board of Directors and our Audit Committee will be included under the headings "Election of Directors," "Election of Directors - Committees of the Board of Directors," and "Corporate Governance - Director Independence" of our definitive proxy statement for our annual meeting of stockholders to be held on May 10, 2017 (the "2017 Proxy Statement") and is incorporated herein by reference. Information required by this Item 10 with respect to Section 16(a) beneficial ownership reporting compliance will be included under the heading "Other Information - Section 16(a) Beneficial Ownership Reporting Compliance" of the 2017 Proxy Statement and is incorporated herein by reference.
The information required by this Item 10 regarding the Company's executive officers is set forth under the heading Executive Officers of the Registrant in Part I of this Annual Report on Form 10-K and is incorporated herein by reference.
Holdings has adopted a Code of Conduct, which applies to all employees, including our principal executive officer, principal financial officer and principal accounting officer, and a Code of Conduct for its Board of Directors. Directors who are also officers of Holdings are subject to both codes of conduct. Each code of conduct is a code of ethics as defined in Item 406 of SEC Regulation S-K. The codes of conduct are available in the "Investors - Corporate Governance" section of our website at www.searsholdings.com. Any amendment to, or waiver from, a provision of the codes of conduct will be posted to the above-referenced website.
There were no material changes to the process by which stockholders may recommend nominees to the Board of Directors during the last year.
Item  11.
Executive Compensation
Information regarding executive and director compensation will be included under the headings "Executive Compensation," "Compensation of Directors," and "Compensation Committee Report" of the 2017 Proxy Statement and is incorporated herein by reference.
Item  12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding security ownership of certain beneficial owners and management will be included under the heading "Amount and Nature of Beneficial Ownership" of the 2017 Proxy Statement and is incorporated herein by reference.

See also Equity Compensation Plan Information in Item 5 of this Report for a discussion of securities authorized for issuance under equity compensation plans.
Item  13.
Certain Relationships and Related Transactions, and Director Independence
Information regarding certain relationships and related transactions and director independence will be included under the headings "Certain Relationships and Transactions," "Review and Approval of Transactions with Related Persons" and "Corporate Governance" of the 2017 Proxy Statement and is incorporated herein by reference.
Item  14.
Principal Accounting Fees and Services
Information regarding principal accountant fees and services will be included under the heading "Independent Registered Public Accounting Firm Fees" of the 2017 Proxy Statement and is incorporated herein by reference.

132

PART IV
Item  15.
Exhibits, Financial Statement Schedules
(a)
The following documents are filed as part of this report:
1.
Financial Statements
Financial statements filed as part of this Annual Report on Form 10-K are listed under Item 8.
2.
Financial Statement Schedule
The financial statement schedule filed as part of this Annual Report on Form 10-K is listed under Item 8.
The separate financial statements and summarized financial information of majority-owned subsidiaries not consolidated and of 50% or less owned persons have been omitted because they are not required pursuant to conditions set forth in Rules 3-09 and 1-02(w) of Regulation S-X.
All other schedules have been omitted because they are not required under the instructions contained in Regulation S-X because the information called for is contained in the financial statements and notes thereto.
(b)
Exhibits
An "Exhibit Index" has been filed as part of this Report beginning on Page E-1 and is incorporated herein by this reference.
Certain of the agreements 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.

Item  16.
Form 10-K Summary
None.


133

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
 
S EARS  H OLDINGS  C ORPORATION
 
 
By:
/S/     R OBERT  A. R IECKER 
Name:
Robert A. Riecker
Title:
Controller and Head of Capital Market Activities
Date: March 21, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities stated and on the dates indicated.
 
/S/  E DWARD  S. L AMPERT
Director, Chairman of the Board of Directors, and Chief Executive Officer (principal executive officer)
March 21, 2017
Edward S. Lampert
 
 
 
 
/S/ JASON M. HOLLAR
Chief Financial Officer (principal financial officer)
March 21, 2017
Jason M. Hollar
 
 
 
 
/S/  R OBERT  A. R IECKER  
Controller and Head of Capital Market Activities (principal accounting officer)
March 21, 2017
Robert A. Riecker
 
 
 
 
/S/  CESAR L. ALVAREZ
Director
March 21, 2017
Cesar L. Alvarez
 
 
 
 
 
/S/ BRUCE R. BERKOWITZ
Director
March 21, 2017
Bruce R. Berkowitz
 
 
 
 
 
/S/ PAUL G. DEPODESTA
Director
March 21, 2017
Paul G. DePodesta
 
 
 
 
 
/S/  KUNAL S. KAMLANI
Director
March 21, 2017
Kunal S. Kamlani
 
 
 
 
 
/S/  W ILLIAM  C. K UNKLER , III  
Director
March 21, 2017
William C. Kunkler, III
 
 
 
 
 
/S/  A NN  N. R EESE  
Director
March 21, 2017
Ann N. Reese
 
 
 
 
 
/S/  T HOMAS  J. T ISCH
Director
March 21, 2017
Thomas J. Tisch
 
 
 
 
 
 


134


EXHIBIT INDEX
2.1

 
 
Purchase and Sale Agreement, dated as of January 5, 2017, by and between Sears Holdings Corporation and Stanley Black & Decker, Inc. (incorporated by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K, dated January 5, 2017, filed on January 10, 2017 (File No. 001-36693)).

 
 
 
 
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)).
 
 
 
 
4.1

 
 
Registrant hereby agrees to furnish to the Commission, upon request, the instruments defining the rights of holders of each issue of long-term debt of Registrant and its consolidated subsidiaries.
 
 
 
 
4.2

 
 
Indenture, dated as of October 12, 2010, among Sears Holdings Corporation, the guarantors party thereto and Wells Fargo Bank, National Association, as Trustee and Collateral Agent (incorporated by reference to Exhibit 4.1 to Registrant's Current Report on Form 8-K, dated October 12, 2010, filed on October 15, 2010 (File No. 000-51217)).
 
 
 
 
4.3

 
 
Security Agreement, dated as of October 12, 2010, among Sears Holdings Corporation, the guarantors party thereto and Wells Fargo Bank, National Association, as Collateral Agent (incorporated by reference to Exhibit 4.2 to Registrant's Current Report on Form 8-K, dated October 12, 2010, filed on October 15, 2010 (File No. 000-51217)).
 
 
 
 
4.4

 
 
First Amendment to Security Agreement, dated as of September 1, 2016, between Sears Holdings Corporation, the other Grantors party thereto and Wilmington Trust, National Association, as collateral agent (incorporated by reference to Exhibit 10.2 to Registrant's Current Report on Form 8-K, dated September 1, 2016, filed on September 2, 2016 (File No. 001-36693)).
 
 
 
 
4.5

 
 
Amended and Restated Intercreditor Agreement, dated as of September 1, 2016, by and among Bank of America, N.A. and Wells Fargo Bank, National Association as ABL Agents, and Wilmington Trust, National Association, as trustee (incorporated by reference to Exhibit 10.3 to Registrant’s Current Report on Form 8-K, dated September 1, 2016, filed on September 2, 2016 (File No. 001-36693)).

 
 
 
 
4.6

 
 
Registration Rights Agreement, dated as of October 12, 2010, by and among Sears Holdings Corporation and the guarantors party thereto and Banc of America Securities LLC (incorporated by reference to Exhibit 4.4 to Registrant's Current Report on Form 8-K, dated October 12, 2010, filed on October 15, 2010 (File No. 000-51217)).
 
 
 
 
4.7

 
 
Registration Rights Agreement, dated as of October 12, 2010, by and among Sears Holdings Corporation and the guarantors party thereto, Sears Holdings Corporation Investment Committee on behalf of the Sears Holdings Pension Plan and Sears Holdings Pension Trust (incorporated by reference to Exhibit 4.5 to Registrant's Current Report on Form 8-K, dated October 12, 2010, filed on October 15, 2010 (File No. 000-51217)).
 
 
 
 
4.8

 
 
Indenture, dated as of November 21, 2014, by and between Sears Holdings Corporation and Computershare Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K, dated November 21, 2014, filed on November 21, 2014 (File No. 001-36693)).
 
 
 
 
4.9

 
 
First Supplemental Indenture, dated as of November 21, 2014, by and between Sears Holdings Corporation and Computershare Trust Company, N.A., as Trustee (including form of note) (incorporated by reference to Exhibit 4.2 to Registrant’s Current Report on Form 8-K, dated November 21, 2014, filed on November 21, 2014 (File No. 001-36693)).
 
 
 
 
4.10

 
 
Warrant Agreement, dated as of November 21, 2014, by and between Sears Holdings Corporation, Computershare Inc. and Computershare Trust Company, N.A., as Warrant Agent (including form of warrant certificate) (incorporated by reference to Exhibit 4.3 to Registrant’s Current Report on Form 8-K, dated November 21, 2014, filed on November 21, 2014 (File No. 001-36693)).
 
 
 
 

E-1


10.1

 
 
Guarantee executed by Sears, Roebuck and Co. under the Indenture, dated as of May 15, 1995, between Sears Roebuck Acceptance Corp. and JP Morgan Chase Bank (successor to The Chase Manhattan Bank, N.A.), as supplemented by the First Supplemental Indenture, dated as of November 3, 2003 (incorporated by reference to Exhibit 4(g) to Sears Roebuck Acceptance Corp.'s Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 2003 (File No. 001-04040)).
 
 
 
 
10.2

 
 
Guarantee executed by Sears, Roebuck and Co. under the Indenture, dated as of October 1, 2002, between Sears Roebuck Acceptance Corp. and BNY Midwest Trust Company, as supplemented by the First Supplemental Indenture, dated as of November 3, 2003 (incorporated by reference to Exhibit 4(h) to Sears Roebuck Acceptance Corp.'s Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 2003 (File No. 001-04040)).
 
 
 
 
10.3

 
 
Guarantee, dated as of November 3, 2003, by Sears, Roebuck and Co. of the commercial paper master notes of Sears Roebuck Acceptance Corp. (incorporated by reference to Exhibit 10.38 to Sears, Roebuck and Co.'s Annual Report on Form 10-K for the fiscal year ended January 3, 2004 (File No. 001-00416)).
 
 
 
 
10.4

 
 
Third Amended and Restated Credit Agreement, dated as of July 21, 2015, between Sears Holdings Corporation, Sears Roebuck Acceptance Corp. and Kmart Corporation, the lenders party thereto, and Bank of America, N.A., as agent (incorporated by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 1, 2015 (File No. 001-36693))  (1)
 
 
 
 
10.5

 
 
First Amendment to Third Amended and Restated Credit Agreement, dated April 8, 2016, by and among Sears Holdings Corporation, Sears Roebuck Acceptance Corp., Kmart Corporation, the lenders party thereto and Bank of America, N.A., as agent (incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K, dated April 8, 2016, filed on April 12, 2016 (File No. 001-36693)).

 
 
 
 
*10.6

 
 
Second Amendment to Third Amended and Restated Credit Agreement, dated February 10, 2017, by and among Sears Holdings Corporation, Sears Roebuck Acceptance Corp., Kmart Corporation, the lenders party thereto and Bank of America, N.A., as agent.

 
 
 
 
10.7

 
 
Confirmation, Ratification and Amendment of Ancillary Loan Documents, dated April 8, 2016, by and among Sears Holdings Corporation, Sears Roebuck Acceptance Corp., Kmart Corporation, certain of their respective subsidiaries and Bank of America, N.A., as administrative agent for its own benefit and the benefit of the other Credit Parties (as defined in the amendment to the Credit Agreement) (incorporated by reference to Exhibit 10.3 to Registrant’s Current Report on Form 8-K, dated April 8, 2016, filed on April 12, 2016 (File No. 001-36693)).

 
 
 
 
10.8

 
 
Third Amended and Restated Guarantee and Collateral Agreement, dated as of July 21, 2015, among Sears Holdings Corporation, Sears, Roebuck and Co., Sears Roebuck Acceptance Corp., Kmart Holding Corporation, Kmart Corporation and certain of their respective subsidiaries, as Grantors, and Bank of America, N.A., Wells Fargo Bank, National Association and General Electric Capital Corporation, as Co-Collateral Agents (incorporated by reference to Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 1, 2015 (File No. 001-36693)).
 
 
 
 
10.9

 
 
Loan Agreement, dated as of September 15, 2014, by and between Sears, Roebuck and Co., Sears Development Co., Kmart Corporation, JPP II, LLC and JPP, LLC (incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 1, 2014 (File No. 001-36693)).

 
 
 
 
10.10

 
 
Guaranty, dated as of September 15, 2014, by and between Sears Holdings Corporation, JPP II, LLC and JPP, LLC (incorporated by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 1, 2014 (File No. 001-36693)).

 
 
 
 
10.11

 
 
Amendment to Loan Agreement, dated as of February 25, 2015, by and between JPP II, LLC, JPP, LLC, Sears Roebuck and Co., Sears Development Co. and Kmart Corporation (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, dated February 26, 2015, filed on February 26, 2015 (File No. 001-36693)).
 
 
 
 

E-2


10.12

 
 
Purchase, Sale and Servicing Transfer Agreement, dated as of July 15, 2003, by and among Sears, Roebuck and Co., Sears Financial Holding Corporation, Sears National Bank, Sears Roebuck de Puerto Rico, Inc., Sears Life Holding Corp., SRFG, Inc., Sears Intellectual Property Management Company and Citicorp (incorporated by reference to Exhibit 10.1 to Sears, Roebuck and Co.'s Current Report on Form 8-K, dated July 15, 2003, filed on July 17, 2003 (File No. 001-00416)).
 
 
 
 
10.13

 
 
Amendment No. 1, dated as of November 3, 2003, to the Purchase, Sale and Servicing Transfer Agreement, by and among Sears, Roebuck and Co., certain subsidiaries of Sears, Roebuck and Co. and Citicorp (incorporated by reference to Exhibit 2(b) to Sears, Roebuck and Co.'s Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 2003 (File No. 001-00416)).
 
 
 
 
10.14

 
 
Sears Holdings Corporation Director Compensation Program, as amended (incorporated by reference to Exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended May 1, 2010 (File No. 000-51217)).**
 
 
 
 
10.15

 
 
Sears Holdings Corporation 2006 Stock Plan, as amended (incorporated by reference to Appendix C to Registrant's Proxy Statement dated March 15, 2006 (File No. 000-51217)).**
 
 
 
 
10.16

 
 
Sears Holdings Corporation 2013 Stock Plan (incorporated by reference to Appendix A to Registrant's Proxy Statement dated March 28, 2013 (File No. 000-51217)).**

 
 
 
 
10.17

 
 
Sears Holdings Corporation Amended and Restated Umbrella Incentive Program (incorporated by reference to Appendix C to Registrant's Proxy Statement dated March 28, 2013 (File No. 000-51217)).**
 
 
 
 
10.18

 
 
Amendment to the Performance Measures under the Amended and Restated Sears Holdings Corporation Umbrella Incentive Program (incorporated by reference to Appendix B to Registrant's Proxy Statement dated March 28, 2013 (File No. 000-51217)).**

 
 
 
 
10.19

 
 
Form of Sears Holdings Corporation Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 30, 2011(File No. 000-51217)).**
 
 
 
 
10.20

 
 
Form of Sears Holdings Corporation Restricted Stock Award Agreement: Terms and Conditions (incorporated by reference to Exhibit 10.17 to Registrant’s Annual Report on Form 10-K for the fiscal year ended February 1, 2014 (File No. 000-51217)).**

 
 
 
 
10.21

 
 
Form of Sears Holdings Corporation Restricted Stock Unit Award Agreement: Terms and Conditions (incorporated by reference to Exhibit 10.18 to Registrant’s Annual Report on Form 10-K for the fiscal year ended February 1, 2014 (File No. 000-51217)).**
 
 
 
 
10.22

 
 
Form of Cash Right - Addendum to Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.17 to Registrant's Annual Report on Form 10-K for the fiscal year ended January 28, 2012 (File No. 000-51217)).**
 
 
 
 
10.23

 
 
Form of Cash Award - Addendum to Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K, dated September 28, 2012, filed on September 28, 2012 (File No. 000-51217)).**
 
 
 
 
10.24

 
 
Form of Cash Award - Addendum to Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K, dated November 30, 2012, filed on November 30, 2012 (File No. 000-51217)).**
 
 
 
 
10.25

 
 
Sears Holdings Corporation Long-Term Incentive Program, effective April 27, 2011 (incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2011 (File No. 000-51217)).**
 
 
 
 
10.26

 
 
Sears Holdings Corporation Cash Long-Term Incentive Plan (Amended and Restated Effective April 10, 2015) (incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended May 2, 2015 (File No. 001-36693)).**
 
 
 
 
10.27

 
 
Sears Holdings Corporation Annual Incentive Plan (Amended and Restated Effective April 10, 2015) (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended May 2, 2015 (File No. 001-36693)).**

E-3


 
 
 
 
10.28

 
 
2015 Additional Definitions under Sears Holdings Corporation Annual Incentive Plan (incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended May 2, 2015 (File No. 001-36693)).**
 
 
 
 
10.29

 
 
2013 Additional Definitions under Sears Holdings Corporation Long-Term Incentive Program (incorporated by reference to Exhibit 10.3 to Registrant's Current Report on Form 8-K, dated February 12, 2013, filed on February 19, 2013 (File No. 000-51217)).**
 
 
 
 
10.30

 
 
2014 Additional Definitions under Sears Holdings Corporation Long-Term Incentive Program (incorporated by reference to Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 3, 2014 (File No. 000-51217)).**
 
 
 
 
10.31

 
 
2015 Additional Definitions under Sears Holdings Corporation Long-Term Incentive Program (incorporated by reference to Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 2, 2015 (File No. 001-36693)).**
 
 
 
 
10.32

 
 
Form of LTIP Award Agreement (incorporated by reference to Exhibit 10.32 to Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 2015 (File No. 001-36693).**
 
 
 
 
10.33

 
 
Form of Cash Award - Addendum to Restricted Stock Award(s) (Lands’ End Make-Whole) (incorporated by reference to Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 3, 2014 (File No. 000-51217)).**
 
 
 
 
10.34

 
 
Form of Cash Award - Addendum to Restricted Stock Unit Award(s) (Lands’ End Make-Whole) (incorporated by reference to Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 3, 2014 (File No. 000-51217)).**
 
 
 
 
10.35

 
 
Form of Cash Award - Addendum to Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, dated October 22, 2014, filed on October 22, 2014 (File No. 001-36693)).**
 
 
 
 
10.36

 
 
Form of Cash Right - Addendum to Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, dated November 7, 2014, filed on November 7, 2014 (File No. 001-36693)).**
 
 
 
 
10.37

 
 
Form of Cash Right - Addendum to Restricted Stock Award(s) and Restricted Stock Unit Awards (Seritage Make-Whole).**
 
 
 
 
10.38

 
 
Form of Executive Severance Agreement (incorporated by reference to Exhibit 10.29 to Registrant’s Annual Report on Form 10-K for the fiscal year ended February 1, 2014 (File No. 000-51217)).**
 
 
 
 
10.39

 
 
Form of letter from Registrant to Edward S. Lampert relating to employment dated March 18, 2013 (incorporated by reference to Exhibit 10.30 to Registrant's Annual Report on Form 10-K for the fiscal year ended February 2, 2013 (File No. 000-51217)).**
 
 
 
 
10.40

 
 
Addendum, dated as of April 21, 2014, to letter from Registrant to Edward S. Lampert relating to employment dated March 18, 2013 (Lands’ End Make-Whole) (incorporated by reference to Exhibit 10.6 to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 3, 2014 (File No. 000-51217)).**
 
 
 
 
10.41

 
 
Letter Agreement, dated January 28, 2016, by and between the Company and Edward S. Lampert (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, dated January 28, 2016, filed on February 3, 2016 (File No. 001-36693)).**
 
 
 
 
10.42

 
 
Letter from Registrant to Jeffrey A. Balagna relating to employment dated April 26, 2013 (incorporated by reference to Exhibit 10.31 to Registrant’s Annual Report on Form 10-K for the fiscal year ended February 1, 2014 (File No. 000-51217)).**
 
 
 
 
10.43

 
 
Letter from Registrant to Girish Lakshman relating to employment dated June 11, 2015 (incorporated by reference to Exhibit 10.42 to Registrant’s Annual Report on Form 10-K for the fiscal year ended January 30, 2016 (File No. 001-36693)).**
 
 
 
 

E-4


10.44

 
 
Letter from Registrant to Leena Munjal relating to employment dated June 2, 2011, as supplemented October 17, 2012 and May 5, 2015 (incorporated by reference to Exhibit 10.43 to Registrant’s Annual Report on Form 10-K for the fiscal year ended January 30, 2016 (File No. 001-36693)).**
 
 
 
 
*10.45

 
 
Letter from Registrant to Sean Skelley relating to employment dated September 24, 2015.**
 
 
 
 
*10.46

 
 
Letter from Registrant to Stephan Zoll relating to employment dated March 23, 2016.**
 
 
 
 
*10.47

 
 
Executive Severance Agreement, dated March 24, 2016, by and between the Company and Stephan Zoll.**
 
 
 
 
10.48

 
 
Letter from Registrant to Jason M. Hollar relating to employment dated as of September 18, 2014 (incorporated by reference to Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 2016 (File No. 001-36693)).**
 
 
 
 
10.49

 
 
Letter from Registrant to Jason M. Hollar relating to employment dated as of October 13, 2016 (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, dated October 13, 2016, filed on October 14, 2016 (File No. 001-36693)).**
 
 
 
 
10.50

 
 
Letter from Registrant to Robert A. Schriesheim relating to employment dated August 15, 2011 (incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 30, 2011(File No. 000-51217)).**
 
 
 
 
10.51

 
 
Executive Severance Agreement, dated and effective as of August 16, 2011, between Sears Holdings Corporation and its affiliates and subsidiaries and Robert A. Schriesheim (incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 30, 2011(File No. 000-51217)).** (1)

 
 
 
 
10.52

 
 
Master Lease by and among Seritage SRC Finance LLC, Seritage KMT Finance LLC, Kmart Operations, LLC, and Sears Operations, LLC, dated as of July 7, 2015 (incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K, dated July 7, 2015, filed on July 13, 2015 (File No. 001-36693)).

 
 
 
 
10.53

 
 
Pension Plan Protection and Forbearance Agreement, dated as of March 18, 2016, by and between Sears Holdings Corporation, certain of its subsidiaries and Pension Benefit Guaranty Corporation (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, dated March 18, 2016, filed on March 24, 2016).
 
 
 
 
10.54

 
 
Consent, Waiver and Amendment, dated as of March 8, 2017, by and between Sears Holdings Corporation, certain of its subsidiaries and Pension Benefit Guaranty Corporation (incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K, dated March 8, 2017, filed March 9, 2017 (File No. 001-36693)).

 
 
 
 
10.55

 
 
Loan Agreement, dated April 8, 2016, by and among JPP, LLC, JPP II, LLC, Cascade Investment, L.L.C., Sears, Roebuck and Co., Sears Development Co., Innovel Solutions, Inc., Big Beaver of Florida Development, LLC and Kmart Corporation (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, dated April 8, 2016, filed on April 12, 2016 (File No. 001-36693)).
 
 
 
 
10.56

 
 
Second Lien Credit Agreement, dated as of September 1, 2016, between Sears Holdings Corporation, Sears Roebuck Acceptance Corp. and Kmart Corporation, the lenders party thereto, and JPP, LLC, as administrative agent and collateral administrator (incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K, dated September 1, 2016, filed on September 2, 2016 (File No. 001-36693)).
 
 
 
 
10.57

 
 
Letter of Credit and Reimbursement Agreement, dated as of December 28, 2016, among Sears Holdings Corporation, Sears Roebuck Acceptance Corp., Kmart Corporation, the financial institutions party thereto from time to time as L/C Lenders, and Citibank, N.A., as Administrative Agent and Issuing Bank (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, dated December 28, 2016, filed on December 30, 2016 (File No. 001-36693)).
 
 
 
 

E-5


10.58

 
 
Loan Agreement, dated as of January 3, 2017, among Sears Roebuck and Co., Kmart Stores of Illinois LLC, Kmart of Washington LLC and Kmart Corporation, collectively as borrower, and JPP, LLC and JPP II, LLC, collectively as initial lender (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, dated January 3, 2017, filed on January 4, 2017 (File No. 001-36693)).
 
 
 
 
*10.59

 
 
Omnibus Amendment to Loan Documents and Request for Advance to Loan Agreement, dated as of January 3, 2017 among Sears Roebuck and Co., Kmart Stores of Illinois LLC, Kmart of Washington LLC and Kmart Corporation, collectively as borrower, and JPP, LLC and JPP II, LLC, collectively as initial lender.

 
 
 
 
*10.60

 
 
First Amendment dated March 2, 2017, to Letter of Credit and Reimbursement Agreement, dated as of December 28, 2016, among Sears Holdings Corporation, Sears Roebuck Acceptance Corp., Kmart Corporation, the financial institutions party thereto from time to time as L/C Lenders, and Citibank, N.A., as Administrative Agent and Issuing Bank.
 
 
 
 
10.61

 
 
Acquired IP License Agreement, dated as of March 8, 2017, by and between Sears Holdings Corporation and Stanley Black & Decker, Inc. (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, dated March 8, 2017, filed March 9, 2017 (File No. 001-36693)).

 
 
 
 
*12

 
 
Computation of ratio of earnings to fixed charges for Registrant and consolidated subsidiaries.
 
 
 
 
*21

 
 
Subsidiaries of the Registrant.
 
 
 
 
*23

 
 
Consent of Deloitte & Touche LLP.
 
 
 
 
*31.1

 
 
Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
*31.2

 
 
Certifications 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 Annual Report on Form 10-K for the fiscal year ended January 28, 2017, formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Statements of Operations for the fiscal years ended January 28, 2017, January 30, 2016 and January 31, 2015; (ii) the Consolidated Statements of Comprehensive Loss for the fiscal years ended January 28, 2017, January 30, 2016 and January 31, 2015; (iii) the Consolidated Balance Sheets at January 28, 2017 and January 30, 2016; (iv) the Consolidated Statements of Cash Flows for the fiscal years ended January 28, 2017, January 30, 2016 and January 31, 2015; (v) the Consolidated Statements of Equity (Deficit) for the fiscal years ended January 28, 2017, January 30, 2016 and January 31, 2015; and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
__________________
 
*
Filed herewith
**
A management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 15(b) of Form 10-K.
(1)
Confidential treatment was granted as to omitted portions of this Exhibit. The omitted material has been filed separately with the Securities and Exchange Commission.
(2)
Portions omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission.


E-6

EXHIBIT 10.6

EXECUTION VERSION




SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT

SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT (this “ Amendment ”) dated as of February 10, 2017 between
SEARS HOLDINGS CORPORATION, a Delaware corporation (“ Holdings ”),
SEARS ROEBUCK ACCEPTANCE CORP., a Delaware corporation, and KMART CORPORATION, a Michigan corporation (the “ Borrowers ”),
The Lenders party hereto, and
BANK OF AMERICA, N.A., as Administrative Agent (the “ Agent ”),
in consideration of the mutual covenants herein contained and benefits to be derived herefrom.


W I T N E S S E T H :

WHEREAS, Holdings, the Borrowers, the Lenders party thereto, the Co-Collateral Agents party thereto, and the Agent, among others, are party to that certain Third Amended and Restated Credit Agreement dated as of July 21, 2015, as amended pursuant to that certain First Amendment to Third Amended and Restated Credit Agreement dated as of April 8, 2016 (the “ Existing Credit Agreement ”; the Existing Credit Agreement as amended hereby, the “ Amended Credit Agreement ”); and

WHEREAS, Holdings, the Borrowers, the Required Lenders and the Agent have agreed to amend the Existing Credit Agreement.

NOW THEREFORE, in consideration of the mutual promises and agreements herein contained, the parties hereto hereby agree as follows:

1.
Incorporation of Terms. All capitalized terms not otherwise defined herein shall have the same meaning as in the Existing Credit Agreement.

2.
Representations and Warranties . Each Borrower hereby represents and warrants that (i) no Default or Event of Default exists under the Existing Credit Agreement or under any other Loan Document as of the date hereof, and (ii) all representations and warranties contained in the Amended Credit Agreement and the other Loan Documents are true and correct in all material respects as of the date hereof, except to the extent that (A) such representations or warranties are qualified by a materiality standard, in which case they are true and correct in all respects, and (B) such representations or warranties expressly relate to an earlier date (in


-1-


EXHIBIT 10.6

which case such representations and warranties are true and correct in all material respects as of such earlier date).

3.
Release by Borrowers . Each Borrower hereby acknowledges and agrees that it has no actual knowledge of any defenses or claims against any Lender, the Agent, the Co-Collateral Agents, any of their Affiliates, or any of their respective officers, directors, employees, attorneys, representatives, predecessors, successors, or assigns with respect to the Obligations, and that if such Borrower now has, or ever did have, any defenses or claims with respect to the Obligations against any Lender, the Agent, the Co-Collateral Agents or any of their respective officers, directors, employees, attorneys, representatives, predecessors, successors, or assigns, whether known or unknown, at law or in equity, from the beginning of the world through this date and through the time of effectiveness of this Amendment, all of them are hereby expressly WAIVED , and each Borrower hereby RELEASES each Lender, the Agent, the Co-Collateral Agents and their respective officers, directors, employees, attorneys, representatives, predecessors, successors, and assigns from any liability therefor.

4.
Amendments to Existing Credit Agreement . The Existing Credit Agreement is hereby amended to delete the stricken text (indicated textually in the same manner as the following example: stricken text ) and to add the double-underlined text (indicated textually in the same manner as the following example: double-underlined ) as set forth in the pages of the Amended Credit Agreement attached as Annex A hereto. Each of Schedule 1.01 (Lenders; Commitments) and Schedule 1C (Extended Term Pricing Grid) to the Existing Credit Agreement are hereby amended in their entirety to reflect the modifications identified in Annex B hereto. Except as provided herein, in the Amended Credit Agreement and in Annex B , all of the terms and conditions of the Existing Credit Agreement (including the Exhibits thereto) shall remain in full force and effect.

5.
Acknowledgement of Reduction of Aggregate Revolving Commitments and Prepayment of Term Loan and 2016 Term Loan on a Pro Rata Basis . The parties hereto hereby acknowledge and agree that, to the extent that any repayment or prepayment of the Term Loan and/or the 2016 Term Loan occurs after the Second Amendment Effective Date and the Aggregate Revolving Commitments are required to be reduced on a Pro Rata Basis in connection with such repayment or prepayment pursuant to the terms of Section 2.11(a)(ii)(x) or Section 2.11(a)(iii)(y), as applicable, the reduction of the Aggregate Revolving Commitments to $1,500,000,000 from $1,971,000 as set forth in the Amended Credit Agreement shall be deemed to have occurred concurrently with and in connection with such repayment or prepayment solely for purposes of determining whether the Aggregate Revolving Commitments have been reduced on a Pro Rata Basis in connection with such repayment or prepayment to the extent required by Section 2.11(a)(ii)(x) or Section 2.11(a)(iii)(y), as applicable.





-2-


EXHIBIT 10.6

6.
Conditions to Effectiveness . This Amendment shall become effective on the date (the “ Second Amendment Effective Date ”) that each of the following conditions precedent has been fulfilled as determined by the Agent:

a.
This Amendment shall have been duly executed and delivered by Holdings, the Borrowers, the Required Lenders and the Agent, and the Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto.

b.
All action on the part of Holdings and the Borrowers necessary for the valid execution, delivery and performance by the Borrowers of this Amendment shall have been duly taken. The Agent shall have received corporate resolutions of Holdings authorizing the entrance of Holdings into this Amendment.

c.
Since January 30, 2016, there shall not have been any event or effect that has had or would be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.

d.
After giving effect to this Amendment and the transactions contemplated hereunder, Capped Excess Availability shall be not less than $325,000,000.

e.
After giving effect to this Amendment and the transactions contemplated hereunder, no Default or Event of Default shall have occurred and be continuing under the Amended Credit Agreement.

f.
The Borrowers shall have paid all fees, expenses and other amounts due and owing to the Agent, the Co-Collateral Agents and the Lenders that have executed this Amendment.

7.
Binding Effect . The terms and provisions hereof shall be binding upon and inure to the benefit of the parties hereto, the Lenders and their respective successors and assigns.

8.
Expenses . The Borrowers shall reimburse the Agent and the Co-Collateral Agents for all reasonable and documented out-of-pocket expenses incurred in connection herewith, including, without limitation, reasonable attorneys’ fees.

9.
Multiple Counterparts . This Amendment may be executed in multiple counterparts, each of which shall constitute an original and together which shall constitute but one and the same instrument. Delivery of an executed counterpart of a signature page of this Agreement by facsimile or in electronic (i.e. “pdf” or “tif”) format shall be effective as delivery of a manually executed counterpart of this Agreement.

10.
Governing Law . THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF OTHER


-3-


EXHIBIT 10.6

THAN SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW.

[remainder of page intentionally left blank]



-4-


IN WITNESS WHEREOF, this Amendment has been duly executed and delivered by each of the parties hereto as of the date first above written.


HOLDINGS :

SEARS HOLDINGS CORPORATION
By: /s/ Robert A. Riecker    
Name: Robert A. Riecker
Title: Controller and Head of Capital Market Activities

BORROWERS :

SEARS ROEBUCK ACCEPTANCE CORP.
By: /s/ Robert A. Riecker    
Name: Robert A. Riecker
Title: Vice President, Finance

KMART CORPORATION
By: /s/ Robert A. Riecker    
Name: Robert A. Riecker
Title: Controller and Head of Capital Market Activities

Signature Page to Second Amendment


BANK OF AMERICA, N.A. , as Agent and as a Lender

By:     /s/ Stephen Garvin                
Name: Stephen Garvin
Title: Managing Director



Signature Page to Second Amendment


WELL FARGO BANK, NATIONAL ASSOCIATION, as a Lender

By:     /s/ Jennifer Cann                
Name: Jennifer Cann
Title: Managing Director


Signature Page to Second Amendment


CITIBANK, N.A., as a Lender

By:     /s/ David Smith                
Name: David Smith
Title: Vice President and Director

Signature Page to Second Amendment


PNC BANK, NATIONAL ASSOCIATION as a Lender

By:     /s/ John Wenzinger                
Name: John Wenzinger
Title: Senior Vice President


Signature Page to Second Amendment


Ally Bank, as a Lender

By:     /s/ Steven J. Brown                
Name: Steven J. Brown
Title: Authorized Signatory
Ally Corporate Finance


Signature Page to Second Amendment


Siemens Financial Services, Inc., as a Lender

By:     /s/ John Finore                
Name: John Finore
Title: Vice President


By:     /s/ Maria Levy                
Name: Maria Levy
Title: Vice President


Signature Page to Second Amendment


Citizens Business Capital, a division of Citizens Aset Finance, Inc., as a Lender

By:     /s/ Christine Scott                
Name: Christine Scott
Title: Senior Vice President

Signature Page to Second Amendment


TD Bank, N. A., as a Lender

By:     /s/ Jeffrey Saperstein                
Name: Jeffrey Saperstein
Title: Vice President

Signature Page to Second Amendment


Regions Bank, as a Lender

By:     /s/ Louis Alexander                
Name: Louis Alexander
Title: Managing Director

Signature Page to Second Amendment


UPS Capital, as a Lender

By:     /s/ Robert C. Dugger                
Name: Robert C. Dugger
Title: Senior Portfolio Manager

Signature Page to Second Amendment


Banco Popular de Puerto Rico, as a Lender

By:     /s/ Hector J. Gonzalez            
Name: Hector J. Gonzalez
Title: Vice President


Signature Page to Second Amendment


Consents from Term Lenders and 2016 Term Lenders are available with the Administrative Agent



Signature Page to Second Amendment


Annex A

Conformed Credit Agreement
[See Attached]



    



ANNEX A
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of July 21, 2015
as amended April 8, 2016
as further amended February 10, 2017
among
SEARS HOLDINGS CORPORATION
and
SEARS ROEBUCK ACCEPTANCE CORP.
and
KMART CORPORATION ,
as Borrowers
and
THE LENDERS NAMED HEREIN ,
and
THE ISSUING LENDERS NAMED HEREIN,
and
BANK OF AMERICA, N.A. ,
as Administrative Agent, Co-Collateral Agent and Swingline Lender
and
WELLS FARGO BANK, NATIONAL ASSOCIATION ,
as Co-Collateral Agent
WELLS FARGO BANK, NATIONAL ASSOCIATION
as Syndication Agent
PNC BANK, NATIONAL ASSOCIATION, SIEMENS FINANCIAL SERVICES, INC., ALLY BANK AND CITIGROUP GLOBAL MARKETS INC.
as Co-Documentation Agents

and

MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED and WELLS FARGO BANK, NATIONAL ASSOCIATION
as Joint Lead Arrangers

MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, WELLS FARGO BANK, NATIONAL ASSOCIATION, PNC BANK, NATIONAL ASSOCIATION AND CITIGROUP GLOBAL MARKETS INC.,
as Joint Bookrunners

        

TABLE OF CONTENTS
        
Page
ARTICLE I

DEFINITIONS AND ACCOUNTING TERMS     1
SECTION 1.01.     Certain Defined Terms    1
SECTION 1.02.
Computation of Time Periods     41 44
SECTION 1.03.
Accounting Terms     41 44
SECTION 1.04.
Other Interpretive Provisions     42 44
ARTICLE II

AMOUNTS AND TERMS OF THE ADVANCES, THE TERM LOAN AND THE 2016 TERM LOAN     44
SECTION 2.01.
The Revolving Advances, the Term Loan and the 2016 Term Loan     42 44
SECTION 2.02.
Making the Revolving Advances     43 45
SECTION 2.03.
The Swingline Advances     43 46
SECTION 2.04.
Making the Swingline Advances     44 46
SECTION 2.05.
Fees; Commitment Fee     45 47
SECTION 2.06.
Optional Termination or Reduction of the Revolving Commitments     45 48
SECTION 2.07.
Repayment of Revolving Advances, Term Loan and 2016 Term Loan     46 48
SECTION 2.08.
Interest     46 49
(a)
Scheduled Interest Owed to 2015 Non-Extending Lenders    49
(b)
Term Loan    49
(c)
2016 Term Loan    49
(d)
Scheduled Interest Owed to 2015 Extending Lenders and Swingline Lender    50
(e)
Default Interest    50
(f)
Regulation D Compensation    50
SECTION 2.09.
Interest Rate Determination     48 51
SECTION 2.10.
Optional Conversion of Revolving Advances, Term Loan Borrowings and 2016 Term Loan Borrowings     49 51
SECTION 2.11.
Optional and Mandatory Prepayments of Revolving Advances, Term Loan and 2016 Term Loan.     49 51
SECTION 2.12.
Increased Costs     51 54
SECTION 2.13.
Illegality     52 54
SECTION 2.14.
Payments and Computations     52 55
SECTION 2.15.
Taxes     53 55
SECTION 2.16.
Sharing of Payments, Etc.     56 58
SECTION 2.17.
Use of Proceeds of Advances, Term Loan and 2016 Term Loan     56 58
SECTION 2.18.
Extension of Loans     56 59
(a)
Extension of Revolving Commitments, Term Loans or 2016 Term Loans    59
(b)
Extension Request    60
(c)
New Lenders    60
(d)
Extension Amendment    61

i

SECTION 2.19.
Increase in Commitments     59 61
(a)
Reserved.    61
(b)
Request for Increase After April 8, 2016    61
(c)
Lender Elections    62
(d)
Notification by Agent    62
(e)
Conditions to Effectiveness of each Commitment Increase    62
(f)
Effective Date and Allocations    63
(g)
Other Provisions    63
(h)
Conflicting Provisions    63
SECTION 2.20
FILO Facility     61 63
(a)
Request for FILO Facility After July 21, 2015    63
(b)
Lender Elections    64
(c)
Notification by Agent    64
(d)
Conditions to Effectiveness of FILO Facility    64
(e)
Effective Date and Allocations    65
SECTION 2.21
Permitted Overadvances     62 65
ARTICLE III

AMOUNT AND TERMS OF THE LETTERS OF CREDIT     65
SECTION 3.01.
L/C Commitment     63 65
SECTION 3.02.
Procedure for Issuance of Letter of Credit     64 66
SECTION 3.03.
Fees and Other Charges     64 67
SECTION 3.04.
Letter of Credit Participations     65 67
SECTION 3.05.
Reimbursement Obligation of the Borrowers     65 68
SECTION 3.06.
Obligations Absolute     66 68
SECTION 3.07.
Letter of Credit Payments     66 69
SECTION 3.08.
Applications     66 69
SECTION 3.09.
Use of Letters of Credit     66 69
SECTION 3.10.
Currency Equivalents Generally     66 69
ARTICLE IV

CONDITIONS TO EFFECTIVENESS     69
SECTION 4.01
Conditions Precedent to Effectiveness     67 69
SECTION 4.02.
Conditions Precedent to Each Extension of Credit     69 71
ARTICLE V

REPRESENTATIONS AND WARRANTIES     72
SECTION 5.01.
Representations and Warranties of the Borrowers     69 72
ARTICLE VI

COVENANTS     76
SECTION 6.01.
Affirmative Covenants     73 76

ii

(a)
Compliance with Laws, Etc.     74 76
(b)
Payment of Taxes, Etc.     74 76
(c)
Maintenance of Insurance     74 76
(d)
Preservation of Corporate Existence, Etc.     74 77
(e)
Inspection Rights     75 77
(f)
Keeping of Books     75 77
(g)
Maintenance of Properties, Etc.     75 77
(h)
Transactions with Affiliates     75 78
(i)
Further Assurances 76 .    78
(j)
Reporting Requirements     76 79
(k)
Collateral Monitoring and Review     78 81
(l)
Landlord Waivers, Access Agreements and Customs Broker Agreements     79 81
(m)
Cash Management 79 .    81
(n)
Liens on Non-Collateral Assets     81 83
(o)
Physical Inventories     81 83
(p)
Letters of Credit     81 84
SECTION 6.02.
Negative Covenants     81 84
(a)
Liens, Etc.     82 84
(b)
Fundamental Changes     82 85
(c)
Acquisitions     83 85
(d)
Restricted Payments 83 .    85
(e)
Negative Pledge Clauses     84 87
(f)
Clauses Restricting Subsidiary Distributions     85 87
(g)
Accounting Changes     85 87
(h)
Reserved 85 .    87
(i)
Dispositions 85 . Make any Disposition except Permitted Dispositions.    87
(j)
Debt; Prepayment of Debt 85 .    87
(k)
Investments     86 88
(l)
Store Closings     86 88
(m)
Existing Debt    88
SECTION 6.03.
Financial Covenant     86 89
ARTICLE VII

EVENTS OF DEFAULT     89
SECTION 7.01.
Events of Default     86 89
ARTICLE VIII

THE AGENT AND CO-COLLATERAL AGENTS     91
SECTION 8.01.
Appointment     89 91
SECTION 8.02.
Delegation of Duties     89 92
SECTION 8.03.
Exculpatory Provisions     89 92
SECTION 8.04.
Reliance by Agent     89 92
SECTION 8.05.
Notice of Default     90 92
SECTION 8.06.
Non-Reliance on Agents and Other Lenders     90 93
SECTION 8.07.
Reports and Financial Statements     90 93
SECTION 8.08.
Indemnification     91 94

iii

SECTION 8.09.
Agent in Its Individual Capacity     92 94
SECTION 8.10.
Successor Agent     92 94
SECTION 8.11.
Co-Documentation Agents and Syndication Agent; Bank Product and Cash Management Services Providers     92 95
SECTION 8.12.
Defaulting Lenders     92 95
(a)
Adjustments    95
(b)
Consents    97
(c)
Defaulting Lender Cure    97
ARTICLE IX

MISCELLANEOUS     97
SECTION 9.01.
Amendments, Etc.     95 97
SECTION 9.02.
Notices, Etc.     95 98
SECTION 9.03.
No Waiver; Remedies     96 99
SECTION 9.04.
Costs and Expenses     96 99
SECTION 9.05.
Right of Set-off     97 100
SECTION 9.06.
Binding Effect; Effectiveness     98 100
SECTION 9.07.
Assignments and Participations     98 100
SECTION 9.08.
Confidentiality     100 103
SECTION 9.09.
Governing Law     101 103
SECTION 9.10.
Execution in Counterparts     101 104
SECTION 9.11.
Jurisdiction, Etc.     101 104
SECTION 9.12.
WAIVER OF JURY TRIAL     101 104
SECTION 9.13.
Release of Collateral or Guarantee Obligation     102 104
SECTION 9.14.
PATRIOT Act Notice     102 105
SECTION 9.15.
Integration     102 105
SECTION 9.16.
Replacement of Lenders     102 105
SECTION 9.17.
No Advisory or Fiduciary Capacity     103 105
SECTION 9.18.
Existing Credit Agreement Amended and Restated     103 106
SECTION 9.19.
Keepwell     103 106



iv


SCHEDULES
Schedule IA     Pricing Grid
Schedule IB     Commitment Fee Grid [Reserved]
Schedule IC    Extended Term Pricing Grid
Schedule 1.01    Lenders; Commitments
Schedule 1.02    Existing Letters of Credit
Schedule 1.03    Existing Swap Contracts
Schedule 3.02    Other LC Facilities
Schedule 5.01(n)    Pension Plan Issues
Schedule 5.01(p)     UCC Filing Jurisdictions
Schedule 5.01(t)    Labor Matters
Schedule 6.01(j)    Financial and Collateral Reports
Schedule 6.01(m)(i)(B)    Blocked Account Banks
Schedule 6.02(d)    Restricted Payments
Schedule 6.02(k)(ii)    Investment Policy

EXHIBITS
Exhibit A    Form of Notice of Borrowing
Exhibit B    Form of Assignment and Acceptance
Exhibit C    Form of Borrowing Base Certificate
Exhibit D    Form of Third Amended and Restated Guarantee and Collateral Agreement
Exhibit E    Form of Credit Card Notification
Exhibit F    Form of Intercreditor Agreement (Collateral and Other Property)
Exhibit G    Form of Customs Broker Agreement
Exhibit H    Form of Third Party Payor Notification
Exhibit I    Form of Compliance Certificate



v

THIRD AMENDED AND RESTATED AGREEMENT (this “ Agreement ”) dated as of July 21, 2015, as amended April 8, 2016, among SEARS HOLDINGS CORPORATION, a Delaware corporation (“ Holdings ”), SEARS ROEBUCK ACCEPTANCE CORP., a Delaware corporation (“ SRAC ”), KMART CORPORATION, a Michigan corporation (“ Kmart Corp. ”), the banks, financial institutions and other institutional lenders listed on the signature pages hereof or pursuant to any joinder hereto or through an assignment as provided in Section 9.07 hereof as Revolving Lenders, Term Lenders or 2016 Term Lenders, as applicable (collectively, the “ Lenders ”), the ISSUING LENDERS party hereto, BANK OF AMERICA, N.A. (the “ Bank ”), as administrative agent (the “ Agent ”), Co-Collateral Agent, and Swingline Lender, WELLS FARGO BANK, NATIONAL ASSOCIATION, as co-collateral agent (collectively, with the Bank in such capacity, the “ Co-Collateral Agents ”), WELLS FARGO BANK, NATIONAL ASSOCIATION, as Syndication Agent, PNC BANK, NATIONAL ASSOCIATION, SIEMENS FINANCIAL SERVICES, INC., ALLY BANK and CITIGROUP GLOBAL MARKETS INC., as co-documentation agents (the “ Co-Documentation Agents ”), MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED (“ MLPFS ”) and WELLS FARGO BANK, NATIONAL ASSOCIATION, as joint lead arrangers (collectively, the “ Lead Arrangers ”), and MLPFS, WELLS FARGO BANK, NATIONAL ASSOCIATION, PNC BANK, NATIONAL ASSOCIATION and CITIGROUP GLOBAL MARKETS INC., as joint bookrunners.

W I T N E S S E T H :
WHEREAS, Holdings, SRAC, Kmart Corp., certain lenders, Wells Fargo Bank, National Association, f/k/a Wells Fargo Retail Finance, LLC. and General Electric Capital Corporation, as co-collateral agents and co-syndication agents, JPMorgan Chase Bank, N.A. and Barclays Bank PLC, as documentation agents, Merrill Lynch, Pierce, Fenner & Smith Incorporated f/k/a Banc of America Securities LLC, Wells Fargo Retail Finance, LLC and GE Capital Markets, Inc. as joint lead arrangers and joint bookrunners, and Bank of America, N.A., as administrative agent (the “ Existing Agent ”), are party to that certain Amended and Restated Credit Agreement dated as of May 21, 2009, as amended by a Second Amended and Restated Credit Agreement dated as of April 8, 2011, as amended by a First Amendment to Second Amended and Restated Credit Agreement dated as of October 2, 2013, as amended by the Third Amended and Restated Credit Agreement dated as of July 21, 2015 (as further amended from time to time and in effect prior to the date hereof, the “ Existing Credit Agreement ”); and
WHEREAS, since the date of the Existing Credit Agreement, Sears Canada and OSH (each as defined in the Existing Credit Agreement) are no longer Subsidiaries of Holdings; and
WHEREAS, certain Lenders have agreed to become Extending Revolving Lenders (as defined in the Existing Credit Agreement) and have furnished Extended Revolving Commitments (as defined in the Existing Credit Agreement) and desire to enter into an Extension Amendment (as provided in Section 2.18(d) of the Existing Credit Agreement); and
WHEREAS, in addition, in accordance with Section 9.01 of the Existing Credit Agreement, the Borrowers, Holdings, certain of the Lenders and the Agent desire to otherwise amend and restate the Existing Credit Agreement as provided herein.
NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth in this Agreement, and for good and valuable consideration, the receipt of which is hereby acknowledged, the undersigned hereby agree that the Existing Credit Agreement shall be amended and restated, in its entirety to read as follows:

ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01.      Certain Defined Terms . As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):




“ 2015 Extending Lender ” means each Lender listed on Schedule 1.01 under the heading 2015 Extending Lenders, whose Revolving Commitment has been extended on July 21, 2015 and shall terminate on the Extended Termination Date.
“ 2015 Non-Extending Lender ” means each Revolving Lender listed on Schedule 1.01 under the heading 2015 Non-Extending Lenders, who has not agreed to extend the Revolving Termination Date for its Revolving Commitment on July 21, 2015.
“ 2016 Term Commitment ” means, as to any 2016 Term Lender, the obligation of such 2016 Term Lender to make its portion of the 2016 Term Loan on the First Amendment Effective Date in the amount set forth opposite such 2016 Term Lender’s name on Schedule 1.01 .
“ 2016 Term Lenders ” means, collectively, any Persons party hereto as a 2016 Term Lender, and each Person that shall become a party hereto as a 2016 Term Lender pursuant to Section 9.07 and shall include all future 2016 Term Lenders who hold an Extended 2016 Term Loan.
“ 2016 Term Loan ” means, collectively, (i) the term loans made by the 2016 Term Lenders on the First Amendment Effective Date pursuant to Section 2.01(c), and (ii) as used in the definitions of “Required Lenders” and “Supermajority Lenders”, the sum of the term loans of all the 2016 Term Lenders.
“ 2016 Term Loan Borrowing ” means a portion of the 2016 Term Loan of a particular Type; provided that no 2016 Term Loan Borrowing shall be in an aggregate principal amount of less than $5,000,000 and each 2016 Term Loan Borrowing constituting a Eurodollar Rate Advance shall be in a principal amount that is an integral multiple of $1,000,000 (unless no portion of the 2016 Term Loan constitutes a Base Rate Advance), and no more than ten (10) Interest Periods in the aggregate for Borrowings, Term Loan Borrowings and 2016 Term Loan Borrowings constituting Eurodollar Rate Advances may be outstanding at any time.
“ 2016 Term Loan Margin ” (a) with respect to any outstanding portion of the 2016 Term Loan that is a Eurodollar Rate Advance, 7.50% per annum, and (b) with respect to any outstanding portion of the 2016 Term Loan that is a Base Rate Advance, 6.50% per annum.
“ 2016 Term Loan Termination Date ” means July 20, 2020.
“ Accelerated Borrowing Base Delivery Event ” means either (i) the occurrence and continuance of any Event of Default, or (ii) the failure of the Borrowers for three (3) days (whether or not consecutive) during any thirty (30) day period to maintain Capped Excess Availability equal to at least 15% of the Line Cap. For purposes of this Agreement, the occurrence of an Accelerated Borrowing Base Delivery Event shall be deemed continuing at the Co-Collateral Agents’ option (x) so long as such Event of Default shall be continuing, and/or (y) if the Accelerated Borrowing Base Delivery Event arises as a result of the Borrowers’ failure to maintain Capped Excess Availability as required hereunder, until Capped Excess Availability has exceeded 15% of the Line Cap for thirty (30) consecutive calendar days, in which case an Accelerated Borrowing Base Delivery Event shall no longer be deemed to be continuing for purposes of this Agreement. The termination of an Accelerated Borrowing Base Delivery Event as provided herein shall in no way limit, waive or delay the occurrence of a subsequent Accelerated Borrowing Base Delivery Event in the event that the conditions set forth in clauses (i) or (ii) hereof again arise.
“ ACH ” means automated clearing house transfers.
“ Acquisition ” means, with respect to any Person (a) a purchase of a controlling interest in, the equity interests of any other Person, (b) a purchase or other acquisition of all or substantially all of the assets or properties of, another Person or of any business unit of another Person, or (c) any merger or consolidation of such Person with any other Person or other transaction or series of transactions resulting in the acquisition of all or substantially all of the assets, or a controlling interest in the equity interests, of any Person, in each case in any transaction or group of transactions which are part of a common plan.
“ Additional Commitment Lender ” has the meaning set forth in Section 2.19(d).

2

“ Additional Extending Lender ” has the meaning set forth in Section 2.18(c).
“ Adjusted Consolidated EBITDA ” means, for any period, Consolidated Net Income for such period plus (a) without duplication and to the extent deducted in determining Consolidated Net Income for such period, the sum of (i) Consolidated Interest Expense for such period, (ii) income tax expense for such period, (iii) all amounts attributable to depreciation and amortization expense for such period, (iv) any items of loss resulting from the sale of assets other than in the ordinary course of business for such period, (v) any non-cash charges for tangible or intangible impairments or asset write downs for such period (excluding any write downs or write-offs of Inventory other than write-downs or write-offs of Inventory related to up to 100 store closings in any four consecutive fiscal quarters), and (vi) any other non-cash charges for such period (including non-cash charges arising from share-based payments to employees or directors, but excluding (1) any non-cash charge already added back to Consolidated Net Income in the calculation of Adjusted Consolidated EBITDA in a prior period, (2) any non-cash charge that relates to the write-down or write-off of Inventory other than write-downs or write-offs of Inventory related to up to 100 store closings in any four consecutive fiscal quarters, and (3) non-cash charges for which a cash payment is required to be made in that or any other period), minus (b) without duplication and to the extent included in Consolidated Net Income for such period, (i) any items of gain resulting from the sale of assets other than in the ordinary course of business for such period, (ii) any cash payments made during such period in respect of non-cash charges described in clause (a)(vi) taken in a prior period and (iii) any non-cash items of income for such period, all calculated on a Consolidated basis in accordance with GAAP (excluding any non-cash income already deducted from Consolidated Net Income in the calculation of Adjusted Consolidated EBITDA in a prior period). For the purposes of calculating Adjusted Consolidated EBITDA in connection with any determination of the Consolidated Leverage Ratio or Fixed Charge Ratio, (i) if at any time during the applicable four-quarter period, Holdings or any of its Subsidiaries shall have made any Material Disposition, the Adjusted Consolidated EBITDA for such fiscal quarter shall be reduced by an amount equal to the Adjusted Consolidated EBITDA (if positive) attributable to the property that is the subject of such Material Disposition for such period or increased by an amount equal to the Adjusted Consolidated EBITDA (if negative) attributable thereto for such fiscal period and (ii) if at any time during the applicable four-quarter period, Holdings or any of its Subsidiaries shall have made a Material Acquisition, Adjusted Consolidated EBITDA for such period shall be calculated after giving pro forma effect thereto as if such Material Acquisition occurred on the first day of such period. As used in this definition, “Material Acquisition” means any acquisition of property or series of related acquisitions of property that (a) constitutes assets comprising all or substantially all of an operating unit of a business or constitutes all or substantially all of the common stock of a Person and (b) involves the payment of consideration by Holdings and its Subsidiaries in excess of $100,000,000; and “Material Disposition” means any Disposition of property or series of related Dispositions of property that yields gross proceeds to Holdings or any of its Subsidiaries in excess of $100,000,000.
“ Adjustment Date ” shall have the meaning provided therefor in Schedule IA .
“ Advance ” means any advance by a Revolving Lender to any Borrower as part of a Borrowing.
“ Affiliate ” means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. For purposes of this definition, the term “control” (including the terms “controlling”, “controlled by” and “under common control with”) of a Person means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person by contract or otherwise.
“ Agent ” has the meaning provided in the Preamble, or any successor thereto.
“ Agent’s Account ” means the account of the Agent maintained by the Agent at Bank of America, N.A., designated by the Agent in writing to the Borrowers, the Co-Collateral Agents and the Lenders.
“ Aggregate Revolving Commitments ” means (i) other than as used pursuant to clause (ii) below, the Revolving Commitments of all the Revolving Lenders, and (ii) as used in the definitions of “Required Lenders” and “Supermajority Lenders”, the sum of (x) the Revolving Commitments of all the Revolving Lenders and (y) to the extent any FILO Facility is a revolving facility, the FILO Commitments of all of the FILO Lenders.

3

As of July 21, 2015, February 10, 2017, the Aggregate Revolving Commitments are $ 3,275,000,000. 1,500,000,000.
“ All-in Yield ” means, as to any Debt, the effective interest rate with respect thereto as reasonably determined by the Agent taking into account the interest rate, margin, original issue discount, upfront fees and “eurodollar rate floors” or “base rate floors”; provided that (i) original issue discount and upfront fees shall be equated to interest rate assuming a four-year life to maturity of such Debt, (ii) customary arrangement, structuring, underwriting, amendment or commitment fees paid solely to the applicable arrangers or agents with respect to such Debt shall be excluded.
“ Applicable Lending Office ” means, with respect to each Lender, such Lender’s Domestic Lending Office in the case of a Base Rate Advance, and such Lender’s Eurodollar Lending Office in the case of a Eurodollar Rate Advance.
“ Applicable Margin ” means, initially, (a) 2.25% per annum for Eurodollar Rate Advances and (b) 1.25% per annum for Base Rate Advances; provided , that on and after the first Adjustment Date occurring at the end of the first full fiscal quarter after the Effective Date, the Applicable Margin will be determined pursuant to the Pricing Grid; provided further that until the first Adjustment Date occurring more than twelve months after the Effective Date, the Applicable Margin shall not be established at Level 1 (even if the Consolidated Leverage Ratio during any period was less than 2.0:1.0).
“ Application ” means an application, in such form as the Issuing Lender may specify from time to time, requesting the Issuing Lender to open a Letter of Credit.
“Application of Disposition Proceeds” means, with respect to any applicable Disposition, the application of the Net Proceeds thereof by Holdings and its Subsidiaries in the following order: (i) first, to repay outstanding Advances in full; (ii) second, (x) to the extent that the outstanding amounts of the Term Loan and 2016 Term Loan have not, since the Second Amendment Effective Date, been reduced by at least 23.8965% of the amount of, respectively, the Term Loan and the 2016 Term Loan outstanding as of the Second Amendment Effective Date, to the repayment of the Term Loan and the 2016 Term Loan (in such order as the Borrowers shall determine, but subject to the requirements of Section 2.11(a) hereof) in such amounts, if any, as necessary to effect a reduction of 23.8965% of the outstanding amount of each of the Term Loan and the 2016 Term Loan relative to the outstanding amount of such Loans as of the Second Amendment Effective Date, and then (y) to the repayment of the Term Loan, the 2016 Term Loan and/or reduction of the Aggregate Revolving Commitments, as the Borrower may elect (but subject to the requirements of Section 2.11(a) hereof), to the extent required to reduce the sum of the Aggregate Revolving Commitments, plus the aggregate outstanding amount of the Term Loan and the 2016 Term Loan, to $2,800,000,000, if such sum then exceeds $2,800,000,000; and (iii) third, to be retained by the Loan Parties to fund permitted purposes as set forth in Section 2.17 hereof (other than Acquisitions and other Investments (other than Investments in Holdings or any of its Subsidiaries permitted hereunder), cash dividends (other than dividends payable to Holdings or any of its Subsidiaries permitted hereunder), or stock repurchases); provided that, notwithstanding the foregoing, until such time as the aggregate amount of Net Proceeds that are required to be applied pursuant to the Application of Disposition Proceeds and that remain after giving effect to the application of Net Proceeds required to repay outstanding Advances in full pursuant to clause (i) (i.e., “first”) hereof (such remaining amount, the “Unapplied Disposition Proceeds”) is greater than $15,000,000, any such Unapplied Disposition Proceeds shall not be required to be applied to clause (ii) (i.e., “second”) hereof, but may be retained by the Loan Parties pursuant to clause (iii) (i.e., “third”) hereof; provided further that upon the consummation of any Disposition subject to the Application of Disposition Proceeds that would cause the aggregate amount of Unapplied Disposition Proceeds (including Unapplied Disposition Proceeds from such Disposition) to exceed $15,000,000, the aggregate amount of all such Unapplied Disposition Proceeds (i.e., including the initial $15,000,000 set forth above) shall be applied pursuant to clauses (ii) (i.e., “second”) through (iii) (i.e., “third”) above and the amount of Unapplied Disposition Proceeds following such application shall be reset at $0.
“ Approved Fund ” means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

4

“April 2016 Mortgage Debt” means the Debt owing by Sears and certain other Subsidiaries of Holdings to JPP, LLC, JPP II, LLC and Cascade Investment, L.L.C., as lenders, pursuant to that certain $500,000,000 secured short-term loan facility dated as of April 8, 2016.
“ Assignment and Acceptance ” means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Agent, in substantially the form of Exhibit B hereto.
“ Authorized Officer ” means, as to Holdings, any Borrower or any other Loan Party, its president, chief executive officer, chief financial officer, vice president and controller, vice president and treasurer, vice president, finance, executive vice president, finance or any other person designated by it and acceptable to the Agent. Any document delivered hereunder that is signed by an Authorized Officer of a Loan Party shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of such Loan Party and such Authorized Officer shall be conclusively presumed to have acted on behalf of such Loan Party.
“ Availability Reserves ” means, without duplication of any other reserves or items that are otherwise addressed or excluded through eligibility criteria, such reserves as any Co-Collateral Agent from time to time determines in its Permitted Discretion as being appropriate (a) to reflect the impediments to the Co-Collateral Agents’ ability to realize upon the Collateral, (b) to reflect claims and liabilities that such Co-Collateral Agent determines will need to be satisfied in connection with the realization upon the Collateral, (c) to reflect criteria, events, conditions, contingencies or risks which adversely affect any component of the Borrowing Base, or (d) to reflect that a Default or an Event of Default then exists. Without limiting the generality of the foregoing, Availability Reserves may include, in any Co-Collateral Agent’s Permitted Discretion (but are not limited to) reserves based on: (i) customs duties, and other costs to release Inventory which is being imported into the United States, (ii) outstanding Taxes and other governmental charges, including, without limitation, ad valorem, real estate, personal property, sales, and other Taxes and claims of the PBGC, which may have priority over the interests of the Co-Collateral Agents in the Collateral, (iii) salaries, wages and benefits due to employees of any Loan Party, (iv) reasonably anticipated changes in the Net Orderly Liquidation Value between appraisals, (v) warehousemen’s or bailees’ charges and other Permitted Encumbrances which may have priority over the interests of the Co-Collateral Agents in the Collateral, (vi) after the occurrence and during the continuance of a Cash Dominion Event or at such other times as otherwise required by the Co-Collateral Agents in their Permitted Discretion, Cash Management Reserves, (vii) after the occurrence and during the continuance of a Cash Dominion Event or at such other times as otherwise required by the Co-Collateral Agents in their Permitted Discretion, Bank Products Reserves, (viii) after the occurrence and during the continuance of a Cash Dominion Event or at such other times as otherwise required by the Co-Collateral Agents in their Permitted Discretion, amounts due to vendors on account of consigned goods, (ix) rent expense at leased Stores and DC locations, (x) royalties payable to non-Loan Parties in respect of licensed merchandise, (xi) the Gift Card Liability Reserve, (xii) Customer Deposits Reserve, (xiii) PACA Liability Reserves, (xiv) PASA Liability Reserves, (xv) after the occurrence and during the continuance of a Cash Dominion Event or at such other time as otherwise required by the Co-Collateral Agents in their Permitted Discretion, amounts due to any state’s lottery commission or other equivalent agency, authority or entity, or to any other Governmental Authority involved in the administration or regulation of lotteries, (xvi) Credit Card Receivables owed to Sears Protection Company (PR), Inc. and its Subsidiaries, (xvii) amounts due to Sears Authorized Hometown Stores, LLC, Sears Home Appliance Showrooms, LLC, Sears Outlet Stores, LLC and their subsidiaries; (xviii) the Debt Maturity Reserve, and (xix) the FILO Reserve. Upon the determination by any Co-Collateral Agent that an Availability Reserve should be established or modified, such Co-Collateral Agent shall notify the Agent in writing and the Agent shall thereupon establish or modify such Availability Reserve, subject to the expiration of the Reserve Notice Period.
“ Available Commitment ” means as to any Revolving Lender at any time, an amount equal to the excess, if any, of (a) such Revolving Lender’s Revolving Commitment then in effect over (b) such Revolving Lender’s Revolving Extensions of Credit then outstanding; provided , that in calculating any Revolving Lender’s Revolving Extensions of Credit for the purpose of determining such Revolving Lender’s Available Commitment pursuant to Section 2.05(a), the aggregate principal amount of Swingline Advances then outstanding shall be deemed to be zero.

5

“ Bank ” has the meaning provided in the Preamble and its successors.
“ Bank Products ” means any services or facilities provided to any Loan Party by any Lender or any of its Affiliates on account of (a) each Swap Contract that (x) is set forth on Schedule 1.03 or is in effect on July 21, 2015 with a counterparty that is a Credit Party as of July 21, 2015 or (y) is entered into after July 21, 2015 with any counterparty that is a Credit Party at the time such Swap Contract is entered into, (b) leasing facilities, provided that in each such case under clause (a)(y) and this clause (b), either the Borrowers or such Credit Party shall have notified the Agent in writing that such service or facility shall constitute a Bank Product hereunder, and (c) any other extension of credit (excluding Cash Management Services) to or for the benefit of any Loan Party (agreed by the Agent and the Borrower as being a “Bank Product” for purposes of this Agreement), provided that in each such case under this clause (c), the Borrowers have notified the Agent in writing, at a time when no Event of Default has occurred and is continuing, that such service or facility shall constitute a Bank Product hereunder; provided, further, that such notice shall be deemed given with respect to any Bank Products provided by the Agent or its Affiliates.
“ Bank Product Reserves ” means such reserves as any Co-Collateral Agent may from time to time determine in its Permitted Discretion as being appropriate to reflect the liabilities and obligations of the Loan Parties with respect to Bank Products then provided or outstanding; provided that in the event that any counterparty to a Swap Contract requires that the Loan Parties provide cash collateral to secure such Swap Contract, the amount of the Bank Product Reserve imposed by the Co-Collateral Agents with respect to such Swap Contract shall take into consideration the amount of such cash collateral.
“ Banker’s Acceptance ” means a time draft or bill of exchange or other deferred payment obligation relating to a Commercial L/C which has been accepted by the Issuing Lender.
“ Base Rate ” means, for any day, a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus one-half of one percent (0.50%), (b) the Eurodollar Rate (calculated utilizing a one-month Interest Period) plus one percent (1.00%), or (c) the rate of interest in effect for such day as publicly announced from time to time by the Bank as its “prime rate.” The “prime rate” is a rate set by the Bank based upon various factors including the Bank’s costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such rate announced by the Bank shall take effect at the opening of business on the day specified in the public announcement of such change.
“ Base Rate Advance ” means an Advance, a Term Loan Borrowing or a 2016 Term Loan Borrowing, as applicable, that bears interest as provided in Sections 2.08(a)(i), 2.08(b)(i), or 2.08(c)(i), as applicable.
“ Blocked Accounts ” means the Blocked Accounts described in Section 6.01(m)(i) and any additional deposit accounts that become subject to Blocked Account Agreements pursuant to Section 6.01(i)(iii).
“ Blocked Account Agreement ” means with respect to a Blocked Account established by a Loan Party, an agreement, in form and substance reasonably satisfactory to the Co-Collateral Agents, establishing control (as defined in the UCC) of such account by the Agent (as “Control Co-Collateral Agent”) and whereby the bank maintaining such account agrees, upon the occurrence and during the continuance of a Cash Dominion Event, to comply only with the instructions originated by the Agent (or any other Co-Collateral Agent which shall succeed the Agent as “Control Co-Collateral Agent” thereunder), without the further consent of any other Person.
“ Blocked Account Bank ” means Bank of America, N.A. and each other bank with whom deposit accounts are maintained in which funds of any of the Loan Parties are concentrated and with whom a Blocked Account Agreement has been, or is required to be, executed in accordance with the terms hereof.
“ Borrower Information ” has the meaning specified in Section 9.08.
“ Borrowers ” means, collectively, SRAC and Kmart Corp.; provided that in the event SRAC is dissolved, merged with and into Holdings or any Subsidiary of Holdings or otherwise ceases to exist in

6

accordance with Section 6.01(d), then Holdings shall designate that Holdings or a direct wholly owned Domestic Subsidiary of Holdings become a Borrower for all purposes of the Loan Documents.
“ Borrowing ” means a borrowing consisting of simultaneous Advances of the same Type made by each of the applicable Lenders pursuant to Section 2.01 or Section 2.03 provided that no more than ten (10) Interest Periods in the aggregate for Borrowings, Term Loan Borrowings and 2016 Term Loan Borrowings constituting Eurodollar Rate Advances may be outstanding at any time.
“ Borrowing Base ” means, at any time, an amount equal to (a) 85% of the aggregate outstanding Eligible Credit Card Accounts Receivable at such time plus (b) 85% of the Eligible Pharmacy Receivables at such time plus (c) the lesser of (i) 70% of the Net Eligible Inventory at such time and (ii) 80% of the Net Orderly Liquidation Value at such time, minus (d) 100% of the then Availability Reserves. The Agent may, in its Permitted Discretion after the expiration of the Reserve Notice Period, adjust Availability Reserves and Inventory Reserves used in computing the Borrowing Base.
“ Borrowing Base Certificate ” means a certificate, signed by an Authorized Officer of Holdings, substantially in the form of Exhibit C or another form which is reasonably acceptable to the Co-Collateral Agents in their Permitted Discretion.
“ Business Day ” means a day of the year on which banks are not required or authorized by law to close in New York, New York or Boston, Massachusetts or, in the case of matters relating to SRAC, Greenville, Delaware or, in the case of matters relating to Kmart Corp., Detroit, Michigan, and, if the applicable Business Day relates to any Eurodollar Rate Advances, a day of the year on which dealings are carried on in the London interbank market.
“ Capital Expenditures ” means, with respect to any Person for any period, all cash expenditures made or costs incurred for the acquisition or improvement of fixed or capital assets of such Person, in each case that are (or should be) set forth as capital expenditures in a consolidated statement of cash flows of such Person for such period, in each case prepared in accordance with GAAP.
“ Capital Lease Obligations ” means, with respect to any Person for any period, the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as liabilities on a balance sheet of such Person under GAAP and the amount of which obligations shall be the capitalized amount thereof determined in accordance with GAAP.
“ Capped Excess Availability ” means, at any time, an amount equal to the (A) the Line Cap, minus (B) the Total Extensions of Credit (other than FILO Extensions of Credit).
“ Cash Dominion Event ” means either (a) the occurrence and continuance of an Event of Default, or (b) the sum of (i) Capped Excess Availability, plus (ii) Suppressed Availability (not to exceed an amount equal to 2.5% of the Line Cap) at any time is less than the greater of (x) 12.5% of the Line Cap, or (y) $175,000,000 for three (3) days Business Days (whether or not consecutive) during any thirty (30) day period. For purposes hereof, the occurrence of a Cash Dominion Event shall be deemed continuing at the Co-Collateral Agents’ option (i) so long as such Event of Default is continuing, and/or (ii) if the Cash Dominion Event arises as a result of the Borrowers’ failure to achieve availability in the amount described in the preceding sentence, until such availability has exceeded such amounts, in each case for thirty (30) consecutive Business Days, in which case a Cash Dominion Event shall no longer be deemed to be continuing for purposes of this Agreement; provided that a Cash Dominion Event shall be deemed continuing (even if availability as described in clause (b) of the preceding sentence exceeds such amount for thirty (30) consecutive Business Days) after a Cash Dominion Event has occurred on two (2) occasions during any twelve month period after July 21, 2015 if the first such Cash Dominion Event has been discontinued and shall continue until the expiration of the twelve month period ending after the commencement of the second Cash Dominion Event. The termination of a Cash Dominion Event as provided herein shall in no way limit, waive or delay the occurrence of a subsequent Cash Dominion Event in the event that the conditions set forth in this definition again arise.

7

“ Cash Equivalents ” means investments of Holdings and its Subsidiaries recorded as cash or cash equivalents in accordance with GAAP.
“ Cash Management Reserves ” means such reserves as any Co-Collateral Agent, from time to time, determines in its Permitted Discretion as being appropriate to reflect the reasonably anticipated liabilities and obligations of the Loan Parties with respect to Cash Management Services then provided or outstanding.
“ Cash Management Services ” means any one or more of the following types of services or facilities provided to any Loan Party by any Lender or any of its Affiliates: (a) ACH transactions, (b) cash management services, including, without limitation, controlled disbursement services, treasury, depository, overdraft, and electronic funds transfer services, (c) foreign exchange facilities, (d) credit card processing services, (e) credit or debit cards, provided that in each such case under clauses (a) through (e), either the Borrowers or such Credit Party shall have notified the Agent in writing that such service or facility shall constitute a Cash Management Service hereunder, (f) purchase cards, and (g) other services or facilities to or for the benefit of any Loan Party (agreed by the Agent and the Borrower as being a “Cash Management Service” for purposes of this Agreement), provided that in each such case under clauses (f) and (g), the Borrowers have notified the Agent in writing, at a time when no Event of Default has occurred and is continuing, that such services or facilities shall constitute Cash Management Services hereunder; provided, further, that such notice shall be deemed given with respect to any Cash Management Services provided by the Agent or its Affiliates.
“ Class ” means (a) the class consisting of 2015 Non-Extending Lenders, (b) the class consisting of 2015 Extending Lenders and, if applicable, Additional Commitment Lenders, (c) the class consisting of Term Lenders, (d) the class consisting of 2016 Term Lenders, (e) any class of Extending Lenders and, if applicable, Additional Extending Lenders having a Revolving Commitment established pursuant to Section 2.18, and (f) any Class of Additional Extending Lenders having a term commitment established pursuant to Section 2.18, as the context may require. For clarity, except as expressly provided herein, each Lender shall have the same rights and obligations under this Agreement and the other Loan Documents.
“ Co-Collateral Agents ” has the meaning provided in the Preamble and any successors thereto.
“ Co-Documentation Agents ” has the meaning provided in the Preamble and any successors thereto.
“ Collateral ” means all property of the Loan Parties, now owned or hereafter acquired, upon which a Lien (excluding any license granted to the Co-Collateral Agents (and deemed to be a Lien pursuant to the definition thereof) for the sole purpose of enabling the Co-Collateral Agents to exercise rights and remedies with respect to the Liens granted on the Collateral set forth in Section 3.1 of the Guarantee and Collateral Agreement) is purported to be created by any Security Document.
“ Commercial L/C ” means a commercial documentary Letter of Credit under which the Issuing Lender agrees to make payments in Dollars for the account of any Borrower, on behalf of any Group Member, in respect of obligations of such Group Member in connection with the purchase of goods or services in the ordinary course of business.
“ Commitment Fee Grid ” means the pricing grid set forth on Schedule IB .
“ Commitment Fee Rate ” means, initially, 0.625% per annum; provided , that on and after the first Adjustment Date occurring after the end of the first full fiscal quarter after the Effective Date, the Commitment Fee Rate will be determined pursuant to the Commitment Fee Grid; provided that in no event shall the commitment fee payable to a 2015 Extending Lender be less than 0.50% per annum.
“ Commitments ” means, collectively, the Revolving Commitments, the Term Commitments and the 2016 Term Commitments, and if applicable, the FILO Commitments.
“ Commodity Exchange Act ” means the Commodity Exchange Act (7 U.S.C. § 1 et seq.).

8

“ Commonly Controlled Entity ” means an entity, whether or not incorporated, that is under common control with any Borrower within the meaning of Section 4001 of ERISA or is part of a group that includes any Borrower and that is treated as a single employer under Section 414 of the Internal Revenue Code.
“ Consolidated ” refers to the consolidation of accounts of Holdings and its Subsidiaries in accordance with GAAP and as presented on a GAAP basis.
“ Consolidated Interest Expense ” means for any period for any Person, total interest expense of such Person (including that attributable to Capital Lease Obligations and other expenses classified as interest expense in accordance with GAAP) on a Consolidated basis with respect to all outstanding Debt of such Person, as determined in accordance with GAAP.
“ Consolidated Leverage Ratio ” means, as of any given day, the ratio of (a) Consolidated Total Debt on such day to (b) Adjusted Consolidated EBITDA for the four immediately preceding fiscal quarters for which financial statements are available or were required to have been delivered pursuant to Section 6.01(j).
“ Consolidated Net Income ” means, for any period, the consolidated net income (or loss) of Holdings and its Subsidiaries, determined on a Consolidated basis in accordance with GAAP; provided that there shall be excluded (a) the income (or deficit) of any Person accrued prior to the date it becomes a Subsidiary of Holdings or is merged into or consolidated with Holdings or any of its Subsidiaries, (b) the income (or deficit) of any Person (other than a Subsidiary of Holdings) in which Holdings or any of its Subsidiaries has an ownership interest, except to the extent that any such income is actually received by Holdings or such Subsidiary in the form of dividends or similar distributions and (c) the undistributed earnings of any Subsidiary of Holdings (other than a Loan Party) to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary is not at the time permitted by the terms of any contractual obligation (other than under any Loan Document) or Requirement of Law applicable to such Subsidiary.
“ Consolidated Total Debt ” means, at any date, the aggregate principal amount of all Debt of Holdings and its Subsidiaries at such date, determined on a Consolidated basis in accordance with GAAP, but excluding (i) issued but not funded letters of credit, (ii) reimbursement obligations which are characterized as trade payables and are not overdue with respect to trade letters of credit (other than Letters of Credit issued hereunder) and (iii) contingent obligations.
“ Convert ”, “ Conversion ” and “ Converted ” each refers to a conversion of Advances, a Term Loan Borrowing or a 2016 Term Loan Borrowing, as applicable, of one Type into Advances, a Term Loan Borrowing or a 2016 Term Loan Borrowing, as applicable, of the other Type, pursuant to Section 2.09 or 2.10.
“ Covenant Compliance Event ” means Capped Excess Availability at any time is less than the greater of (x) 10% of the difference between (i) the Line Cap minus (ii) the sum of (a) the outstanding principal amount of the Term Loan and (b) the outstanding principal amount of the 2016 Term Loan, and (y) $ 200,000,000. 150,000,000.
“ Credit Card Accounts Receivable ” means each Account or Payment Intangible (each as defined in the UCC) together with all income, payments and proceeds thereof, owed by a credit card payment processor or an issuer of credit cards to a Loan Party resulting from charges by a customer of a Loan Party on credit cards issued by such issuer in connection with the sale of goods by a Loan Party or services performed by a Loan Party, in each case in the ordinary course of its business.
“ Credit Card Notification ” has the meaning specified in Section 6.01(m)(i)(A).
“ Credit Card Processors ” ” means the credit card clearinghouses and processors used by the Loan Parties and listed in the Perfection Certificate as of July 21, 2015, or otherwise disclosed in writing to the Agent by the Loan Parties from time to time following July 21, 2015.
“Credit Card Program Assets” means the Credit Card Program Documents, all rights or obligations arising thereunder (including, without limitation, royalty fees and other revenues payable to

9

Holdings or any of its subsidiaries pursuant thereto), all related Intellectual Property and such other assets as the Borrowers and the Co-Collateral Agents may agree, but excluding, for the avoidance of doubt, Credit Card Accounts Receivable or any proceeds thereof.

“Credit Card Program Documents” means the Program Agreement, originally dated as of July 15, 2003, amended and restated as of November 3, 2003, and as further amended by the parties from time to time by and among Sears, Roebuck and Co., Sears Brands Business Unit Corporation (as successor in interest to Sears Intellectual Property Management Company) and Citibank, N.A. (as successor in interest to Citibank (South Dakota), N.A., which was successor in interest to Citibank (USA), N.A.), and the other agreements entered into in connection therewith.

“Credit Card Royalty Securitization” means the securitization, subject to Section 6.01(h) hereof, of royalty fees and other revenues payable to Holdings or any of its subsidiaries pursuant to the Credit Card Program Documents, but excluding, for the avoidance of doubt, Credit Card Accounts Receivable or any proceeds thereof; provided that the documents governing such securitization shall not provide, directly or indirectly, for recourse against any Loan Party by way of a guaranty or any other support arrangement other than such limited recourse as is reasonable given market standards for transactions of a similar type, including in connection with any servicing or management of the assets subject thereto by any Loan Party.

“Credit Card Royalty Securitization Subsidiary” means any Subsidiary of Holdings that engages in no material activities other than the transactions contemplated by a Credit Card Royalty Securitization and activities reasonably related thereto.

“ Credit Party ” or “ Credit Parties ” means (a) individually, (i) each Lender and its Affiliates, (ii) the Agent, (iii) each Co-Collateral Agent, (iv) each Issuing Lender, (v) each Lead Arranger, and (vi) the successors and assigns of each of the foregoing, and (b) collectively, all of the foregoing.
“ Customer Deposits Reserve ” shall mean, at any time, a reserve equal to the aggregate outstanding amount of customer deposits of the Loan Parties at such time.
“ Customs Broker Agreement ” means an agreement in substantially the form attached hereto as Exhibit G , or such other form as the Co-Collateral Agents may reasonably agree, among a Loan Party, a customs broker or other carrier, and the Co-Collateral Agents, in which the customs broker or other carrier acknowledges that it has control over and holds the documents evidencing ownership of the subject Inventory for the benefit of the Co-Collateral Agents and agrees, upon notice from the Co-Collateral Agents (which shall not be furnished unless an Event of Default is continuing), to hold and dispose of the subject Inventory solely as directed by the Co-Collateral Agents.
“ DC ” means any distribution center owned or leased and operated by any Loan Party.
“ DDA ” means each checking, savings or other demand deposit account maintained by any of the Loan Parties.
“ Debt ” of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money (excluding interest payable thereon unless such interest has been accrued and added to the principal amount of such indebtedness), (b) all obligations of such Person for the deferred purchase price of property or services (other than (i) trade payables incurred in the ordinary course of such Person’s business and (ii) any such obligations which are due less than twelve months from the date of incurrence), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments (other than performance, surety and appeals bonds arising in the ordinary course of business and other than the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business) or in respect of bankers’ acceptances or letters of credit, (d) all obligations of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all obligations of such Person as lessee under leases that have been or should be, in accordance with GAAP, recorded as capital leases, (f) all direct recourse payment

10

obligations of such Person in respect of any accounts receivable sold by such Person, (g) all Debt of others referred to in clauses (a) through (f) above or clause (h) below and other payment obligations guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (1) to pay or purchase such Debt or to advance or supply funds for the payment or purchase of such Debt, (2) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Debt or to assure the holder of such Debt against loss, (3) to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether such property is received or such services are rendered) or (4) otherwise to assure a creditor against loss, and (h) all Debt referred to in clauses (a) through (g) above secured by (or for which the holder of such Debt has an existing right, contingent or otherwise, to be secured by) any Lien on property (including accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Debt.
“ Debt Maturity Reserve ” means an Availability Reserve (i) if (x) the Term Loan, the Senior Unsecured Notes, the Existing Second Lien Notes or any other Debt (other than the April 2016 Mortgage Debt) with a principal balance in excess of $50,000,000 (excluding Debt consisting of Short Term commercial paper or other Short Term Debt with an aggregate principal balance of $ 750,000,000 500,000,000 or less (whether incurred pursuant to clause (h) of the definition of Permitted Debt or that otherwise qualifies as Permitted Debt)), or, (y) solely to the extent that the Extended Termination Date of the Extended Revolving Commitments is further extended in accordance with the terms of Section 2.18 hereof to a date that is beyond the 2016 Term Loan Termination Date (as the 2016 Term Loan Termination Date may be extended in accordance with the terms of Section 2.18 hereof), the 2016 Term Loan, in each case remains outstanding on any date that is 91 days or fewer prior to the maturity date of such Debt (any such date under this clause (i), the “date of determination”), then an amount equal to the outstanding principal balance of such Debt, provided that such Debt Maturity Reserve shall be eliminated when such Debt is satisfied (including, if otherwise permissible hereunder, with the proceeds of an Advance in an amount up to the amount of the applicable Debt Maturity Reserve), refinanced, or the maturity thereof extended so as to be in excess of 91 days after such date of determination and (ii , (ii) if the April 2016 Mortgage Debt remains outstanding on any date that is 45 days or fewer prior to the maturity date of such Debt (any such date under this clause (ii), the “date of determination”), then an amount equal to the outstanding principal balance of such Debt, provided that such Debt Maturity Reserve shall be eliminated when such Debt is satisfied (including, if otherwise permissible hereunder, with the proceeds of an Advance in an amount up to the amount of the applicable Debt Maturity Reserve), refinanced, or the maturity thereof extended so as to be in excess of 45 days after such date of determination, and (iii ) if any Debt consisting of Short Term commercial paper or other Short Term Debt (whether incurred pursuant to clause (h) of the definition of Permitted Debt or that otherwise qualifies as Permitted Debt) remains outstanding on any date that is 30 days or fewer prior to both (A) the maturity date of such Debt and (B) the Extended Termination Date (any such date under this clause (ii), the “date of determination”), then an amount equal to the outstanding principal balance of such Debt, provided that such Debt Maturity Reserve shall be eliminated when such Debt is satisfied (including, if otherwise permissible hereunder, with the proceeds of an Advance in an amount up to the amount of the applicable Debt Maturity Reserve), refinanced, or the maturity thereof extended so as to be in excess of 91 days after the date of determination or the Extended Termination Date is extended (if applicable), in any case so that the foregoing conditions are no longer satisfied.
As used herein, “Short Term” means any commercial paper or other Debt for borrowed money having a maturity of 180 days or less from the date of the incurrence or issuance of such Debt.
“ Debtor Relief Laws ” means the Bankruptcy Code of the United States, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally.
“ Default ” means any Event of Default or any event that would constitute an Event of Default but for the requirement that notice be given or time elapse or both.
“ Defaulting Lender ” means any Lender (as reasonably determined by the Agent) that (a) has failed to fund any portion of the Advances, participations in Letters of Credit or participations in Swingline Loans

11

required to be funded by it hereunder within three Business Days of the date required to be funded by it hereunder, (b) has otherwise failed to pay over to the Agent or any other Lender any other amount required to be paid by it hereunder within three Business Days of the date when due, (c) has failed, within three Business Days after request by the Agent, to confirm that it will comply with the terms of this Agreement relating to its Commitments, provided that such Lender shall cease to be a Defaulting Lender under this clause (c) upon the Agent’s receipt of such confirmation, (d) has notified the Borrower, the Agent, the L/C Issuer or the Swing Line Lender in writing that it does not intend to comply with its funding obligations hereunder, or has made a public statement to that effect, or (e) has, or has a direct or indirect parent company that has, (i) become the subject of a proceeding under any Debtor Relief Law, or (ii) had appointed for it a receiver, custodian, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or assets, including the Federal Deposit Insurance Corporation or any other state or federal regulatory authority acting in such a capacity; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any equity interest in that Lender or any direct or indirect parent company thereof by a Governmental Authority so long as such ownership interest does not result in or provide such Lender with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Lender (or such Governmental Authority) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender.
“ Designated Obligations ” shall have the meaning set forth in Section 2.11(b).
“ Designated Prepayment ” shall have the meaning set forth in Section 2.11(b).
“ Disposition ” means any sale, transfer, license, lease or other disposition (including any sale and leaseback transaction), whether in one transaction or in a series of transactions, of any property (including, without limitation, any equity interests).
“ Dollars ” and “ $ ” refers to lawful money of the United States.
“ Domestic Lending Office ” means, with respect to any Lender, the office of such Lender specified as its “Domestic Lending Office” on the signature pages hereof or in the Assignment and Acceptance pursuant to which it became a Lender, or such other office of such Lender as such Lender may from time to time specify to the Borrowers and the Agent.
“ Domestic Subsidiary ” means any Subsidiary organized under the laws of the United States of America, any State thereof or the District of Columbia (excluding, for the avoidance of doubt, any Subsidiary organized under the laws of Puerto Rico).
“ Effective Date ” means April 8, 2011.
“ Eligible Assignee ” means (a) a commercial bank or any other Person engaged in the business of making asset based or commercial loans, or (other than in the case of a Revolving Commitment) any fund or other Person (other than a natural Person) that invests in loans, which bank, Person or fund, together with its Affiliates, has a combined capital and surplus in excess of $300,000,000 and which bank, Person or fund is approved by the Agent, and, unless an Event of Default has occurred and is continuing at the time any assignment is effected in accordance with Section 9.07, the Borrowers, in each case such approval not to be unreasonably withheld or delayed, (b) an existing Lender or an Affiliate of an existing Lender or an Approved Fund, or (c) any Permitted Holder Lender; provided that neither the Borrowers nor an Affiliate of the Borrowers (other than a Permitted Holder Lender) shall qualify as an Eligible Assignee.
“ Eligible Credit Card Accounts Receivable ” means at the time of any determination thereof, each Credit Card Account Receivable that satisfies the following criteria at the time of its creation and continues to meet the same at the time of such determination: such Credit Card Account Receivable (i) has been earned and represents the bona fide amounts due to a Loan Party from a Credit Card Processor and/or credit card issuer, and in each case originated in the ordinary course of business of the applicable Loan Party and (ii) is not ineligible for inclusion in the calculation of the Borrowing Base pursuant to any of clauses (a) through (j)

12

below. Without limiting the foregoing, to qualify as an Eligible Credit Card Account Receivable, a Credit Card Account Receivable shall indicate no person other than a Loan Party as payee or remittance party. In determining the amount to be so included, the face amount of a Credit Card Account Receivable shall be reduced by, without duplication, to the extent not reflected in such face amount, (i) the amount of all accrued and actual discounts, claims, credits or credits pending, promotional program allowances, price adjustments, finance charges, credit card processor fees or other allowances (including any amount that the applicable Loan Party may be obligated to rebate to a customer, a Credit Card Processor, or credit card issuer pursuant to the terms of any agreement or understanding (written or oral)) and (ii) the aggregate amount of all cash received in respect of such Credit Card Account Receivable but not yet applied by the applicable Loan Party to reduce the amount of such Credit Card Account Receivable. Unless otherwise approved from time to time in writing by the Co-Collateral Agents in their Permitted Discretion, no Credit Card Account Receivable shall be Eligible Credit Card Account Receivable if, without duplication:
(a)    such Credit Card Account Receivable is not owned by a Loan Party and such Loan Party does not have good or marketable title to such Credit Card Account Receivable;
(b)    such Credit Card Account Receivable does not constitute a “payment intangible” or “account” (as defined in the UCC) or such Credit Card Account Receivable has been outstanding for more than five (5) Business Days;
(c)    the issuer or payment processor of the applicable credit card with respect to such Credit Card Account Receivable is the subject of any bankruptcy or insolvency proceedings;
(d)    such Credit Card Account Receivable is not the valid, legally enforceable obligation of the applicable issuer with respect thereto;
(e)    such Credit Card Account Receivable is subject to any Lien whatsoever other than Liens in favor of the Co-Collateral Agents, Permitted Liens and Liens permitted pursuant to Section 6.02(a)(vi);
(f)    such Credit Card Account Receivable is not subject to a valid and perfected Lien in favor of the Co-Collateral Agents, for the benefit of the Credit Parties, senior in priority to all other Liens other than Permitted Liens which have priority over the Liens of the Co-Collateral Agents by operation of applicable law and Liens of the type specified in clause (h) of the definition of Permitted Liens;
(g)    the Credit Card Account Receivable does not conform to all representations, warranties, covenants or other provisions in the Loan Documents relating to Credit Card Accounts Receivable;
(h)    such Credit Card Account Receivable is subject to risk of set-off, non-collection or not being processed due to unpaid and/or accrued credit card processor fee balances, limited to the lesser of the balance of Credit Card Account Receivable or unpaid credit card processor fees;
(i)    such Credit Card Account Receivable is evidenced by “chattel paper” or an “instrument” of any kind unless such “chattel paper” or “instrument” is subject to the perfected security interest of the Co-Collateral Agents; or
(j)    such Credit Card Account Receivable does not meet such other reasonable eligibility criteria for Credit Card Accounts Receivable as the Agent (or any Co-Collateral Agent upon written notice to the Agent) may determine from time to time in its Permitted Discretion.
“ Eligible In-Transit Inventory ” means, as of any date of determination thereof, without duplication of other Eligible Inventory, finished goods Inventory:

13

(a)    for which full payment has been delivered to the vendor of such Inventory and evidence of such payment has been received by the Agent; provided that in transit Inventory purchased under “private label” letters of credit issued by SRAC or Letters of Credit issued hereunder shall be deemed Eligible In-Transit Inventory, subject to (x) an Inventory Reserve equal to (i) such percentage as the Agent may determine in its Permitted Discretion, multiplied by (ii) the Inventory Value of such Inventory, and (y) satisfaction of all of the other conditions of this definition;
(b)    which has been shipped from a location outside of the United States, Puerto Rico or the U.S. Virgin Islands for receipt by any Loan Party, but which has not yet been delivered to such Loan Party, which Inventory has been in transit for sixty (60) days or less from the date of shipment of such Inventory;
(c)    for which the purchase order is in the name of any Loan Party and title has passed to such Loan Party;
(d)    for which the document of title reflects a Loan Party as consignee or, if requested by a Co-Collateral Agent, names the Co-Collateral Agents as consignee, and in each case as to which a Co-Collateral Agent has control over the documents of title which evidence ownership of the subject Inventory (such as, if requested by a Co-Collateral Agent, by the delivery of a Customs Broker Agreement);
(e)    which is insured as required pursuant to Section 6.01(c) hereof; and
(f)    which would not be excluded from the definition of “Eligible Inventory” by any of clauses (a), (c) through (g) or (i) through (s) of the definition thereof;
provided that the Agent, or any Co-Collateral Agent upon written notice to the Agent, may, in its Permitted Discretion, exclude any particular Inventory from the definition of “Eligible In-Transit Inventory” in the event the Agent or Co-Collateral Agent determines that such Inventory is subject to any Person’s right or claim which is (or is capable of being) senior to, or pari passu with, the Lien of the Co-Collateral Agents (such as, without limitation, a right of stoppage in transit) or may otherwise adversely impact the ability of the Co-Collateral Agents to realize upon such Inventory.
“ Eligible Inventory ” means at any time, without duplication (i) Eligible In-Transit Inventory, and (ii) items of Inventory of any Loan Party that are held for retail sale to the public in the ordinary course of business, merchantable, and readily saleable to the public in the ordinary course of business, that is not ineligible for inclusion in the calculation of the Borrowing Base pursuant to any of clauses (a) through (s) below. Without limiting the foregoing, to qualify as “Eligible Inventory” no Person other than the Loan Parties shall have any direct or indirect ownership, interest or title to such Inventory and no Person other than the Loan Parties shall be indicated on any purchase order or invoice with respect to such Inventory as having or purporting to have an interest therein. Unless otherwise from time to time approved in writing by the Agent (or any Co-Collateral Agent upon written notice to the Agent) in its Permitted Discretion, no Inventory shall be deemed Eligible Inventory if, without duplication:
(a) the Loan Parties do not have sole and good, valid and unencumbered title thereto (except for Liens of the type described in clauses (a), (b), (c) and (e) of the definition of Permitted Liens); or
(b)    it is not located in the United States, Puerto Rico, Guam or U.S. Virgin Islands; or
(c)    it is not located at property owned or leased by the Loan Parties (except to the extent such Inventory is (i) in transit between such locations, or (ii) is at a customer location and is deemed eligible pursuant to clause (g)) or is located at a third party warehouse or is located at a closed Store (except pursuant to clause (f)) or is located at a closed DC; or

14

(d)    it is not subject to a valid and perfected Lien in favor of the Co-Collateral Agents for the benefit of the Credit Parties, senior in priority to all other Liens other than Permitted Liens which have priority over the Liens of the Co-Collateral Agents by operation of applicable law, including Liens of the types described in clauses (a) through (c) and (g) of the definition of Permitted Liens;
(e)    it is subject to any Lien whatsoever other than Liens in favor of the Co-Collateral Agents, Permitted Liens and Liens permitted pursuant to Section 6.02(a)(vi); or
(f)    it is Inventory located at a Store which is being closed; provided , however that such Inventory will be deemed eligible for the first four (4) weeks after the commencement of the Store Closure Sale for that Store, provided further that the Inventory Value of such Inventory shall be reduced by the “closed store reserve” established by the Borrowers with respect to such Inventory consistent with past practices (but the establishment of such “closed store reserve” by the Borrowers shall not preclude the Co-Collateral Agents, in their Permitted Discretion, from establishing other or larger Inventory Reserves with respect to such Inventory as otherwise provided herein);
(g)    it is consigned from a vendor or is at a customer location but still accounted for in the applicable Loan Party’s inventory balance; or
(h)    it is in-transit (other than Eligible In-Transit Inventory) from a vendor and has not yet been received into a DC or Store; or
(i)    it is identified in the stock ledger of the applicable Loan Party as any of the following departments or consists of Inventory which is ordinarily classified by such Loan Party consistent with its historical practices as the following: floral; gasoline; live plants; miscellaneous or other as classified on the Loan Party’s stock ledger; produce; books; magazines; restaurant operations; or seafood; or it is identified per the applicable Loan Party’s stock ledger as candy; or
(j)    it is Inventory that has been packed-away and stored for more than 12 months at a DC or a Store for future sale, including merchandise of Sears and its Subsidiaries that has been carried over for more than 12 months as currently reported as “XOM” status per the RIM merchandising system; or
(k)    it is identified as wholesaler freight fees; or
(l)    it is Inventory on layaway or is Inventory which has been sold but not delivered or as to which any Loan Party has accepted a deposit from a third party; or
(m)    it is identified per the Loan Parties’ stock ledger as Inventory that is in a leased department, including digital imaging, photofinishing and 1 hour lab; or
(n)    it is otherwise deemed ineligible by the Co-Collateral Agents in their Permitted Discretion after the expiration of the Reserve Notice Period; or
(o)    it is (i) operating supplies, packaging or shipping materials, cartons, labels or other such materials not considered used for sale in the ordinary course of business by the Agent in its Permitted Discretion (ii) work‑in‑process, raw materials, (iii) not in material compliance with all standards imposed by any Governmental Authority having regulatory authority over such Inventory, its use or sale, or (iv) bill and hold goods; or
(p)    it is Inventory which exhibits, includes or is identified by any trademark, tradename or other Intellectual Property right which trademark, tradename or other Intellectual Property right

15

(i) is subject to a restriction that could reasonably be expected to adversely affect the Agent’s ability to liquidate such Inventory or (ii) the relevant Loan Party does not have the right to use in connection with the sale of such Inventory, either through direct ownership or through a written license or sublicense; or
(q)    it is Inventory that is not insured in compliance with the provisions of Section 6.01(c);
(r)    it is Inventory that does not conform to all representations, warranties, covenants or other provisions in the Loan Documents relating to Inventory; or
(s)    it is Inventory acquired in a Permitted Acquisition and the Co-Collateral Agents have not completed their diligence with respect thereto, provided that such Inventory shall be deemed to constitute Eligible Inventory for a period of 30 days after the date of its acquisition notwithstanding that the Co-Collateral Agents have not completed such due diligence as long as such Inventory is of the same kind and quality as other of the Loan Parties’ Inventory and would otherwise constitute Eligible Inventory.
“ Eligible Pharmacy Receivables ” means each Pharmacy Receivable that satisfies the following criteria at the time of creation and continues to meet the same at the time of such determination: such Pharmacy Receivable (i) has been earned and represents the bona fide amounts due to a Loan Party from Third Party Payors, and other Persons reasonably acceptable to the Co-Collateral Agents, and in each case originated in the ordinary course of business of the applicable Loan Party (ii) is non‑recourse to the Loan Parties and has been adjudicated or is otherwise due to a Loan Party for pharmacy related services, and (iii) is not ineligible for inclusion in the calculation of the Borrowing Base pursuant to any of clauses (a) through (m) below. Without limiting the foregoing, to qualify as an Eligible Pharmacy Receivable, an Account shall indicate no person other than a Loan Party as payee or remittance party. In determining the amount to be so included, the face amount of an Account shall be reduced by, without duplication, to the extent not reflected in such face amount, (i) the amount of all accrued and actual discounts, claims, credits or credits pending, promotional program allowances, price adjustments, finance charges, processing fees or other allowances (including any amount that the applicable Loan Party may be obligated to rebate to a customer, or to pay to the Third Party Payors, direct customers or other Persons pursuant to the terms of any agreement or understanding (written or oral)) and (ii) the aggregate amount of all cash received in respect of such Account but not yet applied by the applicable Loan Party to reduce the amount of such Pharmacy Receivable. Unless otherwise approved from time to time in writing by the Co-Collateral Agents in their Permitted Discretion, none of the following Pharmacy Receivables shall be an Eligible Pharmacy Receivable:
(a)    Pharmacy Receivables that have been outstanding for more than ninety (90) days past the invoice date or that are more than sixty (60) days past due;
(b)    Pharmacy Receivables due from any Third Party Payor to the extent that fifty percent (50%) or more of all Pharmacy Receivables from such Third Party Payor are not Eligible Pharmacy Receivables under clause (a), above;
(c)    Pharmacy Receivables which do not constitute an “Account” (as defined in the UCC);
(d)    Pharmacy Receivables with respect to which a Loan Party does not have good, valid and marketable title thereto;
(e)    Pharmacy Receivables that are not subject to a valid and perfected Lien in favor of the Co-Collateral Agents, for the benefit of the Credit Parties, senior in priority to all other Liens other than Permitted Liens which have priority over the Liens of the Co-Collateral Agents by operation of applicable law;

16

(f)    Pharmacy Receivables that are subject to any Lien whatsoever other than Liens in favor of the Co-Collateral Agents for the benefit of the Credit Parties, Permitted Liens, and Liens permitted pursuant to Section 6.02(a)(vi);
(g)    Pharmacy Receivables which are disputed, are with recourse, or with respect to which a claim, counterclaim, offset or chargeback has been asserted (to the extent of such claim, counterclaim, offset or chargeback);
(h)    Pharmacy Receivables due from Medicare, Medicaid and other Governmental Authorities;
(i)    Pharmacy Receivables due from a Third Party Payor who is not duly authorized to conduct business in the United States of America, Puerto Rico, United States Virgin Islands or Guam, as applicable;
(j)    Pharmacy Receivables which are acquired in a Permitted Acquisition unless and until the Co-Collateral Agents have completed an appraisal and audit of such Pharmacy Receivables and otherwise agree that such Pharmacy Receivables shall be deemed Eligible Pharmacy Receivables;
(k)    Pharmacy Receivables as to which (i) the Loan Party making the sale giving rise to such Pharmacy Receivables does not have a valid and enforceable agreement with the Third Party Payor providing for payment to such Loan Party or there is a default thereunder that could be a basis for such Third Party Payor ceasing or suspending any payments to such Loan Party, or (ii) the prescription drugs sold giving rise to such Pharmacy Receivables are not of the type that are covered under the agreement with the Third Party Payor or the party receiving such goods is not entitled to coverage under such agreement, (iii) the Loan Party making the sale giving rise to such Pharmacy Receivables has not received confirmation from such Third Party Payor that the party receiving the prescription drugs is entitled to coverage under the terms of the agreement with such Third Party Payor and the Loan Party is entitled to reimbursement for such Pharmacy Receivables, (iv) the amount of such Pharmacy Receivables exceeds the amounts to which the Loan Party making such sale is entitled to reimbursement for the prescription drugs sold under the terms of such agreements (but solely to the extent of such excess), (v) there are contractual or statutory limitations or restrictions on the rights of the Loan Party making such sale to assign its rights to payment arising as a result thereof or to grant any security interest therein which limitations or restrictions have not been satisfied or waived, (vi) all authorization and billing procedures and documentation required in order for the Loan Party making such sale to be reimbursed and paid on such Pharmacy Receivables by the Third Party Payor have not been properly completed and satisfied to the extent required for such Loan Party to be so reimbursed and paid, and (vii) the terms of the sale giving rise to such Pharmacy Receivables and all practices of such Loan Party with respect to such Pharmacy Receivables do not comply in all material respects with applicable federal, state, and local laws and regulations;
(l)    Pharmacy Receivables which do not conform to all representations, warranties, covenants, or other provisions in the Loan Documents relating to Pharmacy Receivables; or
(m)    Pharmacy Receivables which the Co-Collateral Agents determine in their Permitted Discretion to be uncertain of collection or which do not meet such other reasonable eligibility criteria for Pharmacy Receivables as the Agent (or any Co-Collateral Agent upon written notice to the Agent) may determine in its Permitted Discretion.
“ Environmental Action ” means any action, suit, demand, demand letter, claim, notice of non-compliance or violation, notice of liability or potential liability, investigation, proceeding, consent order or consent agreement relating in any way to any Environmental Law, Environmental Permit or Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment, including (a) by any governmental or regulatory authority for enforcement, cleanup, removal, response, remedial or other actions or damages and (b) by any governmental or regulatory authority or any third party for damages, contribution, indemnification, cost recovery, compensation or injunctive relief.

17

“ Environmental Law ” means any federal, state, local or foreign statute, law, ordinance, rule, regulation, code, order, judgment, decree or judicial or agency interpretation, policy or guidance relating to pollution or protection of the environment, health, safety or natural resources, including those relating to the use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Materials.
“ Environmental Liability ” means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of Holdings, the Borrowers, or any of their Subsidiaries directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.
“ Environmental Permit ” means any permit, approval, identification number, license or other authorization required under any Environmental Law.
“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and issued thereunder.
“ ERISA Affiliate ” means any Person that for purposes of Title IV of ERISA is a member of any Borrower’s controlled group, or under common control with such Borrower, within the meaning of Section 414 of the Internal Revenue Code.
“ ERISA Event ” means (a) (i) the occurrence of a Reportable Event, as defined herein, or (ii) the requirements of subsection (1) of Section 4043(b) of ERISA (without regard to Section 4043(b)(2)) are met with respect to a contributing sponsor, as defined in Section 4001(a)(13) of ERISA, of a Plan, and an event described in paragraph (9), (10), (11), (12) or (13) of Section 4043(c) of ERISA is reasonably expected to occur with respect to such Plan within the following 30 days; (b) the application for a minimum funding waiver with respect to a Plan; (c) the provision by the administrator of any Plan of a notice of intent to terminate such Plan pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA); (d) the cessation of operations at a facility of any Borrower or any ERISA Affiliate in the circumstances described in Section 4062(e) of ERISA; (e) the withdrawal by any Borrower or any ERISA Affiliate from a Multiple Employer Plan during a plan year for which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (f) the conditions for the imposition of a lien under Sections 303(k) or 4068(a) of ERISA shall have been met with respect to any Plan; (g) the institution by the PBGC of proceedings to terminate a Plan pursuant to Section 4042 of ERISA, or the occurrence of any event or condition described in Section 4042 of ERISA that constitutes grounds for the termination of, or the appointment of a trustee to administer, a Plan, or (h) the Borrowers or any ERISA Affiliate incur liabilities under Section 4069 of ERISA.
“ Eurocurrency Liabilities ” has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time.
“ Eurodollar Lending Office ” means, with respect to any Lender, the office of such Lender specified as its “Eurodollar Lending Office” on the signature pages hereof or in the Assignment and Acceptance pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrowers and the Agent.
“ Eurodollar Rate ” means,
(a)     for any Interest Period with respect to a Eurodollar Rate Advance, the rate per annum (which shall in no event be less than zero) equal to the London interbank offered rate administered by ICE Benchmark Administration Limited (“ICE LIBOR”), as published by Reuters (or other commercially available source providing quotations of ICE LIBOR as designated by the Agent from time to time) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, for Dollar deposits (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period. If such

18

rate is not available at such time for any reason, then the “Eurodollar Rate” for such Interest Period shall be the rate per annum determined by the Agent (which shall in no event be less than zero) to be the rate at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Rate Advance being made, continued or converted and with a term equivalent to such Interest Period would be offered by Bank of America’s London Branch to major banks in the London interbank eurodollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period; and
(b)     for any interest calculation with respect to a Base Rate Advance on any date, the rate per annum (which shall in no event be less than zero) equal to (i) ICE LIBOR, at approximately 11:00 a.m., London time determined two London Banking Days prior to such date for Dollar deposits being delivered in the London interbank market for a term of one month commencing that day or (ii) if such published rate is not available at such time for any reason, the rate per annum determined by the Agent (which shall in no event be less than zero) to be the rate at which deposits in Dollars for delivery on the date of determination in same day funds in the approximate amount of the Base Rate Advance being made or maintained and with a term equal to one month would be offered by Bank of America’s London Branch to major banks in the London interbank Eurodollar market at their request at the date and time of determination.
“ Eurodollar Rate Advance ” means an Advance, any Term Loan Borrowing or any 2016 Term Loan Borrowing, as applicable, that bears interest as provided in Sections 2.08(a)(ii), 2.08(b)(ii) or 2.08(c)(ii), as applicable.
“ Eurodollar Rate Reserve Percentage ” for any Interest Period for a Eurodollar Rate Advance by any Lender means the reserve percentage applicable to such Lender two Business Days before the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the minimum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities that includes deposits by reference to which the interest rate on Eurodollar Rate Advances is determined) having a term equal to such Interest Period.
“ Events of Default ” has the meaning specified in Section 7.01.
“ Excess Cash Flow ” means, for any fiscal year of Holdings, the excess of (a) the sum, without duplication, of (i) Consolidated Net Income for such fiscal year (excluding gains and losses from the sale of assets or businesses outside the ordinary course of business included in the calculation of such Consolidated Net Income), plus (ii) expenses reducing Consolidated Net Income incurred or made with respect to any Plan, plus (iii) depreciation, amortization and other non-cash charges reducing Consolidated Net Income (excluding any non-cash charges to the extent they represent an accrual or reserve for potential cash charges in any future period or amortization of a prepaid cash gain that was paid in a prior period and excluding any such charges which were excluded in the calculation of Consolidated Net Income as set forth in clause (a)(i) above), minus (b) the sum, without duplication, of (i) contributions made in cash to any Plan, plus (ii) non-cash gains and other non-cash items increasing Consolidated Net Income (other than any such gains and items which were excluded in the calculation of Consolidated Net Income as set forth in clause (a)(i) above), plus (iii) the amount of scheduled payments and mandatory prepayments of principal, interest, fees, premiums and make whole or prepayment payments on account of Debt for borrowed money made in cash (excluding any repayments of Obligations hereunder and of prepayments of any revolving credit facility unless there is an equivalent permanent reduction in the commitments thereunder and excluding any such payments or prepayments to the extent financed with the proceeds of Debt), and scheduled payments and mandatory prepayments of Capital Lease Obligations (excluding any interest expense portion thereof deducted in the calculation of Consolidated Net Income and excluding any such payments or prepayments to the extent financed with the proceeds of Debt), plus (iv) the amount of optional prepayments of principal on account of the Term Loan, the 2016 Term Loan or the Revolving Advances made in cash during such fiscal year (as a result of which, in the case of the Revolving Advances, the Aggregate Revolving Commitments have been permanently reduced correspondingly), except to the extent that such prepayments are funded with Debt, plus (v) Capital Expenditures made in cash during such fiscal year, except to the extent financed with the proceeds of Debt,

19

plus (vi) the amount of Permitted Acquisitions and Permitted Investments (pursuant to clauses (d), (i), (o), (q) and (r) of the definition thereof) made in cash during such fiscal year, except to the extent financed with the proceeds of Debt.
“ Excluded Accounts ” means payroll, trust and tax withholding accounts funded in the ordinary course of business.
“ Excluded Swap Obligation ” means, with respect to any Loan Party, any Swap Obligation if, and to the extent that, all or a portion of the guaranty of such Loan Party under the Guarantee and Collateral Agreement of, or the grant under a Loan Document by such Loan Party of a security interest to secure, such Swap Obligation (or any guaranty thereof) is or becomes illegal under the Commodity Exchange Act (or the application or official interpretation thereof) by virtue of such Loan Party’s failure for any reason to constitute an “eligible contract participant” as defined in the Commodity Exchange Act (determined after giving effect to Section 9.19 hereof and any and all guarantees of such Loan Party’s Swap Obligations by other Loan Parties) at the time the guaranty of such Loan Party, or grant by such Loan Party of a security interest, becomes effective with respect to such Swap Obligation. If a Swap Obligation arises under a Master Agreement governing more than one Swap Contract, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to Swap Contracts for which such guaranty or security interest becomes illegal.
“ Excluded Taxes ” means any of the following Taxes imposed on or with respect to any Recipient or required to be withheld or deducted from a payment to a Recipient, (a) Taxes imposed on or measured by net income (however denominated and including any Taxes imposed in lieu of income Taxes), franchise Taxes, and branch profits Taxes, in each case, (i) imposed as a result of such Recipient being organized under the laws of, or having its principal office or, in the case of any Lender, its Applicable Lending Office located in, the jurisdiction imposing such Tax (or any political subdivision thereof) or (ii) that are Other Connection Taxes, (b) U.S. federal withholding Taxes imposed on amounts payable to or for the account of such Recipient with respect to an applicable interest in any Extension of Credit or Commitment pursuant to a law in effect on the date on which (i) such Recipient acquires such interest in such Extension of Credit or Commitment (other than pursuant to an assignment request by the Borrower under Section 9.16 ) or (ii) in the case of a Lender, such Lender changes its Applicable Lending Office, except in each case to the extent that, pursuant to Section 2.15 , amounts with respect to such Taxes were payable either to such Lender’s assignor immediately before such Lender became a party hereto or to such Lender immediately before it changed its Applicable Lending Office, (c) Taxes attributable to such Recipient’s failure to comply with Section 2.15(e) or (f) and (d) any U.S. federal withholding Taxes imposed pursuant to FATCA.
“ Existing Credit Agreement ” has the meaning set forth in the Preamble to the Agreement.
“ Existing Intercreditor Agreement ” means the Intercreditor Agreement in respect of the Existing Second Lien Notes dated as of October 12, 2010, by and among the Co-Collateral Agents, as ABL Agents, and Wells Fargo Bank, National Association, as Second Lien Agent.
“ Existing Letters of Credit ” means each of the Letters of Credit described on Schedule 1.02 issued and outstanding under the Existing Credit Agreement immediately prior to July 21, 2015.
“ Existing Second Lien Notes ” means $1,250,000,000 aggregate principal amount of 6⅝% Senior Secured Notes due 2018 of Holdings outstanding as of the Effective Date and any notes issued in exchange therefor pursuant to that certain Indenture, dated as of October 12, 2010, by and among Holdings and the guarantors party thereto and Wells Fargo Bank, National Association, as Trustee and Collateral Agent.
“ Extended 2016 Term Loans ” has the meaning set forth in Section 2.18(a).
“ Extended Term Applicable Margin ” means initially, (a) 3.75% per annum for Eurodollar Rate Advances and (b) 2.75% per annum for Base Rate Advances; provided , that on and after the first Adjustment Date occurring at the end of the first full fiscal quarter after July 21, 2015, the Extended Term Applicable Margin will be determined pursuant to the Extended Term Pricing Grid.

20

“ Extended Term Loans ” has the meaning set forth in Section 2.18(a).
“ Extended Term Pricing Grid ” means the pricing grid set forth on Schedule IC .
“ Extended Termination Date ” means (i) with respect to the Extended Revolving Commitments of the 2015 Extending Lenders, the earlier of (a) July 20, 2020 and (b) the date of termination in whole of the Revolving Commitments pursuant to Section 2.06 or 7.01, and (ii) with respect to any other Extended Revolving Commitments, Extended Term Loans or Extended 2016 Term Loans, as applicable, the earlier of (a) maturity date set forth in an Extension Election and accepted by the applicable Extending Lenders or (b) the date of termination in whole of the Revolving Commitments pursuant to Section 2.06 or 7.01 or the date of acceleration of the Term Loans or the 2016 Term Loans pursuant to Section 7.01.
“ Extended Revolving Commitments ” has the meaning set forth in Section 2.18(a).
“ Extending Lenders ” has the meaning set forth in Section 2.18(b).
“ Extension Amendment ” has the meaning set forth in Section 2.18(d).
“ Extension Election ” has the meaning set forth in Section 2.18(b).
“ Extensions of Credit ” means as to any Lender at any time, an amount equal to the sum of (a) the aggregate Revolving Extensions of Credit of such Lender, (b) the aggregate FILO Extensions of Credit of such Lender, (c) the outstanding principal amount of the Term Loan held by such Lender, and (d) the outstanding principal amount of the 2016 Term Loan held by such Lender, including, without limitation, all extensions of credit made in connection with any Extended Revolving Commitments.
“ FATCA ” means Sections 1471 through 1474 of the Code, as of July 21, 2015 (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.
“ Fee Letter ” means, collectively, (i) the Fee Letter dated March 11, 2011, among Holdings, the Borrowers, Bank, and MLPFS, and (ii) the Term Loan Fee Letter dated September 16, 2013 among Holdings, the Borrowers and MLPFS, as amended on October 2, 2013, (iii) the Amendment Fee Letter dated May 19, 2015, among Holdings, the Borrowers, Bank, Wells Fargo Bank, National Association, General Electric Capital Corporation, and the Lead Arrangers, and (iv) the Amendment Fee Letter dated March 4, 2016, among Holdings, the Borrowers and the Agent, each as amended from time to time.
“ Fee Adjustment Date ” shall have the meaning provided therefor in Schedule IB .
“ Federal Funds Rate ” means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing reasonably selected by it.
“ FILO Commitments ” means the commitments of the FILO Lenders to make FILO Loans in accordance with the terms of this Agreement.
“ FILO Extension of Credit ” means, as to any FILO Lender at any time, the outstanding principal amount of the FILO Loans held by such FILO Lender.
“ FILO Facility ” shall have the meaning provided therefor in Section 2.20(a).

21

“ FILO Lender ” means each Person who becomes a FILO Lender pursuant to Section 2.20 hereof and each Person that shall become a party hereto as a FILO Lender pursuant to Section 9.07.
“ FILO Loan Cap ” means, at any time, the lesser of the FILO Commitments and Incremental Availability.
“ FILO Loans ” means Borrowings made under the FILO Facility.
“ FILO Reserve ” means an Availability Reserve in an amount equal to the excess, if any, of (i) the outstanding FILO Loans over (ii) the FILO Loan Cap (but in no event less than zero).
“ First Amendment Effective Date ” means the “First Amendment Effective Date,” as defined in the First Amendment to Third Amended and Restated Credit Agreement dated as of April 8, 2016 among Holdings, the Borrowers, the Lenders party thereto and the Agent.
“ Fixed Charge Ratio ” means, the ratio, determined as of the end of each fiscal month of the Borrowers for the most recently ended twelve fiscal months, of (a) Adjusted Consolidated EBITDA minus the unfinanced portion of Capital Expenditures (but including Capital Expenditures financed with proceeds of Advances hereunder) minus taxes paid in cash net of refunds (but in no event less than zero), to (b) Fixed Charges, all calculated on a Consolidated basis in accordance with GAAP.
“ Fixed Charges ” means, with reference to any period, without duplication, Consolidated Interest Expense paid or payable in cash, plus scheduled principal payments on Debt made during such period, plus Capital Lease Obligation payments made during such period, all calculated on a Consolidated basis.
“ Fronting Exposure ” means, at any time there is a Defaulting Lender, (a) with respect to the Issuing Lender, such Defaulting Lender’s Revolving Commitment Percentage of the outstanding L/C Obligations other than L/C Obligations as to which such Defaulting Lender’s participation obligation has been reallocated to other Revolving Lenders or cash collateralized in accordance with the terms hereof, and (b) with respect to the Swingline Lender, such Defaulting Lender’s Revolving Commitment Percentage of Swingline Loans other than Swingline Loans as to which such Defaulting Lender’s participation obligation has been reallocated to other Revolving Lenders in accordance with the terms hereof.
“ Fund ” means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.
“ GAAP ” has the meaning specified in Section 1.03.
“ GE Commitment Letter ” means that certain Commitment Letter dated March 16, 2011 among Holdings, the Borrowers and General Electric Capital Corporation, which Commitment Letter has been assigned to Wells Fargo Bank, National Association.
“ Gift Card Liability Reserve ” shall mean, at any time, and without duplication of any other Availability Reserves or Inventory Reserves, a reserve equal to the aggregate remaining value at such time of (i) outstanding gift certificates and gift cards of the Loan Parties entitling the holder thereof to use all or a portion of the certificate or gift card to pay all or a portion of the purchase price for any Inventory and (ii) outstanding merchandise credits.
“ Governmental Authority ” means any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization (including the National Association of Insurance Commissioners).
“ Group Members ” means, collectively, Holdings, the Borrowers and their respective Subsidiaries.

22

“ Guarantee and Collateral Agreement ” means a Third Amended and Restated Guarantee and Collateral Agreement in the form of Exhibit D .
“ Hazardous Materials ” means (a) petroleum and petroleum products, byproducts or breakdown products, radioactive materials, asbestos-containing materials, polychlorinated biphenyls and radon gas and (b) any other chemicals, materials or substances designated, classified or regulated as hazardous or toxic or as a pollutant or contaminant under any Environmental Law.
“ Holdings ” has the meaning provided in the Preamble.
“ Increase Effective Date ” has the meaning provided in Section 2.19(f).
“ Incremental Availability ” shall mean (i) the sum of the Borrowing Base plus 10% of the Net Orderly Liquidation Value of the Loan Parties’ Eligible Inventory, minus (ii) the Total Revolving Extensions of Credit and the outstanding principal amount of the Term Loans and the 2016 Term Loans.
“ Indemnified Taxes ” means Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by or on account of any obligation of any Loan Party under any Loan Document.
“ Insolvency ” means with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA.
“ Insolvent ” means pertaining to a condition of Insolvency.
“ Intellectual Property ” has the meaning set forth in the Guarantee and Collateral Agreement.
“ Interest Period ” means, for each Eurodollar Rate Advance comprising part of the same Borrowing of Revolving Advances, a Term Loan Borrowing or a 2016 Term Loan Borrowing, as applicable, the period commencing on the date of such Eurodollar Rate Advance or the date of the Conversion of any Base Rate Advance into such Eurodollar Rate Advance and ending on the last day of the period selected by the applicable Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the applicable Borrower pursuant to the provisions below. The duration of each such Interest Period shall be one, two or three months, as the applicable Borrower may, upon notice received by the Agent not later than 12:00 noon on the third Business Day prior to the first day of such Interest Period, select; provided , however , that:
(a)    a Borrower may not select any Interest Period with respect to a Revolving Advance that ends after the Revolving Termination Date or the Extended Termination Date, as applicable, or with respect to a Term Loan Borrowing constituting a Eurodollar Rate Advance that ends after the Term Loan Termination Date, or with respect to a 2016 Term Loan Borrowing constituting a Eurodollar Rate Advance that ends after the 2016 Term Loan Termination Date;
(b)    Interest Periods commencing on the same date for Eurodollar Rate Advances comprising part of the same Borrowing shall be of the same duration;
(c)    whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided , however , that, if such extension would cause the last day of such Interest Period of one month or longer to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and
(d)    whenever the first day of any Interest Period occurs on a day of an initial calendar month for which there is no numerically corresponding day in the calendar month that succeeds such initial calendar month by the number of months equal to the number of months in such Interest Period, such Interest Period shall end on the last Business Day of such succeeding calendar month.

23

“ Internal Revenue Code ” means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder.
“ Inventory ” as defined in the UCC.
“ Inventory Reserves ” means the following:
(a)    a reserve for shrink, or discrepancies that arise between Inventory quantities on hand per the Loan Parties’ unit inventory system, and physical counts of the Inventory which will be equal to the greater of (i) the mathematical average of the historical shrink results expressed as a percent of sales, multiplied by sales for the relevant year-to-date period and adjusted for the cost complement for the relevant year-to-date period, but only to the extent such amount exceeds reserves already netted out of the Inventory Value per the stockledger; or (ii) an amount determined by the Agent in its Permitted Discretion or any Co-Collateral Agent in its Permitted Discretion upon written notice to the Agent, in each case, after the expiration of the Reserve Notice Period;
(b)    a reserve for intracompany profit, equal to the most recent three (3) fiscal months of capitalized cost of the foreign buying offices owned and operated by any Loan Party, with the time frame subject to change after the expiration of the Reserve Notice Period based on Inventory performance, or the Agent’s (or any Co-Collateral Agent’s upon written notice to the Agent) Permitted Discretion;
(c)    to the extent not already netted out of the Inventory Value per the stock ledger or not treated as ineligible pursuant to the definition of Eligible Inventory, a reserve determined in the Agent’s (or any Co-Collateral Agent upon written notice to the Agent) Permitted Discretion for (i) hard (permanent) markdowns, (ii) seasonal merchandise (including, without limitation, seasonal apparel which is more than four weeks past a specified selling season, and Inventory for sale during a specified holiday or event (other than seasonal apparel), after the specified holiday or event has occurred), (iii) discontinued and clearance merchandise, (iv) change in product mix of merchandise, (v) change in pricing strategy or markon percentages, (vi) damaged merchandise, (vii) price changes, or (viii) other adjustments as deemed appropriate;
(d)    a reserve established in the Agent’s (or any Co-Collateral Agent’s upon written notice to the Agent) Permitted Discretion for Inventory returned (other than as a result of reclamations) to either the return goods center (“ RGC ”), the vendor, given to charity, or otherwise considered non-saleable, whether defective or non-defective. This reserve is to be calculated as the monthly average for the most recent rolling 12 fiscal month period of return (other than as a result of reclamations) activity to the vendors, the RGC, given to charity, or otherwise considered non-saleable, whether defective or non-defective, both from the Stores and DCs, and is subject to change after the expiration of the Reserve Notice Period at the Agent’s (or any Co-Collateral Agent’s upon written notice to the Agent) Permitted Discretion; and such reserve to be recalculated by the 10th day after each month-end and to be reflected on each Borrowing Base Certificate delivered by Holdings after such date until the amount of such reserve is recalculated pursuant hereto;
(e)    without duplication of any Reserve imposed under clause (a) of the definition of “Eligible In-Transit Inventory”, a reserve for that in transit Inventory purchased under “private label” letters of credit issued by SRAC or Letters of Credit issued hereunder; and
(f)    a reserve for Inventory ordinarily classified as repair services.
“ Inventory Value ” shall mean, with respect to any Inventory of the Loan Parties, the value of such Inventory valued at the lower of cost or market value on a basis consistent with the Loan Parties’ current and historical accounting practice in effect on July 21, 2015, per the stock ledger (without giving effect to LIFO

24

reserves and general ledger reserves for discontinued inventory, markdowns, intercompany profit, rebates and discounts, any cut off adjustments, revaluation adjustments, purchase price adjustments or adjustments with respect to the capitalization of buying, occupancy, distribution and other overhead costs reflected on the balance sheet of the Loan Parties in respect of Inventory). The value of the Inventory as set forth above will be calculated net of the reserve established by the Loan Parties on a basis consistent with the Loan Parties’ current and historical practices, in effect on July 21, 2015, in respect of lost, misplaced or stolen Inventory (but the establishment of such reserves by the Borrowers shall not preclude the Co-Collateral Agents, in their Permitted Discretion, from establishing other or larger Inventory Reserves with respect to such Inventory as otherwise provided herein).
“ Investment ” means, as to any Person, any direct or indirect acquisition or investment by such Person, whether by means of (a) the purchase or other acquisition of equity interests of another Person, (b) a loan, advance or capital contribution to, guarantee or assumption of debt of, or purchase or other acquisition of any other debt or interest in, another Person, or (c) any Acquisition.
“ Issuing Lender ” means, collectively, Bank of America, N.A., Wells Fargo Bank, N.A., and any other Revolving Lender which at the request of any Borrower and with the consent of the Agent, not to be unreasonably withheld, agrees to become an Issuing Lender, it being understood that with the consent of the requesting Borrower (not to be unreasonably withheld) the Issuing Lender may arrange for one or more Letters of Credit to be issued by Affiliates of such Issuing Lender, in which case the term “Issuing Lender” shall include any such affiliate with respect to Letters of Credit issued by such Affiliate. Each reference herein to “the Issuing Lender” shall be deemed to be a reference to the relevant Issuing Lender with respect to the relevant Letter of Credit.
“January 2017 Mortgage Debt” means the Debt owing by Sears and certain other Subsidiaries of Holdings to JPP, LLC and JPP II, LLC, as lenders, pursuant to that certain $500,000,000 secured loan facility dated as of January 3, 2017.
“ Kmart ” means Kmart Holding Corporation, a Delaware corporation.
“ Kmart Corp. ” has the meaning provided in the Preamble.
“ L/C Commitment ” means $1,000,000,000.
“ L/C Obligations ” means at any time, an amount equal to the sum of (a) the aggregate then undrawn and unexpired amount of the then outstanding Letters of Credit and (b) the aggregate amount of drawings under Letters of Credit that have not then been reimbursed or discharged pursuant to Section 3.05 (after giving effect to the proviso thereof).
“ Lenders ” means, collectively, the Revolving Lenders, the Term Lenders and the 2016 Term Lenders.
“ Letters of Credit ” means the collective reference to Commercial L/Cs, Banker’s Acceptances, and Standby L/Cs; individually, a “ Letter of Credit ”. Without limiting the foregoing, the Existing Letters of Credit shall be deemed Letters of Credit issued under this Agreement.
“ Lien ” means any lien, security interest or other charge or encumbrance of any kind or any other type of preferential arrangement, including the lien or retained security title of a conditional vendor, and any easement, right of way or other encumbrance on title to real property, but excluding consignments or bailments of goods of third parties and the interests of lessors under operating leases.
“ Line Cap ” means, at any time of determination, the lesser of (i) the Aggregate Revolving Commitments plus the principal amount of the Term Loan outstanding at such time plus the principal amount of the 2016 Term Loan outstanding at such time, minus any Debt Maturity Reserve in effect at such time, and (ii) the Borrowing Base.

25

“ Liquidation ” means the exercise by the Agent or the Co-Collateral Agents of those rights and remedies accorded to the Agent and/or the Co-Collateral Agents under the Loan Documents and applicable law as a creditor of the Loan Parties with respect to the realization on the Collateral, including (after the occurrence and continuation of an Event of Default) the conduct by the Loan Parties acting with the consent of the Agent and the Co-Collateral Agents, of any public, private or “going-out-of-business”, “store closing” or other similar sale or any other disposition of the Collateral for the purpose of liquidating the Collateral.
“ Loan Documents ” means this Agreement, the Security Documents, the Notes, Fee Letter, any Application, each Borrowing Base Certificate, any other document or instrument now or hereafter designated by the Borrowers and the Agent as a “Loan Document” and any amendment, waiver, supplement or other modification to any of the foregoing.
“ Loan Parties ” means each Group Member that is a party to a Loan Document.
“ Material Adverse Effect ” means a material adverse effect on (a) the business, condition (financial or otherwise), operations or assets of Holdings and its Subsidiaries taken as a whole, or (b) the ability of the Loan Parties taken as a whole to perform their material obligations under the Loan Documents or (c) the validity or enforceability of the Loan Documents taken as a whole or the rights and remedies of the Agent, the Co-Collateral Agents or the Lenders thereunder taken as a whole (including, but not limited to, the enforceability or priority of any Liens granted to the Co-Collateral Agents under the Loan Documents).
“ Material Subsidiary Guarantor ” means a Subsidiary Guarantor that, at the time of determination, accounts for more than 2 5 % of both the total assets and total revenues of Holdings on a consolidated basis (and, together with all other Material Subsidiary Guarantors accounts for more than 5 10 % of both the total assets and total revenues of Holdings on a consolidated basis).
“ MLPFS ” has the meaning provided in the Preamble.
“ Multiemployer Plan ” means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which Holdings or any ERISA Affiliate is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions.
“ Multiple Employer Plan ” means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of Holdings or any ERISA Affiliate and at least one Person other than Holdings and the ERISA Affiliates or (b) was so maintained and in respect of which Holdings or any ERISA Affiliate could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated.
“ Net Eligible Inventory ” means, at any time, an amount equal to the Inventory Value of Eligible Inventory less Inventory Reserves.
“ Net Proceeds ” means, (a) with respect to any Disposition by any Loan Party or any of its Subsidiaries of any property or any casualty or condemnation of such property, the excess, if any, of (i) the sum of cash and cash equivalents received in such transaction (including any cash or cash equivalents received by way of deferred payment pursuant to, or by monetization of, a note receivable or otherwise, but only as and when so received) over (ii) the sum of (A) the principal amount of any Debt (other than Debt owed to Holdings or any of its Subsidiaries, the payment of which in connection with any Permitted Disposition or other transaction shall not, for the avoidance of doubt, be deemed to reduce the amount of Net Proceeds for any purposes under this Agreement) that is secured by the applicable asset by a Lien permitted hereunder which is senior to the Co-Collateral Agents’ Lien, if any, on such asset and that is required , and permitted under this Agreement, to be repaid (or to establish an escrow for the future repayment thereof) in connection with such transaction (other than Debt under the Loan Documents) , (B) the reasonable and customary out-of-pocket expenses incurred by such Loan Party or such Subsidiary in connection with such transaction (including, without limitation, reasonable and customary attorneys’ fees, accountants’ fees, investment banking fees, appraisals, and brokerage, legal, title and recording or transfer tax expenses and commissions) paid by any Loan Party

26

or any of its Subsidiaries to third parties (other than Affiliates), (C) transfer Taxes paid as a result thereof and (D) amounts paid by any Loan Party or any of its Subsidiaries in order to obtain consents required from any third parties (other than Affiliates) to consummate such transaction , and (b) the excess of (i) the sum of the cash and cash equivalents received in connection with the issuance of any equity interests of any Loan Party or any Permitted Refinancing Debt over (ii) the underwriting discounts and commissions, and other reasonable and customary out-of-pocket expenses, incurred by such Loan Party in connection therewith.
“ Net Orderly Liquidation Value ” means the product of (i) Net Recovery Rate and (ii) the Net Eligible Inventory.
“ Net Recovery Rate ” means the appraised orderly liquidation value (on an “as is, where is” basis) of each Loan Party's Eligible Inventory, net of costs and expenses estimated to be incurred in connection with such liquidation, which value is expressed as a percentage of the Inventory Value of Eligible Inventory and shall be determined by the Co-Collateral Agents from time to time based on the most recent appraisal provided by an independent third party appraiser retained by the Co-Collateral Agents in consultation with the Borrowers.
“ Non-Consenting Lender ” has the meaning specified in Section 9.16.
“ Non-Defaulting Lender ” means, at any time, each Lender that is not a Defaulting Lender at such time.
“ Note ” means a promissory note of any Borrower payable to the order of any Lender evidencing the Revolving Commitment, the FILO Commitment (if applicable), the Term Commitment or the 2016 Term Commitment of such Lender.
“ Notice of Borrowing ” has the meaning specified in Section 2.02(a).
“ Obligations ” has the meaning set forth in the Guarantee and Collateral Agreement; provided that Obligations of a Loan Party shall exclude any Excluded Swap Obligations with respect to such Loan Party.
“ Other Connection Taxes ” means, with respect to any Recipient, Taxes imposed as a result of a present or former connection between such Recipient and the jurisdiction imposing such Tax (other than connections arising solely from such Recipient 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 any Extension of Credit or Loan Document pursuant to an assignment request by the Borrowers under Section 9.16).
“ Other LC ” has the meaning set forth in Section 3.02(b) .
“ Other LC Facility ” means the letter of credit facilities set forth on Schedule 3.02 hereto and any other letter of credit facility established by the Borrowers with a Revolving Lender and approved by the Agent in writing in its Permitted Discretion.
“ Other LC Transfer Date ” has the meaning set forth in Section 3.02(c).
“ Other LC Transfer Notice ” means a written notice from the Borrowers, in form and substance reasonably satisfactory to the Agent, executed by an Authorized Officer, specifying one or more Letters of Credit (including the beneficiary, face amount and expiry date thereof, and such other information as the Agent may reasonably request) which the Borrowers desire to deem issued under an Other LC Facility and identifying an Other LC Transfer Date with respect thereto.
“ Other Taxes ” has the meaning specified in Section 2.15.
“ Overadvance ” means any Advance to the extent that, immediately after its having been made, Capped Excess Availability is less than zero.

27

“ PACA ” means the Perishable Agricultural Commodities Act of 1930, as amended.
“ PACA Liability Reserve ” means an amount calculated on a monthly basis by the Agent to provide for vendor liabilities pursuant to PACA.
“ PASA ” means the Packers and Stockyards Act of 1921, as amended.
“ PASA Liability Reserve ” means the liability for vendor liabilities pursuant to PASA.
“ PATRIOT Act ” means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Title III of Pub. L. 107-56 (signed into law October 26, 2001)).
“ PBGC ” means the Pension Benefit Guaranty Corporation (or any successor).
“ Pension Plan ” means any “employee pension benefit plan” (as such term is defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by Holdings or any ERISA Affiliate or to which Holdings or any ERISA Affiliate contributes or has an obligation to contribute, or in the case of a multiple employer or other plan described in Section 4064(a) of ERISA, has made contributions at any time during the immediately preceding five plan years.
“ Perfection Certificate ” means a certificate dated as of July 21, 2015 with respect to the Borrowers and the other Loan Parties in form reasonably satisfactory to the Co-Collateral Agents.
“ Permitted Acquisition ” means any Acquisition permitted under Section 6.02(c).
“ Permitted Debt ” means each of the following as long as no Default or Event of Default exists at the time of incurrence thereof or would arise from the incurrence thereof:
(a)    Debt outstanding on July 21, 2015 and listed in the Perfection Certificate;
(b)    Debt of any Loan Party to any other Loan Party;
(c)    Debt of Holdings or any Subsidiary of Holdings which is not a Loan Party to any Loan Party; provided, that (1) such Debt is incurred in the ordinary course of business consistent with past practices in connection with cash management, (2) such Debt shall not exceed $100,000,000 in the aggregate at any one time outstanding or (3) (i) at the time of incurrence of any such Debt and immediately after giving pro forma effect thereto, no Default or Event of Default shall have occurred and be continuing, and (ii) after giving effect to any such Debt (A) the Pro Forma and Projected Capped Excess Availability is at least 15% of the Line Cap, and (B) the Pro Forma Fixed Charge Ratio shall be at least 1.0 to 1.0;
(d)     Debt of any Group Member to any Subsidiary of Holdings which is not a Loan Party;
(e)    (i) purchase money Debt used to finance the acquisition of any fixed or capital assets, including Capital Lease Obligations, and any Debt assumed in connection with the acquisition of any such assets or secured solely by a Lien on any such assets prior to the acquisition thereof, and (ii) Debt incurred in connection with sale-leaseback transactions with respect to assets not constituting Collateral;
(f)    Debt of any Person that becomes a Subsidiary in an Acquisition permitted in accordance with Section 6.02(c), which Debt is existing at the time such Person becomes a Subsidiary (other than Debt incurred solely in contemplation of such Person’s becoming a Subsidiary);
(g)    the Obligations;

28

(h)    Other Debt in an amount not to exceed $ 750,000,000 1,000,000,000 in the aggregate outstanding at any time; provided that not more than $500,000,000 of such Debt shall consist of Short Term Debt (including, without limitation, Short Term commercial paper);
(i)    Debt described in Section 6.02(a)(vi), provided , that such Debt (i) does not have a maturity date which is earlier than the Extended Termination Date in effect at the time of the incurrence of such Debt, (ii) is incurred on arm’s-length terms, (iii) is subject to an intercreditor agreement in the form of the Existing Intercreditor Agreement or Exhibit F (or such other forms as the Co-Collateral Agents may agree in their Permitted Discretion), and (iv) the security documents, if any, with respect to such Debt are reasonably satisfactory to the Co-Collateral Agents in their Permitted Discretion;
(j)    any other Debt (including, without limitation, the January 2017 Mortgage Debt) , provided , that such Debt (i) does not require the repayment of principal prior to the Extended Termination Date in effect at the time of the incurrence of such Debt in excess of 1.0% of the original principal amount thereof per annum (excluding, for the avoidance of doubt, repayments required as a result of the sale of assets and repayments required in connection with an event that would constitute an Event of Default under Section 7.01(g) hereof) (ii) does not have a maturity date which is earlier than the Extended Termination Date in effect at the time of the incurrence of such Debt, and (iii) is incurred on arm’s-length terms;
(k)    Debt of the type specified in clause (g) of the definition thereof to the extent such Debt constitutes a Permitted Investment;
(l)     Debt in respect of performance bonds, bid bonds, appeal bonds, surety bonds and completion guarantees and similar obligations (including, in each case, letters of credit issued to provide such bonds, guaranties and similar obligations), in each case provided in the ordinary course of business, including those incurred to secure health, safety and environmental obligations in the ordinary course of business;
(m)    Debt arising from overdraft facilities and/or the honoring by a bank or other financial institution of a check, draft or similar instrument drawn against insufficient funds in the ordinary course of business or other cash management services (including, but not limited to, intraday, ACH, credit cards, and purchasing card/T&E services) in the ordinary course of business; provided , that (x) such Debt (other than credit cards or purchase cards) is extinguished within ten Business Days of notification to the applicable Loan Party of its incurrence and (y) such Debt in respect of credit cards or purchase cards is extinguished within 60 days from its incurrence;
(n)    Debt arising from agreements of Holdings or any Subsidiary providing for indemnification, adjustment of purchase or acquisition price or similar obligations, in each case, incurred or assumed in connection with any Permitted Acquisition or the disposition of any business, assets or any Subsidiary not prohibited by this Agreement, other than guarantees of Debt incurred by any Person acquiring all or any portion of such business, assets or any Subsidiary for the purpose of financing such Acquisition;
(o)    Debt consisting of (i) the financing of insurance premiums or (ii) take or pay obligations contained in supply arrangements, in each case, in the ordinary course of business;
(p)    Debt on account of Other LC Facilities and on account of letters of credit issued for the account of any Loan Party by any other Person;
(q)    Debt arising from a Credit Card Royalty Securitization in an amount not to exceed $500,000,000, so long as the Net Proceeds of such Credit Card Securitization received by Holdings or any Subsidiary are applied as permitted pursuant to Section 6.02(j)(iii)(B) or, if elected by Borrowers or with respect to any Net Proceeds remaining after such application permitted by Section 6.02(j)(iii)(B), to the Application of Disposition Proceeds; and
( q r )    Permitted Refinancing Debt.

29

“ Permitted Discretion ” means a determination made in good faith and in the exercise of commercially reasonable business judgment.
“ Permitted Dispositions ” means any of the following:
(a)    transfers and Dispositions of Inventory in the ordinary course of business;
(b)    transfers and Dispositions among the Loan Parties;
(c)    transfers and Dispositions by any Subsidiary of Holdings which is not a Loan Party to any Loan Party;
(d)    transfers and Dispositions by any Subsidiary of Holdings which is not a Loan Party to other Subsidiaries which are not Loan Parties;
(e)    transfers and Dispositions (other than transfers and Dispositions of Inventory, Credit Card Accounts Receivable, Pharmacy Receivables or any other Collateral (as defined in the Guarantee and Collateral Agreement on July 21, 2015)) to any Subsidiary of Holdings which is not a Loan Party by any Loan Party provided , that any such Disposition of Collateral shall be (i) undertaken in the ordinary course of business or (ii) on terms that are fair and reasonable and no less favorable to the Loan Party than it would obtain in a comparable arm’s length transaction with a Person that is not a Subsidiary of Holdings;
(f)    the sale of surplus, obsolete or worn out equipment or other property in the ordinary course of business by the Borrowers or any Subsidiary;
(g)    transfers and Dispositions of assets of Holdings or any Subsidiary of Holdings as follows:
(i)    Dispositions of real property securing the January 2017 Mortgage Debt, provided, that, after giving effect to any repayment of the January 2017 Mortgage Debt from the Net Proceeds of any such Disposition as required pursuant to the loan documentation governing the January 2017 Mortgage Debt (as such loan documentation is in effect as of the Second Amendment Effective Date or amended thereafter (subject to the provisions of Section 6.02(m) hereof)), any remaining Net Proceeds of such Disposition are applied pursuant to the Application of Disposition Proceeds;
(ii)    transfers and Dispositions of any assets held by Holdings or any Subsidiary of Holdings, including any equity interests in any Subsidiary (other than the equity interests of either Borrower or of Sears), in exchange for total consideration in an amount not to exceed $1,000,000 with respect to any transaction or series of related transactions; and
(iii)    other transfers and Dispositions of all or any portion of any Loan Party’s assets , including held by Holdings or any equity interests of its Subsidiaries (other than the equity interests or substantially all of the assets of either Borrower or of Sears), including, but not limited to, (v) any equity interests of any Subsidiaries (other than the equity interests of either Borrower or of Sears), (w) real property, (x) Intellectual Property (including, without limitation, the Kenmore, Craftsman and Die Hard brands), (y) the Sears Automotive Center business and (z) the Home Services Business of Holdings and its Subsidiaries, provided , that immediately after giving effect to any such disposition Disposition and the application of the proceeds thereof , (i) no Default or Event of Default then exists, (ii) either (A) the Pro Forma and Projected Capped Excess Availability is at least 15% of the Line Cap ( provided that , with respect to the transfer or Disposition of the assets of, or any equity interest in, a Material Subsidiary Guarantor (other than Sears), such Pro Forma and Projected Capped Excess Availability is at least the greater of (x) 25% of the Line Cap or (y) $750,000,000), or (B) such Loan Party uses the Net Proceeds of such Disposition to repay Advances in an amount equal to the lesser of (x) 100% of such Net Proceeds and (y) an amount sufficient to cause Pro Forma and Projected Capped Excess Availability to be 15% or more of the Line Cap (or, with respect to the transfer or Disposition of the assets of, or any equity interest in, a Material Subsidiary Guarantor (other than Sears), an amount sufficient to cause Pro Forma and Projected Capped Excess Availability

30

to be the greater of (x) 25% of the Line Cap or (y) $750,000,000) the Net Proceeds of such Disposition are applied pursuant to the Application of Disposition Proceeds , (iii) if the Disposition is to a Subsidiary or Affiliate of a Loan Party which is not a Loan Party, such Disposition shall be on terms that are fair and reasonable and no less favorable to the Loan Party than it would obtain in a comparable arm’s length transaction with a Person that is not a Subsidiary or Affiliate of a Loan Party, and (iv) Capped Excess Availability is no less than Capped Excess Availability immediately prior to such Disposition;
(h)    transfers and Dispositions which constitute Restricted Payments or Permitted Investments that are otherwise permitted hereunder;
(i)    Dispositions permitted pursuant to Section 6.02(b) hereof;
(j)    the sale of other Policy Investments in the ordinary course of business;
(k)    the sale or Disposition of defaulted receivables and the compromise, settlement and collection of receivables in the ordinary course of business or in bankruptcy or other proceedings concerning the other account party thereon and not as part of an accounts receivable financing transaction;
(l)    leases, licenses or subleases or sublicenses of any real or personal property not constituting Collateral in the ordinary course of business;
(m)    any surrender or waiver of contract rights or the settlement, release, recovery on or surrender of contract, tort or other claims of any kind (other than, in each case, with respect to rights to license the Related Intellectual Property, unless the limited license granted to the Co-Collateral Agents in such Related Intellectual Property pursuant to the Loan Documents remains in effect and is acknowledged by the licensee) to the extent that any of the foregoing could not reasonably be expected to have a Material Adverse Effect;
(n)    sales of Inventory (other than Eligible Inventory) determined by the management of the applicable Loan Party not to be saleable in the ordinary course of business of such Loan Party or any of the Loan Parties;
(o)    transfers of assets, including Inventory, in connection with Store closings (and/or department closings within Stores) permitted pursuant to Section 6.02(l); and
(p)    Dispositions to effectuate the REIT Transaction ; and
(q)    Dispositions of Credit Card Program Assets to or by a Credit Card Royalty Securitization Subsidiary pursuant to a Credit Card Royalty Securitization, so long as the Net Proceeds of such Credit Card Royalty Securitization received by Holdings or any Subsidiary are applied as permitted pursuant to Section 6.02(j)(iii)(B) or, if elected by Borrowers or with respect to any Net Proceeds remaining after such application permitted by Section 6.02(j)(iii)(B), to the Application of Disposition Proceeds .
“ Permitted Holder ” means ESL Investments, Inc. and any of its Affiliates other than a Group Member.
“ Permitted Holder Lender ” means (x) any Permitted Holder and/or (y) any Significant Holder, provided , that , the Permitted Holder Lenders shall not (taken as a whole) at any time hold more than 35% of the sum of (A) the Aggregate Revolving Commitments outstanding (or, if the Aggregate Revolving Commitments have been terminated, the aggregate Revolving Extensions of Credit), and (B) to the extent any FILO Facility is a revolving facility, the FILO Commitments outstanding (or if the FILO Commitments have been terminated, the FILO Loans outstanding) (B) the principal amount of the Term Loans outstanding, and (C) the principal amount of the Term Loans outstanding, and (D) the principal amount of the 2016 Term Loans outstanding , and, (E) to the extent any FILO Facility is a term facility, FILO Loans then outstanding ; provided , further that , the no Permitted Holder Lender shall at any time hold any portion of any FILO Facility; provided, further, that, such Permitted Holder executes Lender shall execute a waiver in form and substance reasonably satisfactory to the Agent that it shall have no right whatsoever with respect to that portion of the

31

Commitments, the Advances, the FILO Loans, the Term Loan or the 2016 Term Loan which it holds (a) to consent to any amendment, modification, waiver, consent or other such action with respect to any of the terms of any Loan Document, (b) otherwise to vote on any matter related to any Loan Document, (c) to require Agents or any Lender to undertake any action (or refrain from taking any action) with respect to any Loan Document, (d) to attend any meeting with the Agent or any Lender or receive any information from the Agent or any Lender, (e) to the benefit of any advice provided by counsel to the Agents or the other Lenders or to challenge the attorney-client privilege of the communications between the Agents, such other Lenders and such counsel, or (f) make or bring any claim, in its capacity as Lender, against any Agent with respect to the fiduciary duties of such Agent or Lender and the other duties and obligations of the Agents hereunder; except, that, no amendment, modification or waiver to any Loan Document shall, without such Permitted Holder Lender’s consent, deprive any Permitted Holder Lender of its pro rata share of any payments to which the Lenders as a group (or any Class thereof) are otherwise entitled hereunder or otherwise single out, or intentionally discriminate against the Permitted Holder Lender, as such.
“ Permitted Investments ” means each of the following as long as no Default or Event of Default exists at the time of the making such of Investment or would arise from the making of such Investment:
(a)    Investments existing on, or contractually committed as of, July 21, 2015, and set forth in the Perfection Certificate;
(b)    (i) Investments by any Loan Party and its Subsidiaries in their respective Subsidiaries outstanding on July 21, 2015, (ii) Investments by any Loan Party and its Subsidiaries in Loan Parties, and (iii) Investments by Subsidiaries that are not Loan Parties in Holdings or any Subsidiary;
(c)    other Investments of any Loan Party in any other Subsidiary of Holdings which is not a Loan Party; provided , that (1) such Investment is incurred in the ordinary course of business consistent with past practices in connection with cash management, (2) such Investments shall not exceed $100,000,000 in the aggregate at any one time outstanding and the Pro Forma and Projected Capped Excess Availability is at least 25% of the Line Cap, or (3) (a) at the time of any such Investment and immediately after giving pro forma effect thereto, no Default or Event of Default shall have occurred and be continuing, and (b) after giving effect to any such Investment (A) the Pro Forma and Projected Capped Excess Availability is at least 15% of the Line Cap, and (B) the Pro Forma Fixed Charge Ratio shall be at least 1.0 to 1.0;
(d)    Investments of any Loan Party in any other Person not constituting an Acquisition; provided that (a) at the time of any such Investment and immediately after giving pro forma effect thereto, no Default or Event of Default shall have occurred and be continuing, and (b) after giving effect to any such Investment (A) the Pro Forma and Projected Capped Excess Availability is at least 15% of the Line Cap, and (B) the Pro Forma Fixed Charge Ratio shall be at least 1.0 to 1.0;
(e)    Investments constituting a Permitted Acquisition and Investments held by the Person acquired in such Acquisition at the time of such Acquisition (and not acquired in contemplation of such Acquisition);
(f)    Investments arising out of the receipt of non-cash consideration for the sale of assets otherwise permitted under this Agreement;
(g)    Policy Investments;
(h)    Investments in Swap Contracts not entered into for speculative purposes;
(i)    to the extent not prohibited by applicable law, (1) advances to officers, directors and employees and consultants of the Loan Parties made for travel, entertainment, relocation and other ordinary business purposes and (2) advances to officers, directors and employees and consultants of non-Loan Parties made for travel, entertainment, relocation and other ordinary business purposes, provided, in the case of this clause (2), such advances are made by non-Loan Parties and not with the proceeds of any Investments made by any Loan Party in such non-Loan Party unless otherwise permitted hereunder;

32

(j)    Investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts and disputes with or judgments against, customers and suppliers, in each case in the ordinary course of business or Investments acquired by any Group Member as a result of a foreclosure by any Loan Party with respect to any secured Investments or other transfer of title with respect to any secured Investment in default;
(k)     Reserved; Investments consisting of contributions of Credit Card Program Assets to a Credit Card Royalty Securitization Subsidiary in connection with a Credit Card Royalty Securitization;
(l)    Investments made with the common stock of Holdings;
(m)    accounts receivable, security deposits and prepayments arising and trade credit granted in the ordinary course of business;
(n)    Guarantees by Holdings or any Subsidiary of operating leases (other than Capital Lease Obligations) or of other obligations that do not constitute Debt, in each case entered into by Holdings or any Subsidiary in the ordinary course of business;
(o)    (1) advances in the form of a prepayment of expenses of any Loan Party, so long as such expenses are being paid in accordance with customary trade terms of the applicable Loan Party and (2) advances in the form of a prepayment of expenses of any non-Loan Party, so long as such expenses are being paid in accordance with customary trade terms of the applicable non-Loan Party, provided, in the case of this clause (2), such advances are made by non-Loan Parties and not with the proceeds of any Investments made by any Loan Party in such non-Loan Party unless otherwise permitted hereunder;
(p)    Investments consisting of the licensing or contribution of Intellectual Property pursuant to joint marketing arrangements with other Persons, provided that no such Investment shall impair in any manner the limited license granted to the Co-Collateral Agents in such Intellectual Property pursuant to the Loan Documents;
(q)    Investments in joint ventures that own real properties upon which Stores are located existing as of July 21, 2015 and entered into hereafter in the ordinary course of business; and
(r)    other Investments in an amount not to exceed $ 250,000,000 50,000,000 in the aggregate outstanding at any time; provided that no Investment pursuant to this clause (r) shall be made by any Loan Party in any Subsidiary of Holdings which is not a Loan Party. any cash returns on such Investments, whether in the form of dividends or otherwise, other than Investments in Holdings and its Subsidiaries, are subject to the Application of Disposition Proceeds; and
(s)    Investments in joint ventures made pursuant to a contribution of assets (other than cash or cash equivalents) constituting all or a portion of the Sears Automotive Center business and/or the DieHard business (including related trademarks and other intellectual property); provided that (i) in the event that any Inventory included in the Borrowing Base is contributed to any such joint venture in connection with such Investment, the Borrowers shall, upon or prior to the making of such Investment, deliver to the Agent a Borrowing Base Certificate giving effect on a pro forma basis to such Investment and, to the extent required pursuant to Section 2.11(c), repay Advances or otherwise satisfy Obligations and (ii) any dividends and distributions received by the Loan Parties from such joint ventures, any Net Proceeds received by the Loan Parties from the sale of any assets by such joint ventures and any other cash received by the Loan Parties from such joint ventures (whether at the time of contribution of assets to such joint venture or any deferred payment received) shall be applied pursuant to the Application of Disposition Proceeds.



33

“ Permitted Liens ” means:
(a)     Liens for taxes, assessments and governmental charges or levies to the extent such taxes, assessments or governmental charges are being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained;
(b)     Liens imposed by law, such as materialmen’s, mechanics’, carriers’, workmen’s and repairmen’s Liens and other similar Liens arising in the ordinary course of business securing obligations that are not overdue for a period of more than 30 days or that are being contested in good faith by appropriate proceedings and as to which appropriate reserves are being maintained;
(c)     landlords’ Liens arising in the ordinary course of business securing (i) rents not yet due and payable, (ii) rent for Stores in an amount not to exceed the monthly base rent due for the immediately preceding calendar month and (iii) rents for Stores in excess of the amount set forth in the preceding clause (ii) so long as such amounts are being contested in good faith by appropriate proceedings and as to which appropriate reserves are being maintained;
(d)     any attachment or judgment lien not constituting an Event of Default under Section 7.01(f);
(e)     Liens presently existing or hereafter created in favor of the Co-Collateral Agents, on behalf of the Credit Parties;
(f)     Liens arising by the terms of commercial letters of credit (including, without limitation, pursuant to an Other LC Facility), entered into in the ordinary course of business to secure reimbursement obligations thereunder, provided that such Liens only encumber the title documents and underlying goods relating to such letters of credit or cash and cash equivalents as permitted under clause (m) hereof;
(g)     claims under PACA and PASA;
(h)     Liens in favor of issuers of credit cards arising in the ordinary course of business securing the obligation to pay customary fees and expenses in connection with credit card arrangements;
(i)     Liens incurred or deposits made by any Group Member in the ordinary course of business in connection with workers’ compensation and other casualty insurance lines, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money);
(j)    easements, rights-of-way, covenants, conditions, restrictions (including zoning restrictions), declarations, rights of reverter, minor defects or irregularities in title and other similar charges or encumbrances, whether or not of record, that do not, in the aggregate, interfere in any material respect with the ordinary course of business, or in respect of any real property which is part of the Collateral, any title defects, liens, charges or encumbrances (other than such prohibited monetary Liens) which the title company is prepared to endorse or insure by exclusion or affirmative endorsement reasonably acceptable to the Agent and which is included in any title policy;
(k)    any interest or title of a lessor or sublessor under, and Liens arising from precautionary UCC financing statements (or equivalent filings, registrations or agreements in foreign jurisdictions) relating to, leases and subleases permitted by this Agreement;
(l)    normal and customary rights of setoff upon deposits of cash or other Liens originating solely by virtue of any statutory or common law provision, or ordinary course contractual obligation, relating to bankers’ liens, rights of setoff or similar rights in favor of banks or other depository institutions;
(m)    Liens on cash and cash equivalents securing obligations in respect of Other LC Facilities and in respect of standby or trade letters of credit not constituting Obligations or trade-related bank guarantees;

34

(n)    Liens granted to consignors who have properly perfected on consigned Inventory owned by such consignors and created in the ordinary course of business;
(o)    Liens on premium rebates securing financing arrangements with respect to insurance premiums;
(p)    deposits and other customary Liens to secure the performance of bids, trade contracts (other than for Debt), leases (other than Capital Lease Obligations), statutory and regulatory obligations, surety and appeal bonds, performance and return of money bonds, bids, leases, government contracts, trade contracts, agreements with utilities, and other obligations of a like nature incurred in the ordinary course of business, including those incurred to secure health, safety and environmental obligations in the ordinary course of business;
(q)    Liens that are contractual rights of set‑off (i) relating to the establishment of depository relations with banks not given in connection with the issuance of Debt or (ii) relating to pooled deposit or sweep accounts of the Borrowers or any Subsidiary to permit satisfaction of overdraft or similar obligations incurred in the ordinary course of business of the Borrowers or any Subsidiary;
(r)     Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods;
(s)    Liens solely on any cash earnest money deposits made by any Borrower or any of its Subsidiaries in connection with any letter of intent or purchase agreement in respect of any Investment permitted hereunder;
(t)    Liens on securities that are the subject of repurchase agreements constituting Policy Investments;
(u)    Liens on cash and cash equivalents securing Swap Contracts incurred in the ordinary course of business; and
(v)    other Liens on cash and cash equivalents in an amount not to exceed $25,000,000 held by a third party as security for any obligation (other than Debt) permitted to be incurred by any Group Member hereunder.
“ Permitted Overadvance ” means an Overadvance made by the Agent, in its Permitted Discretion, or at the direction of any Co-Collateral Agent, which:
(a)    is made to maintain, protect or preserve the Collateral and/or the Credit Parties’ rights under the Loan Documents or which is otherwise for the benefit of the Credit Parties;
(b)    is made to enhance the likelihood of, or to maximize the amount of, repayment of the Obligations;
(c)    is made to pay any other amount chargeable to any Loan Party hereunder; and
(d)    together with all other Permitted Overadvances then outstanding, shall not (i) exceed five percent (5%) of the Borrowing Base at any time or (ii) unless a Liquidation is occurring, remain outstanding for more than thirty (30) consecutive Business Days, unless in each case, the Required Lenders otherwise agree;
provided , however , that the foregoing shall not (i) modify or abrogate any of the provisions of Article III regarding any Revolving Lender’s obligations with respect to Letters of Credit, or (ii) result in any claim or liability against the Agent or the Co-Collateral Agents (regardless of the amount of any Overadvance) for “inadvertent Overadvances” (i.e. where an Overadvance results from changed circumstances beyond the control of the Agent or the Co-Collateral Agents (such as a reduction in the collateral value)), and such

35

“inadvertent Overadvances” shall not reduce the amount of Permitted Overadvances allowed hereunder, and further , provided , that in no event shall the Agent make an Overadvance, if after giving effect thereto, the principal amount of the Revolving Extensions of Credit would exceed the Aggregate Revolving Commitments (as in effect prior to any termination of the Revolving Commitments pursuant to Section 2.06 hereof).
“ Permitted Refinancing Debt ” shall mean any Debt issued in exchange for, or the Net Proceeds of which are used to extend, refinance, renew, replace, defease or refund (collectively, to “ Refinance ”), the Debt being Refinanced (or previous refinancings thereof constituting Permitted Refinancing Debt); provided , that (a) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Debt does not exceed the principal amount (or accreted value, if applicable) of the Debt so Refinanced (plus unpaid accrued interest and premium (including tender premiums) thereon and underwriting discounts, defeasance costs, fees, commissions and expenses), (b) the maturity date of such Permitted Refinancing Debt shall not be earlier than the maturity date of the Debt being Refinanced and weighted average life to maturity of such Permitted Refinancing Debt shall be greater than or equal to the weighted average life to maturity of the Debt being Refinanced, (c) if the Debt being Refinanced is subordinated in right of payment to the Obligations under this Agreement, such Permitted Refinancing Debt shall be subordinated in right of payment to such Obligations on terms at least as favorable to the Lenders as those contained in the documentation governing the Debt being Refinanced, (d) no Permitted Refinancing Debt shall have different obligors, or greater guarantees or security, or higher priority guarantees or security, than the Debt being Refinanced; and (e) the Permitted Refinancing Debt shall otherwise be on terms which would not reasonably likely result in a Material Adverse Effect.
“ Person ” means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company or other entity, or a government or any political subdivision or agency thereof.
“ Pharmacy Receivables ” means Accounts arising from the sale of prescription drugs or other Inventory which can be dispensed only through an order of a licensed professional.
“ Plan ” means a Single Employer Plan or a Multiple Employer Plan.
“ Policy Investments ” means Investments made in accordance with the investment policy of the Loan Parties set forth on Schedule 6.02(k)(ii) , as such policy may be amended from time to time with the reasonable consent of the Agent, such consent not to be unreasonably withheld.
“ Pricing Grid ” means the pricing grid set forth on Schedule IA .
“ Pro Forma and Projected Capped Excess Availability ” shall mean, for any date of calculation, after giving effect to the applicable transaction or payment, the pro forma and projected Capped Excess Availability for the subsequent twelve (12) fiscal month period, determined as of the last day of each fiscal month in such period and based on Holdings’ good faith projections that are used to run the businesses of the Borrowers and prepared in accordance with past practice, which projections shall be reasonably satisfactory to the Agent and the Co-Collateral Agents.
“ Pro Forma and Projected Suppressed Availability ” shall mean, for any date of calculation, after giving effect to the applicable transaction or payment, the pro forma and projected Suppressed Availability for the subsequent twelve (12) fiscal month period, determined as of the last day of each fiscal month in such period and based on Holdings’ good faith projections that are used to run the businesses of the Borrowers and prepared in accordance with past practice, which projections shall be reasonably satisfactory to the Agent and the Co-Collateral Agents.
“ Pro Forma Fixed Charge Ratio ” shall mean, for any date of calculation, the Fixed Charge Ratio as of the last day of the most recently completed fiscal quarter for which financial statements are available or were required to have been delivered pursuant to Section 6.01(j) (the “ Reference Date ”), after giving pro forma effect to any applicable transaction or payment as if such transaction or payment had occurred on the first day of the four fiscal quarter period ending on the Reference Date.

36

“ Pro Rata Basis ” means, (x) with respect to any prepayment of the Term Loan pursuant to Section 2.11(a)(ii), and corresponding reduction in the Aggregate Revolving Commitments pursuant to the proviso thereto, that (i) the principal amount of such prepayment as a percentage of the aggregate outstanding principal amount of the Term Loan immediately prior to such prepayment is equal to (ii) the aggregate amount of such reduction as a percentage of the Aggregate Revolving Commitments (or, as applicable, the Revolving Commitments of the 2015 Non-Extending Lenders) immediately prior to such reduction, and (y) with respect to any prepayment of the 2016 Term Loan pursuant to Section 2.11(a)(iii), and corresponding reduction in the Aggregate Revolving Commitments and prepayment of the Term Loan pursuant to the proviso thereto, that (i) the principal amount of such prepayment of the 2016 Term Loan as a percentage of the aggregate outstanding principal amount of the 2016 Term Loan immediately prior to such prepayment is equal to (ii) (A) the aggregate amount of such reduction as a percentage of the Aggregate Revolving Commitments (or, as applicable, the Revolving Commitments of the 2015 Non-Extending Lenders) immediately prior to such reduction and (B) the aggregate amount of such prepayment of the Term loan as a percentage of the Term Loan immediately prior to such reduction.
“ Pro Rata Share ” means, as to any Lender as of any date of determination, a percentage equal to (i) the sum of such Lender’s Revolving Commitment and/or share of the outstanding principal amount of the Term Loan and/or the 2016 Term Loan and, if applicable, FILO Loans as of such date, as applicable, divided by (ii) the Aggregate Revolving Commitments and the aggregate outstanding principal amount of the Term Loan, the 2016 Term Loan and, if applicable, FILO Loans as of such date.
“ Qualified ECP Guarantor ” means, at any time, each Loan Party with total assets exceeding $10,000,000 or that qualifies at such time as an “eligible contract participant” under the Commodity Exchange Act and can cause another Person to qualify as an “eligible contract participant” at such time under Section 1a(18)(A)(v)(II) of the Commodity Exchange Act.
“ Recipient ” means the Agent, the Co-Collateral Agents, any Lender, any Issuing Lender or any other recipient of any payment to be made by or on account of any obligation of any Loan Party hereunder.
“ Refunded Swingline Advances ” has the meaning specified in Section 2.04(b).
“ Register ” has the meaning specified in Section 9.07(d).
“ Reimbursement Obligation ” means the obligation of the Borrowers to reimburse the Issuing Lender pursuant to Section 3.05 for amounts drawn under Letters of Credit.
“ REIT Transaction ” means the sale of 235 real properties (and related assets) and interests in certain joint ventures of Holdings and its subsidiaries on the terms set forth in the Form S-11 of Seritage Growth Properties (including the related exhibits) on file with the SEC.
“ Related Intellectual Property ” means such rights with respect to the Intellectual Property of Holdings and its Subsidiaries as are reasonably necessary to permit the Co-Collateral Agents to enforce their rights and remedies under the Loan Documents with respect to the Collateral.
“ REMIC Certificates ” means the SRC Commercial Mortgage Trust 2003-1 Mortgage Pass-Through Certificates in the aggregate face amount of $1,312,416,000 (as amended, supplemented or otherwise modified, replaced or refinanced, in any case in a manner not materially adverse to the Lenders).
“ Reorganization ” means with respect to any Multiemployer Plan, the condition that such Plan is in reorganization within the meaning of Section 4241 of ERISA.
“ Reportable Event ” means any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty day notice period is waived under subsections .27, .28, .29, .30, .31, .32, .34 or .35 of PBGC Reg. § 4043.

37

“ Required Lenders ” means, at any time, the holders of more than 50% of the sum of the Aggregate Revolving Commitments (other than Commitments held by Permitted Holder Lenders) then in effect and the principal amount of the Term Loan and the 2016 Term Loan then outstanding (other than the portion of the Term Loan and/or the 2016 Term Loan held by Permitted Holder Lenders) or, if the Aggregate Revolving Commitments have been terminated, the holders of more than 50% of the Total Extensions of Credit then outstanding (other than Extensions of Credit held by Permitted Holder Lenders).
“ Requirements of Law ” means as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.
“ Reserve Notice Period ” means one day prior notice to the Borrowers, unless a Cash Dominion Event has occurred and is continuing, in which case the Reserve Notice Period shall mean any notice period (including no notice) determined by any Co-Collateral Agent in its Permitted Discretion to be necessary or desirable to protect the interests of the Credit Parties.
“ Restricted Payment ” means any dividend or other distribution (whether in cash, securities or other property) with respect to any equity interests in Holdings or any Subsidiary of Holdings, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such equity interests in Holdings or any Subsidiary of Holdings or any option, warrant or other right to acquire any such equity interests in Holdings or any Subsidiary of Holdings.
“ Revolving Advance ” has the meaning specified in Section 2.01. A Revolving Advance may be a Base Rate Advance or a Eurodollar Rate Advance (each of which shall be a “ Type ” of Revolving Advance).
“ Revolving Commitment ” means, as to any Revolving Lender, the obligation of such Revolving Lender to make Revolving Advances and participate in Swingline Advances and Letters of Credit in an aggregate principal amount and/or face amount up to (a) the amount set forth opposite such Revolving Lender’s name on Schedule 1.01 or (b) if such Revolving Lender has entered into any Assignment and Acceptance, the amount set forth for such Revolving Lender in the Register maintained by the Agent pursuant to Section 9.07(d), as such amount may be reduced or increased pursuant to Section 2.06.
“ Revolving Commitment Increase ” means an increase in the Revolving Commitment requested pursuant to Section 2.19(b).
“ Revolving Commitment Percentage ” means, as to any Revolving Lender at any time, the percentage which such Revolving Lender’s Revolving Commitment then constitutes of the Aggregate Revolving Commitments or, at any time after the Aggregate Revolving Commitments shall have expired or terminated, the percentage which the aggregate principal amount of such Revolving Lender’s Advances then outstanding plus such Revolving Lender’s participation in Swingline Loans and L/C Obligations constitutes of the aggregate principal amount of the Advances, Swingline Loans and L/C Obligations then outstanding; provided , that , after the Revolving Commitment of any 2015 Non-Extending Lender shall have expired or terminated (other than as a result of the termination of all Revolving Commitments pursuant to Section 2.06 hereof or pursuant to Section 7.01 hereof) and all Obligations owed to such 2015 Non-Extending Lender have been paid in full, (x) the Revolving Commitment Percentage of such 2015 Non-Extending Lender for purposes of Section 8.08 hereof shall be its Revolving Commitment Percentages immediately prior to such date, and (y) the Revolving Commitment Percentages of the 2015 Extending Lenders shall be appropriately adjusted for all other purposes to reflect the termination of the Revolving Commitments of the 2015 Non-Extending Lenders.
“ Revolving Extensions of Credit ” means as to any Revolving Lender at any time, an amount equal to the sum of (a) the aggregate principal amount of all Revolving Advances held by such Revolving Lender then outstanding, (b) such Revolving Lender’s Revolving Commitment Percentage of the aggregate principal amount of Swingline Advances then outstanding and (c) such Revolving Lender’s Revolving Commitment Percentage of the L/C Obligations then outstanding.

38

“ Revolving Lenders ” means, collectively, any Persons signatory hereto as a Revolving Lender, and each Person that shall become a party hereto as a revolving lender pursuant to Section 9.07, and shall include all 2015 Extending Lenders, the 2015 Non-Extending Lenders and all future Revolving Lenders who hold an Extended Revolving Commitment.
“ Revolving Termination Date ” means the earlier of (a) April 8, 2016 and (ii) the date of termination in whole of the Aggregate Revolving Commitments pursuant to Section 2.06 or 7.01.
“ Sears ” means Sears, Roebuck and Co., a New York corporation.
“ SEC ” means the United States Securities and Exchange Commission.
“Second Amendment” means that certain Second Amendment to Third Amended and Restated Credit Agreement dated as of February 10, 2017 among Holdings, the Borrower, the Required Lenders, the Agent and the Co-Collateral Agents.
“Second Amendment Effective Date” means February 10, 2017.
“ Security Documents ” means the collective reference to the Guarantee and Collateral Agreement, and all other security documents hereafter delivered to the Co-Collateral Agents granting a Lien on any property of any Person to secure the obligations and liabilities of any Loan Party under any Loan Document.
“ Senior Unsecured Notes ” means those certain 8% senior unsecured notes due 2019 issued by Holdings pursuant to the First Supplemental Indenture dated November 19, 2014 by and between Holdings, as Issuer and Computershare Trust Company, N.A. as Trustee.
“Short Term” means, with respect to any commercial paper or other Debt for borrowed money, that such commercial paper or other Debt for borrowed money has a maturity of 180 days or less from the date of the incurrence or issuance of such Debt.
“Significant Holder” means (i) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its Subsidiaries, and any Person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan), which is the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934) of 10% or more of the equity securities of Holdings entitled to vote for members of the Board of Directors of Holdings on a fully-diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right), and (ii) any Affiliate of any such Person described in clause (i) above.
“ Single Employer Plan ” means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of any Borrower or any ERISA Affiliate and no Person other than such Borrower and the ERISA Affiliates or (b) was so maintained and in respect of which any Borrower or any ERISA Affiliate could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated.
“ Solvent ” means, when used with respect to any Person, that, as of any date of determination, (a) the amount of the “present fair saleable value” of the assets of such Person will, as of such date, exceed the amount of all “liabilities of such Person, contingent or otherwise”, as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b) such Person will not have, as of such date, an unreasonably small amount of capital with which to conduct its business, and (c) such Person will be able to pay its debts as they mature.
“ Specified Loan Party ” means any Loan Party that is not then an “eligible contract participant” under the Commodity Exchange Act (determined prior to giving effect to Section 9.19).
“ SRAC ” has the meaning provided in the Preamble.

39

“ Standby L/C ” means an irrevocable letter of credit or similar instrument under which the Issuing Lender agrees to make payments in Dollars for the account of any Borrower, on behalf of any Group Member in respect of obligations of such Group Member incurred pursuant to contracts made or performances undertaken or to be undertaken or like matters relating to contracts to which such Group Member is or proposes to become a party, including, without limiting the foregoing, for insurance purposes or in respect of advance payments or as bid or performance bonds or for any other purpose for which a standby letter of credit might be issued.
“ Store ” means any store owned or leased and operated by any Loan Party.
“ Store Closure Sale ” means a store closure sale that, if including more than twenty (20) stores (whether in one transaction or a series of related transactions), is properly managed by an independent, nationally recognized, professional retail inventory liquidation firm reasonably acceptable to the Co-Collateral Agents, over a defined period that is anticipated by the Borrowers not to exceed 12 weeks (on average) from the date of the same commencement.
“ Subsidiary ” of any Person means any corporation, partnership, joint venture, limited liability company, trust or estate of which (or in which) more than 50% of the issued and outstanding capital stock or other equity interest having ordinary voting power to elect a majority of the Board of Directors or other governing body of such corporation, partnership, joint venture, limited liability company, trust or estate (irrespective of whether at the time capital stock or other equity interests of any other class or classes of such corporation, partnership, joint venture, limited liability company, trust or estate shall or might have voting power upon the occurrence of any contingency), is at the time directly or indirectly owned by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person’s other Subsidiaries.
“ Subsidiary Guarantor ” means each direct and indirect wholly owned Domestic Subsidiary of Holdings, that owns Inventory, Credit Card Accounts Receivable, Pharmacy Receivables, or other Collateral (as defined in the Guarantee and Collateral Agreement).
“ Supermajority Lenders ” means, at any time, the holders of 66-2/3% or more of the sum of the Aggregate Revolving Commitments (other than Commitments held by Permitted Holder Lenders) then in effect and the principal amount of the Term Loan and the 2016 Term Loan then outstanding (other than the portion of the Term Loan and/or the 2016 Term Loan held by Permitted Holder Lenders) or, if the Aggregate Revolving Commitments have been terminated, the holders of 66-2/3% or more of the Total Extensions of Credit then outstanding (other than Extensions of Credit held by Permitted Holder Lenders).
“ Suppressed Availability ” means, at any time of calculation, the excess, if any, of the Borrowing Base over the sum of (i) the Aggregate Revolving Commitments at such time and (ii) the principal amount of the Term Loan and the 2016 Term Loan outstanding at such time.
“ Swap Contract ” means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a “ Master Agreement ”), including any such obligations or liabilities under any Master Agreement.

40

“ Swap Obligations ” means with respect to any Loan Party any obligation to pay or perform under any agreement, contract or transaction that constitutes a “swap” within the meaning of Section 1a(47) of the Commodity Exchange Act.
“ Swingline Advances ” has the meaning specified in Section 2.03.
“ Swingline Commitment ” means the obligation of the Swingline Lender to make Swingline Advances pursuant to Section 2.03 in an aggregate principal amount at any one time outstanding not to exceed $100,000,000.
“ Swingline Lender ” means the Bank, in its capacity as the lender of Swingline Advances.
“ Swingline Participation Amount ” has the meaning specified in Section 2.04(c).
“ Syndication Agent ” has the meaning provided in the Preamble and any successors thereto.
“ Taxes ” means all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.
“ Term Commitment ” means, as to any Term Lender, the obligation of such Term Lender to make its portion of the Term Loan on October 2, 2013.
“ Term Lenders ” means, collectively, any Persons party hereto as a Term Lender, and each Person that shall become a party hereto as a Term Lender pursuant to Section 9.07 and shall include all future Term Lenders who hold an Extended Term Loan.
“ Term Loan ” means, collectively, (i) the term loans made by the Term Lenders on October 2, 2013 pursuant to Section 2.01(b), and (ii) as used in the definitions of “Required Lenders” and “Supermajority Lenders”, the sum of (x) the term loans of all the Term Lenders and (y) to the extent any FILO Facility is a term loan facility, the FILO Loans of all of the FILO Lenders.
“ Term Loan Borrowing ” means a portion of the Term Loan of a particular Type; provided that no Term Loan Borrowing shall be in an aggregate principal amount of less than $5,000,000 and each Term Loan Borrowing constituting a Eurodollar Rate Advance shall be in a principal amount that is an integral multiple of $1,000,000 (unless no portion of the Term Loan constitutes a Base Rate Advance), and no more than ten (10) Interest Periods in the aggregate for Borrowings, Term Loan Borrowings and 2016 Term Loan Borrowings constituting Eurodollar Rate Advances may be outstanding at any time.
“ Term Loan Margin ” (a) with respect to any outstanding portion of the Term Loan that is a Eurodollar Rate Advance, 4.50% per annum, and (b) with respect to any outstanding portion of the Term Loan that is a Base Rate Advance, 3.50% per annum.
“ Term Loan Termination Date ” means June 30, 2018.
“ Third Party Payor Notification ” has the meaning specified in Section 6.01(m)(i)(C).
“ Third Party Payors ” means any private health insurance company that is obligated to reimburse or otherwise make payments to pharmacies which sell prescription drugs to eligible patients under any insurance contract with such private health insurer.
“ Total Extensions of Credit ” means at any time, the aggregate amount of the Extensions of Credit of the Lenders outstanding at such time.
“ Total Revolving Extensions of Credit ” means at any time, the aggregate amount of the Revolving Extensions of Credit of the Lenders outstanding at such time.

41

“ Trading With the Enemy Act ” means 50 U.S.C. § 1 et seq., as amended.
“ Transfer Date ” has the meaning set forth in Section 3.02(b) .
“ Transfer Notice ” means a written notice from the Borrowers, in form and substance reasonably satisfactory to the Agent, executed by an Authorized Officer, specifying one or more Other LCs (including the beneficiary, face amount and expiry date thereof, and such other information as the Agent may reasonably request) which the Borrowers desire to deem issued under this Agreement and identifying a Transfer Date with respect thereto.
“ Type ” means either a Base Rate Advance or a Eurodollar Rate Advance.
“ UCC ” means the Uniform Commercial Code as from time to time in effect in the State of New York, provided, however, that if a term is defined in Article 9 of the Uniform Commercial Code differently than in another Article thereof, the term shall have the meaning set forth in Article 9; provided further that, if by reason of mandatory provisions of law, perfection, or the effect of perfection or non-perfection, of a security interest in any Collateral or the availability of any remedy hereunder is governed by the Uniform Commercial Code as in effect in a jurisdiction other than New York, “Uniform Commercial Code” means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection or availability of such remedy, as the case may be.
“ Unfunded Pension Liability ” means the excess of a Pension Plan’s benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Pension Plan’s assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Internal Revenue Code for the applicable plan year.
“ Voting Stock ” means capital stock issued by a corporation, or equivalent interests in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even if the right so to vote has been suspended by the happening of such a contingency.
“ WF Fee Letter ” means that certain Fee Letter dated as of April 6, 2011 among Holdings, Borrowers, Wells Fargo Capital Finance, LLC and Wells Fargo Bank, National Association.
SECTION 1.02.      Computation of Time Periods . In this Agreement, unless otherwise specified, (a) in the computation of periods of time from a specified date to a later specified date, the word “ from ” means “ from and including ” and the words “ to ” and “ until ” each mean “ to but excluding ” (b) “ including ” means “ including without limitation ”; and (c) any reference to a time of day means Eastern time.
SECTION 1.03.      Accounting Terms . All accounting terms not specifically defined herein or in the other Loan Documents shall be construed in accordance with U.S. generally accepted accounting principles (“ GAAP ”) which for purposes of Section 6.03 shall be consistently applied. If at any time any change in U.S. generally accepted accounting principles would affect the computation of any financial ratio or requirement set forth herein, and either the Borrowers or the Required Lenders shall so request, the Agent, the Lenders and the Borrowers shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP (subject to the approval of the Required Lenders which shall not be unreasonably withheld), provided that, until so amended, (i) such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change in principles, and (ii) the Borrowers shall provide to the Agent and the Lenders financial statements and other documents required under this Agreement or as reasonably requested hereunder setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP. For the avoidance of doubt, no retroactive change in GAAP shall apply to the construction of accounting terms under this Agreement in the absence of an amendment hereto in accordance with the terms of this Section 1.03.


42

SECTION 1.04.      Other Interpretive Provisions . With reference to this Agreement and each other Loan Document, unless otherwise specified herein or in such other Loan Document, the definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Unless the context requires otherwise, (i) any definition of or reference to any agreement, instrument or other document shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein or in any other Loan Document), (ii) any reference herein to any Person shall be construed to include such Person’s successors and assigns, (iii) the words “ herein ,” “ hereof ” and “ hereunder ,” and words of similar import when used in any Loan Document, shall be construed to refer to such Loan Document in its entirety and not to any particular provision thereof, (iv) all references in a Loan Document to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, the Loan Document in which such references appear, (v) any reference to any law shall include all statutory and regulatory provisions consolidating, amending replacing or interpreting such law and any reference to any law or regulation shall, unless otherwise specified, refer to such law or regulation as amended, modified or supplemented from time to time, and (vi) the words “ asset ” and “ property ” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.

ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES, THE TERM LOAN AND THE 2016 TERM LOAN
SECTION 2.01.      The Revolving Advances, the Term Loan and the 2016 Term Loan .
(a)    Each Revolving Lender severally agrees, on the terms and conditions hereinafter set forth, to make revolving advances (the “ Revolving Advances ”) to the Borrowers from time to time on any Business Day during the period from the Effective Date until the Revolving Termination Date in the case of 2015 Non-Extending Lenders, or the Extended Termination Date in the case of 2015 Extending Lenders, as applicable, in an aggregate amount at any one time outstanding which, when added to such Lender’s Revolving Commitment Percentage of the sum of (i) the aggregate principal amount of the Swingline Advances then outstanding and (ii) the L/C Obligations then outstanding, equals the amount of such Lender’s Revolving Commitment; provided , that the aggregate principal amount of any Borrowing made at any time, when aggregated with all other then outstanding Extensions of Credit (excluding FILO Extensions of Credit), shall not exceed the Line Cap at such time. Each Borrowing under this Section 2.01 shall be in an aggregate amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof (provided, that the Swingline Lender may request, on behalf of the applicable Borrower, Borrowings that are Base Rate Advances in other amounts pursuant to Section 2.04(b)) and shall consist of Revolving Advances of the same Type made on the same day by the Revolving Lenders ratably according to their respective Revolving Commitments. Within the limits set forth in this Section 2.01(a), the Borrowers may borrow under this Section 2.01(a), prepay pursuant to Section 2.11 and reborrow under this Section 2.01(a).
(b)    Each Term Lender severally agrees, on the terms and conditions hereinafter set forth, to make its portion of the Term Loan to the Borrowers on October 2, 2013 in a principal amount not to exceed the Term Commitment of such Term Lender. Amounts repaid in respect of the Term Loan may not be reborrowed. Upon each Term Lender’s making of its portion of the Term Loan, the Term Commitment of such Term Lender shall be terminated.
(c)    Each 2016 Term Lender severally agrees, on the terms and conditions hereinafter set forth, to make its portion of the 2016 Term Loan to the Borrowers on the First Amendment Effective Date in a principal amount not to exceed the 2016 Term Commitment of such 2016 Term Lender. Amounts repaid in respect of the 2016 Term Loan may not be reborrowed. Upon each 2016 Term Lender’s making of its portion of the 2016 Term Loan, the 2016 Term Commitment of such 2016 Term Lender shall be terminated.


43

SECTION 2.02.      Making the Revolving Advances .
(a)    Each Borrowing under Section 2.01 shall be made on notice, given not later than (x) 12:00 noon on the third Business Day prior to the date of the proposed Borrowing in the case of a Borrowing consisting of Eurodollar Rate Advances or (y) 1:00 p.m. on the date of the proposed Borrowing in the case of a Borrowing consisting of Base Rate Advances, by the applicable Borrower to the Agent, which shall give to each Revolving Lender prompt notice thereof by telecopier. Each such notice of a Borrowing (a “ Notice of Borrowing ”) shall be by telephone, confirmed immediately in writing, by email attachment or by telecopier, in substantially the form of Exhibit A hereto, specifying therein the requested (i) date of such Borrowing, (ii) Type of Revolving Advances comprising such Borrowing, (iii) aggregate amount of such Borrowing, and (iv) in the case of a Borrowing consisting of Eurodollar Rate Advances, initial Interest Period for each such Revolving Advance. Each Notice of Borrowing shall be irrevocable and binding on the applicable Borrower. Each Revolving Lender shall, before 2:00 P.M. on the date of such Borrowing make available for the account of its Applicable Lending Office to the Agent at the Agent’s Account, in same day funds, such Revolving Lender’s ratable (in accordance with its Revolving Commitment Percentage) portion of such Borrowing. After the Agent’s receipt of such funds and upon fulfillment of the applicable conditions set forth in Article IV, the Agent will make such funds available to the Borrower requesting such Borrowing at the Agent’s address for Revolving Advances referred to in Section 9.02.
(b)    Anything in subsection (a) above to the contrary notwithstanding, (i) a Borrower may not select Eurodollar Rate Advances for any Borrowing if the aggregate amount of such Borrowing is less than $5,000,000 or if the obligation of the Lenders to make Eurodollar Rate Advances shall then be suspended pursuant to Section 2.09 or 2.13 and (ii) the Eurodollar Rate Advances may not be outstanding as part of more than ten separate Borrowings, Term Loan Borrowings and 2016 Term Loan Borrowings.
(c)    Unless the Agent shall have received notice from a Revolving Lender prior to the time of any Borrowing that such Revolving Lender will not make available to the Agent such Revolving Lender’s ratable portion of such Borrowing, the Agent may assume that such Revolving Lender has made such portion available to the Agent on the date of such Borrowing in accordance with subsection (a) of this Section 2.02 and the Agent may, in reliance upon such assumption, make available to the applicable Borrower on such date a corresponding amount. If and to the extent that such Revolving Lender shall not have so made such ratable portion available to the Agent, such Revolving Lender and the applicable Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to such Borrower until the date such amount is repaid to the Agent, at (i) in the case of such Borrower, the interest rate applicable at the time to Revolving Advances comprising such Borrowing and (ii) in the case of such Revolving Lender, the Federal Funds Rate. If such Revolving Lender shall repay to the Agent such corresponding amount, such amount so repaid shall be made available to the applicable Borrower and shall constitute such Revolving Lender’s Revolving Advance as part of such Borrowing for purposes of this Agreement.
(d)    The failure of any Revolving Lender to make the Revolving Advance to be made by it as part of any Borrowing shall not relieve any other Revolving Lender of its obligation, if any, hereunder to make its Revolving Advance on the date of such Borrowing, but no Revolving Lender shall be responsible for the failure of any other Revolving Lender to make the Revolving Advance to be made by such other Revolving Lender on the date of any Borrowing.
SECTION 2.03.      The Swingline Advances . (a) Subject to the terms and conditions hereof, the Swingline Lender may, in its discretion, make a portion of the credit otherwise available to the Borrowers under the Revolving Commitments from time to time during the period from the Effective Date until the Extended Termination Date by making swing line advances (“ Swingline Advances ”) to the Borrowers; provided that (i) the aggregate principal amount of Swingline Advances outstanding at any time shall not exceed the Swingline Commitment then in effect (notwithstanding that the Swingline Advances outstanding at any time, when aggregated with the Swingline Lender’s other outstanding Revolving Advances, may exceed the Swingline Commitment then in effect) and (ii) the amount of any Swingline Advance made at any time, when aggregated with all other then outstanding Extensions of Credit

44

(excluding FILO Extensions of Credit), shall not exceed the Line Cap at such time; provided that the Swingline Lender shall not be obligated to make any Swingline Loan at any time when any Revolving Lender is at such time a Defaulting Lender hereunder, and the Swingline Lender has, or after giving effect to such Swingline Loan, may have Fronting Exposure. During the period from the Effective Date until the Extended Termination Date, the Borrowers may use the Swingline Commitment by borrowing, repaying and reborrowing, all in accordance with the terms and conditions hereof. Swingline Advances shall only be available as Base Rate Advances.
(b)    Each Borrower shall repay to the Swingline Lender the then unpaid principal amount of each Swingline Advance made to it weekly, on Wednesday of each week; provided that on each date that a Revolving Advance is borrowed by a Borrower, such Borrower shall repay all Swingline Advances then outstanding, if any, and may use all or a portion of such Revolving Advance to fund such repayment. In all events the unpaid principal balance of all Swingline Advances shall be repaid in full on the Extended Termination Date.
SECTION 2.04.      Making the Swingline Advances .
(a)    Each Borrowing under Section 2.03 shall be made on notice, given not later than 1:00 p.m. on the date of the proposed Borrowing, by the applicable Borrower to the Agent and Swingline Lender. Each such Notice of a Borrowing shall be by telephone, confirmed immediately in writing, by email attachment or by telecopier, in substantially the form of Exhibit A hereto, specifying therein the requested (i) date of such Borrowing and (ii) aggregate amount of such Borrowing. Each Borrowing under the Swingline Commitment shall be in an amount equal to $500,000 or a whole multiple of $100,000 in excess thereof. Not later than 3:00 P.M. on the date of the proposed Borrowing, the Swingline Lender shall make available to the Agent at the Agent’s Account an amount in immediately available funds equal to the amount of the Swingline Advance to be made by the Swingline Lender. Upon fulfillment of the applicable conditions set forth in Article IV, the Agent shall make the proceeds of such Swingline Advance available to the Borrower requesting such Borrowing at the Agent’s address referred to in Section 9.02.
(b)    The Swingline Lender, at any time and from time to time in its sole and absolute discretion may, on behalf of the Borrowers (which hereby irrevocably direct the Swingline Lender to act on their behalf), by notice given by the Swingline Lender no later than 1:00 p.m., request each Revolving Lender to make, and each Revolving Lender hereby agrees to make, a Revolving Advance, in an amount equal to such Lender’s Revolving Commitment Percentage of the aggregate amount of the Swingline Advances (the “ Refunded Swingline Advances ”) outstanding on the date of such notice, to repay the Swingline Lender. Each Revolving Lender shall make the amount of such Revolving Advance available to the Agent at the Agent’s Account in same day funds, not later than 2:00 P.M. on the date of such notice. The proceeds of such Revolving Advances shall be immediately made available by the Agent to the Swingline Lender for application by the Swingline Lender to the repayment of the Refunded Swingline Advances. Each Borrower irrevocably authorizes the Swingline Lender to charge such Borrower’s accounts with the Agent (up to the amount available in each such account) in order to immediately pay the amount of such Refunded Swingline Advances to the extent amounts received from the Revolving Lenders are not sufficient to repay in full such Refunded Swingline Advances.
(c)    If prior to the time a Revolving Advance would have otherwise been made pursuant to Section 2.04(b), one of the events described in Section 7.01 shall have occurred and be continuing or if for any other reason, as determined by the Swingline Lender in its sole discretion, Revolving Advances may not be made as contemplated by Section 2.04(b), each Revolving Lender shall, on the date such Revolving Advance was to have been made pursuant to the notice referred to in Section 2.04(b), purchase for cash an undivided participating interest in the then outstanding Swingline Advances by paying to the Swingline Lender an amount (the “ Swingline Participation Amount ”) equal to (i) such Revolving Lender’s Revolving Commitment Percentage multiplied by (ii) the sum of the aggregate principal amount of Swingline Advances then outstanding that were to have been repaid with such Revolving Advances.
(d)    Whenever, at any time after the Swingline Lender has received from any Revolving Lender such Revolving Lender’s Swingline Participation Amount, the Swingline Lender receives any payment on account of the Swingline Advances, the Swingline Lender will distribute to such Revolving Lender its Swingline Participation

45

Amount (appropriately adjusted, in the case of interest payments, to reflect whether such payment is owed to a 2015 Non-Extending Lender or a 2015 Extending Lender and whether the corresponding interest rate owed to such Lender is calculated in accordance with Section 2.08(a) or 2.08(c)) to reflect the period of time during which such Revolving Lender’s participating interest was outstanding and funded and, in the case of principal and interest payments, to reflect such Revolving Lender’s pro rata portion of such payment if such payment is not sufficient to pay the principal of and interest on all Swingline Advances then due); provided , however , that in the event that such payment received by the Swingline Lender is required to be returned, such Revolving Lender will return to the Swingline Lender any portion thereof previously distributed to it by the Swingline Lender.
(e)    Each Revolving Lender’s obligation to make the Advances referred to in Section 2.04(b) and to purchase participating interests pursuant to Section 2.04(c) shall be absolute and unconditional and shall not be affected by any circumstance, including (i) any set-off, counterclaim, recoupment, defense or other right that such Revolving Lender or any Borrower may have against the Swingline Lender, any Borrower or any other Person for any reason whatsoever, (ii) the occurrence or continuance of a Default or an Event of Default or the failure to satisfy any of the other conditions specified in Article IV, (iii) any adverse change in the condition (financial or otherwise) of any Borrower or any other Loan Party, (iv) any breach of this Agreement or any other Loan Document by any Borrower, any other Loan Party or any other Lender or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing.
SECTION 2.05.      Fees; Commitment Fee . (a) The Borrowers jointly and severally agree to pay to the Agent for the account of each Revolving Lender a commitment fee (i) until the provisions of clause (ii) hereof become effective, on the average daily amount of the Available Commitment of such Lender during the period for which payment is made at a rate per annum equal to the Commitment Fee Rate in effect from time to time; and (ii) upon the expiration of, or earlier termination by the Borrower of, the Revolving Commitments of the 2015 Non-Extending Lenders and the repayment of all amounts owed in connection therewith, on the average daily amount of the Available Commitment of such Lender during the period for which payment is made at a rate per annum equal to 0.50% per annum 0.500% per annum with respect to the period prior to the Second Amendment Effective Date and 0.625% per annum with respect to the period from and after the Second Amendment Effective Date , in each case payable in arrears quarterly on the 5 th day subsequent to the last day of each April, July, October and January , and (x) with respect to 2015 Non-Extending Lenders, on the Revolving Termination Date, and (y) with respect to 2015 Extending Lenders, (provided that, during the continuation of a Cash Dominion Period, such payment shall be made on the 5 th day subsequent to the last day of each month), and on the Extended Termination Date.
(b)     2016 Term Loan Repayment Premium . In the event that, prior to the two year anniversary of the First Amendment Effective Date, all or any portion of the 2016 Term Loans is voluntarily prepaid, refinanced or replaced or is prepaid with the Net Proceeds of a Permitted Disposition as required by the Application of Disposition Proceeds (a “ Prepayment Transaction ”), the Borrowers shall pay (x) a prepayment premium equal to 2.00% of the aggregate principal amount of the 2016 Term Loan so prepaid, refinanced or replaced, if such Prepayment Transaction occurs on or prior to the first anniversary of the First Amendment Effective Date, and (y) a prepayment premium equal to 1.00% of the aggregate principal amount of the 2016 Term Loan so prepaid, refinanced or replaced, if such Prepayment Transaction occurs after the first anniversary of the First Amendment Effective Date but on or prior to the second anniversary of the First Amendment Effective Date. Such amounts shall be due and payable on the date of effectiveness of such Prepayment Transaction.
(c)     Other Fees . Holdings and the Borrowers shall pay to the Agent, the Co-Collateral Agents and the Lead Arrangers, as applicable, the fees set forth in the Fee Letter, the WF Fee Letter and the GE Commitment Letter in the amounts and at the times specified therein.
SECTION 2.06.      Optional Termination or Reduction of the Revolving Commitments .
(a)    The Borrowers shall have the right, without penalty or premium and upon at least three Business Days’ irrevocable notice to the Agent, to permanently terminate in whole or permanently reduce in part the unused portions of the respective Revolving Commitments of the Revolving Lenders, provided that no such termination

46

or reduction of the Revolving Commitments shall be permitted if, after giving effect thereto and to any prepayments of the Advances made on the effective date thereof, the Total Revolving Extensions of Credit would exceed the aggregate amount of the Revolving Commitments as so reduced. Any partial reduction of the Revolving Commitments shall be in the aggregate amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof.
(b)    If, after giving effect to any reduction of the Aggregate Revolving Commitments, the L/C Commitment or the Swingline Commitment exceeds the amount of the Aggregate Revolving Commitments, such L/C Commitment or Swingline Commitment shall be automatically reduced by the amount of such excess.
(c)    The Agent will promptly notify the Revolving Lenders of any termination or reduction of the Aggregate Revolving Commitments under Section 2.06(a) . Upon any reduction of the Aggregate Revolving Commitments, except as provided in Section 2.06(d), the Revolving Commitment of each Revolving Lender shall be reduced by such Revolving Lender’s Revolving Commitment Percentage of such reduction amount.
(d)    In addition to the Borrowers’ rights under Section 2.06(a), the Borrower shall have the right, without penalty or premium and upon at least three Business Days’ irrevocable notice to the Agent and without any reduction in the Revolving Commitments of the 2015 Extending Lenders, to permanently reduce or terminate, (i) in whole or in part, on a ratable basis, the Revolving Commitments of the 2015 Non-Extending Lenders, without the consent of any Lender and (ii) in whole, but not in part, the Revolving Commitments of any one or more 2015 Non-Extending Lenders, non-ratably, without the consent of any Lender, and in each case to repay the Obligations held by such 2015 Non-Extending Lenders to the extent such Obligations exceed the remaining Revolving Commitments of such Lenders, as long as, immediately after giving effect to such reduction, termination and repayment, no Default or Event of Default then exists and, after giving effect to such reduction or termination, Pro Forma and Projected Capped Excess Availability is at least 25% of the Line Cap. The Agent will promptly notify the applicable 2015 Non-Extending Lenders of any reduction or termination of their Revolving Commitments under this Section 2.06(d) .
SECTION 2.07.      Repayment of Revolving Advances, Term Loan and 2016 Term Loan .
(a)    Each Borrower shall repay to the Agent (i) for the ratable account of the 2015 Non-Extending Lenders on the Revolving Termination Date the aggregate principal amount of the Advances made to it by the 2015 Non-Extending Lenders then outstanding, and (ii) for the ratable account of the 2015 Extending Lenders on the Extended Termination Date the aggregate principal amount of the Advances made to it by the 2015 Extending Lenders then outstanding. In the event that the Revolving Termination Date and the Extended Termination Date are the same day, then all payments shall be received by the Agent and applied in accordance with the then Revolving Commitment Percentages of the 2015 Non-Extending Lenders and the 2015 Extending Lenders.
(b)    Beginning on February 2, 2014, the Borrowers shall repay the Agent for the ratable account of the Term Lenders the Term Loan in equal consecutive quarterly installments of $2,500,000 on the first Business Day following the last day of each fiscal quarter of the Borrowers. Each Borrower shall repay to the Agent for the ratable account of the Term Lenders on the Term Loan Termination Date the aggregate principal amount of the Term Loan then outstanding.
(c)    Each Borrower shall repay to the Agent for the ratable account of the 2016 Term Lenders on the 2016 Term Loan Termination Date the aggregate principal amount of the 2016 Term Loan then outstanding.
SECTION 2.08.      Interest .
(a)     Scheduled Interest Owed to 2015 Non-Extending Lenders . Each Borrower shall pay interest on the unpaid principal amount of each Advance made to it and owing to each 2015 Non-Extending Lender from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum:
(i)     Base Rate Advances . During such periods as such Revolving Advance is a Base Rate Advance, a rate per annum equal at all times to the sum of (x) the Base Rate in effect from time

47

to time plus (y) the Applicable Margin for Base Rate Advances in effect from time to time, payable, in the case of any Base Rate Advance (other than a Swingline Advance), in arrears monthly on the 5 th day subsequent to the last day of each month during such periods and on the date such Base Rate Advance shall be Converted or paid in full.
(ii)     Eurodollar Rate Advances . During such periods as such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during each Interest Period for such Advance to the sum of (x) the Eurodollar Rate for such Interest Period for such Advance plus (y) the Applicable Margin for Eurodollar Rate Advances in effect from time to time, payable in arrears on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day that occurs during such Interest Period every three months from the first day of such Interest Period and on the date such Eurodollar Rate Advance shall be Converted or paid in full.
(b)     Term Loan . Each Borrower shall pay interest on the unpaid principal amount of the Term Loan made to it and owing to each Term Lender from October 2, 2013 until such principal amount shall be paid in full, at the following rates per annum:
(i)     Base Rate Advances . During such periods as any outstanding portion of the Term Loan is a Base Rate Advance, each such Term Loan Borrowing shall earn interest at a rate per annum equal at all times to the sum of (x) the Base Rate in effect from time to time plus (y) the Term Loan Margin for Base Rate Advances, payable in arrears quarterly on the 5 th day subsequent to the last day of each month during such periods and on the date such Base Rate Advance shall be Converted or paid in full.
(ii)     Eurodollar Rate Advances . During such periods as any outstanding portion of the Term Loan is a Eurodollar Rate Advance, each such Term Loan Borrowing shall earn interest at a rate per annum equal at all times during each Interest Period for such Eurodollar Rate Advance to the greater of (A) 1.00% or (B) the Eurodollar Rate for such Interest Period for such outstanding portion of the Term Loan plus , in either case, the Term Loan Margin for Eurodollar Rate Advances, payable in arrears on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day that occurs during such Interest Period every three months from the first day of such Interest Period and on the date such Eurodollar Rate Advance shall be Converted or paid in full.
(c)     2016 Term Loan . Each Borrower shall pay interest on the unpaid principal amount of the 2016 Term Loan made to it and owing to each Term Lender from the First Amendment Effective Date until such principal amount shall be paid in full, at the following rates per annum:
(i)     Base Rate Advances . During such periods as any outstanding portion of the 2016 Term Loan is a Base Rate Advance, each such 2016 Term Loan Borrowing shall earn interest at a rate per annum equal at all times to the sum of (x) the Base Rate in effect from time to time plus (y) the 2016 Term Loan Margin for Base Rate Advances, payable in arrears quarterly on the 5 th day subsequent to the last day of each month during such periods and on the date such Base Rate Advance shall be Converted or paid in full.
(ii)     Eurodollar Rate Advances . During such periods as any outstanding portion of the 2016 Term Loan is a Eurodollar Rate Advance, each such 2016 Term Loan Borrowing shall earn interest at a rate per annum equal at all times during each Interest Period for such Eurodollar Rate Advance to the greater of (A) 1.00% or (B) the Eurodollar Rate for such Interest Period for such outstanding portion of the 2016 Term Loan plus , in either case, the 2016 Term Loan Margin for Eurodollar Rate Advances, payable in arrears on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day that occurs during such Interest

48

Period every three months from the first day of such Interest Period and on the date such Eurodollar Rate Advance shall be Converted or paid in full.
(d)     Scheduled Interest Owed to 2015 Extending Lenders and Swingline Lender . Each Borrower shall pay interest on the unpaid principal amount of each Advance made to it and owing to each 2015 Extending Lender and Swingline Lender from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum:
(i)     Base Rate Advances . During such periods as such Advance is a Base Rate Advance, a rate per annum equal at all times to the sum of (x) the Base Rate in effect from time to time plus (y) the Extended Term Applicable Margin for Base Rate Advances, payable (I) in the case of any Base Rate Advance (other than a Swingline Advance), in arrears monthly on the 5 th day subsequent to the last day of each month during such periods and on the date such Base Rate Advance shall be Converted or paid in full and (II) in the case of any Swingline Advance, on the date that such Swingline Advance is required to be repaid.
(ii)     Eurodollar Rate Advances . During such periods as such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during each Interest Period for such Advance to the sum of (x) the Eurodollar Rate for such Interest Period for such Advance, plus (y) the Extended Term Applicable Margin for Eurodollar Rate Advances, payable in arrears on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day that occurs during such Interest Period every three months from the first day of such Interest Period and on the date such Eurodollar Rate Advance shall be Converted or paid in full.
(e)     Default Interest . Upon the occurrence and during the continuance of an Event of Default, at the option of the Agent or on the request of the Required Lenders, the Borrowers shall pay interest on the unpaid principal amount of each Revolving Advance and Reimbursement Obligation owing to each Revolving Lender, and on the principal amount of the Term Loan and the 2016 Term Loan then outstanding, payable in arrears on the dates referred to in Sections 2.08(a), (b), (c) and (d) above as applicable, at a rate per annum equal to 2% per annum above the rate per annum required to be paid on such Advance or Reimbursement Obligation pursuant to Section 2.08(a)(i) or 2.08(d)(i) above, as applicable, or on the outstanding amount of the Term Loan and the 2016 Term Loan pursuant to Section 2.08(b)(i) and 2.08(c)(i) above, as applicable. Further, the Borrowers shall pay interest, to the fullest extent permitted by law, on the amount of any interest, fee or other amount (other than principal) payable hereunder that is not paid when due, from the date such amount shall be due until such amount shall be paid in full, payable in arrears on the date such amount shall be paid in full and on demand, at a rate per annum equal to 2% per annum above the rate per annum required to be paid on Base Rate Advances pursuant to Section 2.08(a)(i), Section 2.08(b)(i), Section 2.08(c)(i) or Section 2.08(d)(i), as applicable.
(f)     Regulation D Compensation . Each Lender that is subject to reserve requirements of the Board of Governors of the Federal Reserve System (or any successor) may require the Borrowers to pay, contemporaneously with each payment of interest on the Eurodollar Rate Advances, additional interest on the related Eurodollar Rate Advances of such Lender at the rate per annum equal to the excess of (i) (A) the applicable Eurodollar Rate divided by (B) one minus the Eurodollar Rate Reserve Percentage over (ii) the applicable Eurodollar Rate. Any Lender wishing to require payment of such additional interest (x) shall so notify the Agent and the Borrowers, in which case such additional interest on the Eurodollar Rate Advances of such Lender shall be payable to such Lender at the place indicated in such notice with respect to each Interest Period commencing at least five Business Days after the giving of such notice and (y) shall notify the Agent and the Borrowers at least five Business Days prior to each date on which interest is payable on the amount then due it under this Section. Each such notification shall be accompanied by such information as the Borrowers may reasonably request.
SECTION 2.09.      Interest Rate Determination . (a) The Agent shall give prompt notice to the Borrowers and the Lenders of the applicable interest rate determined by the Agent for purposes of Sections 2.08(a), 2.08(b), 2.08(c) and 2.08(d).

49

(b)    If, with respect to any Eurodollar Rate Advances, the Required Lenders notify the Agent at least one Business Day before the date of any proposed Eurodollar Rate Advance that the Eurodollar Rate for any Interest Period for such Eurodollar Rate Advances will not adequately reflect the cost to such Required Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such Interest Period, the Agent shall forthwith so notify the Borrowers and the Lenders, whereupon (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance, and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrowers and the Lenders that the circumstances causing such suspension no longer exist.
(c)    If any Borrower shall fail to select the duration of any Interest Period for any Eurodollar Rate Advances in accordance with the provisions contained in the definition of “Interest Period” in Section 1.01, the Agent will forthwith so notify such Borrower and the Lenders and such Eurodollar Rate Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances.
(d)    On the date on which the aggregate unpaid principal amount of Eurodollar Rate Advances comprising any Borrowing shall be reduced, by payment or prepayment or otherwise, to less than $5,000,000, such Eurodollar Rate Advances shall automatically Convert into Base Rate Advances.
(e)    Upon the occurrence and during the continuance of any Event of Default, at the option of the Agent or on the request of the Required Lenders (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance and (ii) the obligation of the Lenders to make, or to Convert Revolving Advances or any outstanding portion of the Term Loan or the 2016 Term Loan into, Eurodollar Rate Advances shall be suspended.
SECTION 2.10.      Optional Conversion of Revolving Advances, Term Loan Borrowings and 2016 Term Loan Borrowings . The Borrowers may on any Business Day, upon notice given to the Agent not later than 12:00 noon on the third Business Day prior to the date of the proposed Conversion and subject to the provisions of Sections 2.09 and 2.13, Convert all Revolving Advances of one Type comprising the same Borrowing into Revolving Advances of the other Type and/or Convert any Term Loan Borrowing or 2016 Term Loan Borrowing, as applicable, of one Type into a Term Loan Borrowing or 2016 Term Loan Borrowing of the other Type, as applicable; provided , however , that any Conversion of Eurodollar Rate Advances into Base Rate Advances shall be made only on the last day of an Interest Period for such Eurodollar Rate Advances, any Conversion of Base Rate Advances into Eurodollar Rate Advances shall be in an amount not less than the minimum amount specified in Section 2.02(b) and no Conversion of any Revolving Advances, Term Loan Borrowings or 2016 Term Loan Borrowings shall result in more separate Borrowings than permitted under Section 2.02(b). Each such notice of a Conversion shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the Revolving Advances, Term Loan Borrowings or 2016 Term Loan Borrowings to be Converted, and (iii) if such Conversion is into Eurodollar Rate Advances, the duration of the initial Interest Period for each such Revolving Advance, Term Loan Borrowing or 2016 Term Loan Borrowing, as applicable. Each notice of Conversion shall be irrevocable and binding on the applicable Borrower.
SECTION 2.11.      Optional and Mandatory Prepayments of Revolving Advances, Term Loan and 2016 Term Loan.
(a)    (i) Any Borrower may, without penalty or premium and upon notice given not later than 12:00 noon on the date of such prepayment to the Agent stating the proposed date and aggregate principal amount of the prepayment, and if such notice is given such Borrower shall, prepay the outstanding principal amount of the Advances comprising part of the same Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided , however , that (x) each partial prepayment shall be in an aggregate principal amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof (or, in the case of partial prepayments of Swingline Advances, $100,000 or a whole multiple thereof) and (y) in the event of any such prepayment of a Eurodollar Rate Advance, the applicable Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 9.04(c).

50

(ii)    Any Borrower may, subject to the terms of this Section 2.11(a)(ii) and upon notice given not later than 12:00 noon on the date of such prepayment to the Agent stating the proposed date and aggregate principal amount of the prepayment, and if such notice is given such Borrower shall, prepay the outstanding principal amount of the Term Loan in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided, however, that (w) each partial prepayment shall be in an aggregate principal amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof, (x) in connection with any such prepayment of the Term Loan, the Aggregate Revolving Commitments shall be reduced on a Pro Rata Basis, provided that the Revolving Commitments of the 2015 Extending Lenders shall not be required to be so reduced so long as (1) (A) no proceeds of Revolving Loans are used to make such prepayment of the Term Loan, and (B) after giving effect to such prepayment, Pro Forma and Projected Capped Excess Availability is greater than 50% of the Line Cap, or (2) the aggregate amount of all prepayments of the Term Loan from and after July 21, 2015 that do not give rise to a reduction of the Aggregate Revolving Commitments on a Pro Rata Basis is less than the sum of (a) the aggregate increases in commitments which have occurred pursuant to Section 2.19(b) hereof and FILO Commitments pursuant to Section 2.20 hereof, in each case after July 21, 2015 and (b) the original principal amount of the 2016 Term Loans, (y) any prepayment of the Term Loan using proceeds of the increases in commitments which have occurred pursuant to Section 2.19(b) or the FILO Facility must be made within thirty (30) days after the effective date of the increases in commitments which have occurred pursuant to Section 2.19(b) or FILO Facility pursuant to Section 2.20, as applicable, and (z) in the event of any such prepayment of a Eurodollar Rate Advance, the applicable Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 9.04(c).
(iii)    Any Borrower may, subject to the terms of this Section 2.11(a)(iii) and upon notice given not later than 12:00 noon on the date of such prepayment to the Agent stating the proposed date and aggregate principal amount of the prepayment, and if such notice is given such Borrower shall, prepay the outstanding principal amount of the 2016 Term Loan in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided, however, that (x) each partial prepayment shall be in an aggregate principal amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof, (y) in connection with any such prepayment of the 2016 Term Loan, the Aggregate Revolving Commitments shall be reduced and the Term Loan shall be prepaid on a Pro Rata Basis, and (z) in the event of any such prepayment of a Eurodollar Rate Advance, the applicable Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 9.04(c).
(b)    In addition to the Borrowers’ rights under Section 2.11(a), as long as (i) no Default or Event of Default then exists or would arise therefrom, and (ii) after giving effect to such prepayment, Pro Forma and Projected Capped Excess Availability is at least 25% of the Line Cap, the Borrowers may, without penalty or premium and without regard to the provisions of Section 2.16, prepay, in whole or in part as applicable (a “ Designated Prepayment ”), the Obligations owing to any one or more 2015 Non-Extending Lender(s) in connection with a reduction or termination of the Revolving Commitments of such 2015 Non-Extending Lenders pursuant to Section 2.06(d) , provided: (i) each Designated Prepayment shall be upon notice given not later than 12:00 noon on the date of such Designated Prepayment to the Agent stating the proposed date and aggregate principal amount of the Designated Prepayment; (ii) each Designated Prepayment, if not ratable to all 2015 Non-Extending Lenders, shall repay the entire outstanding amount of all Obligations held by the applicable 2015 Non-Extending Lender (but solely in the capacity of a 2015 Non-Extending Lender) (including principal, interest, fees, expense reimbursements and other amounts due under the Loan Documents) at par, or at such discount to par as the Borrowers and each applicable 2015 Non-Extending Lender may separately agree in writing, and (iii) the Revolving Commitment of each 2015 Non-Extending Lender receiving such prepayment shall be reduced or terminated by a corresponding amount. Notwithstanding anything to the contrary herein, prepayments hereunder may be made to any 2015 Non-Extending Lender and the Commitments of 2015 Non-Extending Lenders may be reduced or terminated without a pro rata repayment to, or reduction or termination of the Commitments of, any other Lender.
(c)    On the date of delivery of any Borrowing Base Certificate, if the Total Extensions of Credit (excluding FILO Extensions of Credit) exceed the Line Cap, the Borrowers shall prepay Advances in an amount equal

51

to such excess, provided that if the aggregate principal amount of Advances then outstanding is less than the amount of such excess (because L/C Obligations constitute a portion thereof), the Borrowers shall, to the extent of the balance of such excess, replace outstanding Letters of Credit and/or deposit an amount in cash in a cash collateral account established with the Agent for the benefit of the Lenders on terms and conditions satisfactory to the Agent, provided further that if, after the prepayment of any Revolving Advances and the cash collateralization of L/C Obligations under this clause (c) the Total Extensions of Credit (excluding FILO Extensions of Credit) exceed the Line Cap, the Borrowers shall prepay the Term Loan and the 2016 Term Loan pro rata in an amount equal to such excess.
(d)     Reserved The Borrowers shall repay the Advances (without a requirement to reduce the Revolving Commitments), the Term Loan and the 2016 Term Loan with respect to any Permitted Disposition or other transaction, in each case to the extent that the Application of Disposition Proceeds applies, in accordance with the Application of Disposition Proceeds.
(e)    The Borrowers shall prepay Advances (and to the extent required, reduce the Aggregate Revolving Commitments) in an amount necessary to avoid the occurrence of a Collateral Coverage Event (as defined in the Indenture for the Existing Second Lien Notes), provided that if the aggregate principal amount of Advances then outstanding is less than the amount required to be prepaid to avoid the occurrence of a Collateral Coverage Event (because L/C Obligations constitute a portion thereof), the Borrowers shall, to the extent of the balance required, replace outstanding Letters of Credit on terms and conditions satisfactory to the Agent, provided further that if, after the prepayment of any Revolving Advances and the replacement of outstanding Letters of Credit under this clause (e) a Collateral Coverage Event would exist, the Borrowers shall prepay the Term Loan and the 2016 Term Loan pro rata in an amount necessary to avoid the occurrence of such Collateral Coverage Event.
(f)    Upon the occurrence and during the continuance of a Cash Dominion Event, the Borrowers shall prepay the Advances in accordance with the provisions of Section 6.01(m) hereof, and upon the occurrence and during the continuance of an Event of Default, the Borrowers shall cash collateralize the L/C Obligations in accordance with the provisions of Section 7.01 hereof, provided further that if, after the prepayment of any Revolving Advances under this clause (f) (and any cash collateralization of L/C Obligations as set forth above) an Event of Default exists, the Borrowers shall prepay the Term Loan and the 2016 Term Loan pro rata to the extent required by Section 6.4 of the Guarantee and Collateral Agreement.
(g)    The Borrowers shall prepay (x) the Term Loan in an amount equal to 50% of Excess Cash Flow for each fiscal year of Holdings beginning with the fiscal year ending on or about January 31, 2015, and (y) the Term Loan and the 2016 Term Loan on a ratable basis in an aggregate amount equal to 50% of Excess Cash Flow for each fiscal year of Holdings beginning with the fiscal year ending on or about January 31, 2017. Each prepayment under this clause (g) shall be made within 90 days following the end of each applicable fiscal year of Holdings.
(h)    The Borrowers shall deliver to the Administrative Agent, in connection with each prepayment required under Section 2.11(g), a certificate signed by a Authorized Officer of the Borrowers setting forth in reasonable detail the calculation of the amount of such prepayment.
(i)    Any prepayment of Revolving Advances, the Term Loan or the 2016 Term Loan pursuant to clauses (b), (c), (e), (f) or (g) of this Section 2.11 shall be applied, first, to any Base Rate Advances then outstanding and the balance of such prepayment, if any, to the Eurodollar Rate Advances then outstanding. In connection with the foregoing, the Agent may monthly (or more frequently in the Agent’s Permitted Discretion) make the necessary exchange rate calculations in accordance with Section 3.10 to determine whether any such excess described in this Section exists on such date. Prepayments made pursuant to clauses (b), (c), or (e) of this Section 2.11 shall not reduce the Aggregate Revolving Commitments hereunder except to the extent provided in clause (b) above. Any prepayment of the Term Loan required pursuant to this Section 2.11 shall be applied to the scheduled installments of the Term Loan in the inverse order of maturity and shall not reduce or postpone the time for any scheduled payments of the Term Loan hereunder (including pursuant to clause (g) above); provided that any voluntary prepayment of the Term Loan pursuant to Section 2.11(a) shall be applied to the scheduled installments of the Term Loan as the Borrowers shall direct.

52

SECTION 2.12.      Increased Costs . (a) If, due to either (i) after the Effective Date the introduction of or any change in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law) made or issued after the Effective Date, there shall be any increase in the cost to any Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Advances or issuing or participating in Letters of Credit (excluding for purposes of this Section 2.12 any such increased costs resulting from (i) Taxes or Other Taxes (as to which Section 2.15 shall govern) and (ii) changes in the basis of taxation of overall net income or overall gross income by the United States or by the foreign jurisdiction or state under the laws of which such Lender is organized or has its Applicable Lending Office or any political subdivision thereof), then the Borrowers shall from time to time, upon demand by such Lender (with a copy of such demand to the Agent), pay to the Agent for the account of such Lender additional amounts sufficient to compensate such Lender for such increased cost; provided that a Lender claiming additional amounts under this Section 2.12(a) agrees to use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Applicable Lending Office and/or take other commercially reasonable action if the making of such a designation or the taking of such actions would avoid the need for, or reduce the amount of, such increased cost that may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. A certificate as to the amount of such increased cost, submitted to the Borrowers and the Agent by such Lender, shall be entitled to a presumption of correctness. If any Borrower so notifies the Agent after any Lender notifies the Borrowers of any increased cost pursuant to the foregoing provisions of this Section 2.12(a), such Borrower may, upon payment of such increased cost to such Lender, replace such Lender with a Person that is an Eligible Assignee in accordance with the terms of Section 9.07 (and the Lender being so replaced shall take all action as may be necessary to assign its rights and obligations under this Agreement to such Eligible Assignee).

(b)    If any Lender determines that compliance with any change after the Effective Date in law or regulation or any guideline or request after the Effective Date from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital or liquidity required or expected to be maintained by such Lender or any entity controlling such Lender and that the amount of such capital or liquidity is increased by or based upon the existence of such Lender’s commitment to lend hereunder and other commitments of this type, then, upon demand by such Lender (with a copy of such demand to the Agent), the Borrowers shall pay to the Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender or such entity in the light of such circumstances, to the extent that such Lender reasonably determines such increase in capital or liquidity to be allocable to the existence of such Lender’s commitment to lend hereunder. A certificate as to such amounts submitted to the Borrowers and the Agent by such Lender shall be entitled to a presumption of correctness. Notwithstanding anything herein to the contrary, the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines, requirements and directives thereunder issued in connection therewith or in implementation thereof and all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a change in law covered by this Section 2.12 regardless of the date enacted, adopted, issued or implemented.
(c)    The Borrowers shall not be required to compensate a Lender pursuant to this Section for any increased costs or capital, liquidity or reserve requirement or pursuant to Section 2.15 for any Taxes incurred more than six months prior to the date that such Lender notifies the Borrowers of the change or issuance giving rise to such increased costs or capital, liquidity or reserve requirement or Tax and of such Lender’s intention to claim compensation therefor; provided that if the change or issuance giving rise to such increased costs or capital, liquidity or reserve requirement or Tax is retroactive, then the six-month period referred to above shall be extended to include the period of retroactive effect thereof.
SECTION 2.13.      Illegality . Notwithstanding any other provision of this Agreement, if any Lender shall notify the Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for any Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar

53

Rate Advances hereunder, (a) each Eurodollar Rate Advance will automatically, upon such demand, Convert into a Base Rate Advance or an Advance that bears interest at the rate set forth in Sections 2.08(a)(i), 2.08(b)(i) or 2.08(c)(i), as the case may be, and (b) the obligation of the Lenders to make Eurodollar Rate Advances or to Convert Advances, Term Loan Borrowings, 2016 Term Loan Borrowings or FILO Borrowings, if applicable, into Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrowers and the Lenders that the circumstances causing such suspension no longer exist.
SECTION 2.14.      Payments and Computations . (a) The Borrowers shall make each payment hereunder and under the other Loan Documents, without any right of counterclaim or set-off, not later than 1:00 P.M. on the day when due in U.S. dollars to the Agent at the Agent’s Account in same day funds. The Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or commitment fees ratably (other than amounts payable pursuant to Section 2.12, 2.15 or 9.04(c)) to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 9.07(c), from and after the effective date specified in such Assignment and Acceptance, the Agent shall make all payments hereunder and under the other Loan Documents in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves.
(b)    Each Borrower hereby authorizes each Lender, if and to the extent payment owed by it to such Lender is not made when due hereunder or under the other Loan Documents, to charge from time to time against any or all of such Borrower’s accounts with such Lender any amount so due, notwithstanding that an Overadvance may result thereby. Any such Lender so charging such accounts shall deliver the proceeds therefrom to the Agent for distribution to the Credit Parties in the manner set forth herein and in the other Loan Documents.
(c)    All computations of interest based on the Base Rate shall be made by the Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or the Federal Funds Rate and of letter of credit fees, commitment fees and other fees shall be made by the Agent on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or commitment fees are payable. Each determination by the Agent of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error.
(d)    Whenever any payment hereunder or under the other Loan Documents shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or commitment fee, as the case may be; provided , however , that, if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day.
(e)    Unless the Agent shall have received notice from any Borrower prior to the date on which any payment is due by it to the Lenders hereunder that such Borrower will not make such payment in full, the Agent may assume that the applicable Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent such Borrower shall not have so made such payment in full to the Agent, each Lender shall repay to the Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Agent, at the Federal Funds Rate.
SECTION 2.15.      Taxes . (a) Any and all payments by the Borrowers to or for the account of any Lender, the Agent or any Co-Collateral Agent hereunder or under the other Loan Documents or any other documents to be delivered hereunder shall be made, in accordance with Section 2.14 or the applicable provisions of such other documents, free and clear of and without deduction for any and all present or future Taxes (excluding any Excluded

54

Taxes). If the Borrowers shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any other Loan Document or any other documents to be delivered hereunder to any Lender, the Agent or any Co-Collateral Agent, (i) to the extent that the withholding or deduction is made on account of Indemnified Taxes, the sum payable shall be increased as may be necessary so that after making all required deductions for Indemnified Taxes (including deductions for Indemnified Taxes applicable to additional sums payable under this Section 2.15) such Lender, the Agent and the Co-Collateral Agents (as the case may be) receive an amount equal to the sum each would have received had no such deductions of Indemnified Taxes been made, (ii) the Borrowers shall make such deductions as are determined by such Borrowers to be required based upon the information and documentation it has received pursuant to Sections 2.15(e) and (f) and (iii) the Borrowers shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law.
(b)    In addition, the Borrowers shall pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or under the other Loan Documents or from the execution, delivery or registration of, performing under, or otherwise with respect to, this Agreement or the other Loan Documents or any other documents to be delivered hereunder, but excluding (i) any such taxes that are Other Connection Taxes imposed with respect to an assignment (other than an assignment made pursuant to Section 9.16), and (ii) all other United States federal taxes other than withholding taxes (hereinafter referred to as “ Other Taxes ”). Other Taxes shall not include any Taxes imposed on, or measured by reference to, gross income, net income or gain.
(c)    Without duplication of any additional amounts paid pursuant to Section 2.15(a), the Borrowers shall indemnify each Lender, the Agent and each Co-Collateral Agent for and hold it harmless against the full amount of Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 2.15) imposed on or paid by such Lender, the Agent or any Co-Collateral Agent (as the case may be) and any liability (including penalties, interest and reasonable expenses) arising therefrom or with respect thereto. This indemnification shall be made within 30 days from the date such Lender, the Agent or any Co-Collateral Agent (as the case may be) makes written demand therefor.
(d)    Within 30 days after the date of any payment of Indemnified Taxes, the Borrowers shall furnish to the Agent, at its address referred to in Section 9.02, the original or a certified copy of a receipt evidencing such payment to the extent such a receipt is issued therefor, or other written proof of payment thereof that is reasonably satisfactory to the Agent.
(e)    Any Lender that is entitled to an exemption from or reduction of withholding tax with respect to payments made under any Loan Document shall deliver to the Borrowers and the Agent, at the time or times reasonably requested by the Borrowers or the Agent, such properly completed and executed documentation reasonably requested by the Borrowers or the Agent as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Lender, if reasonably requested by the Borrowers or the Agent, shall deliver such other documentation prescribed by applicable Law or reasonably requested by the Borrowers or the Agent as will enable the Borrowers or the Agent to determine whether or not such Lender is subject to backup withholding or information reporting requirements.
(i)    Without limiting the generality of the foregoing:
(a)    Each Lender that is a United States person, on or prior to the date of its execution and delivery of this Agreement in the case of each Lender and on the date of the Assignment and Acceptance pursuant to which it becomes a Lender in the case of each other Lender, and from time to time thereafter as reasonably requested in writing by the Borrowers or the Agent), shall provide each of the Agent and the Borrowers with two executed originals of Internal Revenue Service Form W-9 certifying that such Lender is exempt from U.S. federal backup withholding tax on payments pursuant to this Agreement or the other Loan Documents; and

55

(b)    Each Lender organized under the laws of a jurisdiction outside the United States, and each other Lender that is not a domestic corporation within the meaning of Section 7701(a)(30) of the Internal Revenue Code:
(1)    represents that all payments to be made to it under this Agreement or any other Loan Document are exempt from United States withholding tax (including backup withholding tax) under an applicable statute or tax treaty;

(2)    on or prior to the date of its execution and delivery of this Agreement in the case of each Lender and on the date of the Assignment and Acceptance pursuant to which it becomes a Lender in the case of each other Lender, and from time to time thereafter as reasonably requested in writing by the Borrowers (but only so long as such Lender remains lawfully able to do so), shall provide each of the Agent and the Borrowers with two executed originals of Internal Revenue Service Forms W-8BEN, W-8BEN-E or W-8ECI, as appropriate, or any successor or other form prescribed by the Internal Revenue Service, certifying that such Lender is exempt from or entitled to a reduced rate of United States withholding tax on payments pursuant to this Agreement or the other Loan Documents; and

(3)    on or prior to the date of its execution and delivery of this Agreement in the case of each Lender and on the date of the Assignment and Acceptance pursuant to which it becomes a Lender in the case of each other Lender, and from time to time thereafter as reasonably requested in writing by the Borrowers (but only so long as such Lender remains lawfully able to do so), shall provide each of the Agent and the Borrowers with executed originals of any other form prescribed by applicable law as a basis for claiming exemption from or a reduction in U.S. federal withholding tax, duly completed, together with supplementary documentation as may be prescribed by applicable law to permit the Borrowers or the Agent to determine the withholding or deduction required to be made.

If the form provided by a Lender at the time such Lender first becomes a party to this Agreement indicates a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from Indemnified Taxes unless and until such Lender provides the appropriate forms certifying that a lesser rate applies, whereupon withholding tax at such lesser rate only shall be considered excluded from Indemnified Taxes for periods governed by such form; provided , however , that, if at the date of the Assignment and Acceptance pursuant to which a Lender assignee becomes a party to this Agreement, the Lender assignor was entitled to payments under subsection (a) in respect of United States withholding tax with respect to interest paid at such date, then, to such extent, the term Indemnified Taxes shall include (in addition to withholding taxes that may be imposed in the future or other amounts otherwise includable in Indemnified Taxes) United States withholding tax, if any, applicable with respect to the Lender assignee on such date. If any form or document referred to in this subsection (e) requires the disclosure of information, other than information necessary to compute the tax payable and information required on the date hereof by Internal Revenue Service Form W-8BEN, W-8BEN-E, or W-8ECI, that the Lender reasonably considers to be confidential, the Lender shall give notice thereof to the Borrowers and shall not be obligated to include in such form or document such confidential information. For purposes of this subsection (e), the terms “ United States ” and “ United States person ” shall have the meanings specified in Section 7701 of the Internal Revenue Code.

(f)    For any period with respect to which a Lender has failed to provide the Borrowers with the appropriate form, certificate or other document described in Section 2.15(e) ( other than if such failure is due to a change in law, or in the interpretation or application thereof, occurring subsequent to the date on which a form, certificate or other document originally was required to be provided, or if such form, certificate or other document otherwise is not required under subsection (e) above), such Lender shall not be entitled to indemnification under Section 2.15(a) or (c) with respect to Indemnified Taxes imposed by the United States by reason of such failure; provided , however , that should a Lender become subject to Indemnified Taxes because of its failure to deliver a form, certificate or other

56

document required hereunder, the Borrowers shall take such steps as the Lender shall reasonably request to assist the Lender to recover such Indemnified Taxes. Further, if a payment made to a Lender under any Loan Document would be subject to U.S. federal withholding tax imposed by FATCA if such 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 the Borrowers and the Agent at the time or times prescribed by law and at such time or times reasonably requested by the Borrowers or the Agent such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Internal Revenue Code) and such additional documentation reasonably requested by the Borrowers or the Agent as may be necessary for the Borrowers and the Agent to comply with their obligations under FATCA and to determine that such Lender has complied with such Lender’s obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this paragraph (f), “FATCA” shall include any amendments made to FATCA after July 21, 2015.
(g)    Each Lender agrees that if any form or certification it previously delivered pursuant to this Section 2.15 expires or becomes obsolete or inaccurate in any respect, it shall update such form or certification or promptly notify the Borrowers and the Agent in writing of its legal inability to do so.
(h)    Any Lender claiming any additional amounts payable pursuant to this Section 2.15 agrees to use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Eurodollar Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts that may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender.
(i)    If any Lender determines, in its sole discretion exercised in good faith, that it has actually and finally realized, by reason of a refund, deduction or credit of any Indemnified Taxes paid or reimbursed by the Borrowers pursuant to subsection (a) or (c) above in respect of payments under this Agreement or the other Loan Documents, a current monetary benefit that it would otherwise not have obtained, and that would result in the total payments under this Section 2.15 exceeding the amount needed to make such Lender whole, such Lender shall pay to the Borrowers, with reasonable promptness following the date on which it actually realizes such benefit, an amount equal to the amount of such excess, net of all out-of-pocket expenses incurred by such Lender reasonably allocable in securing such refund, deduction or credit, provided that the Borrowers, upon the request of such Lender, agree to repay the amount paid over to the Borrowers to such Lender in the event such Lender is required to repay such refund to such jurisdiction. Nothing in this subsection (i) shall be construed to require any Lender to make available to the Borrowers or any other Person its tax returns or any confidential tax information.
(j)    If the Agent, any Co-Collateral Agent or any Lender, as the case may be, shall become aware that it is entitled to claim a refund from a Governmental Authority in respect of Indemnified Taxes or Other Taxes paid by Borrower pursuant to this Section 2.15, including Indemnified Taxes or Other Taxes as to which it has been indemnified by Borrower, or with respect to which Borrower or a Group Member that is a signatory hereto has paid additional amounts pursuant to this Section 2.15, it shall notify Borrower of the availability of such refund claim and, if the Agent, any Co-Collateral Agent or any Lender, as the case may be, determines in good faith that making a claim for refund will not have any adverse consequence to its taxes or business operations, shall, after receipt of a request by Borrower, make a claim to such Governmental Authority for such refund at Borrower’s expense.
SECTION 2.16.      Sharing of Payments, Etc. If any Lender shall obtain any payment from any Group Member (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Advances, the Term Loan, the 2016 Term Loan or other amounts owing to it (other than pursuant to Section 2.05(b), 2.06, 2.07, 2.11, 2.12, 2.15, 2.18, 2.19 or 9.04(c)) in excess of its ratable share, such Lender shall forthwith purchase from the other Lenders such participations in the Advances, the Term Loan, the 2016 Term Loan or other amounts owing to them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided , however , that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender’s ratable share (according

57

to the proportion of (i) the amount of such Lender’s required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrowers agree that any Lender so purchasing a participation from another Lender pursuant to this Section 2.16 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrowers in the amount of such participation.
SECTION 2.17.      Use of Proceeds of Advances, Term Loan and 2016 Term Loan . (a) The proceeds of the Advances shall be available (and each Borrower agrees that it shall use such proceeds) for general corporate purposes of Holdings and its Subsidiaries, including, without limitation, for Acquisitions, Capital Expenditures, cash dividends, payment of any of the Obligations, and stock and bond repurchases, all to the extent not prohibited under the Loan Documents.
(b)    The proceeds of the Term Loan shall be available (and each Borrower agrees that it shall use such proceeds) to repay outstanding Revolving Advances on the date such Term Loan was made. Such repayment shall not result in a reduction of the Aggregate Revolving Commitments.
(c)    The proceeds of the 2016 Term Loan shall be available (and each Borrower agrees that it shall use such proceeds) to repay outstanding Revolving Advances on the First Amendment Effective Date. Such repayment shall not result in a reduction of the Aggregate Revolving Commitments.
SECTION 2.18.      Extension of Loans .
(a)     Extension of Revolving Commitments, Term Loans or 2016 Term Loans . The Borrowers may at any time and from time to time request that all or a portion of the Revolving Commitments (including the L/C Commitment and the Swingline Commitment), the Term Loans and/or the 2016 Term Loans be amended to extend the termination date with respect to all or a portion of the Revolving Commitments (any such Revolving Commitments which have been so amended, “ Extended Revolving Commitments ”, any such Term Loans which have been so amended, “ Extended Term Loans ”, and any such 2016 Term Loans which have been so amended, “ Extended 2016 Term Loans ”) and to provide for other terms consistent with this Section 2.18. In order to establish any Extended Revolving Commitments, Extended Term Loans or Extended 2016 Term Loans, the Borrowers shall provide a notice to the Agent (who shall provide a copy of such notice to each of the Revolving Lenders, Term Lenders and/or 2016 Term Lenders, as applicable) (each, a “ Extension Request ”) setting forth the proposed terms (which shall be determined in consultation with the Agent) of the Extended Revolving Commitments, Extended Term Loans or Extended 2016 Term Loans to be established, which shall (x) be identical as offered to each Revolving Lender, Term Lender and/or 2016 Term Lender, as applicable (including as to the proposed interest rates and fees payable) and offered pro rata to each Revolving Lender, each Term Lender and each 2016 Term Lender hereunder, as applicable, and (y) be identical to the Revolving Commitments, Term Loans and/or 2016 Term Loans hereunder, except that: (i) the maturity date of the Extended Revolving Commitments shall be later than the Revolving Termination Date and equal to or later than the Extended Termination Date, or with respect to the Term Loans, the maturity date of the Extended Term Loans shall be later than the Term Loan Termination Date and equal to or later than the Extended Termination Date, or with respect to the 2016 Term Loans, the maturity date of the Extended 2016 Term Loans shall be later than the 2016 Term Loan Termination Date, (ii) payments of interest and fees may be at different rates on Extended Revolving Commitments, Extended Term Loans and Extended 2016 Term Loans (and related outstandings), provided that any increase in the interest rate on the Extended Term Loans or Extended 2016 Term Loans in excess of 0.25% per annum shall result in a comparable increase in the interest rate applicable to the Revolving Extensions of Credit in an amount equal to such excess, (iii) the terms of the Extended Revolving Commitments, Extended Term Loans and/or Extended 2016 Term Loans may provide, subject to the consent of the Required Lenders (excluding from the calculation thereof, any Revolving Lenders, Term Lenders or 2016 Term Lenders who decline to extend their Revolving Commitments, their Term Loans or their 2016 Term Loans, as applicable) for other or different covenants and terms that apply solely to any period after the Revolving Termination Date, the Term Loan Termination Date or the 2016 Term Loan Termination Date, as applicable, or, if earlier, the termination in full of the Revolving Commitments that are not Extended Revolving Commitments or the

58

repayment in full of Term Loans that are not Extended Term Loans or the repayment in full of 2016 Term Loans that are not Extended 2016 Term Loans, as applicable, and (iv)(A) all borrowings under the Revolving Commitments (including Extended Revolving Commitments) and repayments thereunder shall be made on a pro rata basis (except for (1) payments of interest and fees at different rates on commitments (and related outstandings) in accordance with the rights of the applicable Class and (2) repayments required upon the termination date of the commitments of any Class); (B) all repayments of the Term Loans (including Extended Term Loans) shall be made on a pro rata basis (except for (1) payments of interest and fees at different rates on commitments (and related outstandings) in accordance with the rights of the applicable Class and (2) repayments required upon the maturity date of the Term Loans of any Class); and (C) all repayments of the 2016 Term Loans (including Extended 2016 Term Loans) shall be made on a pro rata basis (except for (1) payments of interest and fees at different rates on commitments (and related outstandings) in accordance with the rights of the applicable Class and (2) repayments required upon the maturity date of the 2016 Term Loans of any Class); provided, further , that (A) the conditions precedent to a Borrowing set forth in Section 4.02 shall be satisfied at the time when any Revolving Advances are made in respect of any Extended Revolving Commitment, (B) in connection with an Extension Request with respect to the Revolving Commitments, either (i) the Revolving Lenders collectively have consented to the applicable Extension Request with respect to a majority of the Revolving Commitments (it being understood that no consent of any Term Lender or 2016 Term Lender shall be required) or (ii) simultaneously with the effectiveness of the maturity extension in respect of the Extended Revolving Commitments the Revolving Commitments that are not Extended Revolving Commitments shall be terminated in full (including by deemed cancellation of the entirety of the Revolving Commitments and the implementation of new commitments in respect of the Extended Revolving Commitments), (C) in connection with an Extension Request with respect to the Term Loans either (i) the Term Lenders collectively have consented to the applicable Extension Request with respect to a majority in amount of the Term Loans (it being understood that no consent of any Revolving Lender or 2016 Term Lender shall be required) or (ii) simultaneously with the effectiveness of the maturity extension in respect of the Extended Term Loans, the Term Loans that are not Extended Term Loans shall be paid in full (the foregoing not being deemed to modify or waive the provisions of Section 2.11 hereof regarding the conditions precedent to repayment of the Term Loans), (D) in connection with an Extension Request with respect to the 2016 Term Loans either (i) the 2016 Term Lenders collectively have consented to the applicable Extension Request with respect to a majority in amount of the 2016 Term Loans (it being understood that no consent of any Revolving Lender or Term Lender shall be required) or (ii) simultaneously with the effectiveness of the maturity extension in respect of the Extended 2016 Term Loans, the 2016 Term Loans that are not Extended 2016 Term Loans shall be paid in full (the foregoing not being deemed to modify or waive the provisions of Section 2.11 hereof regarding the conditions precedent to repayment of the 2016 Term Loan), and (E) all documentation in respect of such extension shall be consistent with the foregoing.
(b)     Extension Request . The Borrowers shall provide the applicable Extension Request at least ten (10) Business Days (or such shorter period as may be agreed by the Agent) prior to the date on which the applicable Lenders are requested to respond. No Lender shall have any obligation to agree to provide any Extended Revolving Commitment, Extended Term Loan or Extended 2016 Term Loan pursuant to any Extension Request. Any Lender (each, an “ Extending Lender ”) wishing to have all or a portion of its Revolving Commitments, Term Loans or 2016 Term Loans subject to such Extension Request amended into Extended Revolving Commitments, Extended Term Loan or Extended 2016 Term Loans, as applicable, shall notify the Agent (each, an “ Extension Election ”) on or prior to the date specified in such Extension Request of the amount of its Revolving Commitments, Term Loans or 2016 Term Loans, as applicable, which it has elected to request be amended into Extended Revolving Commitments, Extended Term Loan or Extended 2016 Term Loans (subject to any minimum denomination requirements imposed by the Agent). In the event that the aggregate principal amount of Revolving Commitments, Term Loans or 2016 Term Loans, as applicable, in respect of which applicable Revolving Lenders, Term Lenders or 2016 Term Lenders shall have accepted the relevant Extension Request exceeds the amount of Extended Revolving Commitments, Extended Term Loan or Extended 2016 Term Loans requested to be extended pursuant to the Extension Request, Revolving Commitments, Term Loans or 2016 Term Loans, as applicable, subject to Extension Elections shall be amended to reflect allocations of the Extended Revolving Commitments, Extended Term Loan or Extended 2016 Term Loans, which Extended Revolving Commitments, Extended Term Loans and/or Extended 2016 Term Loans shall be allocated as agreed by Agent and the Borrowers.

59

(c)     New Lenders . Following any Extension Request made by the Borrowers in accordance with this Section 2.18, if the Revolving Lenders, Term Lenders and/or 2016 Term Lenders, as applicable, shall have declined to agree during the period specified in Section 2.18(b) above to provide Extended Revolving Commitments, Extended Term Loan or Extended 2016 Term Loans in an aggregate principal amount equal to the amount requested by the Borrowers in such Extension Request, the Borrowers may request that banks, financial institutions or other institutional lenders or investors (including any Extending Lender) provide an Extended Revolving Commitment, an Extended Term Loan or an Extended 2016 Term Loan or a commitment to provide an additional term loan tranche hereunder (the “ Additional Extending Lenders ”); provided that such Extended Revolving Commitments, Extended Term Loan or Extended 2016 Term Loans of such Additional Extending Lenders (i) shall be in an aggregate principal amount for all such Additional Extending Lenders not to exceed the aggregate principal amount of Extended Revolving Commitments, Extended Term Loan or Extended 2016 Term Loans so declined to be provided by the existing Lenders and (ii) shall be on identical terms to the terms applicable to the terms specified in the applicable Extension Request (and any Extended Revolving Commitments, Extended Term Loan or Extended 2016 Term Loans, as applicable, provided by existing Lenders in respect thereof) and, if a new tranche of term loans is to be incurred including other terms as are customary for a term loan provided that the maturity term for any term loan commitment hereunder shall not be earlier than the 2016 Term Loan Termination Date; provided further that, as a condition to the effectiveness of any Extended Revolving Commitment, Extended Term Loan or Extended 2016 Term Loan or term loan commitment of any Additional Extending Lender, the Agent shall have consented (such consent not to be unreasonably withheld or delayed) to each Additional Extending Lender. Upon (1) the earlier of the Revolving Termination Date (including a deemed Revolving Termination Date in accordance with clause (B) of the proviso to Section 2.18(a) above, (or, if applicable, any Extended Termination Date occurring after the Revolving Termination Date) or such earlier date as any declining Revolving Lenders may agree), (a) the Revolving Commitments of the applicable declining Revolving Lenders will be terminated pro rata with the Commitments of other applicable declining Revolving Lenders by an aggregate amount equal to the aggregate principal amount of the Extended Revolving Commitments and the term loan commitments of such Additional Extending Lenders and (b) the Revolving Commitment or term loan commitment of each such Additional Extending Lender will become effective, (2) the earlier of the Term Loan Termination Date (including a deemed Term Loan Termination Date in accordance with clause (C) of the proviso to Section 2.18(a) above) (or, if applicable, any Extended Termination Date occurring after the Term Loan Termination Date) or such earlier date as any declining Term Lenders may agree), (a) the Term Loans of the applicable declining Term Lenders will be repaid in an aggregate principal amount equal to the Extended Term Loans provided by Additional Extending Lenders and (b) the term loan commitment of each such Additional Extending Lender will become effective, and (3) the earlier of the 2016 Term Loan Termination Date (including a deemed 2016 Term Loan Termination Date in accordance with clause (D) of the proviso to Section 2.18(a) above) (or, if applicable, any Extended Termination Date occurring after the 2016 Term Loan Termination Date) or such earlier date as any declining 2016 Term Lenders may agree), (a) the 2016 Term Loans of the applicable declining 2016 Term Lenders will be repaid in an aggregate principal amount equal to the Extended 2016 Term Loans provided by Additional Extending Lenders and (b) the term loan commitment of each such Additional Extending Lender will become effective. The Extended Revolving Commitments, Extended Term Loans and/or Extended 2016 Term Loans of Additional Extending Lenders will be incorporated as Revolving Commitments, Term Loans or 2016 Term Loans hereunder in the same manner in which Extended Revolving Commitments of existing Revolving Lenders or Extended Term Loans of existing Term Lenders or Extended 2016 Term Loans of existing 2016 Term Lenders are incorporated hereunder pursuant to this Section 2.18.
(d)     Extension Amendment . Extended Revolving Commitments, Extended Term Loans, Extended 2016 Term Loans and Revolving Commitments and term loan commitments of Additional Extending Lenders shall be established pursuant to an amendment (each, an “ Extension Amendment ”) to this Agreement among the Borrower, the Agent and each Extending Lender and each Additional Extending Lender, if any, providing an Extended Revolving Commitment, an Extended Term Loan, an Extended 2016 Term Loan, a new Revolving Credit Commitment, or a term loan commitment as applicable, thereunder, which shall be consistent with the provisions set forth in Sections 2.18(a), (b) and (c) above (but which shall not require the consent of any other Lender). The effectiveness of any Extension Amendment shall be subject to the satisfaction on the date thereof of each of the conditions set forth in Section 4.02 and, to the extent reasonably requested by the Agent, receipt by the Agent of legal opinions, board resolutions and officers’ certificates consistent with those delivered on the Effective Date. The Agent shall promptly

60

notify each Lender as to the effectiveness of each Extension Amendment. Each of the parties hereto hereby agrees that this Agreement and the other Loan Documents may be amended pursuant to an Extension Amendment, without the consent of any other Lenders, to the extent necessary to (i) reflect the existence and terms of the Extended Revolving Commitments, the Extended Term Loans, the Extended 2016 Term Loans, the new Revolving Commitments, or the term loan commitments as the case may be, incurred pursuant thereto and (ii) effect such other amendments to this Agreement and the other Loan Documents as may be necessary or appropriate, in the reasonable opinion of the Agent and the Borrowers, to effect the provisions of this Section.
SECTION 2.19.      Increase in Commitments .
(a)     Reserved .
(b)     Request for Increase After April 8, 2016 . 2016. In addition to the Borrowers’ rights to request a FILO Facility under Section 2.20, after April 8, 2016, provided no Default or Event of Default then exists or would arise therefrom, upon notice to the Agent (which shall promptly notify the Revolving Lenders) and the Co-Collateral Agents, the Borrowers may make Revolving Commitment Increase requests from time to time (which Revolving Commitment Increase may take the form of a term loan tranche); provided , however , that (w) no such Revolving Commitment Increase may be made without the consent of the Co-Collateral Agents, whose consent shall not be unreasonably withheld, (x) the aggregate amount of all Revolving Commitment Increases pursuant to this Section 2.19(b) following April 8, 2016 shall not exceed $250,000,000, (y) each Revolving Commitment Increase request shall be in a minimum amount of $100,000,000, and (z) the Borrowers may request a maximum of four Revolving Commitment Increases. At the time of sending such notice, the Borrowers (in consultation with the Agent) shall specify the time period within which each Revolving Lender is requested to respond (which shall in no event be less than ten Business Days from the date of delivery of such notice to the Revolving Lenders).
(c)     Lender Elections . Each Revolving Lender shall notify the Agent within the time period described in Section 2.19(b) whether or not it agrees to increase its Revolving Commitment and, if so, whether by an amount equal to, greater than, or less than its Revolving Commitment Percentage of such Revolving Commitment Increase request. Any Revolving Lender not responding within such time period shall be deemed to have declined to increase its Revolving Commitment. No Revolving Lender shall have any obligation to increase its Revolving Commitment.
(d)     Notification by Agent . The Agent shall notify the Borrowers, each Revolving Lender and the Lead Arrangers, of the Revolving Lenders’ responses to each request made under Section 2.19(b). To achieve the full amount of any Revolving Commitment Increase specified in any Revolving Commitment Increase request, subject to the approval of the Agent (which approval shall not be unreasonably withheld), to the extent that the existing Revolving Lenders decline to increase their Revolving Commitments, or decline to increase their Revolving Commitments in the full amount requested by the Borrowers, other consenting Eligible Assignees (each an “ Additional Commitment Lender ”) may become a Revolving Lender hereunder and furnish a Revolving Commitment in the amount requested by the Borrowers under Section 2.19(b) and not accepted by the existing Revolving Lenders, provided , however , that without the consent of the Agent, at no time shall the Revolving Commitment of any Additional Commitment Lender be less than $10,000,000. At the request of the Borrowers, one or more of the Lead Arrangers, in consultation with the Borrowers, may, but shall not be required, to use their reasonable efforts to arrange for Revolving Commitments from Additional Commitment Lenders.
(e)     Conditions to Effectiveness of each Commitment Increase . As a condition precedent to each Revolving Commitment Increase, (i) the Borrowers shall deliver to the Agent a certificate of each Borrower dated as of the applicable Increase Effective Date signed by an Authorized Officer of such Borrower (A) certifying and attaching the resolutions adopted by the board of directors (or other applicable governing body) of such Borrower approving or consenting to such Revolving Commitment Increase, and (B) certifying that, before and after giving effect to such Revolving Commitment Increase, the representations and warranties contained in Article V hereof and the other Loan Documents are true and correct in all material respects on and as of the Increase Effective Date, except to the extent (1) such representations or warranties are qualified by a materiality standard, in which case they shall be true and correct

61

in all respects, and (2) such representations or warranties expressly relate to an earlier date (in which case such representations and warranties shall be true and correct in all material respects as of such earlier date), (ii) the Loan Parties other than the Borrowers shall deliver an “acknowledgment and acceptance” of the Revolving Commitment Increase in form reasonably satisfactory to the Agent, (iii) if applicable, the Borrowers, the Agent, and any Additional Commitment Lender shall have executed and delivered a joinder to the Loan Documents in such form as the Agent shall reasonably require; (iv) to the extent that the Revolving Commitment Increase shall take the form of a term loan tranche, this Agreement shall be amended, in form and substance reasonably satisfactory to the Agent, to include such terms as are customary for a term loan commitment, including that the term loan advances shall (A) have a maturity date no earlier than the Extended Termination Date, (B) if subject to amortization, shall have an average weighted life not less than the Extended Termination Date, and (C) may not be voluntarily prepaid unless contemporaneously therewith, the other Revolving Commitments are ratably permanently reduced; (iv) the Borrowers shall have paid such fees to the applicable Lead Arrangers (to the extent that such Lead Arrangers provide assistance in arranging the Revolving Commitment Increases of Additional Commitment Lenders), the Additional Commitment Lenders and the other Revolving Lenders who agree to increase their Revolving Commitments, as the Borrowers and the applicable Lead Arrangers, the Additional Commitment Lenders and the other Revolving Lenders, respectively, may agree; (v) the Borrowers shall deliver to the Agent and the Lenders an opinion or opinions, in form and substance reasonably satisfactory to the Agent, from counsel to the Borrowers reasonably satisfactory to the Agent and dated such date; (vi) the Borrowers shall have delivered to the Agent an updated Borrowing Base Certificate dated as of the Increase Effective Date, and (vii) no Default or Event of Default shall exist or result from the Revolving Commitment Increase. The Borrowers shall prepay any Advances outstanding on the Increase Effective Date (and pay any additional amounts required pursuant to Section 9.04(c) ) and may borrow on a non-ratable basis from any Revolving Lender or Additional Commitment Lender committed to a portion of the applicable Revolving Commitment Increase, in each case to the extent necessary to keep the outstanding Advances ratable with any revised Revolving Commitment Percentage arising from any non-ratable increase in the Revolving Commitments under this Section.
Each of the parties hereto hereby agrees that the Agent may take any and all further action as may be reasonably necessary to ensure that all Advances in respect of Revolving Commitment Increases, when originally made, are included in each Borrowing of outstanding Advances on a pro rata basis. The Borrower agrees that Section 9.04(c) shall apply to any conversion of Eurodollar Rate Advances to Base Rate Advances reasonably required by the Agent to effect the foregoing.
(f)     Effective Date and Allocations . If the Revolving Commitments are increased after April 8, 2016 in accordance with this Section, the Agent (in consultation with the Borrowers) shall determine the effective date (each, an “ Increase Effective Date ”) and the final allocation of the Revolving Commitment Increase, giving effect to the occurrence of the applicable Increase Effective Date. The Agent shall promptly notify the Borrowers and the Revolving Lenders of such final allocation and the Increase Effective Date, and on the Increase Effective Date (i) the Aggregate Revolving Commitments under, and for all purposes of, this Agreement shall be increased by the aggregate amount of the Revolving Commitment Increase, and (ii) the applicable Schedule to the Agreement shall be deemed modified, without further action, to reflect the revised Commitments of the Revolving Lenders.
(g)     Other Provisions That portion of the Revolving Commitment of each Revolving Lender and Additional Commitment Lender constituting its portion of any Revolving Commitment Increase under this Section 2.19 (i) other than in the case of a term loan, shall bear interest and be entitled to receive letter of credit fees at the rates provided for 2015 Extending Lenders, (ii) shall, other than in the case of a term loan, receive Commitment Fees based on the Restated Commitment Fee Grid Section 2.05(a) hereof , (iii) shall terminate on the Extended Termination Date or in the case of a term loan on or after the Extended Termination Date, and (iv) except as provided in clause (e) hereof, shall otherwise be on the same terms as set forth in, and be entitled to the benefits of, this Agreement and the other Loan Documents.
(h)     Conflicting Provisions . This Section shall supersede any provisions in Sections 2.16 or 9.01 to the contrary. Each of the parties hereto hereby agrees that, upon any Increase Effective Date, this Agreement shall be deemed amended to the extent (but only to the extent) necessary to reflect the existence and terms of the Revolving Commitment Increase, without need for further consents pursuant to Section 9.01. Any such deemed amendment may

62

be memorialized in writing by the Agent with the Borrowers’ and Co-Collateral Agents’ consent (not to be unreasonably withheld) and furnished to the other parties hereto.
SECTION 2.20.      FILO Facility .
(a)     Request for FILO Facility After July 21, 2015 . 2015. In addition to the Borrowers’ rights to request a Revolving Commitment Increase under Section 2.19, after July 21, 2015, provided no Default or Event of Default then exists or would arise therefrom, upon notice to the Agent (which shall promptly notify the Revolving Lenders) and the Co-Collateral Agents, the Borrowers may request that the Revolving Lenders establish a “first-in, last-out” facility (the “ FILO Facility ”), which may take the form of either a revolving or term facility; provided , however , that (w) the consent of the Co-Collateral Agents, whose consent shall not be unreasonably withheld, shall be required for the establishment of a FILO Facility, (x) the aggregate FILO Commitments and FILO Loans shall not exceed $500,000,000 in the aggregate at any one time outstanding, (y) any request for the establishment of a FILO Facility shall be in a minimum amount of $100,000,000, and (z) there shall be no more than one FILO Facility outstanding at any time. In order to establish any FILO Facility, the Borrowers shall provide a notice to the Agent and the Co-Collateral Agents setting forth the proposed terms of the FILO Facility, which shall be determined in consultation with the Agent and, in any case, include the following: (i) the same maturity date as the Extended Termination Date, or any later date for the termination of Revolving Commitments established pursuant to Section 2.18 , (ii) provide that payments of interest and fees (including both commitment and up-front fees) may be at different rates on the FILO Facility from those relating to the Revolving Commitments (and related outstandings), the Term Loan and the 2016 Term Loan, (iii) require that the FILO Facility be (A) to the extent the FILO Facility is a term loan facility, fully funded on the effective date thereof, and (B) to the extent the FILO Facility is a revolving facility, funded on the effective date thereof in an amount not less than the lesser of the full amount thereof and the amount necessary to repay any then outstanding Advances, and thereafter be drawn in full prior to the making of any Advance under the Revolving Commitments, (iv) provide for a draw condition on the FILO Facility that the aggregate amount outstanding under the FILO Facility shall not exceed the lesser of (1) Incremental Availability and (2) the FILO Commitment, (v) provide that FILO Loans may not be prepaid, or the FILO Commitments reduced, in whole or in part unless no Default or Event of Default then exists and is continuing and, after giving effect to such prepayment or reduction, Pro Forma and Projected Capped Excess Availability is at least 50% of the Line Cap, (vi) require the Agent to establish and adjust the FILO Reserve as and when applicable, (vii) include such inter-lender provisions as may be reasonably acceptable to the Co-Collateral Agents, and (viii) include such other modifications (including, without limitation, to the definitions of “Required Lenders” and “Supermajority Lenders”) as the Co-Collateral Agents and the Borrowers may determine necessary or appropriate. At the time of sending such notice, the Borrowers (in consultation with the Agent) shall specify the time period within which each Revolving Lender is requested to respond (which shall in no event be less than ten Business Days from the date of delivery of such notice to the Revolving Lenders).
(b)     Lender Elections . Each Revolving Lender shall notify the Agent within the time period described in Section 2.20(a) whether or not it agrees to participate in the FILO Facility and, if so, whether by an amount equal to, greater than, or less than its Revolving Commitment Percentage. Any Revolving Lender not responding within such time period shall be deemed to have declined to participate in the FILO Facility. No Revolving Lender shall have any obligation to participate in the FILO Facility.
(c)     Notification by Agent . The Agent shall notify the Borrowers, each Revolving Lender and the Lead Arrangers, of the Revolving Lenders’ responses to each request made under Section 2.20(a). To achieve the full amount of the FILO Facility specified in any request made by the Borrowers, subject to the approval of the Agent (which approval shall not be unreasonably withheld), to the extent that the existing Revolving Lenders decline to participate in the FILO Facility, or decline to participate in an amount equal to its Revolving Commitment Percentage, other consenting Eligible Assignees may become a FILO Lender hereunder and furnish a FILO Commitment in the amount requested by the Borrowers under Section 2.20(a) and not accepted by the existing Revolving Lenders, provided , however , that without the consent of the Agent, at no time shall the FILO Commitment of any FILO Lender be less than $ 10,000,000. 10,000,000, and provided further that, at no time shall any Permitted Holder Lender hold any portion of any FILO Facility hereunder. At the request of the Borrowers, one or more of the Lead Arrangers, in consultation

63

with the Borrowers, may, but shall not be required, to use their reasonable efforts to arrange for FILO Commitments from Eligible Assignees.
(d)     Conditions to Effectiveness of FILO Facility . As a condition precedent to the establishment of the FILO Facility after July 21, 2015, (i) the Borrowers shall deliver to the Agent a certificate of each Borrower signed by an Authorized Officer of such Borrower (A) certifying and attaching the resolutions adopted by the board of directors (or other applicable governing body) of such Borrower approving or consenting to the establishment of the FILO Facility, and (B) certifying that, before and after giving effect to the establishment of the FILO Facility, the representations and warranties contained in Article V hereof and the other Loan Documents are true and correct in all material respects on and as of the effective date of the FILO Facility, except to the extent (1) such representations or warranties are qualified by a materiality standard, in which case they shall be true and correct in all respects, and (2) such representations or warranties expressly relate to an earlier date (in which case such representations and warranties shall be true and correct in all material respects as of such earlier date), (ii) the Loan Parties other than the Borrowers shall deliver an “acknowledgment and acceptance” of the establishment of the FILO Facility in form reasonably satisfactory to the Agent, (iii) the Borrowers shall have paid such fees to the applicable Lead Arrangers (to the extent that such Lead Arrangers provide assistance in arranging the FILO Facility), and the FILO Lenders, as the Borrowers and the applicable Lead Arrangers and the FILO Lenders, respectively, may agree; (iv) the Borrowers shall deliver to the Agent and the Lenders an opinion or opinions, in form and substance reasonably satisfactory to the Agent, from counsel to the Borrowers reasonably satisfactory to the Agent and dated such date; (v) the Borrowers shall have delivered to the Agent an updated Borrowing Base Certificate dated as of the effective date of the FILO Facility, (vi) if applicable, the Borrowers, the Agent, and any Eligible Assignee which becomes a FILO Lender shall have executed and delivered a joinder to the Loan Documents in such form as the Agent shall reasonably require; (vii) this Agreement shall have been amended to the extent necessary to reflect the existence and terms of the FILO Facility and to effect other amendments to this Agreement and the other Loan Documents as may be necessary or appropriate, in the reasonable opinion of the Agent and the Borrowers to effect the provisions of this Section, with the consent of the FILO Lenders, the Co-Collateral Agents and the Borrower (such consents not to be unreasonably withheld) , but without the need for further consents from the Lenders, and (viii) no Default or Event of Default shall exist or result from the establishment of the FILO Facility. The Borrowers shall use the proceeds of the FILO Facility to prepay any Advances outstanding on the effective date thereof (and pay any additional amounts required pursuant to Section 9.04(c) ) ; provided that, in the event the FILO Facility takes the form of a term loan facility, the Borrowers may decline to prepay the Advances outstanding on the effective date thereof if, immediately after giving effect to the funding of the FILO Facility and the application of the proceeds thereof, Capped Excess Availability is not less than the sum of (1) $150,000,000 plus (2) the amount of the proceeds of such FILO Facility, net of related fees and expenses paid at the closing of such FILO Facility .
(e)     Effective Date and Allocations . If the FILO Facility is established after July 21, 2015 in accordance with this Section, the Agent (in consultation with the Borrowers) shall determine the effective date and the final allocation of the FILO Commitments. The Agent shall promptly notify the Borrowers and the FILO Lenders of such final allocation and the effective date of the FILO Facility, and on the effective date the Schedule to the Agreement shall be deemed modified, without further action, to reflect the FILO Commitments of the FILO Lenders.
SECTION 2.21.      Permitted Overadvances . The Agent may, in its discretion, make Permitted Overadvances without the consent of the Lenders, the Swingline Lender and the Issuing Lenders, and each Lender shall be bound thereby. Any Permitted Overadvance may constitute a Swingline Advance. A Permitted Overadvance is for the account of the Borrowers and shall constitute a Base Rate Advance and an Obligation (as defined in the Guarantee and Collateral Agreement) and shall be repaid by the Borrowers in accordance with the provisions of Section 2.03(b) or 2.11(c), as applicable. The making of any such Permitted Overadvance on any one occasion shall not obligate the Agent or any Lender to make or permit any Permitted Overadvance on any other occasion or to permit such Permitted Overadvances to remain outstanding. The making by the Agent of a Permitted Overadvance shall not modify or abrogate any of the provisions of Article III regarding the Lenders’ obligations to purchase participations with respect to Letters of Credit or of Section 2.04 regarding the Lenders’ obligations to purchase participations with respect to Swingline Advance. The Agent shall have no liability for, and no Loan Party or Credit Party shall have the right to, or shall, bring

64

any claim of any kind whatsoever against the Agent with respect to “inadvertent Overadvances” (i.e. where an Overadvance results from changed circumstances beyond the control of the Agent (such as a reduction in the collateral value)) regardless of the amount of any such Overadvance(s).

ARTICLE III
AMOUNT AND TERMS OF THE LETTERS OF CREDIT
SECTION 3.01.      L/C Commitment .
(a)    Subject to the terms and conditions hereof, each Issuing Lender, in reliance on the agreements of the other Revolving Lenders set forth in Section 3.04(a), agrees to issue Letters of Credit for the account of any Borrower (on behalf of such Borrower or on behalf of any other Group Member) on any Business Day during the period from the Effective Date until the Extended Termination Date in such form as may be approved from time to time by such Issuing Lender; provided that no Issuing Lender shall have any obligation to issue any Letter of Credit if (i) after giving effect to such issuance, the L/C Obligations would exceed the L/C Commitment or (ii) the face amount of the requested Letter of Credit, when aggregated with all other then outstanding Extensions of Credit (excluding FILO Extensions of Credit), shall not exceed the Line Cap at such time; provided further that each Issuing Lender may, but shall not be required to, issue Letters of Credit such that the aggregate L/C Obligations attributable to all such outstanding Letters of Credit issued by such Issuing Lender exceed $500,000,000. Each Letter of Credit shall (i) be denominated in Dollars or any other lawful foreign currency which is approved in writing on a case by case basis by the Issuing Lender and the Agent in their sole and absolute discretion and (ii) expire no later than the earlier of (x) the first anniversary of its date of issuance, or (y) subject to the provisions of Section 6.01(p), the date that is five (5) Business Days prior to the Extended Termination Date, provided that any Letter of Credit with a one-year term may provide for the renewal thereof for additional one-year periods (which, subject to the provisions of Section 6.01(p)) shall in no event extend beyond the date referred to in clause (y) above). Each Application and each Letter of Credit shall be subject to the International Standby Practices (ISP 98) of the International Chamber of Commerce (in the case of Standby L/Cs) or the Uniform Customs and Practice for Documentary Credits as most recently published by the International Chamber of Commerce (in the case of Commercial L/Cs) and, to the extent not inconsistent therewith, the laws of the State of New York.
(b)    The Issuing Lender shall not at any time be obligated to issue any Letter of Credit if (i) such issuance would conflict with, or cause the Issuing Lender or any Revolving Lender to exceed any limits imposed by, any applicable Requirement of Law, (ii) any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain the Issuing Lender from issuing such Letter of Credit, or any law applicable to the Issuing Lender or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over the Issuing Lender shall prohibit, or request that the Issuing Lender refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon the Issuing Lender with respect to such Letter of Credit any restriction, reserve or capital requirement (for which the Issuing Lender is not otherwise compensated hereunder) not in effect on the Effective Date, or shall impose upon the Issuing Lender any unreimbursed loss, cost or expense which was not applicable on the Effective Date and which the Issuing Lender in good faith deems material to it; (iii) such issuance would violate one or more policies of the Issuing Lender applicable to letters of credit generally, or (iv) any Revolving Lender is at such time a Defaulting Lender hereunder, unless the Issuing Lender has entered into arrangements, including the delivery of cash collateral, satisfactory to the Issuing Lender (in its sole discretion) with the Borrowers or such Defaulting Lender to eliminate the Issuing Lender’s actual or potential Fronting Exposure (after giving effect to Section 8.12(a)(iv) with respect to the Defaulting Lender arising from either (x) the Letter of Credit then proposed to be issued or (y) that Letter of Credit and all other L/C Obligations as to which the Issuing Lender has actual or potential Fronting Exposure, as it may elect in its sole discretion.
SECTION 3.02.      Procedure for Issuance of Letter of Credit . (a) Any Borrower may from time to time request that the Issuing Lender issue a Commercial L/C or Standby L/C for its account (on behalf of such Borrower or on behalf of any other Group Member) by delivering to the Issuing Lender at its address for notices specified herein

65

an Application therefor, completed to the satisfaction of the Issuing Lender, and such other certificates, documents and other papers and information as the Issuing Lender may reasonably request. Upon receipt of any Application, the Issuing Lender will process such Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby (but in no event shall the Issuing Lender be required to issue any Letter of Credit earlier than three Business Days after its receipt of the Application therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed to by the Issuing Lender and the applicable Borrower. The Issuing Lender shall furnish a copy of such Letter of Credit to the applicable Borrower promptly following the issuance thereof. The Issuing Lender shall promptly notify the Agent of the issuance, extension or amendment of Letters of Credit and any drawings or other payments under Letters of Credit.
(b)    Any letter of credit issued by an Issuing Lender under any Other LC Facility for the account of a Borrower (each, an “ Other LC ”), may, at the election of the Borrowers and with the consent of the applicable Issuing Lender, be deemed issued under this Agreement, provided that (1) the Borrowers execute and deliver a Transfer Notice to the Agent three (3) Business Days prior to the date proposed for the transfer of such Other LC to governance hereunder (the “ Transfer Date ”), (2) the issuance of such Other LC would be permitted under this Agreement and all conditions precedent to such issuance would be satisfied on the Transfer Date as if such letters of credit were newly issued hereunder on the Transfer Date, (3) after giving effect to the transfer of the Other LC, either (x) Projected and Pro Forma Capped Excess Availability shall be at least 50% of the Line Cap, or (y) both (i) Projected and Pro Forma Capped Excess Availability shall be at least 25% of the Line Cap, and (ii) the Pro Forma Fixed Charge Coverage Ratio shall be at least 1.0: 1.0, and (4) no Default or Event of Default shall have occurred and be continuing as of the Transfer Date, or shall arise as a result of the deemed issuance of such Other LC hereunder.
(c)    Any Letter of Credit issued by an Issuing Lender under this Agreement for the account of a Borrower, may, at the election of the Borrowers and with the consent of the applicable Issuing Lender, be deemed issued under any Other LC Facility, provided that (1) the Borrowers and the issuing lender under the Other LC Facility execute and deliver an Other LC Transfer Notice to the Agent three (3) Business Days prior to the date proposed for the transfer of such Letter of Credit to governance under the Other LC Facility (the “ Other LC Transfer Date ”), (2) after giving effect to such transfer to the Other LC Facility, outstanding Letters of Credit issued under this Agreement shall be in an aggregate stated amount of at least $500,000,000, and (3) the issuance of such Other LC would be permitted under the Other LC Facility and all conditions precedent to such issuance would be satisfied on the Other LC Transfer Date as if such letters of credit were newly issued thereunder on the Other LC Transfer Date.
SECTION 3.03.      Fees and Other Charges . (a) The Borrowers will pay a fee on the face amount of all outstanding Letters of Credit (provided, however, that with respect to any Letter of Credit that, by its terms provides for one or more automatic increases in the amount thereof, the amount of such Letter of Credit shall be deemed to be the maximum amount of such Letter of Credit after giving effect to all such increases, whether or not such maximum amount is in effect at such time) at a per annum rate equal to (i) in the case of each Standby L/C and Banker’s Acceptance, (A) with respect to the 2015 Non-Extending Lenders (to be shared ratably amongst them), the Applicable Margin then in effect with respect to Eurodollar Rate Advances and (B) with respect to 2015 Extending Lenders (to be shared ratably amongst them), the Extended Term Applicable Margin then in effect with respect to Eurodollar Rate Advances and (ii) in the case of each Commercial L/C, (A) with respect to the 2015 Non-Extending Lenders, 50% of the Applicable Margin then in effect with respect to Eurodollar Rate Advances and (B) with respect to 2015 Extending Lenders, 50% of the Extended Term Applicable Margin then in effect with respect to Eurodollar Rate Advances, in each case payable quarterly in arrears the 5 th day subsequent to the last day of each April, July, October and January after the issuance date (provided that, during the continuation of a Cash Dominion Event, such payment shall be made on the 5 th day subsequent to the last day of each month after the issuance date) . In addition, the Borrowers shall pay to the Issuing Lender for its own account a fronting fee in an amount to be agreed upon by the applicable Issuing Lender and the Borrowers (but in no event to exceed 0.125% per annum) on the undrawn and unexpired amount of each Letter of Credit, payable quarterly in arrears on the 5 th day subsequent to the last day of each April, July, October and January

66

after the issuance date (provided that, during the continuation of a Cash Dominion Event, such payment shall be made on the 5 th day subsequent to the last day of each month after the issuance date) .
(b)    In addition to the foregoing fees, the Borrowers shall pay or reimburse the Issuing Lender for such normal and customary costs and expenses as are incurred or charged by the Issuing Lender in issuing, negotiating, effecting payment under, amending or otherwise administering any Letter of Credit, unless otherwise agreed.
SECTION 3.04.      Letter of Credit Participations . (a) The Issuing Lender irrevocably agrees to grant and hereby grants to each Revolving Lender, and, to induce the Issuing Lender to issue Letters of Credit, each Revolving Lender irrevocably agrees to accept and purchase and hereby accepts and purchases from the Issuing Lender, on the terms and conditions set forth below, for such Revolving Lender’s own account and risk an undivided interest equal to such Revolving Lender’s Revolving Commitment Percentage in the Issuing Lender’s obligations and rights under and in respect of each Letter of Credit and the amount of each draft paid by the Issuing Lender thereunder. Each Revolving Lender agrees with the Issuing Lender that, if a draft is paid under any Letter of Credit for which the Issuing Lender is not reimbursed in full by the Borrowers in accordance with the terms of this Agreement, such Revolving Lender shall pay to the Issuing Lender upon demand at the Issuing Lender’s address for notices specified herein an amount equal to such Revolving Lender’s Revolving Commitment Percentage of the amount of such draft, or any part thereof, that is not so reimbursed. Each Revolving Lender’s obligation to pay such amount shall be absolute and unconditional and shall not be affected by any circumstance, including (i) any set-off, counterclaim, recoupment, defense or other right that such Revolving Lender may have against the Issuing Lender, the Borrowers or any other Person for any reason whatsoever, (ii) the occurrence or continuance of a Default or an Event of Default or the failure to satisfy any of the other conditions specified in Article IV, (iii) any adverse change in the condition (financial or otherwise) of the Borrowers or any other Loan Party, (iv) any breach of this Agreement or any other Loan Document by the Borrowers, any other Loan Party or any other Revolving Lender or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing; provided that each Revolving Lender shall only be obligated to make any such payment in Dollars (and not any foreign currency) in accordance with the provisions of Section 3.10 hereof.
(b)    If any amount required to be paid by any Revolving Lender to the Issuing Lender pursuant to Section 3.04(a) in respect of any unreimbursed portion of any payment made by the Issuing Lender under any Letter of Credit is paid to the Issuing Lender within three Business Days after the date such payment is due, such Revolving Lender shall pay to the Issuing Lender on demand an amount equal to the product of (i) such amount, times (ii) the daily average Federal Funds Rate during the period from and including the date such payment is required to the date on which such payment is immediately available to the Issuing Lender, times (iii) a fraction the numerator of which is the number of days that elapse during such period and the denominator of which is 360. If any such amount required to be paid by any Revolving Lender pursuant to Section 3.04(a) is not made available to the Issuing Lender by such Revolving Lender within three Business Days after the date such payment is due, the Issuing Lender shall be entitled to recover from such Revolving Lender, on demand, such amount with interest thereon calculated from such due date at the rate per annum set forth in Section 2.08(a)(i) or Section 2.08(c)(i), as applicable, applicable to Base Rate Advances. A certificate of the Issuing Lender submitted to any Revolving Lender with respect to any amounts owing under this Section shall be conclusive in the absence of manifest error.
(c)    Whenever, at any time after the Issuing Lender has made payment under any Letter of Credit and has received from any Revolving Lender its pro rata share of such payment in accordance with Section 3.04(a), the Issuing Lender receives any payment related to such Letter of Credit (whether directly from the applicable Borrower or otherwise, including proceeds of collateral applied thereto by the Issuing Lender), or any payment of interest on account thereof, the Issuing Lender will distribute to such Revolving Lender its pro rata share thereof (appropriately adjusted to reflect whether such payment is owed to a Non-Extending Lender (including a 2015 Non-Extending Lender) or an Extending Lender (including a 2015 Extending Lender) and whether the corresponding interest rate owed to such Lender is calculated in accordance with Section 2.08(a) or 2.08(c)); provided , however , that in the event that any such payment received by the Issuing Lender shall be required to be returned by the Issuing Lender, such Revolving Lender shall return to the Issuing Lender the portion thereof previously distributed by the Issuing Lender to it.

67

SECTION 3.05.      Reimbursement Obligation of the Borrowers . If any draft is paid under any Letter of Credit, the applicable Borrower shall reimburse the Issuing Lender for the amount of (a) the draft so paid and (b) any taxes, fees, charges or other costs or expenses incurred by the Issuing Lender in connection with such payment, not later than 12:00 Noon on (i) the Business Day that the applicable Borrower receives notice of such draft, if such notice is received on such day prior to 10:00 A.M. or (ii) if clause (i) above does not apply, the Business Day immediately following the day that the applicable Borrower receives such notice; provided , that if the total reimbursement amount set forth in clauses (a) or (b) above is not less than $5,000,000 or $500,000, respectively, the applicable Borrower may, subject to the conditions to borrowing set forth herein, request that such reimbursement be financed with a Base Rate Advance or Swingline Advance in an equivalent amount and, to the extent so financed, the Borrower’s obligation to make such payment shall be discharged and replaced by the resulting Advance. Each such payment shall be made to the Issuing Lender at its address for notices referred to herein in Dollars (or if the Letter of Credit is issued in a currency other than Dollars, in such currency or the Dollar equivalent thereof calculated in accordance with the provisions of Section 3.10) and in immediately available funds. Interest shall be payable on any such amounts from the date on which the relevant draft is paid until payment in full at the rate set forth in (x) until the Business Day next succeeding the date of the relevant notice, Section 2.08(a)(i) or Section 2.08(c)(i), as applicable, with respect to the portions of the applicable draft attributable to 2015 Non-Extending Lenders and 2015 Extending Lenders, respectively, and (y) thereafter, Section 2.08(d).

SECTION 3.06.      Obligations Absolute . Each Borrower’s obligations under this Article III shall be absolute and unconditional under any and all circumstances and irrespective of any set-off, counterclaim or defense to payment that any Borrower may have or have had against the Issuing Lender, any beneficiary of a Letter of Credit or any other Person. Each Borrower also agrees with the Issuing Lender that the Issuing Lender shall not be responsible for, and such Borrower’s Reimbursement Obligations under Section 3.05 shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or any dispute between or among such Borrower and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or any claims whatsoever of such Borrower against any beneficiary of such Letter of Credit or any such transferee. The Issuing Lender shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Issuing Lender. Each Borrower agrees that any action taken or omitted by the Issuing Lender under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross negligence or willful misconduct, shall be binding on such Borrower and shall not result in any liability of the Issuing Lender to such Borrower.

SECTION 3.07.      Letter of Credit Payments . If any draft shall be presented for payment under any Letter of Credit, the Issuing Lender shall promptly notify the applicable Borrower of the date and amount thereof. The responsibility of the Issuing Lender to the Borrowers in connection with any draft presented for payment under any Letter of Credit shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in connection with such presentment are substantially in conformity with such Letter of Credit.

SECTION 3.08.      Applications . To the extent that any provision of any Application related to any Letter of Credit is inconsistent with the provisions of this Article III, the provisions of this Article III shall apply.

SECTION 3.09.      Use of Letters of Credit . The Letters of Credit shall be available (and each Borrower agrees that it shall use such Letters of Credit) for general corporate purposes of Holdings and its Subsidiaries.


68

SECTION 3.10.      Currency Equivalents Generally . Any amount specified in this Agreement (including pursuant to Section 3.05 above) to be in a currency other than Dollars shall also include the equivalent of such amount in Dollars, such equivalent amount to be determined by the Agent at such time on the basis of the Spot Rate (as defined below) for the purchase of such currency with Dollars. For purposes of this Section 3.10, the “Spot Rate” for a currency means the rate determined by the Agent to be the rate quoted by the Person acting in such capacity as the spot rate for the purchase by such Person of such currency with another currency through its principal foreign exchange trading office at approximately 11:00 a.m. on the date two Business Days prior to the date of such determination; provided that the Agent may obtain such spot rate from another financial institution designated by the Agent if the Person acting in such capacity does not have as of the date of determination a spot buying rate for any such currency.
ARTICLE IV
CONDITIONS TO EFFECTIVENESS
SECTION 4.01.      Conditions Precedent to Effectiveness . The effectiveness of this Agreement is conditioned upon satisfaction of the following conditions precedent:
(a)    The Agent’s receipt of the following, each of which shall be originals or telecopies (followed promptly by originals) unless otherwise specified, each properly executed by an Authorized Officer of the signing Loan Party, each dated July 21, 2015 (or, in the case of certificates of governmental officials, a recent date before July 21, 2015) and each in form and substance satisfactory to the Agent and the Co-Collateral Agents:
(i)    this Agreement duly executed by each of Holdings, the Borrowers, the Agent, the Co-Collateral Agents, and the Lenders.
(ii)    the Security Documents or amendments thereto or restatements thereof (including, without limitation, the Guarantee and Collateral Agreement), in each case to the extent reasonably requested by the Agent, each duly executed by the applicable Loan Parties;
(iii)    all other Loan Documents, or amendments thereto or restatements thereof to the extent reasonably requested by the Agent, each duly executed by the applicable Loan Parties;
(iv)    such certificates of resolutions or other action, incumbency certificates and/or other certificates of Authorized Officers of each Loan Party as the Agent may reasonably require evidencing (A) the authority of each Loan Party to enter into this Agreement and the other Loan Documents to which such Loan Party is a party or is to be a party and (B) the identity, authority and capacity of each Authorized Officer thereof authorized to act as an Authorized Officer in connection with this Agreement and the other Loan Documents to which such Loan Party is a party or is to be a party;
(v)    copies of each Loan Party’s organization or other governing documents and such other documents and certifications as the Agent may reasonably require to evidence that each Loan Party is duly organized or formed, and that each Loan Party is validly existing, in good standing and qualified to engage in business in each jurisdiction where failure to so qualify could reasonably be expected to have a Material Adverse Effect;
(vi)    An opinion of in house counsel to Holdings and of one or more special or local counsel to Holdings, the Borrowers, and the other Loan Parties, addressed to the Agent, the Co-Collateral Agents and each Lender as to such matters as the Agent and Co-Collateral Agents may reasonably request;
(vii)    a certificate signed by an Authorized Officer of Holdings and the Borrowers certifying (A) that the conditions specified in Section 4.02 have been satisfied, (B) to the Solvency

69

of the Loan Parties, taken as a whole, as of July 21, 2015 after giving effect to the transactions contemplated hereby, and (C) that the Perfection Certificate is true and correct in all material respects;
(viii)    evidence that all insurance (including endorsements) required to be maintained pursuant to Section 6.01(c) has been obtained and is in effect;
(ix)    A Borrowing Base Certificate, duly completed and executed by an Authorized Officer of Holdings, together with supporting information satisfactory to the Co-Collateral Agents in their Permitted Discretion, and dated as of the end of June 2015.
(x)    results of searches or other evidence reasonably satisfactory to the Co-Collateral Agents (in each case dated as of a date reasonably satisfactory to the Co-Collateral Agents) indicating the absence of Liens on the assets of the Loan Parties, except for Liens permitted by Section 6.02(a);
(xi)    duly executed Credit Card Notifications, Third Party Payor Notifications and Blocked Account Agreements required pursuant to Section 6.01(m);
(xii)    a duly executed agreement from each Subsidiary of Holdings which is not a Loan Party and which owns any real estate constituting a warehouse or DC that houses collateral or owns Related Intellectual Property, pursuant to which each such Subsidiary grants to the Co-Collateral Agents a rent-free or royalty-free (as applicable) license to use such real estate and Related Intellectual Property in connection with the Co-Collateral Agents’ enforcement of their remedies under the Loan Documents with respect to the Collateral, during the occurrence and continuation of an Event of Default; and
(xiii)    such other customary certificates, documents or consents as the Agent and the Co-Collateral Agents reasonably may require.
(b)    all actions required by law or reasonably requested by the Co-Collateral Agents to be undertaken, and all, documents and instruments, including Uniform Commercial Code financing statements and Blocked Account Agreements, required by law or reasonably requested by the Co-Collateral Agents to be filed, registered, or recorded to create or perfect the Liens intended to be created under the Loan Documents and all such documents and instruments shall have been so filed, registered or recorded to the satisfaction of the Agent
(c)    Capped Excess Availability shall be equal to or greater than $1,000,000,000.
(d)    Reserved.
(e)    The REIT Transaction shall have been consummated (or shall be consummated substantially concurrently with the effectiveness of this Agreement) on terms and conditions satisfactory to the Agent and the Co-Collateral Agents, the Borrowers shall have received the net cash proceeds therefrom, that together with the proceeds realized from the Macerich, Simon Property Group and General Growth Properties real estate transactions, and certain other real estate transactions completed after April 1, 2015, amount to at least $2,500,000,000, and such cash proceeds shall be used to repay the outstanding Revolving Advances (as defined in the Existing Credit Agreement).
(f)    Revolving Lenders holding a majority of the Revolving Commitments (such amount to be no less than $1,637,500,000) shall have agreed to become 2015 Extending Lenders.
(g)    The Required Lenders under the Existing Credit Agreement shall have consented to this Agreement, after giving effect to reductions and/or reallocations of commitments under the Existing Credit Agreement.
(h)    The conditions set forth in Section 4.02 shall be satisfied.

70

(i)    There shall have been no event or circumstance since January 31, 2015 that has had or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect.
(j)    All fees required to be paid to the Agent, the Co-Collateral Agents or the Lead Arrangers on or before July 21, 2015 shall have been paid in full, and all fees required to be paid to the Lenders on or before July 21, 2015 shall have been paid in full.
(k)    The Borrowers shall have paid all costs and expenses of the Agent and the Co-Collateral Agents (to the extent set forth in Section 9.04(a)) incurred in connection with or relating to this Agreement and the other Loan Documents, including reasonable fees, charges and disbursements of counsel to the Agent and each Co-Collateral Agent, to the extent invoiced prior to or on July 21, 2015, (provided that such payment shall not thereafter preclude a final settling of accounts between the Borrowers and the Agent and the Co-Collateral Agents).
SECTION 4.02.      Conditions Precedent to Each Extension of Credit . The obligation of each Lender to make an Extension of Credit on any date shall be subject to the conditions precedent that the effectiveness of this Agreement shall have occurred and on the date of such Extension of Credit the following statements shall be true (and each of the giving of the applicable Notice of Borrowing or Application for a Letter of Credit, as the case may be, and the acceptance by the applicable Borrower of the proceeds of such Borrowing or the issuance of such Letter of Credit, as applicable, shall constitute a representation and warranty by the applicable Borrower that on the date of such Borrowing or Letter of Credit issuance such statements are true):
(i)    the representations and warranties made by each Loan Party in or pursuant to the Loan Documents are true and correct on and as of such date in all material respects, before and after giving effect to such Extension of Credit and to the application of the proceeds therefrom, as though made on and as of such date, except to the extent that (A) such representations or warranties are qualified by a materiality standard, in which case they shall be true and correct in all respects, (B) such representations or warranties expressly relate to an earlier date (in which case such representations and warranties shall be true and correct in all material respects as of such earlier date), and (C) such representations relate to Section 5.01(f), in which case the representation shall be limited to clause (c) of the definition of “Material Adverse Effect”;
(ii)    no event has occurred and is continuing, or would result from such Extension of Credit or from the application of the proceeds therefrom, that constitutes a Default or an Event of Default; and
(iii)    after giving effect to such Extension of Credit, (A) the Total Extensions of Credit (other than FILO Extensions of Credit) will not exceed the Line Cap, and (B) no Collateral Coverage Event (as defined in the Indenture for the Existing Second Lien Notes) shall result therefrom.
The conditions set forth in this Section 4.02 are for the sole benefit of the Credit Parties but until the Required Lenders otherwise direct the Agent to cease making Extensions of Credit, the Revolving Lenders will fund their Revolving Commitment Percentage of all Advances and participate in all Swingline Advances and Letters of Credit whenever made or issued, which are requested by a Borrower and which, notwithstanding the failure of the Loan Parties to comply with the provisions of this Article IV, are agreed to by the Agent acting in the interests of the Credit Parties, provided , however, the making of any such Extensions of Credit shall not be deemed a modification or waiver by any Credit Party of the provisions of this Article IV on any future occasion or a waiver of any rights or the Credit Parties as a result of any such failure to comply.

ARTICLE V
REPRESENTATIONS AND WARRANTIES
SECTION 5.01.      Representations and Warranties of the Borrowers . Holdings and the Borrowers hereby jointly and severally represent and warrant as follows:

71

(a)    Each Loan Party (i) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and (ii) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect.
(b)    The execution, delivery and performance by each Loan Party of the Loan Documents to which it is a party, and the consummation of the transactions contemplated hereby or thereby, are within such Loan Party’s powers, have been duly authorized by all necessary organizational action, and do not contravene (i) the charter or by-laws or other organizational or governing documents of such Loan Party or (ii) law or any contractual restriction binding on or affecting any Loan Party, except, for purposes of this clause (ii), to the extent such contravention would not reasonably be expected to have a Material Adverse Effect.
(c)    No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is required for the due execution, delivery and performance by any Loan Party of any Loan Document to which it is a party that has not already been obtained if the failure to obtain such authorization, approval or other action could reasonably be expected to result in a Material Adverse Effect.
(d)    Each Loan Document has been duly executed and delivered by each Loan Party party thereto. This Agreement constitutes, and each other Loan Document will constitute upon execution, the legal, valid and binding obligation of each Loan Party party thereto enforceable against such Loan Party in accordance with its respective terms subject to the effect of any applicable bankruptcy, insolvency, reorganization or moratorium or similar laws affecting the rights of creditors generally and subject to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity).
(e)    The consolidated balance sheet of Holdings and its Subsidiaries as at January 31, 2015, and the related consolidated statements of income and cash flows of Holdings and its Subsidiaries for the fiscal year then ended, accompanied by an opinion of Deloitte & Touche LLP, independent public accountants, copies of which have been furnished to the Agent, fairly present the consolidated financial condition of Holdings and its Subsidiaries as at such date and the consolidated results of the operations of Holdings and its Subsidiaries for the period ended on such date, all in accordance with GAAP consistently applied.
(f)    Since January 31, 2015, there has been no event or circumstance, either individually or in the aggregate, that has had or would reasonably be expected to have a Material Adverse Effect.
(g)    There is no action, suit, investigation, litigation or proceeding, including any Environmental Action, which is pending or, to Holdings or any Borrower’s knowledge, threatened affecting Holdings, the Borrowers or any of their respective Subsidiaries before any court, Governmental Authority or arbitrator that would, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect other than as reported in filings with the SEC made prior to the date hereof.
(h)    Following application of the proceeds of each Advance, FILO Loan, the Term Loan and the 2016 Term Loan and the issuance of each Letter of Credit, not more than five (5%) percent of the value of the assets of the Borrowers and their respective Subsidiaries on a consolidated basis will be margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System).
(i)    No Loan Party is an “investment company”, or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940, as amended.
(j)    All United States Federal income tax returns and all other material tax returns which are required to be filed have been filed by or on behalf of Holdings, the Borrowers and their respective Subsidiaries, and all taxes due with respect to Holdings, the Borrowers and their respective Subsidiaries pursuant to such returns or pursuant to any assessment received by Holdings, the Borrowers or any Subsidiary have been paid except to the extent permitted in Section 6.01(b). The charges, accruals and reserves on the books of Holdings, the Borrowers and their

72

Subsidiaries in respect of taxes or other governmental charges have been made in accordance with, and to the extent required by, GAAP.
(k)    All written factual information heretofore furnished by Holdings, the Borrowers or their Subsidiaries to the Agent, any Co-Collateral Agent or any Lender (including the Perfection Certificate) for purposes of or in connection with this Agreement or any other Loan Document, taken as a whole, was true and correct in all material respects on the date as of which such information was stated or certified, provided that with respect to projected financial information, the Loan Parties represent only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time.
(l)    (i) Each Loan Party has title in fee simple to, or a valid leasehold interest in, all its real property, and good title to, or a valid leasehold interest in, all its other property necessary for the conduct of its business and except as, in the aggregate, would not reasonably be expected to have a Material Adverse Effect, and (ii) no Inventory, Credit Card Account Receivable, DC or Related Intellectual Property is subject to any Lien except as permitted by Section 6.02(a).
(m)    Except as, in the aggregate, would not reasonably be expected to have a Material Adverse Effect: (i) each Loan Party owns, or is licensed to use, all Intellectual Property necessary for the conduct of its business as currently conducted; (ii) no material claim has been asserted and is pending by any Person challenging or questioning the use of any Intellectual Property or the validity or effectiveness of any Intellectual Property, nor do Holdings or the Borrowers know of any valid basis for any such claim; and (iii) the use of Intellectual Property by each Group Member does not infringe on the rights of any Person in any material respect.
(n)    Except as set forth on Schedule 5.01(n ) or as would not reasonably be expected to result in a Material Adverse Effect, (i) neither a Reportable Event nor a failure to meet minimum required contributions (in accordance with Section 430 or any prior applicable section of the Internal Revenue Code or Section 302 of ERISA) has occurred during the five year period prior to the date on which this representation is made or deemed made with respect to any Plan, (ii) each Plan is in compliance with the applicable provisions of ERISA, the Internal Revenue Code and other applicable federal or state laws, and (iii) no termination of a Single Employer Plan has occurred. Except as set forth on Schedule 5.01(n ), no Lien imposed under the Internal Revenue Code or ERISA exists on account of any Plan, and no Lien in favor of the PBGC or a Plan has arisen, during such five-year period. Each Single Employer Plan that is intended to qualify under Section 401(a) of the Internal Revenue Code has received a favorable determination letter from the United States Internal Revenue Service (the “ IRS ”) and, to the best knowledge of Holdings and the Borrowers, nothing has occurred which would cause the loss of, such qualification. Except as set forth on Schedule 5.01(n) or as would not reasonably be expected to result in a Material Adverse Effect, the Loan Parties and each ERISA Affiliate have made all required contributions to each Plan subject to Section 430 of the Internal Revenue Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 430 of the Internal Revenue Code has been made with respect to any Plan. There are no pending or, to the best knowledge of Holdings and the Borrowers, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan that would reasonably be expected to have a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary duty rules with respect to any Plan that has resulted or could reasonably be expected to result in a Material Adverse Effect. No ERISA Event has occurred or is reasonably expected to occur, in each case that would reasonably be expected to result in a Material Adverse Effect. Neither any Loan Party nor any ERISA Affiliate has incurred, or would reasonably be expected to incur, any liability under Title IV of ERISA with respect to any Pension Plan, other than premiums due and not delinquent under Section 4007 of ERISA or as would not reasonably be expected to have a Material Adverse Effect; neither any Loan Party nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and, to the knowledge of the Borrowers, no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Sections 4201 or 4243 of ERISA with respect to a Multiemployer Plan except as would not reasonably be expected to have a Material Adverse Effect; and neither any Loan Party nor any ERISA Affiliate has engaged in a transaction that would reasonably be expected to be subject to Sections 4069 or 4212(c) of ERISA. Except as would not reasonably be expected to have a Material Adverse Effect, neither Holdings, the Borrowers nor any Commonly Controlled Entity has had a complete or partial withdrawal (as

73

such terms are defined in Sections 4203 and 4205 of ERISA, respectively) from any Multiemployer Plan that has resulted or would reasonably be expected to result in a liability under ERISA. No such Multiemployer Plan is in Reorganization or Insolvent except as would not reasonably be expected to result in aggregate liability to Holdings and its Subsidiaries of $100,000,000 or more.
(o)    Except as, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect, no Group Member (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability.
(p)    The Guarantee and Collateral Agreement is effective to create in favor of the Co-Collateral Agents, for the benefit of the Credit Parties, a legal, valid and enforceable security interest in the Collateral described therein and proceeds thereof. When financing statements and other filings specified on Schedule 5.01(p) in appropriate form are filed in the offices specified on Schedule 5.01(p) , the Guarantee and Collateral Agreement shall, to the extent a security interest therein can be perfected by filing a UCC financing statement, constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in such Collateral and the proceeds thereof, as security for the Obligations, in each case prior and superior in right to the Lien or claim of any other Person (except Liens permitted by Section 6.02(a) which by operation of law would have priority over the Liens securing the Obligations).
(q)    The Loan Parties, taken as a whole, are, and after giving effect to the incurrence of all Debt and obligations incurred in connection herewith will be, Solvent.
(r)    The properties of the Loan Parties are insured as required pursuant to Section 6.01(c) hereof. Each insurance policy required to be maintained by the Loan Parties pursuant to Section 6.01(c) is in full force and effect and all premiums in respect thereof that are due and payable have been paid.
(s)    As of July 21, 2015: (1) except as set forth in the Perfection Certificate, there are no outstanding rights to purchase any equity interests in any Subsidiary of a Loan Party, and (2) the copies of the organization and governing documents of each Loan Party and each amendment hereto provided pursuant to Section 4.01are true and correct copies of each such document, each of which is valid and in full force and effect.
(t)    As of July 21, 2015, except as would not reasonably be expected to have individually or in the aggregate, a Material Adverse Effect, (a) there are no strikes, lockouts, slowdowns or other material labor disputes against any Loan Party or any Subsidiary thereof pending or, to the knowledge of Holdings or any Borrower, threatened, (b) the hours worked by and payments made to employees of the Loan Parties comply with the Fair Labor Standards Act and any other applicable federal, state, local or foreign law dealing with such matters, (c) all payments due from any Loan Party and its Subsidiaries, or for which any claim may be made against any Loan Party, on account of wages and employee health and welfare insurance and other benefits, have been paid or properly accrued in accordance with GAAP as a liability on the books of such Loan Party. Except as set forth on Schedule 5.01(t) (as updated by the Borrowers from time to time) (i) no Loan Party or any Subsidiary is a party to or bound by any collective bargaining agreement, management agreement or any material bonus, restricted stock, stock option, or stock appreciation plan or agreement or any similar plan, agreement or arrangement (excluding in each case individual employment agreements) and (ii) no employee of a Loan Party is also an employee of the Permitted Holder. There are no representation proceedings pending or, to the knowledge of Holdings or any Borrower, threatened to be filed with the National Labor Relations Board, and no labor organization or group of employees of any Loan Party or any Subsidiary has made a pending demand for recognition, in each case which would individually or in the aggregate reasonably be expected to result in a Material Adverse Effect. There are no complaints, unfair labor practice charges, grievances, arbitrations, unfair employment practices charges or any other claims or complaints against any Loan Party or any Subsidiary pending or, to the knowledge of Holdings or any Borrower, threatened to be filed with any Governmental Authority or arbitrator based on, arising out of, in connection with, or otherwise relating to the employment or termination of employment of any employee of any Loan Party or any of its Subsidiaries which would, individually or in the aggregate, be reasonably expected to

74

result in a Material Adverse Effect. The consummation of the transactions contemplated by the Loan Documents will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which any Loan Party or any of its Subsidiaries is bound, except as would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
(u)    No broker or finder brought about the obtaining, making or closing of the Advances, the Term Loan or the 2016 Term Loan or transactions contemplated by the Loan Documents, and, other than amounts payable pursuant to the Fee Letters, no Loan Party or Affiliate thereof has any obligation to any Person in respect of any finder’s or brokerage fees in connection therewith.
(v)    No Loan Party has any obligation to any Permitted Holder with respect to any consulting, management or similar fee; provided, that, for the avoidance of doubt, the foregoing shall not apply to (i) any arrangement disclosed in Holdings' annual report on form 10-K for the fiscal year ended January 31, 2015; (ii) any employment arrangement between any Loan Party and an individual Person who is also an employee of a Permitted Holder, so long as such employment arrangements are (x) on terms that are fair and reasonable and comparable to terms provided to employees in comparable positions for companies of a comparable size and no less favorable to such Loan Party than it would obtain in a comparable arm's length transaction with a Person that is not an employee of a Permitted Holder and (y) in the case of any officer (as defined in Rule 16a-1 under the Securities Exchange Act of 1934) or director of Holdings, any beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of more than 10.0% of Holdings' equity interests or any Person that ranks in the top five in compensation among all employees of the Loan Parties, approved by a majority of disinterested members of the board of directors of Holdings in good faith; or (iii) any obligation arising from any financial advisory, financing or underwriting services or other investment banking activities provided by a Permitted Holder so long as (x) such services directly relate to and are provided in conjunction with an acquisition or divestiture or other specific transaction conducted outside the ordinary course of business, (y) such services are on terms that are fair and reasonable and comparable to terms provided by independent financial advisory, financing or underwriting service provider or other investment banking service providers and (z) compensation for such services are approved by a majority of disinterested members of the board of directors of Holdings in good faith.
(w)    To the extent applicable, each Loan Party is in compliance, in all material respects, with (i) the United States Trading with the Enemy Act, as amended, and each of the foreign assets control regulations of the United States Treasury Department (31 C.F.R., Subtitle B, Chapter V, as amended) and any other enabling legislation or executive order relating thereto, (ii) the PATRIOT Act, (iii) the United States Foreign Corrupt Practices Act of 1977, and (iv) the Corruption of Foreign Public Officials Act, as amended (the “FCPA”). No part of the proceeds of any credit extensions will be used, directly or, to the Loan Parties’ knowledge, indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the FCPA.
(x)     None of Holdings, the Borrowers, any of their respective Subsidiaries, nor any Permitted Holder or Significant Holder is an Affiliate of the Sears Holdings Pension Plan. The Sears Holdings Pension Plan qualifies as an Eligible Assignee pursuant to the definition thereof (without giving effect to clause (c) of such definition).
(y)     (x) None of Holdings, the Borrowers, nor any of their respective Subsidiaries, nor, to the knowledge of the Borrowers, any director, officer, employee, agent or affiliate of the Borrowers is an individual or entity (for purposes of this clause (x) , a “Person”) that is, or is owned or controlled by Persons that are the subject of any sanctions (A) administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control, the United Nations Security Council, the European Union, Her Majesty’s Treasury or other applicable sanctions authority or (B) pursuant to the U.S. Iran Sanctions Act, as amended, or Executive Order 13590 (collectively, “Sanctions”) or (C) located, organized or resident in a country or territory that is, or whose government is, the subject of Sanctions (including, without limitation, Burma/Myanmar, Iran, North Korea, Sudan and Syria). The Loan Parties will not, directly or, to their knowledge, indirectly, use the proceeds of any credit extensions, or lend, contribute or otherwise make available such proceeds to any Subsidiary, joint venture partner or other Person in any manner that would directly or indirectly result in a violation of Sanctions by any Person.

75


ARTICLE VI
COVENANTS
SECTION 6.01.      Affirmative Covenants . So long as any Advance or other Obligation (other than contingent indemnification obligations for which no claim shall have then been asserted) shall remain unpaid, any Letter of Credit shall remain outstanding (unless the same has been cash collateralized in an amount equal to 105% of the aggregate then undrawn and unexpired amount of such Letters of Credit and all other Reimbursement Obligations or back-to-back letters of credit from an issuer and on terms acceptable to the Issuing Lender have been provided in respect of such Letters of Credit) or any Lender shall have any Commitment hereunder, each of Holdings and the Borrowers will, and will cause each of their Subsidiaries to:
(a)     Compliance with Laws, Etc. Comply in all respects with all applicable Requirements of Law, such compliance to include compliance with ERISA and Environmental Laws, except for such non-compliance as would not reasonably be expected to have a Material Adverse Effect.
(b)     Payment of Taxes, Etc. Pay and discharge before the same shall become delinquent, (i) all taxes, assessments and governmental charges or levies imposed upon it or upon its property (ii) all payments required to be made to any Pension Plan, and (iii) all lawful claims that, if unpaid, might by law become a Lien upon its property; provided that neither Holdings, the Borrowers nor any of their Subsidiaries shall be required to pay or discharge any such tax, assessment, charge or claim (x) that is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained, unless and until any Lien resulting therefrom attaches to its property and becomes enforceable against its other creditors or (y) if such non-payments, either individually or in the aggregate, would not be reasonably expected to have a Material Adverse Effect.
(c)     Maintenance of Insurance . Maintain insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is consistent with prudent business practice; provided that Holdings, the Borrowers and their Subsidiaries may self-insure to the extent consistent with prudent business practice; provided further that policies maintained with respect to any Collateral located at a warehouse or DC shall provide coverage for Inventory at (x) the retail selling price of such Inventory less any permanent markdowns, consistent with the Loan Parties’ past practices, or (y) another selling price permitted by the Co-Collateral Agents in their Permitted Discretion. None of the Credit Parties shall be a co-insurer with any Loan Party or any other Person with respect to any fire and extended coverage policies maintained with respect to any Collateral without the prior written consent of the Co-Collateral Agents. Fire and extended coverage policies maintained with respect to any Collateral shall be endorsed or otherwise amended to include a non-contributing lenders’ loss payable clause, in form and substance reasonably satisfactory to the Co-Collateral Agents, which endorsements or amendments shall provide that during a Cash Dominion Event, the insurer shall pay all proceeds otherwise payable to the Loan Parties under the policies directly to the Co-Collateral Agents, as their interests may appear, in accordance with Section 6.01(m). Within thirty (30) days following delivery of written notice from the Agent to Holdings, Holdings shall notify the insurers and use commercially reasonable efforts to have such policies amended to include such other provisions as the Co-Collateral Agents may reasonably require from time to time to protect the interests of the Credit Parties. Commercial general liability policies shall be endorsed to name the Co-Collateral Agents as additional insureds, as their interests may appear. Each certificate delivered by the Loan Parties’ insurance broker with respect to each property insurance policy referred to in this Section 6.01(c) shall also provide that such policy shall not be canceled, modified or not renewed other than upon not less than ten (10) days’ prior written notice thereof by the insurance broker to the Co-Collateral Agents. The Borrowers shall deliver to the Co-Collateral Agents, prior to the cancellation, modification or non-renewal of any such policy of insurance, evidence of renewal or replacement of a policy previously delivered to the Co-Collateral Agents, including an insurance binder therefor, together with evidence satisfactory to the Co-Collateral Agents of payment of the premium therefor and, upon request of the Agent, a copy of such renewal or replacement policy. In the event that the Borrowers fail to maintain any such insurance as required pursuant to this Section 6.01(c), the Agent may obtain such insurance on behalf of the Borrowers and the Loan Parties shall reimburse the Agent as provided herein for all

76

costs and expenses in connection therewith; the Agent’s obtaining of such insurance shall not be deemed a cure or waiver of any Default or Event of Default arising from the Loan Parties’ failure to comply with the provisions of this Section 6.01(c).
(d)     Preservation of Corporate Existence, Etc. Preserve and maintain its corporate existence, material rights (charter and statutory) and franchises; provided that (i) Holdings, the Borrowers and their Subsidiaries may consummate any merger or consolidation permitted under Section 6.02(b); (ii) neither Holdings nor the Borrowers nor any of their Subsidiaries shall be required to preserve or maintain the corporate existence of any Subsidiary (other than Sears, SRAC, Kmart Corp. or any Material Subsidiary Guarantors) if the Board of Directors of the parent of such Subsidiary, or an executive officer of such parent to whom such Board of Directors has delegated the requisite authority, shall determine that the preservation and maintenance thereof is no longer desirable in the conduct of the business of such parent and that the loss thereof is not disadvantageous in any material respect to the Borrowers, Sears, any Material Subsidiary Guarantor, such parent or the Lenders; (iii) Sears shall not be required to preserve or maintain the corporate existence of SRAC, provided that in the event SRAC is dissolved, merged with or into Holdings or any Subsidiary of Holdings or otherwise ceases to exist, then Sears shall or shall cause a direct wholly owned Domestic Subsidiary of Sears to, execute and deliver to the Agent an assumption agreement with respect to SRAC’s obligations under the Loan Documents in form and substance reasonably satisfactory to the Agent and such other officer certificates, legal opinions, financing statements (if applicable) and documentation as the Agent reasonably requests; (iv) none of Holdings, the Borrowers or any of Material Subsidiary Guarantors shall be required to preserve any right or franchise of any Subsidiary (other than a Material Subsidiary Guarantor) if the Board of Directors of Holdings, such Borrower or such Material Subsidiary Guarantor shall determine that the preservation thereof is no longer desirable in the conduct of its business and that the loss thereof is not disadvantageous in any material respect to Holdings, the Borrowers, such Material Subsidiary Guarantor or the Lenders and (v) no Subsidiary Guarantor which is not a Material Subsidiary Guarantor shall be required to preserve or maintain its corporate existence if (A) no Default or Event of Default has occurred and is continuing, and (B) such Subsidiary Guarantor is merged or liquidated into another Subsidiary Guarantor; provided that contemporaneously with the occurrence of any of the actions permitted to be taken pursuant to clauses (i) – (v) above, the Borrowers shall furnish to the Co-Collateral Agents an updated Borrowing Base Certificate.
(e)     Inspection Rights . In addition to the Agent’s and the Co-Collateral Agents’ rights under Section 6.01(k) hereof, subject to reasonable confidentiality limitations and requirements imposed by Holdings or the Borrowers due to competitive concerns or otherwise, at any reasonable time and from time to time (but no more than twice a year unless a Default or an Event of Default has occurred and is continuing), permit the Agent, the Co-Collateral Agents or any of the Lenders or any agents or representatives thereof, at the Lenders’ expense, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, Holdings, the Borrowers and any of their Subsidiaries, and to discuss the affairs, finances and accounts of Holdings, the Borrowers and any of their Subsidiaries, as the case may be, with any of their officers or directors and with their independent certified public accountants.
(f)     Keeping of Books . Keep proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of Holdings, the Borrowers and each such Subsidiary in accordance with GAAP in effect from time to time.
(g)     Maintenance of Properties, Etc. Except as otherwise permitted pursuant to Section 6.02(b), or where the failure to do so, either individually or in the aggregate, would not be reasonably expected to have a Material Adverse Effect, maintain and preserve all of its properties that are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted.
(h)     Transactions with Affiliates . Conduct all transactions otherwise permitted under this Agreement with any of their Affiliates on terms that are fair and reasonable and no less favorable to Holdings, the applicable Borrower or their respective Subsidiaries than it would obtain in a comparable arm’s-length transaction with a Person not an Affiliate other than (i) as required by any applicable Requirement of Law, (ii) so long as no Default or Event of Default has occurred and is continuing, transactions between or among the Loan Parties and any of their

77

Subsidiaries, to the extent not prohibited hereunder, or (iii) if a Default or Event of Default has occurred and is continuing, transactions in the ordinary course of business between or among the Loan Parties and any of their Subsidiaries and transactions between or among Loan Parties, to the extent not prohibited hereunder; provided , that the foregoing shall not prohibit (i) any Loan Party or any Subsidiary thereof from entering into employment arrangements with its officers and retention and other agreements with officers and directors pursuant to the reasonable requirements of its business or (ii) any transactions pursuant to the agreements on Schedule 13 to the Perfection Certificate, as in effect on the date hereof.
(i)     Further Assurances .
(i)    With respect to any (i) Inventory, Credit Card Accounts Receivable, Pharmacy Receivables and other Collateral (as defined in the Guarantee and Collateral Agreement as in effect on July 21, 2015) acquired after the Effective Date by any Group Member that is or is required to become a Loan Party hereunder and (ii) any property required to become subject to a perfected Lien in favor of the Co-Collateral Agents pursuant to Section 6.02(a)(vi) hereunder, promptly (i) execute and deliver to the Co-Collateral Agents such amendments to the Guarantee and Collateral Agreement or such other documents as the Co-Collateral Agents, may reasonably request in order to grant to the Co-Collateral Agents, for the benefit of the Credit Parties, a security interest in such property and (ii) take all actions as the Co-Collateral Agents, may reasonably request to grant to the Co-Collateral Agents, for the benefit of the Credit Parties, a perfected security interest in such property with the priority required herein, including the filing of Uniform Commercial Code financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement or by law or as may be requested by the Co-Collateral Agents and the delivery of Blocked Account and other control agreements as may be reasonably requested by the Co-Collateral Agents.
(ii)    With respect to any new Domestic Subsidiary (other than any Credit Card Royalty Securitization Subsidiary) which is created or acquired after the Effective Date by any Group Member and which owns any Inventory, Credit Card Accounts Receivable, Pharmacy Receivables and other Collateral (as defined in the Guarantee and Collateral Agreement as in effect on July 21, 2015) related to such receivables and Inventory, promptly cause such new Domestic Subsidiary to (i) become a party to the Guarantee and Collateral Agreement, (ii) take such actions as the Co-Collateral Agents, may reasonably request to grant to the Co-Collateral Agents for the benefit of the Credit Parties a security interest, with the priority and perfection required herein, in the Collateral described in the Guarantee and Collateral Agreement held by such new Domestic Subsidiary, including, to the extent applicable, the filing of Uniform Commercial Code financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement or by law or as may be reasonably requested by the Co-Collateral Agents and the delivery of Blocked Account and other control agreements, (iii) if requested by the Co-Collateral Agents, deliver to the Co-Collateral Agents an officer’s certificate with respect to such Domestic Subsidiary in form and substance reasonably satisfactory to the Co-Collateral Agents, and (iv) if requested by Co-Collateral Agents, deliver to the Co-Collateral Agents legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Co-Collateral Agents.
(iii)    In the event the Borrowers or the other Loan Parties open a new deposit account in which funds of any of the Loan Parties are concentrated, or commence concentrating funds in an existing deposit account that is not subject to a Blocked Account Agreement, at the request of the Co-Collateral Agents, the Borrowers shall deliver or cause to be delivered a Blocked Account Agreement reasonably satisfactory in form and substance to the Co-Collateral Agents with respect to such account.
(iv)    In the event that the Collateral owned by Private Brands, Ltd. at any time exceeds $50,000,000, if requested by Co-Collateral Agents, deliver to the Co-Collateral Agents legal opinions

78

with respect to perfection of the Co-Collateral Agents’ Liens and such other matters as the Co-Collateral Agents may reasonably request, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Co-Collateral Agents.
(j)     Reporting Requirements . Furnish to the Agent:
(i)    as soon as available and in any event within 50 days after the end of each of the first three fiscal quarters of each fiscal year of Holdings, (a) the consolidated balance sheet of Holdings and its Subsidiaries and the consolidated balance sheet of Holdings and its domestic Subsidiaries as of the end of such quarter and consolidated statements of income and cash flows of Holdings and its Subsidiaries and the consolidated statements of income and cash flows of Holdings and its domestic Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, duly certified (subject to year-end audit adjustments) by an Authorized Officer of Holdings as having been prepared in accordance with GAAP and (b) a certificate of an Authorized Officer of Holdings as to compliance with the terms of this Agreement and the other Loan Documents in the form of Exhibit I , including in reasonable detail the calculations necessary to determine the Fixed Charge Ratio (whether or not compliance therewith is then required under Section 6.03), provided that in the event of any change in GAAP used in the preparation of such financial statements, subject to Section 1.03, the Borrowers shall also provide, if necessary for the calculation of the Fixed Charge Ratio, a statement of reconciliation conforming such financial statements to GAAP (the Borrowers being permitted to satisfy the requirements of clause (i)(a) by delivery, in the manner provided in Section 9.02(b), of its quarterly report on form 10-Q (or any successor form), as filed with the SEC);
(ii)    as soon as available and in any event within 95 days after the end of each fiscal year of Holdings, (a) a copy of the annual audit report for such year for Holdings and its Subsidiaries, containing the consolidated balance sheet of Holdings and its Subsidiaries as of the end of such fiscal year and consolidated statements of income and cash flows of Holdings and its Subsidiaries for such fiscal year, in each case reported on without a “going concern” or like qualification or exception, or qualification arising out of the scope of the audit, by its Board-appointed auditor of national standing (b) a consolidated balance sheet of Holdings and its domestic Subsidiaries as of the end of such fiscal year and consolidated statements of income and cash flows of Holdings and its domestic Subsidiaries for such fiscal year duly certified by an Authorized Officer of Holdings as having been prepared in accordance with GAAP, and (c) a certificate of an Authorized Officer of Holdings as to compliance with the terms of this Agreement and the other Loan Documents in the form of Exhibit I , including in reasonable detail the calculations necessary to determine the Fixed Charge Ratio (whether or not compliance therewith is then required under Section 6.03), provided that in the event of any change in GAAP used in the preparation of such financial statements, the Borrowers shall also provide, if necessary for the calculation of the Fixed Charge Ratio, a statement of reconciliation conforming such financial statements to GAAP (the Borrowers being permitted to satisfy the requirements of clause (ii)(a) by delivery, in the manner provided in Section 9.02(b), of its annual report on form 10-K (or any successor form), as filed with the SEC);
(iii)    as soon as available and in any event within 10 Business Days of the end of each fiscal month, a Borrowing Base Certificate as of the end of the preceding fiscal month and supporting information satisfactory to the Agent in its Permitted Discretion with respect to the determination of the Borrowing Base; provided , that upon the occurrence and during the continuance of an Accelerated Borrowing Base Delivery Event, such Borrowing Base Certificate and supporting information shall be delivered on Friday of each week (or, if Friday is not a Business Day, on the next succeeding Business Day), as of the close of business on the immediately preceding Saturday (it being understood that any weekly Borrowing Base Certificate shall constitute the Loan Parties’ best estimates of Net Eligible Inventory and other items, as applicable);

79

(iv)    promptly and in any event within five days after any Authorized Officer of Holdings or any Borrower has knowledge of the occurrence and continuance of a Default or Event of Default, a statement of an Authorized Officer of Holdings or such Borrower setting forth details of such Default or Event of Default and the action that Holdings or such Borrower has taken and proposes to take with respect thereto;
(v)    promptly after the sending or filing thereof, copies of all quarterly and annual reports and proxy solicitations that Holdings sends to its public security holders generally, and copies of all reports on form 8-K (or its equivalent) and registration statements for the public offering (other than pursuant to employee Plans) of securities that Holdings or any of its Subsidiaries files with the SEC or any national securities exchange;
(vi)    promptly after the commencement thereof, notice of all actions and proceedings before any court, governmental agency or arbitrator affecting Holdings, the Borrowers or any of their Subsidiaries of the type described in Section 5.01(g);
(vii)    as soon as available, but in any event no later than 60 days after the end of each fiscal year of Holdings, forecasts prepared by management of Holdings for Holdings and its domestic Subsidiaries in form satisfactory to the Agent and containing information reasonably required by the Agent;
(viii)    (A) contemporaneously with the delivery of the reports required pursuant to clauses (i) and (ii) above, a report (which may take the form of a footnote to Holdings’ quarterly and annual reports filed with the SEC and delivered to the Agent) setting forth the estimated Unfunded Pension Liability of Holdings and its Subsidiaries, and (B) promptly after receipt thereof by the Loan Parties, a copy of the funded status report received from the Loan Parties’ actuaries with respect to amounts to be funded under the Loan Parties’ Pension Plan;
(ix)    promptly, notice of any event that the Loan Parties reasonably believes has resulted in a Material Adverse Effect;
(x)    the financial and collateral reports described on Schedule 6.01(j) , at the times set forth in such Schedule;
(xi)    during the continuance of an Accelerated Borrowing Base Delivery Event, as soon as available and in any event within 30 days after the end of each fiscal month of each fiscal year of Holdings, (a) the consolidated balance sheet of Holdings and its Subsidiaries and the consolidated balance sheet of Holdings and its domestic Subsidiaries as of the end of such month and consolidated statements of income and cash flows of Holdings and its Subsidiaries and the consolidated statements of income and cash flows of Holdings and its domestic Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such month, duly certified (subject to year-end audit adjustments) by an Authorized Officer of Holdings as having been prepared in accordance with GAAP and (b) a certificate of an Authorized Officer of Holdings as to compliance with the terms of this Agreement and the other Loan Documents in the form of Exhibit I , including in reasonable detail the calculations necessary to determine the Fixed Charge Ratio (whether or not compliance therewith is then required under Section 6.03), provided that in the event of any change in GAAP used in the preparation of such financial statements, subject to Section 1.03, the Borrowers shall also provide, if necessary for the calculation of the Fixed Charge Ratio, a statement of reconciliation conforming such financial statements to GAAP; and
(xii)    such other information respecting Holdings, the Borrowers or any of their Subsidiaries, or the Borrowing Base as the Agent or any Lender through the Agent may from time to time reasonably request ; and

80

(xiii)     on Friday of each week, a report of the daily outstanding balance for the immediately preceding five Business Day period of all Debt owing by the Loan Parties that was permitted to be incurred pursuant to clause (h) of the definition of Permitted Debt .
Reports and financial statements required to be delivered by the Borrowers pursuant to clauses (i)(a), (ii)(a) and (v) of this subsection (j) shall be deemed to have been delivered on the date on which Holdings causes such reports, or reports containing such financial statements, to be posted on the Internet at www.sec.gov or at such other website identified by the Borrowers in a notice to the Agent and the Lenders and that is accessible by the Lenders without charge.
(k)     Collateral Monitoring and Review . Upon the request of the Agent, any Co-Collateral Agent, or the Required Lenders, after reasonable notice and during normal business hours, permit the Agent, the Co-Collateral Agents or professionals (including, consultants, accountants, and/or appraisers) retained by the Co-Collateral Agents to conduct appraisals, commercial finance examinations and other evaluations, including, without limitation, of (i) the Loan Parties’ practices in the computation of the Borrowing Base and (ii) the assets included in the Borrowing Base and financial information such as, but not limited to, sales, gross margins, payables, accruals and reserves, related to the calculation of the Borrowing Base. The Borrowers shall pay the reasonable out-of-pocket fees and expenses of the Agent and the Co-Collateral Agents (including, without limitation, the reasonable charges of professionals) in connection with two inventory appraisals and two commercial finance examinations each fiscal year (which the Agent and Co-Collateral Agents shall be obligated to undertake for the benefit of the Credit Parties), provided , however , notwithstanding the foregoing, if Capped Excess Availability is at any time less than 15% of the Line Cap, the Agent and the Co-Collateral Agents may in their discretion, undertake up to three inventory appraisals and three commercial finance examinations each fiscal year at the Borrowers’ expense. Notwithstanding the foregoing, the Agent and the Co-Collateral Agents may cause (i) additional appraisals and commercial finance examinations to be undertaken (A) as each in its Permitted Discretion deems necessary or appropriate, at its own expense, and (B) if required by applicable law or if a Default or an Event of Default has occurred and is continuing, in each case, at the expense of the Borrowers. In connection with any inventory appraisal and commercial finance examination relating to the computation of the Borrowing Base, Holdings shall make such adjustments to the calculation of the Borrowing Base as the Agent shall, after the expiration of the Reserve Notice Period, reasonably require in its Permitted Discretion based upon the terms of this Agreement and the results of such inventory appraisal and commercial finance examination. Any inventory appraisal or commercial finance examination requested by the Agent or any Co-Collateral Agent shall be scheduled at such time as the Co-Collateral Agents, in consultation with the Borrowers, may agree in order to minimize any disruption to the conduct of the Borrowers’ business.
(l)     Landlord Waivers, Access Agreements and Customs Broker Agreements . (i) Obtain from each lessor that is a Group Member , and use commercially reasonable efforts to obtain from each lessor that is not a Group Member, leasing a DC at which Collateral is located to a Loan Party, consents, approvals, Lien waivers and rights to access and occupy each such DC (including, without limitation, to take possession and dispose of any Collateral from each such DC upon the occurrence and during the continuance of an Event of Default) reasonably satisfactory to the Co-Collateral Agents; (ii) obtain from each Subsidiary of Holdings owning a DC at which Collateral is located, consents, approvals, Lien waivers and rights to access and occupy each such DC (including, without limitation, to take possession and dispose of the Collateral from each such DC upon the occurrence and during the continuance of an Event of Default) reasonably satisfactory to the Co-Collateral Agents; (iii) use commercially reasonable efforts to cause each Loan Party’s customs brokers to deliver an agreement (including, without limitation, a Customs Broker Agreement) to the Co-Collateral Agents covering such matters and in such form as the Co-Collateral Agents may reasonably require; and (iv) with respect to any property or assets not constituting Collateral and subject to the Lien of a third party, if requested by the Agent, use commercially reasonable efforts to cause (but shall not be required to cause as a condition of the granting of such Lien) the holder of such Lien to enter into an agreement reasonably satisfactory to the Agent, permitting the Co-Collateral Agents to use such property and assets, at no cost or expense to the Co-Collateral Agents, in connection with the disposition of any of the Collateral by the Co-Collateral Agents during the continuance of an Event of Default.


81

(m)     Cash Management .
( i)    On or prior to July 21, 2015:
(A)    deliver to the Agent copies of notifications (each, a “ Credit Card Notification ”) substantially in the form attached hereto as Exhibit E which have been executed on behalf of such Loan Party and addressed to such Loan Party’s Credit Card Processors listed in the Perfection Certificate; and
(B)    enter into a Blocked Account Agreement reasonably satisfactory in form and substance to the Co-Collateral Agents with each Blocked Account Bank covering the deposit accounts set forth on Schedule 6.01(m)(i)(B) (collectively, the “ Blocked Accounts ”); and
(C)    deliver to the Agent copies of notifications (each, a “ Third Party Payor Notification ”) substantially in the form attached hereto as Exhibit H which have been executed on behalf of such Loan Party and addressed to such of each Loan Party’s Third Party Payors relating to Eligible Pharmacy Receivables listed in the Perfection Certificate as any Co-Collateral Agent shall reasonably request.
(ii)    The Loan Parties shall ACH or wire transfer daily (or with respect to DDAs that have historically not been swept daily (and other DDAs with the consent of the Co-Collateral Agents, not to be unreasonably withheld), periodically, consistent with past practices) (and whether or not there are then any outstanding Obligations and whether or not a Cash Dominion Event then exists) to a Blocked Account all amounts on deposit in each DDA of such Loan Party, other than DDAs that are Excluded Accounts; provided that such covenant shall not apply to (i) any minimum balance as may be required to be kept in the subject DDA by the depository institution at which such DDA is maintained or (ii) if greater, any amounts maintained by the Loan Parties in such DDAs (and other DDAs with the consent of the Co-Collateral Agents, not to be unreasonably withheld) in the ordinary course of business consistent with past practices. The Loan Parties shall ACH or wire transfer daily to a Blocked Account all payments due from credit card processors and other proceeds of any of the Collateral. All funds in each DDA and Blocked Account (other than Excluded Accounts) shall be conclusively presumed to be Collateral and proceeds of Collateral and the Agent, Co-Collateral Agents and the Lenders shall have no duty to inquire as to the source of the amounts on deposit in any DDA or Blocked Account.
(iii)    To the extent that any Loan Party hereafter engages a Credit Card Processor other than the Credit Card Processors listed in the Perfection Certificate, or a Third Party Payor other than the Third Party Payors listed in the Perfection Certificate, such Loan Party shall promptly furnish written notice thereof to the Agent and shall deliver to the Agent an executed Credit Card Notification or Third Party Payor Notification, as applicable, with respect to such Credit Card Processor or Third Party Payor. Each Credit Card Notification and Third Party Payor Notification shall be held by the Agent until the occurrence of a Cash Dominion Event. After the occurrence and during the continuance of a Cash Dominion Event, the Agent may deliver such Credit Card Notifications and Third Party Payor Notifications to the applicable Credit Card Processors and Third Party Payors.
(iv)    Each Blocked Account Agreement shall require, after the occurrence and during the continuance of a Cash Dominion Event, the ACH or wire transfer no less frequently than daily (and whether or not there are then any outstanding Obligations) to the Agent’s Account, of all cash receipts and collections held in each applicable Blocked Account (net of any minimum balance, not to exceed $25,000 (or such greater amount with the consent of the Co-Collateral Agents, not to be unreasonably withheld), as may be required to be kept in the subject Blocked Account by the Blocked Account Bank), including, without limitation, the following:

82

(A)    all available cash receipts from the sale of Inventory and other Collateral;
(B)    all proceeds of collections of Pharmacy Receivables and Credit Card Accounts Receivable;
(C)    all proceeds from any casualty or other insured damage to, or any taking under power of eminent domain or by condemnation or similar proceeding of any Collateral; and
(D)    all Net Proceeds from any equity issuance by any Loan Party or its Subsidiaries.
The Borrowers shall be deemed to have complied with the provisions of this clause (iv) if they cause the ACH or wire transfer daily of all funds which an Authorized Representative of the Borrowers in good faith believes to be the amount deposited in the Blocked Accounts in excess of $25,000 (or such greater amount as permitted above in this clause (iv)).
(v)    The Agent’s Account shall at all times be under the sole dominion and control of the Co-Collateral Agents. The Loan Parties hereby acknowledge and agree that (i) the Loan Parties have no right of withdrawal from the Agent’s Account, (ii) the funds on deposit in the Agent’s Account shall at all times be collateral security for all of the Obligations, and (iii) the funds on deposit in the Agent’s Account shall be applied as provided in this Agreement. In the event that, notwithstanding the provisions of this Section 6.01(m), during the continuance of a Cash Dominion Event, any Loan Party receives or otherwise has dominion and control of any such proceeds or collections, such proceeds and collections shall be held in trust by such Loan Party for the Co-Collateral Agents, shall not be commingled with any of such Loan Party’s other funds or deposited in any account of such Loan Party and shall, not later than the Business Day after receipt thereof, be deposited into the Agent’s Account or dealt with in such other fashion as such Loan Party may be instructed by the Co-Collateral Agents. During the continuance of a Cash Dominion Event, the amounts deposited into the Agent’s Account shall be applied to the prepayment of the Advances then outstanding (and if an Event of Default exists and is continuing, to all other Obligations); provided that upon payment in full of such outstanding Advances or Obligations, as applicable, any remaining amounts will be released and transferred to a deposit account of the Loan Parties as the Borrowers shall direct and the existence of a Cash Dominion Event (other than as the result of the occurrence of an Event of Default) shall not, in and of itself, impair the right of the Borrowers to Revolving Advances in accordance with the terms hereof.
(vi)    Upon the request of the Agent, the Loan Parties shall cause bank statements and/or other reports to be delivered to the Agent not less often than monthly, accurately setting forth all amounts deposited in each Blocked Account to ensure the proper transfer of funds as set forth above.
(n)     Liens on Non-Collateral Assets . In the event of the incurrence of Debt and the granting of a Lien pursuant to Section 6.02(a)(vi) hereof, grant, and cause each of its Subsidiaries to, grant the Co-Collateral Agents, as security for the Obligations, a Lien on the assets of Holdings or any of its Subsidiaries which is the subject of the Lien of the Person holding such Debt (to the extent that such assets do not then constitute Collateral) pursuant to Section 6.02(a)(vi) hereof.
(o)     Physical Inventories . Cause physical inventories and periodic cycle counts to be undertaken, at the expense of the Loan Parties, in each case consistent with past practices (but in no event less frequently than one physical inventory per fiscal year), conducted by such inventory takers and following such methodology as is consistent with the immediately preceding inventory or as otherwise may be satisfactory to the Co-Collateral Agents in their Permitted Discretion. The Co-Collateral Agents, at the expense of the Loan Parties, may participate in and/or observe

83

each scheduled physical count of Inventory which is undertaken on behalf of any Loan Party. The Loan Parties, within five (5) days following the completion of any such inventory, shall provide the Co-Collateral Agents with a reconciliation of the results of such inventory (as well as of any other physical inventory or cycle counts undertaken by a Loan Party) and shall post such results to the Loan Parties’ stock ledgers and general ledgers, as applicable.
(p)     Letters of Credit . In the event that the Loan Parties request that any Letter of Credit have an expiry after the Extended Termination Date and the Issuing Lenders in their discretion, issue such Letter of Credit, the Borrowers shall on or before the date that is (10) Business Days prior to the Extended Termination Date, deposit in a cash collateral account of the Co-Collateral Agents, an amount equal to 105% of the L/C Obligations with respect to any such Letter of Credit.
SECTION 6.02.      Negative Covenants . So long as any Advance or other Obligation (other than contingent indemnification obligations for which no claim shall have then been asserted) shall remain unpaid, any Letter of Credit shall remain outstanding (unless the same has been cash collateralized in an amount equal to 105% of the aggregate then undrawn and unexpired amount of such Letters of Credit and all other Reimbursement Obligations or back-to-back letters of credit from an issuer and on terms acceptable to the Issuing Lender have been provided in respect of such Letters of Credit) or any Lender shall have any Commitment hereunder, each of Holdings and the Borrowers will not, and will not permit any of their Subsidiaries to:
(a)     Liens, Etc. Create or suffer to exist any Lien upon property of Holdings, the Borrowers or any Domestic Subsidiary constituting Inventory, Credit Card Accounts Receivable, Pharmacy Receivables or any other Collateral (as defined in the Guarantee and Collateral Agreement as in effect on July 21, 2015) or any Related Intellectual Property, other than:
(i)    Permitted Liens,
(ii)    the Liens existing on July 21, 2015 and described in the Perfection Certificate,
(iii)    the replacement, extension or renewal of any Lien permitted by clause (ii) above upon or on the same property theretofore subject thereto (and on any additions to any such property and in any property taken in replacement or substitution for any such property), or the replacement, extension or renewal (without increase in the amount) of the Debt secured thereby,
(iv)    to the extent any Liens permitted by clause (ii) above are terminated (and not replaced, extended or renewed in accordance with clause (iii) above), Liens not otherwise permitted by clause (iii) above securing Debt in an amount up to the amount of Debt secured by such terminated Liens; provided that (A) any such Lien (and the Debt secured thereby) shall be incurred no later than ninety (90) days after the termination of the Lien permitted by clause (ii) above, and (B) any such Lien shall be granted on the same property (and on any additions to such property or any property taken by the Loan Parties in replacement or substitution for such property) as the terminated Lien,
(v)    Liens on Related Intellectual Property with Persons that have entered into an agreement, reasonably satisfactory to the Agent, acknowledging the limited license granted to the Co-Collateral Agents in such trademarks or trade names pursuant to the Loan Documents and agreeing to abide by, and not interfere with, such limited license; and
(vi)    Liens to secure (A) the Existing Second Lien Notes and any Permitted Refinancing Debt with respect thereto and (B) additional Debt of the Borrowers for borrowed money in an aggregate principal amount not to exceed, at any time outstanding, the difference between $2,000,000,000 and the principal amount of Debt outstanding pursuant to the preceding clause (A), provided , that , (1) no Default or Event of Default then exists or would arise from the incurrence of such Debt or the granting of such Lien, (2 ) in the case of clause (B) only, the Pro Forma and Projected Capped Excess Availability is at least 15% of the Line Cap immediately after giving effect to the

84

incurrence of such Debt, (3 ) such Lien shall be subordinate to the Lien of the Co-Collateral Agents and the holder of such Lien shall have entered into an intercreditor agreement substantially in the form of the Existing Intercreditor Agreement, or such other form as the Co-Collateral Agents may reasonably agree, ( 4 3 ) if the Debt secured by such Liens is secured by both Collateral and by property and assets of any Loan Party which do not constitute Collateral, the Co-Collateral Agents shall have obtained a Lien on such property and assets that do not otherwise constitute Collateral to secure the Obligations, subordinate to the Lien of the holder of such Debt pursuant to an intercreditor agreement substantially in the form of Exhibit F hereto, or such other form as the Co-Collateral Agents may reasonably agree, and ( 5 4 ) the documentation granting such Lien shall be in form and substance reasonably satisfactory to the Co-Collateral Agents in their Permitted Discretion ; and
(vii)     Liens arising under or in connection with a Credit Card Royalty Securitization; provided that any Liens granted by a Loan Party pursuant to this clause (viii) shall be limited to Credit Card Program Assets .
(b)     Fundamental Changes . Merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or substantially all of its assets (in each case, whether now owned or hereafter acquired), or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default or Event of Default shall have occurred and be continuing (i) any Subsidiary of any Borrower may merge into such Borrower in a transaction in which such Borrower is the surviving entity, (ii) any Subsidiary of Holdings may merge into Holdings or any other Subsidiary of Holdings (provided that (A) if Kmart Corp. is a party to such merger, such merger shall be with Holdings, Kmart or a direct Subsidiary of Kmart Corp. and Kmart Corp. shall be the continuing or surviving entity, (B) if any Subsidiary Guarantor is a party to such merger (other than with a Borrower or Holdings), such Subsidiary Guarantor shall be the continuing or surviving entity or the continuing or surviving entity shall become a Subsidiary Guarantor and (C) if SRAC is a party to such merger, then Sears shall comply with the requirements of Section 6.01(d)), (iii) any Subsidiary of Holdings other than the Borrowers may sell, transfer, lease or otherwise dispose of its assets to any Borrower, to Holdings or to a Subsidiary of Holdings (provided that if such sale or transfer includes Collateral and the transferee is not the Borrower or Holdings, the transferee shall be a Subsidiary Guarantor), (iv) any Subsidiary of Holdings other than the Borrowers or Sears may sell, transfer, lease or otherwise dispose of its assets to a Person that is not a Subsidiary or merge with a Person that is not a Subsidiary, in each case pursuant to a Permitted Disposition, (v) any Subsidiary of Holdings other than the Borrowers, Sears or any Material Subsidiary Guarantor (except, in the case of SRAC, as provided in Section 6.01(d)) may liquidate or dissolve if Holdings and the Borrowers determine in good faith that such liquidation or dissolution is in the best interests of Holdings, the Borrowers, Sears, the other Material Subsidiary Guarantors and their Subsidiaries and is not disadvantageous in any material respect to Holdings, the Borrowers, Sears, the other Material Subsidiary Guarantors or the Lenders; provided , that a Material Subsidiary Guarantor may liquidate or dissolve into a Person that is a Subsidiary of Holdings immediately prior to such liquidation or dissolution, if the continuing or surviving entity is or shall become a Subsidiary Guarantor in accordance with Section 6.01(i)(ii), and (vi) Holdings or any Subsidiary of Holdings may merge with a Person that is not a Subsidiary of Holdings immediately prior to such merger if, in the case of any merger involving Holdings, a Borrower or a Subsidiary Guarantor, Holdings, such Borrower or such Subsidiary Guarantor, as applicable, is the continuing or surviving entity or, in the case of any merger involving a Subsidiary Guarantor, the continuing or surviving entity shall become a Subsidiary Guarantor in accordance with Section 6.01(i)(ii) and (vii) any Credit Card Royalty Securitization Subsidiary may sell or otherwise finance or Dispose of the assets subject to the Credit Card Royalty Securitization ; provided that contemporaneously with (x) the occurrence of any of the actions permitted to be taken pursuant to the foregoing clauses (i) through (vi) of this clause (b) or (y) the consummation of a Credit Card Royalty Securitization , the Borrowers shall furnish to the Co-Collateral Agents an updated Borrowing Base Certificate.
(c)     Acquisitions . Make any Acquisition unless (a) at the time of any such Acquisition and immediately after giving effect thereto, no Default or Event of Default shall have occurred and be continuing, (b) after giving effect to any such Acquisition (A) Pro Forma and Projected Capped Excess Availability is at least 15% of the Line Cap, and (B) the Pro Forma Fixed Charge Ratio shall be at least 1.0 to 1.0, and (D) immediately after giving effect to any such Acquisition, Holdings and the Borrowers shall comply with Section 6.01(i) to the extent applicable, (c)

85

such Acquisition shall have been approved by the Board of Directors of the Person (or similar governing body if such Person is not a corporation) which is the subject of such Acquisition and such Person shall not have announced that it will oppose such Acquisition or shall not have commenced any action which alleges that such Acquisition shall violate applicable law, and (d) any assets acquired shall be utilized in, and if the Acquisition involves a merger, consolidation or acquisition of equity interests, the Person which is the subject of such Acquisition shall be engaged in, a business engaged by, or related to a business engaged by, the Loan Parties as of July 21, 2015.
(d)    Restricted Payments.
(i)    Declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, if at the date of declaration thereof (either before or immediately after giving effect thereto and the payment thereof), a Default or Event of Default shall have occurred and be continuing, except that at any time that a Default or Event of Default shall exist and be continuing, (A) Holdings may declare and pay dividends with respect to its equity interests payable solely in additional shares of its common stock, (B) Subsidiaries of Holdings may declare and pay dividends to Holdings, the Borrowers or another wholly owned Subsidiary of any Borrower and (C) non-wholly-owned Subsidiaries may declare and pay dividends to the holders of their equity interests other than a Group Member on a ratable basis.
(ii)    Declare or make, or agree to pay or make, directly or indirectly, any other Restricted Payment (other than a Restricted Payment to a Loan Party), except that if no Default or Event of Default shall have occurred and be continuing (either before or immediately after giving effect thereto and the payment thereof):
(A)    Holdings and its Subsidiaries may make Restricted Payments in an aggregate amount not to exceed $1,500,000,000 from and after the Effective Date through the Extended Termination Date, provided , that, (i) immediately after giving effect to any such Restricted Payment, Pro Forma and Projected Capped Excess Availability is greater than 50% of the Line Cap and (ii) Restricted Payments pursuant to this subsection (A) shall not exceed $1,000,000,000 in any rolling twelve month period;
(B)    Holdings and its Subsidiaries may make other Restricted Payments, provided, that, immediately after giving effect thereto (i) Pro Forma and Projected Capped Excess Availability is at least 15% of the Line Cap, and (ii) the Pro Forma Fixed Charge Ratio shall be at least 1.05 to 1.0; provided , that, for purposes of the calculation of Pro Forma Fixed Charge Ratio (x) Adjusted Consolidated EBITDA and Consolidated Interest Expense shall be computed on a trailing four quarter basis, and scheduled principal payments shall be computed on a four quarter forward basis, and (y) the amount of the Restricted Payment paid in cash being made in connection with the calculation shall be added to Fixed Charges;
(C)    Holdings and its Subsidiaries may make other Restricted Payments in cash or in kind (with values equal to the amount of any cash otherwise distributable hereunder) (1) in an amount not to exceed the Net Proceeds of any common stock issuances by Holdings after the Effective Date, (2) in an amount not to exceed the Net Proceeds of any Permitted Dispositions of the type set forth in clauses (f) and (g) of the definition thereof, and (3) in an amount not to exceed any dividends and distributions received (directly or indirectly) on account of equity interests in any Subsidiary of Holdings which is not a Loan Party, and (4) to the stockholders of Holdings in the form of the equity interests of the subsidiaries set forth on Schedule 6.02(d) , provided , that (x) in each case, immediately after giving effect thereto, the Pro Forma and Projected Capped Excess Availability is at least 15% of the Line Cap, and (y) the aggregate amount of any such Restricted Payments pursuant to clauses (1) through (and including) (3) (whether in cash or in other property or a combination thereof) shall not exceed in any twelve consecutive months 75% of any such Net Proceeds, dividends and distributions received in such twelve consecutive month period; provided that Restricted Payments made pursuant to this clause (C) in cash during any twelve consecutive month

86

period shall not exceed $125,000,000. For the avoidance of doubt, any Net Proceeds of the type described in clauses (1) through and including (3) of this Section 6.02(d)(ii)(C) may be utilized to repay the Obligations and shall not be required to be segregated prior to making any Restricted Payments otherwise permitted under this clause (C); and
(D)    Holdings and its Subsidiaries may make other Restricted Payments as long as (i)(A) such Restricted Payment is funded from cash on hand and not from proceeds of any Extensions of Credit, (B) for the 120 days before any such Restricted Payment, no Advances were outstanding, and (C) for each of the 120 days before any such Restricted Payment, the Borrowers shall have had cash on hand sufficient to make such Restricted Payment without the necessity of obtaining proceeds of Advances for the operations of their businesses or for the purpose of making such Restricted Payment, and (ii) after giving effect to such Restricted Payment, no Advances are outstanding.
(e)     Negative Pledge Clauses . Enter into or suffer to exist or become effective any agreement that prohibits or limits the ability of Holdings or any Subsidiary of Holdings to create, incur, assume or suffer to exist any Lien in favor of the Co-Collateral Agents upon the Collateral (as defined in the Guarantee and Collateral Agreement and other Security Documents in effect from time to time, and including assets which become Collateral pursuant to Section 6.01(n)), whether now owned or hereafter acquired, other than any agreement relating to any Lien on cash and cash equivalents not prohibited by Section 6.02(a).
(f)     Clauses Restricting Subsidiary Distributions . Enter into or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Subsidiary of Holdings other than a Loan Party to (a) make Restricted Payments in respect of any equity interests of such Subsidiary held by, or pay any indebtedness owed to, Holdings or any other Subsidiary of Holdings, (b) make loans or advances to, or other investments in, Holdings or any other Subsidiary of Holdings or (c) transfer any of its assets to Holdings or any other Subsidiary of Holdings, except for such encumbrances or restrictions existing under or by reason of (i) any restrictions existing under this Agreement and the other Loan Documents; (ii) any restrictions with respect to a Subsidiary imposed pursuant to an agreement that has been entered into in connection with the disposition of all or any portion of the equity interests or assets of such Subsidiary; (iii) the provisions contained in any agreement governing indebtedness existing as of July 21, 2015 (and in any refinancing of such indebtedness so long as no more restrictive than those contained in the respective existing indebtedness); (iv) customary provisions restricting subletting or assignment of any lease governing a leasehold interest of any Borrower or a Subsidiary of any Borrower entered into in the ordinary course of business, (v) customary restrictions and conditions contained in the documents relating to any Lien, so long as such Lien is not prohibited hereunder and such restrictions or conditions relate only to the specific asset subject to such Lien; (vi) customary provisions restricting assignment of any contract entered into by any Borrower or any Subsidiary of any Borrower in the ordinary course of business, (vii) any agreement or instrument governing acquired debt, which restriction is not applicable to any Person or the properties or assets of any Person, other than the Person or the properties or assets of the Person acquired pursuant to the respective acquisition and so long as the respective encumbrances or restrictions were not created (or made more restrictive) in connection with or in anticipation of the respective acquisition; (viii) customary provisions restricting the assignment of licensing agreements, management agreements or franchise agreements entered into by any Borrower or any of its Subsidiaries in the ordinary course of business; (ix) restrictions on the transfer of assets securing purchase money obligations and capitalized lease obligations; (x) customary net worth provisions contained in real property leases entered into by Subsidiaries of any Borrower, so long as the applicable Borrower has determined in good faith that such net worth provisions could not reasonably be expected to impair the ability of the Borrowers and their Subsidiaries to meet their ongoing obligations, (xi) restrictions in respect of the REMIC Certificates and the real property assets related thereto, the Intellectual Property held by KCD IP, LLC and any proceeds of the foregoing, and (xii) restrictions governing a Subsidiary of Holdings in connection with a Credit Card Royalty Securitization, and (xiii) such other restrictions as the Borrowers and the Co-Collateral Agents may agree.
(g)     Accounting Changes . Make or permit any change in accounting policies or reporting practices, except as required or permitted by GAAP.

87

(h)     Reserved .
(i)     Dispositions . Make any Disposition except Permitted Dispositions.
(j)     Debt; Prepayment of Debt .
(i)    Create, incur, assume, suffer to exist or otherwise become or remain liable with respect to, any Debt, except Permitted Debt;
(ii)    Prepay any Debt with proceeds of Advances unless at the time of any such prepayment and immediately after giving pro forma effect thereto, (A) no Default or Event of Default shall have occurred and be continuing, and (B) after giving effect to any such prepayment (1) Pro Forma and Projected Capped Excess Availability plus Pro Forma and Projected Suppressed Availability (not to exceed an amount equal to 5% of the Line Cap) is at least 15% of the Line Cap, and (2) the Pro Forma Fixed Charge Ratio shall be at least 1.05 to 1.0; and
(iii)    Prepay any Debt (without utilizing proceeds of Advances) unless except:
(A)    Prepayments of Debt solely with Net Proceeds of Dispositions permitted pursuant to clause (g)(iii) of the definition of “Permitted Dispositions” to the extent remaining after application to clauses (i) and (ii) of the Application of Disposition Proceeds, so long as (A) the Co-Collateral Agents have established a Debt Maturity Reserve with respect to the outstanding amount of such Debt prior to the prepayment thereof, and (B) both immediately before and immediately after giving effect to such prepayment, the amount of all Short Term Debt (whether consisting of commercial paper or otherwise) outstanding under clause (h) of Permitted Debt is $0;
(B)    Prepayments of the April 2016 Mortgage Debt solely with Net Proceeds received from the Credit Card Royalty Securitization; and
(C)    Other prepayments of Debt (without utilizing proceeds of Advances) so long as at the time of any such prepayment and immediately after giving pro forma effect thereto, no Default or Event of Default shall have occurred and be continuing. Further, if Holdings, the Borrowers or any of their Subsidiaries shall prepay any Debt ( including Debt owed by a Loan Party to a Subsidiary that is not a Loan Party, but excluding other Debt owed to Holdings or any of its Subsidiaries without utilizing proceeds of Advances pursuant to this clause (C ) on any date (each, a “Prepayment Date”) then the Borrowers shall not permit Capped Excess Availability to be less than 12.5% of the Line Cap at any time from the Prepayment Date until one year following the Prepayment Date; provided this sentence shall not apply to prepayments of Debt (A) with the proceeds of the incurrence of Permitted Debt as long as the maturity of such Permitted Debt (i) with respect to Permitted Debt prepaying Debt having a maturity of one year or less, is at least sixty (60) days later than the maturity of the Debt so refinanced, or (ii) with respect to all other Debt, is later than the maturity of the Debt so refinanced and the latest Extended Termination Date, or (B) with the proceeds from the issuance of equity interests in a Group Member (other than to another Group Member), or (C) in a principal amount not to exceed $25,000,000 in the aggregate in any fiscal year.

88

For the avoidance of doubt, the foregoing sub-sections (ii) and (iii) of this Section 6.02(j) will not apply to the repayment of the Obligations, which are rather governed by the provisions of Article II hereof.
(k)     Investments . Make any Investments, except Permitted Investments.
(l)     Store Closings . Close more than 250 full line Sears or Kmart Stores in any fiscal quarter or more than 500 full line Sears or Kmart Stores in any four consecutive fiscal quarters without the consent of the Co-Collateral Agents, such consent not to be unreasonably withheld and/or fail to comply with the requirements of the definition of Store Closure Sale when and as applicable.
(m)     Existing Debt. Permit, or amend the documentation governing any Debt existing as of the Second Amendment Effective Date to permit, the maturity date of such existing Debt to be shortened, the amortization of any such existing Debt to be increased or accelerated or the addition of or amendment to any new or existing mandatory repayment or prepayment provisions with respect to such Debt that would give rise to payment of such Debt earlier than provided for by the applicable agreements as in effect on the Second Amendment Effective Date; provided that this Section 6.02(m) shall not apply to any Debt owed to Holdings or any of its Subsidiaries (other than Debt owed by a Loan Party to a Subsidiary that is not a Loan Party).
SECTION 6.03.      Financial Covenant . During the continuance of a Covenant Compliance Event, each of Holdings and the Borrowers will not permit the Fixed Charge Ratio as of the last day of any fiscal month of Holdings to be less than 1.0 to 1.0.
ARTICLE VII
EVENTS OF DEFAULT
SECTION 7.01.      Events of Default . If any of the following events (“ Events of Default ”) shall occur and be continuing:
(a)    Any Borrower shall fail to pay (i) any principal of any Advance, Term Loan, 2016 Term Loan or Reimbursement Obligation when the same becomes due and payable, or (ii) any interest on any Advance, Term Loan, 2016 Term Loan or Reimbursement Obligation or any fees, or any other amounts payable under this Agreement or any other Loan Document, in each case under this clause (ii), within three (3) days after the same becomes due and payable; or
(b)    Any representation or warranty made by any Loan Party herein or in any other Loan Document shall prove to have been incorrect in any material respect when made; or
(c)    (i) Any Loan Party shall fail to perform or observe any term, covenant or agreement contained in Section 6.01 (d), (e), (h), (j) (other than 6.01(j)(viii)), (k), or (m), 6.02, or 6.03 of this Agreement or (ii) any Loan Party shall fail to perform or observe any other term, covenant or agreement contained in this Agreement or any other Loan Document, if such failure shall remain unremedied for thirty (30) days after written notice thereof shall have been given to Holdings and the Borrowers by the Agent or any Lender; or
(d)    Any Group Member shall fail to pay principal of at least $50,000,000 on any Debt that is outstanding (but excluding Debt outstanding hereunder) when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other event shall occur or condition shall exist under any agreement or instrument relating to any Debt that is outstanding in a principal amount of at least $50,000,000 and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid or redeemed, purchased or defeased, or an offer to prepay,

89

redeem, purchase or defease such Debt shall be required to be made and is accepted in an amount of at least $50,000,000 (in each case other than (i) a scheduled prepayment, redemption or purchase, or (ii) a mandatory prepayment, redemption or purchase, or a required offer to prepay, redeem or purchase, that results from the voluntary sale or transfer of property or assets), in each case prior to the stated maturity thereof; or
(e)    Any Group Member shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against any Group Member seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 90 days, or any of the actions sought in such proceeding (including the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur; or any Group Member shall take any corporate action to authorize any of the actions set forth above in this subsection (e); or
(f)    A judgment or order for the payment of money in excess of $50,000,000 (net of any portion of such judgment to be paid by a third-party insurer as to which coverage has not been disputed) shall be rendered against any Group Member and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or
(g)    (i) Any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its Subsidiaries, and any Person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) other than a Permitted Holder becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have “beneficial ownership” of all securities that such person or group has the right to acquire (such right, an “option right”), whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 35% or more of the equity securities of Holdings entitled to vote for members of the Board of Directors of Holdings on a fully-diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right) and such “person” or “group” shall beneficially own (as such term is used herein) a greater percentage of the equity Securities of Holdings entitled to vote for members of the Board of Directors than the Permitted Holders shall, collectively, beneficially own; or (ii) during any period of 12 consecutive months, a majority of the members of the Board of Directors or other equivalent governing body of Holdings cease to be composed of individuals (x) who were members of that board or equivalent governing body on the first day of such period, (y) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (x) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (z) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (x) and (y) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body; or (iii) Holdings shall cease for any reason to own, directly or indirectly, 100% of the Voting Stock of Sears and Kmart; or
(h)    (i) Any Borrower or any of its ERISA Affiliates shall incur, or shall be reasonably likely to incur liability in excess of $100,000,000 in the aggregate as a result of one or more of the following: (i) the occurrence of any ERISA Event; (ii) the partial or complete withdrawal of such Borrower or any of its ERISA Affiliates from a Multiemployer Plan; or (iii) the reorganization or termination of a Multiemployer Plan; or (iv) the PBGC shall have filed a notice of Lien; or
(i)    Any of the Security Documents shall cease, for any reason, to be in full force and effect, or any Loan Party shall so state in writing, or any Lien created by any of the Security Documents shall cease to be

90

enforceable and of the same effect and priority purported to be created thereby, including as a result of the failure to comply with Section 5.4 of the Guarantee and Collateral Agreement; or
(j)    The guarantee contained in Section 2 of the Guarantee and Collateral Agreement shall cease, for any reason, to be in full force and effect or any Loan Party shall so state in writing;
then, and in any such event, the Agent may, or, at the request of the Required Lenders shall, take any or all of the following actions upon notice to the Borrowers: (i) declare the Revolving Commitment of each Revolving Lender to be terminated, whereupon the same shall forthwith terminate; and (ii) declare the Advances, the Term Loan, the 2016 Term Loan, all interest thereon and all other amounts payable under this Agreement and the other Loan Documents (including all amounts of the L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) to be forthwith due and payable, whereupon the Advances, the Term Loan, the 2016 Term Loan, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrowers; provided , however , that in the event of an actual or deemed entry of an order for relief with respect to any Borrower under the United States Bankruptcy Code, (A) the Revolving Commitment of each Revolving Lender shall automatically be terminated and (B) the Advances, the Term Loan, the 2016 Term Loan, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrowers. With respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to this paragraph or for which the outstanding amount of any drawing under any Letters of Credit (including any taxes, fees, charges and other costs and expenses incurred by the Issuing Lender in connection therewith) have not then been fully reimbursed or discharged, the Borrowers shall at such time deposit in a cash collateral account opened by the Co-Collateral Agents, an amount equal to 105% of the aggregate then undrawn and unexpired amount of such Letters of Credit and all other Reimbursement Obligations. Amounts held in such cash collateral account shall be applied by the Agent to the payment of drafts drawn under such Letters of Credit and the other Reimbursement Obligations, and the unused portion thereof after all such Letters of Credit shall have expired or been fully drawn upon and all Reimbursement Obligations fully reimbursed or discharged, if any, shall be applied to repay other Obligations of the Borrowers hereunder and under the other Loan Documents. After all such Letters of Credit shall have expired or been fully drawn upon, all Reimbursement Obligations shall have been satisfied and all other Obligations of the Borrowers hereunder and under the other Loan Documents shall have been paid in full, the balance, if any, in such cash collateral account shall be returned to the Borrowers (or such other Person as may be lawfully entitled thereto).
It is understood and agreed that if the 2016 Term Loans are accelerated pursuant to this Section 7.01 for any reason, including without limitation because of the commencement of any insolvency proceeding or other proceeding pursuant to any debtor relief laws, the premium payable pursuant to Section 2.05(b) (the "2016 Term Loan Prepayment Premium") determined as of the date of acceleration will also be due and payable as though the 2016 Term Loans were voluntarily prepaid as of such date and shall constitute part of the Obligations in respect of the 2016 Term Loans, in view of the impracticability and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of each 2016 Term Lender’s lost profits as a result thereof. Any 2016 Term Loan Prepayment Premium payable in accordance with the immediately preceding sentence shall be presumed to be the liquidated damages sustained by each 2016 Term Lender as the result of the early termination and the Loan Parties agree that it is reasonable under the circumstances currently existing. The 2016 Term Loan Prepayment Premium shall also be payable in the event the 2016 Term Loans are satisfied or released by foreclosure (whether by power of judicial proceeding or otherwise) or deed in lieu of foreclosure. EACH LOAN PARTY EXPRESSLY WAIVES THE PROVISIONS OF ANY PRESENT OR FUTURE STATUTE OR LAW THAT PROHIBITS OR MAY PROHIBIT THE COLLECTION OF THE FOREGOING PREMIUM IN CONNECTION WITH ANY SUCH ACCELERATION INCLUDING IN CONNECTION WITH ANY VOLUNTARY OR INVOLUNTARY ACCELERATION OF THE 2016 TERM LOANS PURSUANT TO ANY INSOLVENCY PROCEEDING OR OTHER PROCEEDING PURSUANT TO ANY DEBTOR RELIEF LAWS. Each Loan Party expressly agrees that: (A) the 2016 Term Loan Prepayment Premium is reasonable and is the product of an arm’s length transaction between sophisticated business people, ably represented by counsel; (B) the 2016 Term Loan Prepayment Premium shall be payable notwithstanding the then prevailing market rates at the

91

time payment is made; (C) there has been a course of conduct between 2016 Term Lenders and the Loan Parties giving specific consideration in this transaction for such agreement to pay the 2016 Term Loan Prepayment Premium; and (D) the Loan Parties shall be estopped hereafter from claiming differently than as agreed to in this paragraph. Each Loan Party expressly acknowledges that its agreement to pay the 2016 Term Loan Prepayment Premium to the 2016 Term Lenders as herein described is a material inducement for the 2016 Term Lenders to provide the 2016 Term Commitment and provide the 2016 Term Loans.

ARTICLE VIII
THE AGENT AND CO-COLLATERAL AGENTS
SECTION 8.01.      Appointment . Each Lender hereby irrevocably designates and appoints (i) the Bank as Agent, and (ii) the Bank and Wells Fargo Bank, National Association as Co-Collateral Agents, under this Agreement and the other Loan Documents, and each such Lender irrevocably authorizes the Agent and the Co-Collateral Agents, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent and the Co-Collateral Agents, as applicable, by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. For clarity, and notwithstanding anything to the contrary contained in this Agreement and the other Loan Documents, no consent of the Lenders shall be required to amend this Agreement or the Loan Documents to (i) cause additional assets to become Collateral or to add additional Subsidiaries as guarantors of the Obligations, or (ii) implement the provisions of Sections 2.18 or 8.12, and the Agent and the Loan Parties shall be entitled to execute any and all amendments necessary or desirable to accomplish any of the foregoing and such amendments shall be binding on the other parties hereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, neither the Agent nor the Co-Collateral Agents shall have any duties or responsibilities, except those expressly set forth in this Agreement and the other Loan Documents to which it is a party, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent or the Co-Collateral Agents.
SECTION 8.02.      Delegation of Duties . Each of the Agent and the Co-Collateral Agents may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys‑in‑fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Neither the Agent nor the Co-Collateral Agents shall be responsible for the negligence or misconduct of any agents or attorneys-in‑fact selected by it with reasonable care.
SECTION 8.03.      Exculpatory Provisions . No Agent (for purposes of this Article VIII, “ Agent ” and “ Agents ” shall mean the collective reference to the Agent, the Co-Collateral Agents and any other Lender designated as an “Agent” for purposes of this Agreement, including the Lead Arrangers, the Syndication Agent and the Co-Documentation Agents) nor any of their respective officers, directors, employees, agents, attorneys‑in‑fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except to the extent that any of the foregoing are found by a final and non-appealable decision of a court of competent jurisdiction to have resulted from its or such Person’s own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by any Loan Party or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Agents under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of any Loan Party that is a party thereto to perform its obligations hereunder or thereunder. The Agents shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of any Loan Party.

92

SECTION 8.04.      Reliance by Agent . The Agent and Co-Collateral Agents shall be entitled to rely, and shall be fully protected in relying, upon any instrument, writing, resolution, notice, consent, certificate, affidavit, letter, telecopy, telex or teletype message, statement, order or other document or conversation believed by them to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including counsel to Holdings or the Borrowers), independent accountants and other experts selected by the Agent. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Agent. The Agent and Co-Collateral Agents shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless they shall first receive such advice or concurrence of the Required Lenders (or, if so specified by this Agreement, the Supermajority Lenders or all Lenders) as they deem appropriate or they shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense that may be incurred by them by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required Lenders (or, if so specified by this Agreement, the Supermajority Lenders or all Lenders), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Advances, the Term Loan and the 2016 Term Loan.
SECTION 8.05.      Notice of Default . The Agent and the Co-Collateral Agents shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default unless the Agent or the applicable Co-Collateral Agent has received notice from a Lender, Holdings or a Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a “notice of default”. In the event that the Agent receives such a notice, the Agent shall give notice thereof to the Lenders. The Agent and the Co-Collateral Agents shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders (or, if so specified by this Agreement, the Supermajority Lenders or all Lenders); provided that unless and until the Agent or the Co-Collateral Agents shall have received such directions, the Agent, in consultation with the Co-Collateral Agents, may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders.
SECTION 8.06.      Non-Reliance on Agents and Other Lenders . Each Lender expressly acknowledges that neither the Agent, the Co-Collateral Agents nor any of their respective officers, directors, employees, agents, attorneys‑in‑fact or affiliates have made any representations or warranties to it and that no act by the Agent or any Co-Collateral Agent hereafter taken, including any review of the affairs of a Loan Party or any affiliate of a Loan Party, shall be deemed to constitute any representation or warranty by the Agent or any Co-Collateral Agent to any Lender. Each Lender represents to the Agent and the Co-Collateral Agents that it has, independently and without reliance upon the Agent, any Co-Collateral Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Loan Parties and their affiliates and made its own decision to make its Advances, the Term Loan and the 2016 Term Loan hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent, any Co-Collateral Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Loan Parties and their Affiliates. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent or the Co-Collateral Agents hereunder, the Agent and the Co-Collateral Agents shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of any Loan Party or any Affiliate of a Loan Party that may come into the possession of the Agent or any Co-Collateral Agent or any of their respective officers, directors, employees, agents, attorneys‑in‑fact or affiliates.



93

SECTION 8.07.      Reports and Financial Statements . By signing this Agreement, each Lender:
(a)    agrees to furnish the Agent after the occurrence and during the continuance of a Cash Dominion Event (and thereafter at such frequency as the Agent may reasonably request) with a summary of all Bank Products and Cash Management Services provided by, and amounts due or to become due on account thereof to, such Lender. In connection with any distributions to be made hereunder, the Agent shall be entitled to assume that no amounts are due to any Lender on account of any such Bank Products or Cash Management Services unless the Agent has received written notice thereof from such Lender;
(b)    is deemed to have requested that the Agent furnish such Lender, promptly after they become available, copies of all financial statements and reports required to be delivered by the Loan Parties hereunder and all commercial finance examinations and appraisals of the Collateral received by the Co-Collateral Agents (collectively, the “ Reports ”) (which the Agent and the Co-Collateral Agents agree to so deliver);
(c)    expressly agrees and acknowledges that the Agent and the Co-Collateral Agents make no representation or warranty as to the accuracy of the Reports, and shall not be liable for any information contained in any Report;
(d)    expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that the Agent, the Co-Collateral Agents or any other party performing any audit or examination will inspect only specific information regarding the Loan Parties and will rely significantly upon the Loan Parties' books and records, as well as on representations of the Loan Parties' personnel;
(e)    agrees to keep all Reports confidential in accordance with the provisions of this Agreement; and
(f)    without limiting the generality of any other indemnification provision contained in this Agreement, agrees: (i) to hold the Agent, the Co-Collateral Agents and any such other Lender or Person preparing a Report harmless from any action the indemnifying Lender may take or conclusion the indemnifying Lender may reach or draw from any Report in connection with any credit extensions that the indemnifying Lender has made or may make to the Borrowers, or the indemnifying Lender's participation in any Letter of Credit or Swingline Advance, or the indemnifying Lender's purchase of, a Loan or Loans; and (ii) to pay and protect, and indemnify, defend, and hold the Agent, the Co-Collateral Agents and any such other Lender or Person preparing a Report harmless from and against, the claims, actions, proceedings, damages, costs, expenses, and other amounts (including reasonable attorney costs) incurred by the Agent, Co-Collateral Agents and any such other Lender or Person preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Lender.
SECTION 8.08.      Indemnification . The Lenders agree to indemnify the Agent and each Co-Collateral Agent in its capacity as such (to the extent not reimbursed by Holdings or the Borrowers and without limiting the obligation of Holdings or the Borrowers to do so), ratably according to their respective Pro Rata Shares in effect on the date on which indemnification is sought under this Section (or, if indemnification is sought after the date upon which the Revolving Commitments of any Lender shall have terminated and the Advances, the Term Loan and the 2016 Term Loan shall have been paid in full, in accordance with such Pro Rata Shares immediately prior to such date), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever that may at any time (whether before or after the payment of the Advances, the Term Loan and the 2016 Term Loan) be imposed on, incurred by or asserted against such Agent in any way relating to or arising out of, the Commitments, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by such Agent under or in connection with any of the foregoing; provided that no 2015 Non-Extending Lender shall be obligated to indemnify the Agent or any Co-Collateral Agent for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which relate to matters subsequent to the termination of such 2015 Non-Extending Lender’s Commitment and repayment of all Obligations to such 2015 Non-Extending Lender (for clarity, such 2015 Non-Extending Lenders shall remain liable for any claims which relate

94

to a period during which they were a “Lender” hereunder, even if first asserted after the termination of such 2015 Non-Extending Lender’s Revolving Commitment and repayment of all Obligations to such 2015 Non-Extending Lender), provided further that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements that are found by a final and non-appealable decision of a court of competent jurisdiction to have resulted from the Agent’s or any Co-Collateral Agent’s gross negligence or willful misconduct. The agreements in this Section shall survive the payment of the Advances, the Term Loan, the 2016 Term Loan and all other amounts payable hereunder.
SECTION 8.09.      Agent in Its Individual Capacity . Each Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with any Loan Party as though such Agent were not an Agent. With respect to its Advances made or renewed by it and with respect to any Letter of Credit issued or participated in by it, each Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not an Agent, and the terms “Lender” and “Lenders” shall include each Agent in its individual capacity.
SECTION 8.10.      Successor Agent .
(a)    The Agent may resign as Agent upon 30 days’ notice to the Lenders and the Borrowers. If the Agent shall resign as Agent under this Agreement and the other Loan Documents, then the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent shall (unless an Event of Default shall have occurred and be continuing) be subject to approval by the Borrowers (which approval shall not be unreasonably withheld or delayed), whereupon such successor agent shall succeed to the rights, powers and duties of the Agent, and the term “Agent” shall mean such successor agent effective upon such appointment and approval, and the former Agent’s rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any holders of the Advances, Term Loan or 2016 Term Loan. If no successor agent has accepted appointment as Agent by the date that is 30 days following a retiring Agent’s notice of resignation, the retiring Agent’s resignation shall nevertheless thereupon become effective, and the Lenders shall assume and perform all of the duties of the Agent hereunder, until such time, if any, as the Required Lenders appoint a successor agent as provided for above. After any retiring Agent’s resignation as Agent, the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement and the other Loan Documents.
(b)    Any Co-Collateral Agent may resign as Co-Collateral Agent upon 30 days’ notice to the Lenders and the Borrowers. The rights, duties and responsibilities of the Co-Collateral Agents hereunder are specific to each of Bank of America, N.A. and Wells Fargo Bank, National Association, and upon (i) the resignation of any such Person as a Co-Collateral Agent hereunder, or (ii) except as otherwise agreed by the Borrowers and the Agent (whose agreement shall not be unreasonably withheld), the assignment of all of the rights, duties and obligations under this Agreement in respect of its Revolving Commitment, FILO Commitment, the Advances, the Term Loan, the 2016 Term Loan and other amounts owing to it and any Note or Notes held by it by any such Person, then such rights, duties and responsibilities of such Person as a Co-Collateral Agent shall automatically terminate and be of no further force and effect; provided that the provisions of this Article VIII shall inure to such Person’s benefit as to any actions taken or omitted to be taken by it while it was Co-Collateral Agent under this Agreement and the other Loan Documents. Without limiting the foregoing, no additional Co-Collateral Agents shall be appointed hereunder without the prior written consent of the Agent and the Borrowers.
SECTION 8.11.      Co-Documentation Agents and Syndication Agent; Bank Product and Cash Management Services Providers . (a) Neither the Co-Documentation Agents, the Syndication Agent nor any other Lender designated as an “Agent” for purposes of this Agreement (other than the Bank in its capacity as Agent and Co-Collateral Agent, and Wells Fargo Bank, National Association in its capacity as Co-Collateral Agent) shall have any duties or responsibilities hereunder in its capacity as such.

95

(b)    Notwithstanding anything to the contrary in this Agreement or any other Loan Document, no provider or holder of any Bank Products or Cash Management Services shall have any voting or approval rights hereunder (or be deemed a Lender) solely by virtue of its status as the provider or holder of such agreements or products or the Obligations owing thereunder, nor shall the consent of any such provider or holder be required (other than in their capacities as Lenders, to the extent applicable) for any matter hereunder or under any of the other Loan Documents, including as to any matter relating to the Collateral or the release of Collateral or any Loan Party.
SECTION 8.12.      Defaulting Lenders .
(a)     Adjustments . Notwithstanding anything to the contrary contained in this Agreement, if any Lender becomes a Defaulting Lender, then, until such time as that Lender is no longer a Defaulting Lender, to the extent permitted by applicable Law:
(i)     Waivers and Amendments . Such Defaulting Lender’s right to approve or disapprove any amendment, waiver or consent with respect to this Agreement shall be restricted as set forth in the definition of “Required Lenders”, “Supermajority Lenders” and this Section 8.12.
(ii)     Defaulting Lender Waterfall . Any payment of principal, interest, fees or other amounts received by the Agent for the account of such Defaulting Lender (whether voluntary or mandatory, at maturity, pursuant to Article VII or otherwise) or received by the Agent from a Defaulting Lender pursuant to Section 9.05 shall be applied at such time or times as may be determined by the Agent as follows: first, to the payment of any amounts owing by such Defaulting Lender to the Agent hereunder; second, to the payment on a pro rata basis of any amounts owing by such Defaulting Lender to the Issuing Lenders or Swingline Lender hereunder; third, to Cash Collateralize the Issuing Lenders’ Fronting Exposure with respect to such Defaulting Lender; fourth, as the Borrowers may request (so long as no Default or Event of Default exists), to the funding of any Extension of Credit in respect of which such Defaulting Lender has failed to fund its portion thereof as required by this Agreement, as determined by the Agent; fifth, if so determined by the Agent and the Borrowers, to be held in a deposit account and released pro rata in order to (x) satisfy such Defaulting Lender’s potential future funding obligations with respect to Extensions of Credit under this Agreement and (y) Cash Collateralize the Issuing Lenders’ future Fronting Exposure with respect to such Defaulting Lender with respect to future Letters of Credit issued under this Agreement; sixth, to the payment of any amounts owing to the Non-Defaulting Lenders, the Issuing Lenders or Swingline Lender as a result of any judgment of a court of competent jurisdiction obtained by any Lender, the Issuing Lenders or the Swingline Lender against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement; seventh, so long as no Default or Event of Default exists, to the payment of any amounts owing to the Borrowers as a result of any judgment of a court of competent jurisdiction obtained by the Borrowers against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement; and eighth, to such Defaulting Lender or as otherwise directed by a court of competent jurisdiction; provided that if (x) such payment is a payment of the principal amount of any Extension of Credit in respect of which such Defaulting Lender has not fully funded its appropriate share, and (y) such Advances, Term Loans or 2016 Term Loans were made or the related Letters of Credit were issued at a time when the conditions set forth in Section 4.02 were satisfied or waived, such payment shall be applied solely to pay the Extensions of Credit owed to all Non-Defaulting Lenders on a pro rata basis prior to being applied to the payment of any Obligations owed to, such Defaulting Lender until such time as all Advances, Term Loans, 2016 Term Loans and funded and unfunded participations in Letters of Credit and Swingline Loans are held by the Lenders pro rata in accordance with the Commitments hereunder without giving effect to Section 2.16. Any payments, prepayments or other amounts paid or payable to a Defaulting Lender that are applied (or held) to pay amounts owed by a Defaulting Lender or to post Cash Collateral pursuant to this Section 8.12 shall be deemed paid to and redirected by such Defaulting Lender, and each Lender irrevocably consents hereto.

96

(iii)     Certain Fees .
(a)    No Defaulting Lender shall be entitled to receive any fee payable under Section 2.05 for any period during which that Lender is a Defaulting Lender (and the Borrowers shall not be required to pay any such fee that otherwise would have been required to have been paid to that Defaulting Lender).
(b)    Each Defaulting Lender shall be entitled to receive Letter of Credit fees pursuant to Section 3.03 for any period during which that Lender is a Defaulting Lender only to the extent allocable to its Revolving Commitment Percentage of the stated amount of Letters of Credit for which it has provided cash collateral.
(c)    With respect to any fee payable under Section 2.05 or any Letter of Credit Fee not required to be paid to any Defaulting Lender pursuant to clause (a) or (b) above, the Borrowers shall (x) pay to each Non-Defaulting Lender that portion of any such fee otherwise payable to such Defaulting Lender with respect to such Defaulting Lender’s participation in Letters of Credit or Swingline Loans that has been reallocated to such Non-Defaulting Lender pursuant to clause (iv) below, (y) pay to the Issuing Lenders and Swingline Lender, as applicable, the amount of any such fee otherwise payable to such Defaulting Lender to the extent allocable to such Issuing Lender’s or Swingline Lender’s Fronting Exposure to such Defaulting Lender, and (z) not be required to pay the remaining amount of any such fee.
(iv)     Reallocation of Applicable Percentages to Reduce Fronting Exposure . All or any part of such Defaulting Lender’s participation in Letters of Credit and Swingline Loans shall be reallocated among the Non-Defaulting Lenders in accordance with their respective Revolving Commitment Percentages (calculated without regard to such Defaulting Lender’s Revolving Commitment) but only to the extent that (x) the conditions set forth in Section 4.02 are satisfied at the time of such reallocation (and, unless the Borrowers shall have otherwise notified the Agent at such time, the Borrowers shall be deemed to have represented and warranted that such conditions are satisfied at such time), and (y) such reallocation does not cause the aggregate outstanding amount of Obligations of any Non-Defaulting Lender to exceed such Non-Defaulting Lender’s Revolving Commitment. No reallocation hereunder shall constitute a waiver or release of any claim of any party hereunder against a Defaulting Lender arising from that Lender having become a Defaulting Lender, including any claim of a Non-Defaulting Lender as a result of such Non-Defaulting Lender’s increased exposure following such reallocation.
(v)     Cash Collateral, Repayment of Swing Line Loans . If the reallocation described in clause (a)(iv) above cannot, or can only partially, be effected, the Borrowers shall, without prejudice to any right or remedy available to them hereunder or under applicable Law, (x) first, prepay Swingline Loans in an amount equal to the Swingline Lenders’ Fronting Exposure and (y) second, cash collateralize the Issuing Lenders’ Fronting Exposure in accordance with the procedures set forth in Section 3.01(b) .

97

(b)     Consents . If a Lender becomes a Defaulting Lender, then, in addition to the rights and remedies that may be available to the other Credit Parties, the Loan Parties or any other party at law or in equity, and not in limitation thereof, except as set forth in the last sentence hereof, such Defaulting Lender’s right to participate in decision-making rights related to the Obligations in respect of Required Lender and Supermajority Lender votes, this Agreement or the other Loan Documents shall be suspended during the pendency of such failure or refusal. Notwithstanding anything else provided herein, any amendment, waiver determination, consent or notification under Section 9.01 that would (i) increase or extend the term of the Revolving Commitment of a Defaulting Lender, (ii) reduce the principal amount of the Advances, the Term Loan or the 2016 Term Loan made by such Defaulting Lender, (iii) alter the terms and conditions of this sentence or (iv) otherwise disproportionately affect a Defaulting Lender, will require the consent of such Defaulting Lender.
(c)     Defaulting Lender Cure . If the Borrowers, the Agent, the Swingline Lender and the Issuing Lenders agree in writing that a Lender is no longer a Defaulting Lender, the Agent will so notify the parties hereto, whereupon as of the effective date specified in such notice and subject to any conditions set forth therein (which may include arrangements with respect to any cash collateral), that Lender will, to the extent applicable, purchase at par that portion of outstanding Advances of the other Lenders or take such other actions as the Agent may determine to be necessary to cause the Advances and funded and unfunded participations in Letters of Credit and Swingline Loans to be held on a pro rata basis by the Revolving Lenders in accordance with their Revolving Commitment Percentages (without giving effect to Section 2.16 ), whereupon such Lender will cease to be a Defaulting Lender; provided that no adjustments will be made retroactively with respect to fees accrued or payments made by or on behalf of the Borrowers while that Lender was a Defaulting Lender; and provided, further, that except to the extent otherwise expressly agreed by the affected parties, no change hereunder from Defaulting Lender to Lender will constitute a waiver or release of any claim of any party hereunder arising from that Lender’s having been a Defaulting Lender.

ARTICLE IX
MISCELLANEOUS
SECTION 9.01.      Amendments, Etc. No amendment or waiver of any provision of this Agreement or any other Loan Document, nor consent to any departure by any Borrower or any Loan Party therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided , however , that no amendment, waiver or consent shall (a) unless in writing and also signed by each Lender directly affected thereby, do any of the following: (i) increase the amount or extend the expiration date of any Lender’s Commitment, (ii) reduce the principal of, or interest on, the Advances, the Term Loan, the 2016 Term Loan or any fees or other amounts payable hereunder or (iii) postpone any date fixed for any payment of principal of, or interest on, the Advances, the Term Loan, the 2016 Term Loan or any fees or other amounts payable hereunder; provided that any waiver or reduction of any payment of the Term Loan or the 2016 Term Loan from any Excess Cash Flow may be waived or modified solely with the written consent of the Term Lenders or the 2016 Term Lenders, as applicable, then holding a majority in amount of the Term Loans or the 2016 Term Loans, as applicable; (b) unless in writing and signed by all of the Lenders, do any of the following: (i) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Advances, the Term Loan or the 2016 Term Loan, or the number of Lenders, that shall be required for the Lenders or any of them to take any action hereunder, (ii) other than in accordance with Section 9.13, release all or substantially all of the Collateral or release all or substantially all of the guarantors from their obligations under the Guarantee and Collateral Agreement, (iii) except as expressly permitted herein or in any other Loan Document, subordinate the Liens granted hereunder or under the other Loan Documents, to any other Lien, (iv) amend this Section 9.01, (v) amend the definitions of “Required Lenders” or “Supermajority Lenders” or (vi) other than in accordance with Section 6.01(d), release either Borrower from all of its obligations hereunder, (c) unless in writing and signed by the Supermajority Lenders, increase any advance rate percentage set forth in the definition of “Borrowing Base” or increase the Swingline Commitment; (d) unless in writing and signed by the Agent and the Co-Collateral Agents (in addition to the Lenders required above to take such action), as applicable, amend, modify or waive any provision of

98

Article VIII or affect the rights or duties of the Agent and the Co-Collateral Agents, as applicable, under this Agreement or any other Loan Document; (e) unless in writing and signed by the Swingline Lender (in addition to the Lenders required above to take such action), amend, modify or waive any provision of Section 2.03 or 2.04; (f) unless in writing and signed by each Issuing Lender (in addition to the Lenders required above to take such action), amend, modify or waive any provision of Article III, or (g) unless in writing signed by each affected member of any Class, have a materially disproportionate adverse effect on such Class.
SECTION 9.02.      Notices, Etc. (a) All notices and other communications provided for hereunder shall be in writing (including telecopier communication) and mailed, telecopied or delivered, (i) if to Holdings, any Borrower or any Subsidiary Guarantor, at its address at 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; (ii) if to any Lender, at its address set forth in its completed administrative questionnaire delivered to the Agent; (iii) if to the Bank, (x) in its capacity as Agent, a Co-Collateral Agent, the Swingline Lender or an Issuing Lender, at its address at 100 Federal Street, 9 th Floor, Boston, Massachusetts 02110, Attention: Christine M. Scott and Brian P. Lindblom, and (y) in its capacity as Agent with respect to financial and other reporting sent pursuant to Section 6.01(j) hereof, at its address set forth in clause (x) above and also at 1455 Market Street, San Francisco, CA 94103, Attention: Aamir Saleem, in each case with a copy to Riemer & Braunstein LLP, Three Center Plaza, Boston, Massachusetts 02108, Attention: David S. Berman, Esq.; (iv) if to Wells Fargo Bank, National Association or its Affiliates, in its capacity as a Co-Collateral Agent or as an Issuing Lender, at its address at One Boston Place, 19 th Floor, Boston, Massachusetts 02108, Attention: Joseph Burt, with a copy to Choate, Hall & Stewart LLP, Two International Place, Boston, Massachusetts 02110, Attention: Kevin J. Simard, Esq., or (v), if to any other Issuing Lender, at such address as shall be designated by such party in a written notice to the other parties and, as to each other party, at such other address as shall be designated by such party in a written notice to the Borrowers and the Agent; provided that notices required to be delivered pursuant to Section 6.01(j)(i), (ii), (iii), and (v) shall be delivered to the Agent and the Lenders as specified in Section 9.02(b). All such notices and communications shall, when mailed, telecopied, telegraphed or emailed, be effective when deposited in the mails, telecopied, delivered to the telegraph company or confirmed by email, respectively, except that notices and communications to the Agent pursuant to Article II, III or VIII shall not be effective until received by the Agent. Delivery by telecopier of an executed counterpart of any amendment or waiver of any provision of this Agreement or any Loan Document or of any exhibit hereto or thereto to be executed and delivered hereunder shall be effective as delivery of a manually executed counterpart thereof.
(b)    Holdings and the Borrowers agree that materials required to be delivered pursuant to Sections 6.01(j)(i), (ii), (iii) and (v), shall be deemed delivered to the Agent on the date on which Holdings causes such reports, or reports containing such financial statements, to be posted on the Internet at www.sec.gov or at such other website identified by the Borrowers in a written notice to the Agent and the Lenders and that is accessible by the Lenders without charge or if not so posted, may be delivered to the Agent in an electronic medium in a format acceptable to the Agent by email to christine.marie.scott@baml.com and to aamir.saleem@baml.com. Holdings and the Borrowers agree that the Agent may make such materials, as well as any other written information, documents, instruments and other material relating to Holdings, the Borrowers, any of their Subsidiaries or any other materials or matters relating to this Agreement, the Loan Documents or any of the transactions contemplated hereby (collectively, the “ Communications ”) available to the Lenders by posting such notices on Intralinks or a substantially similar electronic system (the “ Platform ”). Holdings and the Borrowers acknowledge that (i) the distribution of material through an electronic medium is not necessarily secure and that there are confidentiality and other risks associated with such distribution, (ii) the Platform is provided “as is” and “as available” and (iii) neither the Agent nor any of its Affiliates warrants the accuracy, adequacy or completeness of the Communications or the Platform and each expressly disclaims liability for errors or omissions in the Communications or the Platform. No warranty of any kind, express, implied or statutory, including any warranty of merchantability, fitness for a particular purpose, non-infringement of third party rights or freedom from viruses or other code defects, is made by the Agent or any of its Affiliates in connection with the Platform.
(c)    Each Lender agrees that notice to it (as provided in the next sentence) (a “ Notice ”) specifying that any Communications have been posted to the Platform shall constitute effective delivery of such information, documents or other materials to such Lender for purposes of this Agreement; provided that if requested by any Lender

99

the Agent shall deliver a copy of the Communications to such Lender by email or telecopier. Each Lender agrees (i) to notify the Agent in writing of such Lender’s e-mail address to which a Notice may be sent by electronic transmission (including by electronic communication) on or before the date such Lender becomes a party to this Agreement (and from time to time thereafter to ensure that the Agent has on record an effective e-mail address for such Lender) and (ii) that any Notice may be sent to such e-mail address.
SECTION 9.03.      No Waiver; Remedies . No failure on the part of any Lender or the Agent to exercise, and no delay in exercising, any right hereunder or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.
SECTION 9.04.      Costs and Expenses . (a) Holdings and the Borrowers jointly and severally agree to pay promptly all reasonable costs and expenses of the Agent in connection with the preparation, execution, delivery, distribution (including via the internet or through a service such as Intralinks), administration, modification and amendment of this Agreement, the other Loan Documents and the other documents to be delivered hereunder, including, (A) all due diligence, syndication (including printing, distribution and bank meetings), transportation, computer, duplication, appraisal, consultant, and audit expenses, (B) subject to Section 6.01(k), all expenses incurred in connection with inspections, verifications, examinations and appraisals relating to the Borrowing Base and the Collateral, and (C) the reasonable fees and expenses of counsel for the Agent and the Co-Collateral Agents with respect thereto and with respect to advising the Agent and the Co-Collateral Agents as to their rights and responsibilities under this Agreement and the other Loan Documents, including, without limitation, the fees and expenses set forth in the Fee Letter, the WF Fee Letter and the GE Commitment Letter. Holdings and the Borrowers further jointly and severally agree to pay on demand all costs and expenses of the Agent, the Co-Collateral Agents and the Lenders, if any (including reasonable counsel fees and expenses), in connection with the enforcement of, or protection of their rights under, (whether through negotiations, legal proceedings or otherwise) of this Agreement, the other Loan Documents and the other documents to be delivered hereunder, including reasonable fees and expenses of one counsel for the Agent, and one counsel for the Lenders in connection with the enforcement of or protection rights under this Section 9.04(a).
(b)    Holdings and the Borrowers jointly and severally agree to indemnify and hold harmless the Agent, each Co-Collateral Agent, each Issuing Lender and each Lender and each of their Affiliates and their officers, directors, employees, agents and advisors (each, an “ Indemnified Party ”) from and against any and all claims, damages, losses, liabilities and expenses (including reasonable fees and expenses of counsel) incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of (including in connection with any investigation, litigation or proceeding or preparation of a defense in connection therewith) (i) this Agreement, the Existing Credit Agreement, the other Loan Documents, any of the transactions contemplated herein or therein or the actual or proposed use of the Letters of Credit or the proceeds of the Advances, and (ii) the actual or alleged presence of Hazardous Materials on any property of Holdings, the Borrowers or any of their Subsidiaries or any Environmental Action relating in any way to Holdings, the Borrowers or any of their Subsidiaries, except to the extent such claim, damage, loss, liability or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party’s gross negligence or willful misconduct. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 9.04(b) applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by Holdings, any Borrower, its directors, equityholders or creditors or an Indemnified Party or any other Person, whether or not any Indemnified Party is otherwise a party thereto and whether or not the transactions contemplated hereby are consummated. Holdings and the Borrowers also agree not to assert any claim for special, indirect, consequential or punitive damages against the Agent, any Co-Collateral Agent, any Lender, any of their Affiliates, or any of their respective directors, officers, employees, attorneys and agents, on any theory of liability, arising out of or otherwise relating to this Agreement, the other Loan Documents, any of the transactions contemplated herein or the actual or proposed use of the Letters of Credit or the proceeds of the Advances, the Term Loan or 2016 Term Loan.
(c)    If (i) any payment of principal of, or Conversion of, any Eurodollar Rate Advance is made by any Borrower to or for the account of a Lender other than on the last day of the Interest Period for such Advance,

100

as a result of a payment or Conversion pursuant to Section 2.09(d) or (e), 2.11 or 2.13, acceleration of the maturity of the Advances pursuant to Section 7.01 or for any other reason, or by an Eligible Assignee to a Lender other than on the last day of the Interest Period for such Advance upon an assignment of rights and obligations under this Agreement pursuant to Section 9.07 as a result of a demand by any Borrower pursuant to Section 9.07(a), or (ii) any Borrower fails to prepay, borrow, continue or convert any Eurodollar Rate Advance on the date or in the amount notified by any Borrower; the applicable Borrower shall, promptly after notice by such Lender setting forth in reasonable detail the calculations used to quantify such amount (with a copy of such notice to the Agent), pay to the Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses that it may reasonably incur as a result of such payment or Conversion, including any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance. For purposes of calculating amounts payable by the Borrowers to the Lenders under this Section 9.04(c), each Lender shall be deemed to have funded each Eurodollar Rate Advance made by it at the Eurodollar Rate for such Advance by a matching deposit or other borrowing in the London interbank market for a comparable amount and for a comparable period, whether or not such Eurodollar Rate Advance was in fact so funded.
(d)    Without prejudice to the survival of any other agreement of Holdings or any Borrower hereunder, the agreements and obligations of Holdings and the Borrowers contained in Sections 2.12, 2.15 and 9.04 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the other Loan Documents.
SECTION 9.05.      Right of Set-off . Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 7.01 to authorize the Agent to declare the Extensions of Credit due and payable pursuant to the provisions of Section 7.01, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender or such Affiliate to or for the credit or the account of Holdings or any Loan Party against any and all of the obligations of Holdings and the Loan Parties now or hereafter existing under this Agreement, the other Loan Documents and the Extensions of Credit of such Lender, whether or not such Lender shall have made any demand under this Agreement or the other Loan Documents. Each Lender agrees promptly to notify Holdings or the applicable Loan Party (with a copy to the Agent) after any such set-off and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender and its Affiliate under this Section are in addition to other rights and remedies (including other rights of set-off) that such Lender and its Affiliate may have.
SECTION 9.06.      Binding Effect; Effectiveness . When this Agreement has been executed by Holdings, the Borrowers, the Agent and the Co-Collateral Agents, and the Lenders, this Agreement shall thereafter be binding upon and inure to the benefit of Holdings, the Borrowers, the Agent, the Co-Collateral Agents, each Issuing Lender, each Lender and their respective successors and assigns; provided , that, except with respect to Sections 9.07 and 9.08, this Agreement shall only become effective upon satisfaction of the conditions precedent set forth in Section 4.01 and none of the provisions of this Agreement, including without limitation provisions in respect of Term Loans, 2016 Term Loans, Advances and Letters of Credit to be made by or issued by any Lender, and in respect of any covenant, fee, indemnity, default, and expense reimbursement made by any Loan Party or for which any Loan Party is liable hereunder, shall become effective, nor shall any representation herein be deemed to be made, until the satisfaction of such conditions.
SECTION 9.07.      Assignments and Participations . (a) Each Lender may, upon notice to the Borrowers and the Agent and with the consent, not to be unreasonably withheld or delayed, of the Agent, and, unless an Event of Default has occurred and is continuing, the Borrowers (which consent shall be deemed given by the Borrowers if the Borrowers have not responded to a request for such consent within ten (10) Business Days), assign to one or more Persons all or a portion of its rights and obligations under this Agreement (including all or a portion of its Revolving Commitment, the Advances, the Term Loan, the 2016 Term Loan and other amounts owing to it and any Note or Notes

101

held by it); provided , however , that (i) no assignment of a Revolving Commitment may be made by a 2015 Extending Lender to a 2015 Non-Extending Lender unless such 2015 Non-Extending Lender shall agree to become a 2015 Extending Lender for purposes of the assigned rights and obligations pursuant to documentation acceptable to the Agent and the Borrowers; (ii) any assignment of a Revolving Commitment by a 2015 Non-Extending Lender to a 2015 Extending Lender shall, without further action, result in the Revolving Commitments so assigned being extended to the Extended Termination Date and otherwise entitle such Revolving Lender to the rights and obligations of Revolving Commitments of 2015 Extending Lenders hereunder (including the applicable fee and interest rates), (iii) each such assignment with respect to any Class of rights and obligations shall be of a constant, and not a varying, percentage of all rights and obligations under this Agreement with respect to such Class, (iv) except in the case of an assignment to a Person that, immediately prior to such assignment, was a Lender, an Affiliate of a Lender or an Approved Fund or an assignment of all of a Lender’s rights and obligations under this Agreement, (x) the amount of the Revolving Commitment of the assigning Revolving Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $10,000,000 (unless an Event of Default has occurred and is continuing, in which case not less than $5,000,000) or an integral multiple of $1,000,000 in excess thereof unless the Borrowers and the Agent otherwise agree, (y) the amount of the Term Loan of the assigning Term Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000 or an integral multiple of $1,000,000 in excess thereof (or, if less, the entire outstanding amount of the Term Loan held by such Term Lender) unless the Borrowers and the Agent otherwise agree, and (z) the amount of the 2016 Term Loan of the assigning 2016 Term Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000 or an integral multiple of $1,000,000 in excess thereof (or, if less, the entire outstanding amount of the 2016 Term Loan held by such 2016 Term Lender) unless the Borrowers and the Agent otherwise agree, (v) each such assignment shall be to an Eligible Assignee, (vi) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, and the parties to such assignment (other than the Borrowers and the Agent) shall deliver together therewith any Note subject to such assignment and a processing and recordation fee of $3,500 (except no such fee shall be payable for assignments to a Lender, an Affiliate of a Lender or an Approved Fund), and (vii) any Lender may, without the approval of the Borrowers, but with notice to the Borrowers, assign all or a portion of its rights and obligations to any of its Affiliates or to another Lender (provided no assignment of Revolving Commitments or any Revolving Advances or other Revolving Extensions of Credit may be made by a Revolving Lender to a Term Lender or a 2016 Term Lender pursuant to this clause unless such Term Lender or 2016 Term Lender, as applicable, is already also a Revolving Lender hereunder). Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (other than its rights under Section 2.12, 2.15 and 9.04 to the extent any claim thereunder relates to an event arising prior such assignment) and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto).
(b)    In connection with any assignment of rights and obligations of any Defaulting Lender hereunder, no such assignment shall be effective unless and until, in addition to the other conditions thereto set forth herein, the parties to the assignment shall make such additional payments to the Agent in an aggregate amount sufficient, upon distribution thereof as appropriate (which may be outright payment, purchases by the assignee of participations or sub-participations, or other compensating actions, including funding, with the consent of the Agent, the applicable pro rata share of Loans previously requested but not funded by the Defaulting Lender, to each of which the applicable assignee and assignor hereby irrevocably consent), to (x) pay and satisfy in full all payment liabilities then owed by such Defaulting Lender to the Agent, the Issuing Lender or any Lender hereunder (and interest accrued thereon) and (y) acquire (and fund as appropriate) its full pro rata share of all Loans and participations in Letters of Credit and Swingline Loans in accordance with its Revolving Commitment Percentage. Notwithstanding the foregoing, in the event that any assignment of rights and obligations of any Defaulting Lender hereunder shall become effective under

102

applicable law without compliance with the provisions of this paragraph, then the assignee of such interest shall be deemed to be a Defaulting Lender for all purposes of this Agreement until such compliance occurs.
(c)    By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the other Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Loan Parties or the performance or observance by the Borrowers of any of their obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 5.01 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement and the other Loan Documents as are delegated to the Agent by the terms hereof and thereof, together with such powers and discretion as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Lender.
(d)    Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with any Note or Notes subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit B hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrowers.
(e)    The Agent shall maintain at its address referred to in Section 9.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Revolving Commitment of, and principal amount of the Advances and L/C Obligations owing to, each Revolving Lender from time to time, the principal amount of the Term Loan owing to each Term Lender from time to time, and the principal amount of the 2016 Term Loan owing to each 2016 Term Lender from time to time (the “ Register ”). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrowers, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrowers or any Lender at any reasonable time and from time to time upon reasonable prior notice.
(f)    Each Lender may, without the consent of the Agent or any Loan Party, sell participations to one or more banks or other entities (other than the Borrowers or any of their Affiliates) in or to all or a portion of its rights and obligations under this Agreement (including all or a portion of its Revolving Commitment, the Advances owing to it, the portion of the Term Loan owing to it, the portion of the 2016 Term Loan owing to it, and any Note or Notes held by it); provided , however , that (i) such Lender’s obligations under this Agreement (including its Revolving Commitment to the Borrowers and its obligations to the Swingline Lender and the Issuing Lender hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Note for all purposes of this Agreement, (iv) the Borrowers, the Agent, the Co-Collateral Agents and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement and (v) no participant under any such participation shall have any right to approve any amendment or waiver of any provision of this Agreement or any Loan Document, or consent to any departure by any Borrower therefrom, except to the extent that such amendment,

103

waiver or consent would require the affirmative vote of the Lender from which it purchased its participation pursuant to Section 9.01(a).
(g)    Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 9.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to Holdings, the Borrowers or their Subsidiaries furnished to such Lender by or on behalf of the Borrowers; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any Borrower Information relating to Holdings, the Borrowers or their Subsidiaries received by it from such Lender in accordance with Section 9.08.
(h)    Notwithstanding any other provision set forth in this Agreement, any Lender may at any time (i) create a security interest in all or any portion of its rights under this Agreement (including the Advances owing to it, the portion of the Term Loan owing to it, the portion of the 2016 Term Loan owing to it and any Notes held by it), including, without limitation, in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System and (ii) assign to one or more special purpose funding vehicles (each, an “ SPV ”) all or any portion of its funded Advances (without the corresponding Revolving Commitment), without the consent of any Person or the payment of a fee, by execution of a written assignment agreement in a form agreed to by such Lender and such SPV, and may grant any such SPV the option, in such SPV’s sole discretion, to provide the Borrowers all or any part of any Advances that such Lender would otherwise be obligated to make pursuant to this Agreement. Such SPVs shall have all the rights which a Revolving Lender making or holding such Advances would have under this Agreement, but no obligations; provided , that no SPV shall be entitled to compensation pursuant to Section 2.12 or 2.15 in excess of that to which the applicable Revolving Lender would otherwise have been entitled. The Lender shall remain liable for all its original obligations under this Agreement, including its Revolving Commitment (although the unused portion thereof shall be reduced by the principal amount of any Advances held by an SPV). Notwithstanding such assignment, the Agent and Borrowers may deliver notices to the Lender (as agent for the SPV) and not separately to the SPV unless the Agent and Borrowers are requested in writing by the SPV (or its agent) to deliver such notices separately to it. The Borrowers shall, at the request of any Revolving Lender, execute and deliver to such Person as such Revolving Lender may designate, a Note in the amount of such Lender's Revolving Commitment to evidence the Advances of such Revolving Lender and related SPV.
(i)    The Borrowers, upon receipt of written notice from the relevant Lender, agree to issue Notes to any Lender to facilitate transactions of the type described in paragraph (g) above.
(j)    Neither Holdings nor any Borrower shall have the right to assign its rights hereunder or any interest herein without the prior written consent of each of the Lenders (except, in the case of SRAC, pursuant to Section 6.01(d)).
SECTION 9.08.      Confidentiality . Neither the Agent, any Co-Collateral Agent, any Issuing Lender, nor any Lender may disclose to any Person any confidential, proprietary or non-public information of Holdings or the Borrowers furnished to the Agent or the Lenders by Holdings or the Borrowers (such information being referred to collectively herein as the “ Borrower Information ”), except that each of the Agent, each of the Co-Collateral Agents, each of the Issuing Lenders and each of the Lenders may disclose Borrower Information (i) to its and its Affiliates’ employees, officers, directors, agents and advisors to whom disclosure is required to enable the Agent, the Co-Collateral Agents, the Issuing Lenders or such Lender to perform its obligations under this Agreement and the other Loan Documents or in connection with the administration or monitoring of this Agreement and the other Loan Documents by the Agent, the Co-Collateral Agents, Issuing Lenders, or such Lender (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Borrower Information and instructed to keep such Borrower Information confidential on substantially the same terms as provided herein), (ii) to the extent requested by any regulatory authority, (iii) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (iv) to any other party to this Agreement and the other Loan Documents, (v) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement and the other Loan Documents or the enforcement of rights hereunder or thereunder, (vi) subject to an agreement containing provisions

104

substantially the same as those of this Section 9.08, to any assignee or participant, or any prospective assignee or participant, (vii) to the extent such Borrower Information (A) is or becomes generally available to the public on a non-confidential basis other than as a result of a breach of this Section 9.08 by the Agent, any Co-Collateral Agent or such Lender, as the case may be, or (B) is or becomes available to the Agent, any Co-Collateral Agent or such Lender on a non-confidential basis from a source other than Holdings, the Borrowers or any of their Subsidiaries and (viii) with the consent of the Borrowers.
SECTION 9.09.      Governing Law . This Agreement and the Notes shall be governed by, and construed in accordance with, the laws of the State of New York without regard to conflicts of laws principles thereof but including Section 5-1401 and 5-1402 of the New York General Obligations Law.

SECTION 9.10.      Execution in Counterparts . This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement.
SECTION 9.11.      Jurisdiction, Etc. (a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the non-exclusive jurisdiction of any New York State court or federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the extent permitted by law, in such federal court. Holdings and each of the Borrowers hereby irrevocably consents to the service of process in any action or proceeding in such courts by the mailing thereof by any parties hereto by registered or certified mail, postage prepaid, to Holdings or such Borrower at its address specified pursuant to Section 9.02. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents in the courts of any jurisdiction.
(b)    Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any New York State or federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
SECTION 9.12.      WAIVER OF JURY TRIAL . EACH OF HOLDINGS, THE BORROWERS, THE AGENT, THE CO-COLLATERAL AGENTS, THE ISSUING LENDERS AND THE LENDERS HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR THE ACTIONS OF THE AGENT, THE CO-COLLATERAL AGENTS, THE ISSUING LENDERS OR ANY LENDER IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
SECTION 9.13.      Release of Collateral or Guarantee Obligation . (a) Notwithstanding anything to the contrary contained herein or in any other Loan Document, the Co-Collateral Agents are hereby irrevocably authorized by each Lender (without requirement of consent of or notice to any Lender) to take, and hereby agree to take, any action requested by the Borrowers having the effect of releasing any Collateral or guarantee obligations (i) to the extent necessary to permit consummation of any transaction not prohibited by any Loan Document (including, without limitation, any Permitted Disposition) or that has been consented to in accordance with Section 9.01; provided that the

105

guarantee obligations of Sears may not be released without the consent of the Required Lenders, or (ii) under the circumstances described in paragraph (b) below.
(b)    At such time as the Advances, the Term Loan, the 2016 Term Loan, the Reimbursement Obligations and all other Obligations shall have been paid in full in cash, the Commitments have been terminated and no Letters of Credit shall be outstanding (or any outstanding Letters of Credit shall have been cash collateralized in an amount equal to 105% of the aggregate then undrawn and unexpired amount of such Letters of Credit and all other Reimbursement Obligations or back-to-back letters of credit from an issuer and on terms acceptable to the Issuing Lenders have been provided in respect of such Letters of Credit), the Collateral shall be released from the Liens created by the Security Documents, and the Security Documents and all obligations (other than those expressly stated to survive such termination) of the Co-Collateral Agents and each Loan Party under the Security Documents shall terminate, all without delivery of any instrument or performance of any act by any Person.
SECTION 9.14.      PATRIOT Act Notice . Each Lender that is subject to the PATRIOT Act and the Agent (for itself and not on behalf of any Lender) hereby notifies each Borrower that pursuant to the requirements of the PATRIOT Act, it is required to obtain, verify and record information that identifies each Borrower, which information includes the name and address of such Borrower and other information that will allow such Lender or the Agent, as applicable, to identify such Borrower in accordance with the PATRIOT Act. Each Borrower hereby agrees to provide such information promptly upon the request of any Lender or the Agent.
SECTION 9.15.      Integration . This Agreement and the other Loan Documents represent the agreement of Holdings, the Borrowers, the Agent, the Co-Collateral Agents and the Lenders with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by the Agent, any Co-Collateral Agent or any Lender relative to subject matter hereof and thereof not expressly set forth or referred to herein or in the other Loan Documents. Notwithstanding the foregoing, Holdings and the Borrowers acknowledge and agree that the provisions of the GE Commitment Letter survive the execution hereof to the extent set forth herein and therein.

SECTION 9.16.      Replacement of Lenders . If any Lender requests compensation under Section 2.12 or if the Borrowers are required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.15 , if any Lender does not consent (a “ Non-Consenting Lender ”) to a proposed amendment, waiver, consent or release with respect to any Loan Document that requires the consent of each Lender and that has been approved by the Required Lenders or any Lender is a Defaulting Lender, then the Borrowers may, at their sole expense and effort, upon notice to such Lender and the Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 9.07 ), all of its interests, rights and obligations under this Agreement and the related Loan Documents to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment), provided that:
(a)     (a)     the Borrowers shall have paid to the Agent the assignment fee specified in Section 9.07 ;
(b)     (b)     such Lender shall have received payment of an amount equal to the outstanding principal of its Advances, its ratable share of the Term Loan and its ratable share of the 2016 Term Loan, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Loan Documents from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrowers (in the case of all other amounts);
(c)     (c)     in the case of any such assignment resulting from a claim for compensation under Section 2.12 or payments required to be made pursuant to Section 2.15 , such assignment will result in a reduction in such compensation or payments thereafter;
(d)     (d)     with respect to the replacement of any Non-Consenting Lender, such amendment, waiver or consent can be effected as a result of such assignment (together with all other assignments required by the Agent to be made pursuant to this paragraph); and

106

(e)     (d)     such assignment does not conflict with applicable laws.
A Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrowers to require such assignment and delegation cease to apply.
SECTION 9.17.      No Advisory or Fiduciary Capacity . In connection with all aspects of each transaction contemplated hereby, the Loan Parties each acknowledge and agree that: (i) the credit facility provided for hereunder and any related arranging or other services in connection therewith (including in connection with any amendment, waiver or other modification hereof or of any other Loan Document) are an arm’s-length commercial transaction between the Loan Parties, on the one hand, and the Credit Parties, on the other hand, and each of the Loan Parties is capable of evaluating and understanding and understands and accepts the terms, risks and conditions of the transactions contemplated hereby and by the other Loan Documents (including any amendment, waiver or other modification hereof or thereof); (ii) in connection with the process leading to such transaction, the each Credit Party is and has been acting solely as a principal and is not the financial advisor, agent or fiduciary, for the Loan Parties or any of their respective Affiliates, stockholders, creditors or employees or any other Person; (iii) none of the Credit Parties has assumed or will assume an advisory, agency or fiduciary responsibility in favor of the Loan Parties with respect to any of the transactions contemplated hereby or the process leading thereto, including with respect to any amendment, waiver or other modification hereof or of any other Loan Document (irrespective of whether any of the Credit Parties has advised or is currently advising any Loan Party or any of its Affiliates on other matters) and none of the Credit Parties has any obligation to any Loan Party or any of its Affiliates with respect to the transactions contemplated hereby except those obligations expressly set forth herein and in the other Loan Documents; (iv) the Credit Parties and their respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Loan Parties and their respective Affiliates, and none of the Credit Parties has any obligation to disclose any of such interests by virtue of any advisory, agency or fiduciary relationship; and (v) the Credit Parties have not provided and will not provide any legal, accounting, regulatory or tax advice with respect to any of the transactions contemplated hereby (including any amendment, waiver or other modification hereof or of any other Loan Document) and each of the Loan Parties has consulted its own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate. Each of the Loan Parties hereby waives and releases, to the fullest extent permitted by law, any claims that it may have against each of the Credit Parties with respect to any breach or alleged breach of agency or fiduciary duty.
SECTION 9.18.      Existing Credit Agreement Amended and Restated . Upon satisfaction of the conditions precedent to the effectiveness of this Agreement, (a) this Agreement shall amend and restate the Existing Credit Agreement in its entirety, (b) the rights and obligations of the parties under the Existing Credit Agreement shall be subsumed within and be governed by this Agreement; provided, however, that Holdings and the Borrowers hereby agree that (i) each Existing Letter of Credit outstanding under the Existing Credit Agreement on July 21, 2015 shall be a Letter of Credit hereunder, and (ii) all obligations and other liabilities of the Loan Parties under the Existing Credit Agreement shall remain outstanding, shall constitute continuing Obligations secured by the Collateral, and this Agreement shall not be deemed to evidence or result in a novation or repayment and reborrowing of such obligations and other liabilities.
SECTION 9.19.      Keepwell . Each Loan Party that is a Qualified ECP Guarantor at the time the Guarantee and Collateral Agreement or the grant of a security interest under the Loan Documents, in each case, by any Specified Loan Party becomes effective with respect to any Swap Obligation, hereby jointly and severally, absolutely, unconditionally and irrevocably undertakes to provide such funds or other support to each Specified Loan Party with respect to such Swap Obligation as may be needed by such Specified Loan Party from time to time to honor all of its obligations under the Loan Documents in respect of such Swap Obligation (but, in each case, only up to the maximum amount of such liability that can be hereby incurred without rendering such Qualified ECP Guarantor’s obligations and undertakings under the Guarantee and Collateral Agreement voidable under applicable Law relating to fraudulent conveyance or fraudulent transfer, and not for any greater amount). The obligations and undertakings of each Qualified ECP Guarantor under this Section shall remain in full force and effect until the Obligations have been paid and performed in full. Each Loan Party intends this Section to constitute, and this Section shall be deemed to constitute, a guarantee

107

of the obligations of, and a “keepwell, support, or other agreement” for the benefit of, each Specified Loan Party for all purposes of the Commodity Exchange Act.

[Remainder of page intentionally left blank]



108

Annex B





Schedule 1.01
Lenders; Commitment s

Lenders; Commitments


Revolving Lender


Revolving Commitment
Bank of America, N.A.
$285,388,127.87
Wells Fargo Bank, National Association
$608,828,006.09
Citibank, N.A.
$152,207,001.52
PNC Bank, National Association
$152,207,001.52
Ally Commercial Finance LLC
$76,103,500.76
Siemens Financial Services, Inc.
$76,103,500.76
Citizens Business Capital
$53,272,450.53
TD Bank, N.A.
$46,423,135.46
Regions Bank
$19,025,875.19
UPS Capital Corporation
$19,025,875.19
Banco Popular de Puerto Rico
$11,415,525.11

TOTAL
$1,500,000,000.00

Term Commitments were funded on October 2, 2013. As of the Second Amendment Effective Date, the aggregate outstanding amount of the Term Loan is $967,500,000.
2016 Term Commitments were funded on April 8, 2016. As of the Second Amendment Effective Date, the aggregate outstanding amount of the 2016 Term Loan is $750,000,000.


 
SCHEDULE IC

Extended Term Pricing Grid


Level
Consolidated Leverage Ratio
Extended Term Applicable Margin for
Eurodollar Rate Advances
Extended Term Applicable Margin for
Base Rate Advances
1
Less than 2.0:1.0
3.50%
2.50%
2
Greater than or equal to 2.0:1.0 but less than 3.0:1.0
3.75%
2.75%
3
Greater than or equal to 3.0:1.0
4.00%
3.00%

Changes in the Extended Term Applicable Margin resulting from changes in the Consolidated Leverage Ratio shall become effective on each Adjustment Date and shall remain in effect until the next change to be effected pursuant to this paragraph. If any financial statements referred to above are not delivered within the time periods specified above, then, until such financial statements are delivered, the Consolidated Leverage Ratio as at the end of the fiscal period that would have been covered thereby shall for the purposes of this definition be deemed to be greater than 3.0 to 1.0.
If any financial statements are at any time restated or otherwise revised (including as a result of an audit) or if the information set forth in any financial statement otherwise proves to be false or incorrect such that the Extended Term Applicable Margin would have been higher than was otherwise in effect during any period, without constituting a waiver of any Default or Event of Default arising as a result thereof, interest payable under this Agreement, whether previously paid or not, shall be immediately recalculated at such higher rate for any applicable periods and shall be due and payable on demand.



EXHIBIT 10.45

 
[LETTERHEAD OF SEARS HOLDINGS]



September 24, 2015



Sean Skelley


Dear Sean,

We are pleased to extend to you our offer to join Sears Holdings Corporation (“SHC”) as President, Home Services reporting to the Board of Directors for Homes Services. Your start date is to be October 12, 2015 and you will be employed by Sears Holdings Management Corporation. Your work location will be SHC’s Corporate Headquarters located in Hoffman Estates, IL. This letter serves as confirmation of our offer, subject to all of the contingencies listed below and subject to the approval of the Compensation Committee (“Compensation Committee”) of SHC’s Board of Directors.
The key elements of your compensation package and the other conditions of your employment are as follows:
•
Annual base salary at a rate of $800,000.
•
Participation in the Sears Holdings Corporation Annual Incentive Plan (“AIP”) with an annual target incentive opportunity of 100% of your base salary. Your first year target annual incentive opportunity under the AIP will be prorated based on the period of time from your start date until the last day of such fiscal year. Any payment under the AIP will be paid by April 15th of the following fiscal year, provided that you fulfill the duties and responsibilities of your position for the applicable fiscal year (as determined by SHC) and are actively employed as of the payment date. Further details regarding your AIP target award will be provided to you following your start date.
•
Notwithstanding the foregoing, provided you fulfill the duties and responsibilities of your position for the applicable fiscal year (as determined by SHC) and are actively employed on the AIP payment date for the applicable fiscal year’s AIP, for the following fiscal years, your AIP bonus will be no less than the guaranteed amount indicated below:

Fiscal Year
Guaranteed Amount
2015
100 % of your pro-rated target incentive opportunity under AIP for such fiscal year as defined above.
2016
100% of your target incentive opportunity under AIP for such fiscal year

Payment of the foregoing guaranteed amount is subject to all applicable tax withholding and is subject to offset for amounts you may owe to the Company to the maximum extent permitted by law.
•
Participation in the SHC long-term incentive program (“LTI”). Your target incentive opportunity under the 2015 SHC LTI will be 100% of your base salary. The LTI award for the year in which your start date occurs will be prorated based on the period of time from your start date through February 3, 2018, the last day of SHC’s 2017 fiscal year. Further details regarding your 2015 SHC LTI target award will be provided to you following your start date.

Mr. Sean Skelley
September 24, 2015
Page 2


•
You represent and warrant to SHC that:
(a)
as of your start date with SHC, you are not subject to any obligation, written or oral, containing any non-competition provision or any other restriction (including, without limitation, any confidentiality provision) that would result in any restriction on your ability to accept and perform this or any other position with SHC or any of its affiliates; and,
(b)
you are not (i) a member of any board of directors, board of trustees or similar governing body of any for-profit, non-profit or not-for-profit entity, or (ii) a party to any agreement, written or oral, with any entity under which you would receive remuneration for your services, except as disclosed to and approved by SHC in advance of your start date.
In addition, you agree that you will not (1) become a member of any board or body described in clause (b)(i) above, or (2) become a party to any agreement described in clause (b)(ii), above, in each case without the prior written consent of SHC, such consent not to be unreasonably withheld. Further, you agree you will not disclose or use, in violation of an obligation of confidentiality, any information that you acquired as a result of any previous employment or otherwise.  
•
You will be required to sign an Executive Severance Agreement (“Agreement”), the Agreement provides consideration of twelve (12) months of salary continuation, subject to mitigation, upon, for example, involuntary termination without Cause as defined therein. In addition, the Agreement includes non-disclosure, non-solicitation and a limited non-compete that apply following termination of employment and regardless of whether you receive severance benefits under this Agreement. These provisions are detailed in the Agreement, which you should review thoroughly.
•
You will be provided commuter benefits from your start date through April 30, 2017 or until your relocation to the greater Chicago metropolitan area, whichever occurs first. These commuter benefits will be:
•
Weekly round trip commercial air transportation between your home in Leesburg, VA and the greater Chicago metropolitan area, subject to the procedures and guidelines set forth in SHC’s Corporate Travel and Entertainment Policy (“T&E Policy”); and
•
Ground transportation between your home in Leesburg, VA and the local airport for travel to the Hoffman Estates office, and also to and from Chicago area airports when commuting to your home in Leesburg, VA. You may select from any means of ground transportation, subject to the procedures and guidelines set forth in the T&E Policy.
•
A monthly cash commuter allowance of $4,050, which includes a 35% tax-gross-up. This cash allowance is intended to assist you with all other commuter expenses including but not limited to hotel or rent (including security deposit), utilities, meals, ground transportation (other than the trips specified above) including fuel and tolls. This payment will be processed with the last paycheck of each month and is subject to applicable tax withholding.

You will be provided with a corporate Commuter Credit Card that should be used to purchase only the commuter benefits described in (a) and (b) above. A separate corporate Travel Credit Card will be provided to you to be used for eligible business expenses. You will be required to track your commuter expenses separate from your business expenses. On a monthly basis, after you submit your expense report(s), SHC will pay for approved commuter expenses ((a) and (b) above) and, in accordance with the Company’s Travel and Entertainment Policy, for business related expenses.



Mr. Sean Skelley
September 24, 2015
Page 3

Commuter benefits will be treated as taxable imputed income to you and will be included in your W-2 wages. The Company will add to your pay a cash gross-up equal to 35% of the imputed income from (a) and (b) above, to defray a portion of the taxes due on these commuter expenses (the amount cited in (c) already includes such a tax gross-up).

•
You will be eligible for relocation assistance in accordance with the Company’s standard relocation policy. To receive relocation assistance, you must sign the Relocation Repayment Agreement enclosed with this letter. Your relocation package will include:
•
Home sale assistance and moving and storage of household goods (includes shipment of up to two (2) automobiles); and
•
A one-time relocation lump sum payment of $40,000

The relocation lump sum payment will be made as soon as administratively possible at the time you initiate your relocation, but will be forfeited if for any reason, you do not complete your relocation by the twenty-fourth (24 th ) month anniversary of your start date. Completion of your relocation will be determined by SHC based on the facts and circumstances but you will be deemed to have completed your relocation upon (a) scheduling final delivery of your household goods to within 50 miles of your work location, (b) purchasing a home within 50 miles of your work location, or (c) signing a long-term rental lease (at least one year) within 50 miles of your work location. If permanent relocation has not been completed prior to the twenty-fourt (24) month anniversary of your start date, you will be required to repay SHC any portion of the relocation lump sum already paid to you, including any taxes withheld, unless prohibited by law within thirty (30) days of your last day worked or twenty-four month anniversary of your start date, whichever occurs first.

Once you have received your relocation lump sum payment, your commuter benefits will cease.

•
You will be covered under and subject to the terms and conditions of the Non-Accrual Vacation Policy.
•
You will be eligible to participate in all retirement, health and welfare programs on a basis no less favorable than other executives at your level, in accordance with the applicable terms, conditions and availability of those programs.
•
This offer also is contingent upon satisfactory completion of a background reference check, employment authorization verification and pre-employment drug test.

All payments in this letter will be subject to applicable tax withholding requirements.

Sean, we are looking forward to you joining Sears Holdings Corporation. We are excited about the important contributions you will make to the company and look forward to your acceptance of our offer. If you need additional information or clarification, please call.

This offer will expire if not accepted within one week from the date of this letter. To accept, sign below and return this letter along with your signed Executive Severance Agreement to my attention.











Mr. Sean Skelley
September 24, 2015
Page 4


Sincerely,



/s/ Tiffany Morris
Tiffany Morris

Enclosures

Accepted:

/s/ Sean Skelley                  9/28/15
Sean Skelley                        Date



EXHIBIT 10.46

 
[LETTERHEAD OF SEARS HOLDINGS]


March 23, 2016


Dr. Stephan H. Zoll

Dear Stephan,

We are pleased to extend to you our offer to join Sears Holdings Corporation (“SHC”) as President, Online, reporting to Edward Lampert, Chief Executive Officer. Your start date is to be determined and you will be employed by Sears Holdings Management Corporation. Your work location will be SHC’s Corporate Headquarters located in Hoffman Estates, Illinois. This letter serves as confirmation of our offer, subject to all of the contingencies listed below.
The key elements of your compensation package and the other conditions of your employment are as follows:
•
Annual base salary at a rate of $725,000.
•
Participation in the Sears Holdings Corporation Annual Incentive Plan (“AIP”) with an annual target incentive opportunity of 100% of your base salary. Any payment under the AIP will be paid by April 15 th of the following fiscal year, provided that you are actively employed as of the payment date. Further details regarding your AIP target award will be provided to you following your start date.
•
Notwithstanding the foregoing, provided you are actively employed on the AIP payment date for the applicable fiscal year’s AIP, for the following fiscal years, your AIP bonus will be no less than the guaranteed amount indicated below:

Fiscal Year
Guaranteed Amount
2016
$725,000
2017
$725,000

Payment of the foregoing guaranteed amount is subject to offset for amounts you may owe to the Company to the maximum extent permitted by law.
•
Participation in the SHC long-term incentive programs (“LTI”):  Your target incentive opportunity under the SHC LTI will be 103% of your base salary. Your 2016 LTI target opportunity will be calculated without pro-ration through February 2, 2019, the last day of SHC’s 2018 fiscal year and the last day of the 2016-2018 LTI performance period. SHC’s LTI is comprised of two separate programs: (i) Cash Long-Term Incentive Plan (“Cash LTI”), a time-based vesting program; and (ii) Long-Term Incentive Program (“LTIP”), a performance-based program. For 2016, Cash LTI is 25% of your total LTI target opportunity, and LTIP is 75% of the total. Further details regarding your SHC LTI target award and both programs will be provided to you following your start date.


Dr. Stephan H. Zoll
March 23, 2016
Page 2



•
A special cash award of One Million Nine Hundred Thousand Dollars ($1,900,000) (“Special Cash Award”). This award will be earned progressively as of the dates indicated below:

 
Amount
Start Date
$500,000
1 st Anniversary of Start Date
$900,000
2 nd Anniversary of Start Date
$250,000
3 rd Anniversary of Start Date
$250,000

Payment under the Special Cash Award will be made within thirty (30) days after the applicable date indicated above, provided you are actively employed on the applicable anniversary date. Payment will be subject to all applicable tax withholding and is subject to offset for amounts you may owe to the Company, to the maximum extent permitted by law. In the event that your employment with the Company terminates for any reason prior to an applicable anniversary date, you will not be entitled to receive any unpaid portion of the Special Cash Award.

Payment of the Special Cash Award is subject to the following:

•
If SHC involuntarily terminates your employment for Cause (as defined in the ESA referenced below) or you voluntarily terminate your employment without Good Reason (as defined in the ESA referenced below), you will be obligated to repay some or all of the Special Cash Award as follows:

Date of Termination
Repayment Obligation
Prior to or on 1 st  anniversary of start date
Must repay 100% of Special Cash Award received
After 1 st  anniversary of start date but prior to or on 2 nd  anniversary of start date
Must repay $58,333 for each month from the month in which falls the Date of Termination until the date that would have been your 2 nd  anniversary; in counting months for this purpose, if the Date of Termination is more than halfway through a month, such month will not be counted
After 2 nd  anniversary of start date
No obligation to repay any amount

In all instances where you are obligated to make repayment, the amount you would owe will be the gross amount paid, that is, will include amounts withheld for taxes.

•
You represent and warrant to SHC that:
(a)
except for the non-competition and confidentiality obligations you have to eBay, which have been disclosed to SHC, as of your start date with SHC, you are not subject to any obligation, written or oral, containing any non-competition provision or any other restriction (including, without limitation, any confidentiality provision) that would result in any restriction on your ability to accept and perform this or any other position with SHC or any of its affiliates; and,


Dr. Stephan H. Zoll
March 23, 2016
Page 3



(b)
except for the board positions listed on Exhibit A, you are not (i) a member of any board of directors, board of trustees or similar governing body of any for-profit, non-profit or not-for-profit entity, or (ii) a party to any agreement, written or oral, with any entity under which you would receive remuneration for your services, except as disclosed to and approved by SHC in advance of your start date.
In addition, you agree that you will not (1) become a member of any board or body described in clause (b)(i) above, or (2) become a party to any agreement described in clause (b)(ii), above, in each case without the prior written consent of SHC, such consent not to be unreasonably withheld. Further, you agree you will not disclose or use, in violation of an obligation of confidentiality, any information that you acquired as a result of any previous employment or otherwise.
 
•
You will be required to sign an Executive Severance Agreement (“Agreement”), the Agreement provides consideration of twleve (12) months of salary continuation, subject to mitigation, upon, for example, involuntary termination without Cause as defined therein. In addition, the Agreement includes non-disclosure, non-solicitation and a limited non-compete that apply following termination of employment and regardless of whether you receive severance benefits under this Agreement. These provisions are detailed in the Agreement, which you should review thoroughly.
•
You will be eligible for relocation assistance in accordance with the Company’s standard relocation policy. To receive relocation assistance, you must sign the Relocation Repayment Agreement enclosed with this letter. Your relocation package will include:
•
The Company’s relocation vendor will assign a local Destination Service Provider (DSP) to assist you with settling in at your destination location. The DSP will help you and any eligible relocating family members work with and schedule time with real estate agents, identify financial institutions, arrange for utility hook-ups, and obtain US driver’s licensing and registration. The DSP will also assist your family with identifying gyms, parks, places of worship, shopping, etc. In addition, relocation assistance will include:
•
Moving and storage of household goods; and
•
A one-time relocation lump sum payment of $35,000 (net).

The relocation lump sum payment will be made as soon as administratively possible, but if for any reason, you do not complete your relocation by the first anniversary of your start date, you will be required to repay SHC any portion of the relocation lump sum already paid to you, including any taxes withheld, unless prohibited by law within thirty (30) days of your last day worked or first anniversary of your start date, whichever occurs first.

•
You will be provided a twelve (12) month temporary housing benefit beginning from your start date. The benefit will include a monthly cash allowance of $5,000 (net). This cash allowance is intended to assist you with all temporary housing related expenses including but not limited to hotel or rent (including security deposit), utilities, etc. This payment will be processed with the last paycheck of each month and is subject to applicable tax withholding.


Dr. Stephan H. Zoll
March 23, 2016
Page 4



•
To assist with your personal tax affairs related to your relocation, the Company has appointed external tax consultants Ernst & Young (“E&Y”). E&Y will help you complete your US federal and state tax returns for the tax year in which you relocate and one subsequent tax year.  Included with this assistance, E&Y will have a telephonic meeting with you before you relocate to discuss potential home country and US tax implications associated with your relocation.  To the extent some, or all, of these services are deemed imputed income and taxable to you, the Company will add 35% of such amounts to your earnings to defray a portion of the taxes due on the imputed income.
•
You will be covered under and subject to the terms and conditions of the Non-Accrual Vacation Policy.
•
This offer also is contingent upon you obtaining work authorization in the United States.

All payments in this letter will be subject to applicable tax withholding requirements.
Stephan, we are looking forward to you joining Sears Holdings Corporation. We are excited about the important contributions you will make to the company and look forward to your acceptance of our offer. If you need additional information or clarification, please call.

(Remainder of page intentionally blank; Continue next page)

Dr. Stephan H. Zoll
March 23, 2016
Page 5




This offer will expire if not accepted within one week from the date of this letter. To accept, sign below and return this letter along with your signed Executive Severance Agreement to my attention.

Sincerely,

/s/ Tiffany Morris

Tiffany Morris

Enclosures

Accepted:

/s/ Stephan H. Zoll                       _24_/_03_/_2016_
Stephan H. Zoll                        Date

Dr. Stephan H. Zoll
March 23, 2016
Page 6





EXHIBIT A


Board Seats :

•
Medianet; www.medianet-bb.de
•
IFH; www.ifhkoeln.de
•
Bonagora; www.bonagora.com



EXHIBIT 10.47

EXECUTIVE SEVERANCE AGREEMENT
By this Executive Severance Agreement dated March 24, 2016 (“Agreement”), Sears Holdings Corporation and its affiliates and subsidiaries (“Sears”), and Stephan H. Zoll (“Executive”), intending to be legally bound, and for good and valuable consideration, agree as follows:
1.      Effect of Severance .
(a)           Severance Benefits . If Executive is involuntarily terminated without “Cause” or Executive voluntarily terminates Executive’s employment for “Good Reason” (as such terms are defined in Section 2 below), Executive shall be entitled to the benefits described in subsection (i), (ii) and (iii) below (collectively referred to herein as “Severance Benefits”). Executive shall not be entitled to the Severance Benefits if Executive’s employment terminates for any other reason, including due to death or “Disability” (as defined in Section 2 below). Executive shall also not be entitled to Severance Benefits if Executive does not meet all of the other requirements under this Agreement, including under subsection 4(g).
i.           Continuation of Salary .
1.    Sears or the appropriate “Sears Affiliate” (as defined in Section 2 below) shall pay Executive cash severance equal to twelve (12) months of pay at Executive’s annual base salary rate as of the date Executive’s employment terminates (“Date of Termination”) plus an amount equal to his annual target incentive opportunity under the Annual Incentive Plan for the fiscal year in which his Date of Termination occurs. Subject to subsection (a)(i)(2) below, payment of such amount (“Salary Continuation”) shall commence on Executive’s “Separation from Service” (as defined in Section 2 below) and shall be paid in substantially equal installments on each regular salary payroll date for a period of twelve (12) months following Date of Termination (“Salary Continuation Period”), except as otherwise provided in this Agreement.
In addition, if the Date of Termination is prior to the third anniversary of Executive’s start date, then, in addition to the Salary Continuation, Sears or the appropriate Sears Affiliate will pay Executive an amount equal to any unpaid amount of the Special Cash Award set forth in his Offer Letter. In such event, such amount will be subject to all of the terms and conditions in this Agreement applicable to Salary Continuation, including that payment is conditioned on providing and not revoking the release referenced in and in accordance with section 4(g), and the forfeiture provision stated in subparagraph (3), below, except that payment will be made within forty-five (45) days of his Date of Termination
Notwithstanding the foregoing, the Sears or Sears Affiliate obligation to pay Salary Continuation under this subsection (a)(i)(1) shall be reduced on a dollar-for-dollar basis (but not below zero), by the amount, if any, of fees, salary or wages that Executive earns from a

    


subsequent employer (including those arising from self-employment) during the Salary Continuation Period. For avoidance of doubt, Executive shall not be obligated to seek affirmatively or accept an employment, contractor, consulting or other arrangement in order to mitigate Salary Continuation. Further, to the extent Executive does not execute and timely submit the General Release and Waiver (in accordance with subsection 4(g) below) by the deadline specified therein, Salary Continuation payments shall terminate and forever lapse, and Executive shall be required to reimburse Sears for any portion of the Salary Continuation paid during the Salary Continuation Period.
2.    Notwithstanding anything in this subsection (a)(i) to the contrary, if the Salary Continuation payable to Executive in accordance with subsection (a)(i)(1) above during the first six (6) months after Executive’s Separation from Service would exceed the “Section 409A Threshold” and if as of the date of the Separation from Service Executive is a “Specified Employee” (as such terms are defined in Section 2 below), then, payment shall be made to Executive on each regular salary payroll date during the first six (6) months of the Salary Continuation Period until the aggregate amount received equals the Section 409A Threshold. Any portion of the Salary Continuation in excess of the Section 409A Threshold that would otherwise be paid during such first six (6) months or any portion of the Salary Continuation that is otherwise subject to Section 409A, shall instead be paid to Executive in a lump sum payment on the date that is six (6) months and one (1) day after the date of Executive’s Separation from Service. No interest shall accrue or be paid with respect to any such deferred amounts.
3.    All Salary Continuation payments (described under this subsection (a)(i)) will terminate and forever lapse if Executive is employed by a “Sears Competitor” or “Sears Vendor” (as such terms are defined in subsection 4(c)(ii) and 4(d)(ii) herein, respectively) during the Salary Continuation Period or in the event of Executive’s breach (in accordance with Section 10 below), and Executive shall be required to reimburse Sears for any portion of the Salary Continuation paid during the Salary Continuation Period.

ii.           Continuation of Benefits .
1.    During the Salary Continuation Period, Executive will be entitled to participate in all benefit plans and programs (except as specified in this subsection (a)(ii)), as an active associate, in which Executive was eligible to participate on the Date of Termination (subject to the terms and conditions and continued availability of such plans and programs); provided, however, that Executive will not be eligible to participate in the long-term disability plan (as of the 15 th day following the Date of Termination), health care flexible spending account (except on an after-tax basis and only through the earlier of the end of Salary Continuation Period or the calendar year in which the Separation from

2

March 2016

Service occurs), Sears paid life insurance and the Sears Holdings 401(k) Savings Plan (or any other defined contribution plan sponsored by Sears or a Sears Affiliate) during the Salary Continuation Period. Executive and Executive’s eligible dependents shall be entitled to continue to participate, as active participants, in Sears medical and dental plans (subject to the terms and conditions and continued availability of such plans) during the Salary Continuation Period.
2.    If Executive does not timely execute and submit the General Release and Waiver (in accordance with subsection 4(g) herein) by the deadline specified therein, Executive shall be required to reimburse Sears for the portion of the cost for the benefits referred to under subsection (a)(ii)(1) immediately above paid by Sears during the Salary Continuation Period, and Executive shall instead be eligible for COBRA continuation coverage under the Sears medical and dental plans as of Executive’s Date of Termination.
3.    Subject to subsection (a)(ii)(4) immediately below, in the event Executive provides services to another employer and is covered by such employer’s health benefits plan or program, the medical and dental benefits provided by Sears hereunder shall be secondary to such employer’s health benefits plan or program in accordance with the terms of the Sears health benefit plans.
4.    All of the benefits described in this subsection (a)(ii) will terminate and forever lapse if Executive is employed by a Sears Competitor or Sears Vendor during the Salary Continuation Period or in the event of Executive’s breach (in accordance with Section 10 below), and Executive shall be required to reimburse Sears for any portion of the cost for the benefits referred to under subsection (a)(ii)(1) immediately above paid by Sears during the Salary Continuation Period, and Executive shall instead be eligible for COBRA continuation coverage under the Sears medical and dental plans as of Executive’s Severance from Service date.
iii.           Outplacement . As of Executive’s Separation from Service, Executive will be immediately eligible for reasonable outplacement services at the expense of Sears or the appropriate Sears Affiliate. Sears and Executive will mutually agree on which outplacement firm, among current vendors used by Sears, will provide these services. Such services will be provided for up to twelve (12) months from the Separation from Service or until employment is obtained, whichever occurs first. Outplacement benefits described in this subsection (a)(iii) will terminate and forever lapse if Executive is employed by a Sears Competitor or Sears Vendor or in the event of Executive’s breach (in accordance with Section 10 below).

iv.           Other . Notwithstanding the foregoing and anything herein to the contrary, in the event of Executive’s death during the Salary Continuation Period, any unpaid portion of the Salary Continuation payable in accordance with subsection (a)(i) above shall be paid in a lump sum, within sixty (60) days of

3

March 2016

death (and no later than amounts would have been paid absent death), to Executive’s estate, and any eligible dependents who are covered dependents as of the date of death shall incur a qualifying event under COBRA as a result of such death.
(b)           Impact of Termination on Certain Other Plans/Programs .
i.     Annual Incentive Plan . Upon Executive’s Date of Termination, Executive’s entitlement to any award under the applicable annual incentive plan (“AIP”) sponsored by Sears, shall be determined in accordance with the terms and conditions of the AIP document regarding termination of employment.

ii.     Long-Term Incentive Program(s) . Upon Executive’s Date of Termination, Executive’s entitlement to any award granted to Executive under a long-term incentive program (“LTIP”) sponsored by Sears, shall be determined in accordance with the terms and conditions of the award letter and the LTIP document regarding termination of employment.

iii.     Stock Plan . Upon Executive’s Date of Termination, Executive’s entitlement to any unvested options, restricted stock or other equity award granted to Executive under a stock plan sponsored by Sears shall be determined in accordance with the terms and conditions of the applicable award agreement and the stock plan document regarding termination of employment.

(c)           Post-Termination Forfeiture of Severance Benefits . If Sears determines within 12 months after Executive’s Date of Termination that Executive engaged in activity during employment with Sears that Sears determines constituted Cause, Executive shall immediately cease to be eligible for Severance Benefits and shall be required to reimburse Sears for any portion of the Salary Continuation and, if applicable, the additional amount equal to the Special Cash Award, paid to Executive and for the cost of other Severance Benefits received by Executive during the Salary Continuation Period.
2.           Definitions . For purposes of this Agreement, each capitalized term in this Agreement is either defined in the section, exhibit or appendix in which it first appears or in this Section 2. The following capitalized terms shall have the definitions as set forth below:
(a)          “ Cause ” shall mean (i) a material breach by Executive (other than a breach resulting from Executive’s incapacity due to a Disability) of Executive’s duties and responsibilities which breach is demonstrably willful and deliberate on Executive’s part, is committed in bad faith or without reasonable belief that such breach is in the best interests of Sears or the Sears Affiliates and is not remedied in a reasonable period of time after receipt of written notice from Sears specifying such breach; (ii) the commission by Executive of a felony; or (iii) willful misconduct in connection with Executive’s employment.
(b)              “Change in Control” shall mean:
i.
    Any one person, or more than one person acting as a group, acquires ownership of stock of the corporation that operates the

4

March 2016

Business such that the acquired stock, together with stock already held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of such corporation.
ii.
    A majority of members of the board of directors of the corporation that operates the Business is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of such corporation's board of directors before the date of the appointment or election.
iii.
    Any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets used to operate the Business that have a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all of the assets used to operate the Business.
(c)          “ Disability ” shall mean disability as defined under the Sears long-term disability plan (regardless of whether the Executive is a participant under such plan).
(d)          “ Good Reason ” shall mean, without Executive’s written consent, (i) a reduction of more than ten percent (10%) in the sum of Executive’s annual base salary and target AIP bonus from those in effect as of the date of this Agreement; (ii) Executive’s mandatory relocation to an office more than fifty (50) miles from the Sears headquarters in Hoffman Estates, Illinois; or (iii) any other action or inaction that constitutes a material breach of the terms of this Agreement, including failure of a successor company to assume or fulfill the obligations under this Agreement.  In each case, Executive must provide Sears with written notice of the facts giving rise to a claim that “Good Reason” exists for purposes of this Agreement, within thirty (30) days of the initial existence of such Good Reason event, and Sears shall have a right to remedy such event within sixty (60) days after receipt of Executive’s written notice  (“the sixty (60) day period”). If Sears remedies the Good Reason event within the sixty (60) day period, the Good Reason event (and Executive's right to receive any benefit under this Agreement on account of termination of employment for Good Reason) shall cease to exist. If Sears does not remedy the Good Reason event within the sixty (60) day period, and Executive does not incur a termination of employment within thirty (30) days following the earlier of: (y) the date Sears notifies Executive that it does not intend to remedy the Good Reason or does not agree that there has been a Good Reason event, or (z) the expiration of the sixty (60) day period, the Good Reason event (or any claim of Good Reason) shall cease to exist.  Notwithstanding the foregoing, if Executive fails to provide written notice to Sears of the facts giving rise to a claim of Good Reason within thirty (30) days of the initial existence of such Good Reason event, the Good Reason event (and Executive's right to receive any benefit under this Agreement on account of termination of employment for Good Reason) shall cease to exist as of the thirty-first (31 st ) day following the later of its occurrence or Executive’s knowledge thereof.

5

March 2016

(e)          “ Sears Affiliate ” shall mean any person with whom Sears is considered to be a single employer under Code Section 414 (b) and all persons with whom Sears would be considered a single employer under Code Section 414 (c), substituting “50%” for the “80%” standard that would otherwise apply.
(f)          “ Section 409A Threshold ” shall mean an amount equal to two times the lesser of (i) Executive's base salary for services provided to Sears and any Sears Affiliate as an employee for the calendar year preceding the calendar year in which Executive has a Separation from Service; or (ii) the maximum amount that may be taken into account under a qualified plan in accordance with Code Section 401(a)(17) for the calendar year in which the Executive has a Separation from Service. In all events, this amount shall be limited to the amount specified under Treasury Regulation Section 1.409A-1(b)(9)(iii)(A) or any successor thereto.
(g)          “ Separation from Service ” shall mean a “separation from service” with Sears (including any Sears Affiliate) within the meaning of Code Section 409A (and regulations issued thereunder). Notwithstanding anything herein to the contrary, the fact that Executive is treated as having incurred a Separation from Service under Code Section 409A and the terms of this Agreement shall not be determinative, or in any way affect the analysis, of whether Executive has retired, terminated employment, separated from service, incurred a severance from employment or become entitled to a distribution, under the terms of any retirement plan (including pension plans and 401(k) savings plans) maintained by Sears (including by a Sears Affiliate).
(h)          “ Specified Employee ” shall mean a “specified employee” under Code Section 409A (and regulations issued thereunder).
3.           Intellectual Property Rights . Executive acknowledges that Executive’s development, work or research on any and all inventions or expressions of ideas, that may or may not be eligible for patent, copyright, trademark or trade secret protection, hereafter made or conceived solely or jointly within the scope of employment at Sears or any Sears Affiliate, provided such invention or expression of an idea relates to the business of Sears or any Sears Affiliate, or relates to actual or demonstrably anticipated research or development of Sears or any Sears Affiliate, or results from any work performed by Executive for or on behalf of Sears or any Sears Affiliate, are hereby assigned to Sears, including Executive’s entire rights, title and interest. Executive will promptly disclose such invention or expression of an idea to Executive’s management and will, upon request, promptly execute a specific written assignment of title to Sears. If Executive currently holds any inventions or expressions of an idea, regardless of whether they were published or filed with the U.S. Patent and Trademark Office or the U.S. Copyright Office, or is under contract to not so assign, Executive will list them on the last page of this Agreement.
4.           Protective Covenants . Executive acknowledges that this Agreement provides for additional consideration beyond employment itself and beyond what Sears or any Sears Affiliate is otherwise obligated to provide. In consideration of the opportunity for the Severance Benefits, and other good and valuable consideration, including such consideration as set forth in the offer letter presented to Executive (and executed by Executive and Sears), Executive agrees to the following:

6

March 2016

(a)           Non-Disclosure of Sears Confidential Information . Executive acknowledges and agrees to be bound by the following, whether or not Executive receives any Severance Benefits under this Agreement:
i.           Non-Disclosure .
1. Executive will not, during the term of Executive’s employment with Sears or any Sears Affiliate or thereafter, and other than in the performance of his duties and obligations during his employment with Sears or as required by law or legal process, and except as Sears may otherwise consent or direct in writing, reveal or disclose, sell, use, lecture upon or publish any “Sears Confidential Information” (as defined in subsection 4(a)(ii) below) until such time as the information becomes publicly known other than as a result of its disclosure, directly or indirectly, by Executive; and
2.      Executive understands that if Executive possesses any proprietary information of another person or company as a result of prior employment or otherwise, Sears expects and requires that Executive will honor any and all legal obligations that Executive has to that person or company with respect to proprietary information, and Executive will refrain from any unauthorized use or disclosure of such information.
ii.           Sears Confidential Information . For purposes of this Agreement, “Sears Confidential Information” means trade secrets and non-public information which Sears or any Sears Affiliate designates as being confidential or which, under the circumstances, should be treated as confidential, including, without limitation, any information received in confidence or developed by Sears or any Sears Affiliate, its long and short term goals, vendor and supply agreements, databases, methods, programs, techniques, business information, financial information, marketing and business plans, proprietary software, personnel information and files, client information, pricing, and other information relating to the business of Sears or any Sears Affiliate that is not known generally to the public or in the industry.
iii.           Return of Sears Property . All documents and other property that relate to the business of Sears or any Sears Affiliate are the exclusive property of Sears, even if Executive authored or created them. Executive agrees to return all such documents and tangible property to Sears upon termination of employment or at such earlier time as Sears may request Executive to do so.
iv.           Conflict of Interest . During Executive’s employment with Sears or any Sears Affiliate and during any Salary Continuation Period, except as may be approved in writing by Sears, neither Executive nor members of Executive’s immediate family (which shall refer to Executive, any spouse or any child) will have financial investments or other interests or relationships with Sears’ or any Sears Affiliate’s customers, suppliers or competitors which might impair Executive’s independence of judgment on behalf of the Company. Also during Executive’s employment with Sears or any Sears Affiliate and during any

7

March 2016

Salary Continuation Period, Executive agrees further not to engage in any activity in competition with Sears or any Sears Affiliate and will avoid any outside activity that could adversely affect the independence and objectivity of Executive’s judgment, interfere with the timely and effective performance of Executive’s duties and responsibilities to Sears or any Sears Affiliate, discredit Sears or any Sears Affiliate or otherwise conflict with the best interests of Sears or any Sears Affiliate.
(b)           Non-Solicitation of Employees . During Executive’s employment with Sears or any Sears Affiliate and for twelve (12) months following Executive’s Date of Termination, whether or not Executive receives any Severance Benefits under this Agreement, Executive will not, directly or indirectly, solicit or encourage any person to leave her/his employment with Sears or any Sears Affiliate or assist in any way with the hiring of any Sears or any Sears Affiliate employee by any future employer or other entity.
(c)           Non-Competition . Executive acknowledges that as a result of Executive’s position at Sears or any Sears Affiliate, Executive has learned or developed, or will learn or develop, Sears Confidential Information and that use or disclosure of Sears Confidential Information is likely to occur if Executive were to render advice or services to any Sears Competitor.
i.          Therefore, for twelve (12) months following Executive’s Date of Termination, whether or not Executive receives any Severance Benefits under this Agreement, Executive will not, directly or indirectly, aid, assist, participate in, consult with, render services for, accept a position with, become employed by, or otherwise enter into any relationship with (other than having a passive ownership interest in or being a customer of) any Sears Competitor.
ii.          For purposes of this Agreement, “Sears Competitor” means:
1.    Those companies listed on Appendix A , each of which Executive acknowledges is a Sears Competitor, whether or not it falls within the categories in subsection (ii)(2) immediately below, and further acknowledges that this is not an exclusive list of Sears Competitors and is not intended to limit the generality of subsection (ii)(2) immediately below; and
2.    Any party (A) engaged in any retail business (whether in a department store, specialty store, discount store, direct marketing, or electronic commerce or other business format), that consists of selling furniture, appliances, electronics, hardware, lawn/garden, auto parts, food/consumables, toys, seasonal, fitness/sporting goods, apparel and/or pharmacy products, or providing home improvement, product repair and/or home services, with combined annual revenue in excess of $1 billion, or (B) a party engaged in any other line of business, in which Sears (including any Sears Affiliate) has commenced business prior to the end of Executive’s employment, having annual gross sales in that line of business in excess of $100 million.

8

March 2016

iii.          Executive acknowledges that Sears shall have the right to propose modifications to Appendix A periodically to include (1) emergent Competitors in Sears existing lines of business and (2) Competitors in lines of business that are new for Sears, in each case, with the prior written consent of Executive, which consent shall not be unreasonably withheld.
iv.          Executive further acknowledges that Sears (or Sears Affiliates) does business throughout the United States, Puerto Rico, U.S. Virgin Islands, Guam and Canada and that this non-compete provision applies in any state or province (as applicable) of the United States, Puerto Rico, U.S. Virgin Islands, Guam and Canada, in which Sears does business. This non-compete provision will not apply outside of the United States, Puerto Rico, U.S. Virgin Islands, Guam and Canada.
(d)           Restriction on Post-Employment Affiliation with Sears Vendors. Executive acknowledges that as a result of Executive’s position at Sears or any Sears Affiliate, Executive has learned or developed, or will learn or develop, Sears Confidential Information and that use or disclosure of Sears Confidential Information is likely to occur if Executive were to render advice or services to any “Sears Vendor” (as defined herein).
i.    Therefore, for twelve (12) months from Executive’s Date of Termination, whether or not Executive receives any Severance Benefits under this Agreement, Executive will not, directly or indirectly, aid, assist, participate in, consult with, render services for, accept a position with, become employed by, or otherwise enter into any relationship with (other than having a passive ownership interest in or being a customer of) any Sears Vendor.
ii.    For purposes of this Agreement, “Sears Vendor” means, the vendors, if any, listed in Appendix A as well as any vendor with combined annual gross sales of services or merchandise to Sears in excess of $200 million.
(e)           Compliance with Protective Covenants . Executive will provide Sears with such information as Sears may from time to time reasonably request to determine Executive’s compliance with this Section 4. Executive authorizes Sears to contact Executive’s future employers and other entities with which Executive has any business relationship to determine Executive’s compliance with this Agreement or to communicate the contents of this Agreement to such employers and entities. Executive releases Sears, Sears Affiliates, their agents and employees, from all liability for any damage arising from any such contacts or communications.
(f)           Necessity and Reasonableness . Executive agrees that the restrictions set forth herein are necessary to prevent the use and disclosure of Sears Confidential Information and to otherwise protect the legitimate business interests of Sears and Sears Affiliates. Executive further agrees and acknowledges that the provisions of this Agreement are reasonable.
(g)           General Release and Waiver . Upon Executive’s Date of Termination (whether initiated by Sears or Executive in accordance with subsection 1(a) above) potentially entitling Executive to Severance Benefits, Executive will execute a binding general release and waiver of claims in a form to be provided by Sears (“General

9

March 2016

Release and Waiver”), which is incorporated by reference under this Agreement. This General Release and Waiver will be in a form substantially similar to the attached sample. If the General Release and Waiver is not signed within the time required by the waiver or is signed but subsequently revoked, Executive will not continue to receive any Severance Benefits otherwise payable under subsection 1(a) above. Further, Executive shall be obligated to reimburse Sears for any portion of (i) the Salary Continuation paid during the Salary Continuation Period under subsection (1)(a)(i) herein, and (ii) the cost for the benefits provided during the Salary Continuation Period under subsection (1)(a)(ii) herein. A sample of this General Release and Waiver is provided as Exhibit A to this Agreement.
(h)           Exception Request . Notwithstanding the foregoing, Executive may request a waiver or a specific exception to the non-competition provisions of this Agreement by written request to the Vice President, Talent & Human Capital Services or Senior Vice President, General Counsel and Corporate Secretary (or the equivalent) of Sears. Such a request will be given reasonable consideration and may be granted, in whole or in part, or denied at Sears’ absolute discretion.
5.           Irreparable Harm . Executive acknowledges that irreparable harm would result from any breach by Executive of the provisions of this Agreement, including without limitation subsections 4(a), 4(b), 4(c) and 4(d), and that monetary damages alone would not provide adequate relief for any such breach. Accordingly, if Executive breaches or threatens to breach this Agreement, Executive consents to injunctive relief in favor of Sears without the necessity of Sears posting a bond. Moreover, any award of injunctive relief shall not preclude Sears from seeking or recovering any lawful compensatory damages which may have resulted from a breach of this Agreement, including a forfeiture of any future payments and a return of any payments and benefits already received by Executive.
6.           Non-Disparagement . Executive will not take any actions that would reasonably be expected to be detrimental to the interests of Sears or any Sears Affiliate, nor make derogatory statements, either written or oral to any third party, or otherwise publicly disparage Sears or any Sears Affiliate, its products, services, or present or former employees, officers or directors, and will not authorize others to make derogatory or disparaging statements on Executive’s behalf. This provision does not and is not intended to preclude Executive from entering into any relationship with a Sears Competitor or Sears Vendor after such relationship is permissible under subsection 4(c) or 4(d), respectively, nor does it preclude Executive from providing truthful testimony in response to legal process or governmental inquiry. Further, the Company will instruct the members of its Senior Management Team not to make derogatory statements, either written or oral to any third party, or otherwise publicly disparage Executive, and not authorize others to make derogatory or disparaging statements on Sears’ behalf.
7.           Cooperation . Executive agrees, without receiving additional compensation, to fully and completely cooperate with Sears, both during and after the period of employment with Sears or any Sears Affiliate (including any Salary Continuation Period), with respect to matters that relate to Executive’s period of employment, in all investigations, potential litigation or litigation in which Sears is involved or may become involved other than any such investigations, potential litigation or litigation between Sears and Executive. Sears will reimburse Executive for reasonable travel and out-of-pocket expenses incurred in connection with any such investigations, potential litigation or litigation.

10

March 2016

8.           Future Enforcement or Remedy . Any waiver, or failure to seek enforcement or remedy for any breach or suspected breach, of any provision of this Agreement by Sears or Executive in any instance shall not be deemed a waiver of such provision in the future.
9.           Acting as Witness . Executive agrees that both during and after the period of employment with Sears or any Sears Affiliate (including any Salary Continuation Period), Executive will not voluntarily act as a witness, consultant or expert for any person or party in any action against or involving Sears or any Sears Affiliate or corporate relative of Sears, unless subject to judicial enforcement to appear as a fact witness only.
10.           Breach by Executive . In the event of a breach by Executive of any of the provisions of this Agreement, including without limitation the non-competition provisions (Section 4) and the non-disparagement provision (Section 6) of this Agreement, the obligation of Sears or any Sears Affiliate to pay Salary Continuation or to provide other Severance Benefits under this Agreement will immediately cease and any Salary Continuation payments already received and the value of any other Severance Benefits already received will be returned by Executive to Sears. Further, Executive agrees that Sears shall be entitled to recovery of its attorneys’ fees and other associated costs incurred as a result of any attempt to redress a breach by Executive or to enforce its rights and protect its interests under the Agreement.
11.           Severability . If any provision(s) of this Agreement shall be found invalid, illegal, or unenforceable, in whole or in part, then such provision(s) shall be modified or restricted so as to effectuate as nearly as possible in a valid and enforceable way the provisions hereof, or shall be deemed excised from this Agreement, as the case may require, and this Agreement shall be construed and enforced to the maximum extent permitted by law, as if such provision(s) had been originally incorporated herein as so modified or restricted or as if such provision(s) had not been originally incorporated herein, as the case may be.
12.           Governing Law . This Agreement will be governed under the internal laws of the state of Illinois without regard to principles of conflicts of laws. Executive agrees that the state and federal courts located in the state of Illinois shall have exclusive jurisdiction in any action, lawsuit or proceeding based on or arising out of this Agreement, and Executive hereby: (a) submits to the personal jurisdiction of such courts; (b) consents to the service of process in connection with any action, suit, or proceeding against Executive; (c) waives any other requirement (whether imposed by statute, rule of court, or otherwise) with respect to personal jurisdiction, venue or service of process; and (d) agrees not to file any action, suit, or proceeding against the Company based on or arising out of this Agreement in any forum except the state or federal courts located in the state of Illinois.
13.           Right to Jury . Executive agrees to waive any right to a jury trial on any claim contending that this Agreement or the General Release and Waiver is illegal or unenforceable in whole or in part, and Executive agrees to try any claims brought in a court or tribunal without use of a jury or advisory jury. Further, should any claim arising out of Executive’s employment, termination of employment or Salary Continuation Period (if any) be found by a court or tribunal of competent jurisdiction to not be released by the General Release and Waiver, Executive agrees to try such claim to the court or tribunal without use of a jury or advisory jury.

11

March 2016

14.           Employment-at-Will . This Agreement does not constitute a contract of employment, and Executive acknowledges that Executive’s employment with Sears or any Sears Affiliate is terminable “at-will” by either party with or without cause and with or without notice.
15.           Other Plans, Programs, Policies and Practices . If any provision of this Agreement conflicts with any other plan, programs, policy, practice or other Sears document, then the provisions of this Agreement will control, except as otherwise precluded by law. Executive shall not be eligible for any benefits under the Sears Holdings Corporation Master Transition Pay Plan or any successor severance plan or program.
16.           Entire Agreement . This Agreement, including any exhibits or appendices hereto, contains and comprises the entire understanding and agreement between Executive and Sears (including any Sears Affiliate) and fully supersedes any and all prior agreements or understandings between Executive and Sears with respect to the subject matter contained herein, and may be amended only by a writing signed by the Chief Executive Officer, Vice President, Talent & Human Capital Services or Senior Vice President, General Counsel and Corporate Secretary (or equivalent) of Sears.
17.           Confidentiality . Executive agrees that the existence and terms of the Agreement, including any compensation paid to Executive, and discussions with Sears (including any Sears Affiliate) regarding this Agreement, shall be considered confidential and shall not be disclosed or communicated in any manner except: (a) as required by law or legal process; (b) to Executive’s spouse or domestic partner, or (c) to Executive’s financial/legal advisors, all of whom shall agree to keep such information confidential.
18.           Tax Withholding . Any compensation paid or provided to Executive under this Agreement shall be subject to any applicable federal, state or local income and employment tax withholding requirements.
19.           Notices . All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other parties or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive : At the most recent address on file at Sears.

If to Sears :     Sears Holdings Corporation
3333 Beverly Road    
Hoffman Estates, Illinois 60179
Attention to both:     Vice President, Talent & Human Capital Services
Senior Vice President, General Counsel and Corporate
Secretary

20.           Assignment . Sears may assign its rights under this Agreement to any successor in interest, whether by merger, consolidation, sale of assets, or otherwise. This Agreement shall be binding whether it is between Sears and Executive or between any successor or assignee of Sears or affiliate thereof and Executive.
21.           Section 409A Compliance . To the extent that a payment or benefit under this Agreement is subject to Code Section 409A, it is intended that this Agreement as applied to that payment or benefit comply with the requirements of Code Section 409A, and the Agreement shall be administered and interpreted consistent with this intent.

12

March 2016

22.           Counterparts . This Agreement may be executed in one or more counterparts, which together shall constitute a valid and binding agreement.

IN WITNESS WHEREOF, Executive and Sears, by its duly authorized representative, have executed this Agreement on the dates stated below, effective as of the latest date set forth below.
EXECUTIVE        SEARS HOLDINGS CORPORATION


/s/ Stephan H. Zoll         BY: /s/ Tiffany Morris    
Stephan H. Zoll         Tiffany Morris


March 24, 2016          March 24, 2016    
Date        Date





13

March 2016
EXHIBIT A

NOTICE: YOU MAY CONSIDER THIS GENERAL RELEASE AND WAIVER FOR UP TO TWENTY-ONE (21) DAYS. YOU MAY NOT SIGN IT UNTIL ON OR AFTER YOUR LAST DAY OF WORK. IF YOU DECIDE TO SIGN IT, YOU MAY REVOKE THE GENERAL RELEASE AND WAIVER WITHIN SEVEN (7) DAYS AFTER SIGNING. ANY REVOCATION WITHIN THIS PERIOD MUST BE IMMEDIATELY SUBMITTED IN WRITING TO GENERAL COUNSEL, SEARS HOLDINGS CORPORATION, 3333 BEVERLY ROAD, HOFFMAN ESTATES, IL 60179. YOU MAY WISH TO CONSULT WITH AN ATTORNEY BEFORE SIGNING THIS DOCUMENT.
GENERAL RELEASE AND WAIVER
In consideration of the severance benefits that are described in the attached Executive Severance Agreement, I, for myself, my heirs, administrators, representatives, executors, successors and assigns, do hereby release Sears Holdings Corporation, its current and former agents, subsidiaries, affiliates, related organizations, employees, officers, directors, shareholders, attorneys, successors, and assigns (collectively, “Sears”) from any and all claims of any kind whatsoever, whether known or unknown, arising out of, or connected with, my employment with Sears and the termination of my employment. This General Release and Waiver includes, but is not limited to, all claims under Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1866 (42 U.S.C. § 1981), the Civil Rights Act of 1991, the Age Discrimination in Employment Act, the Employee Retirement Income Security Act (“ERISA”), the Americans with Disabilities Act, the Rehabilitation Act of 1973, the Worker Adjustment and Retraining Notification Act, the Family and Medical Leave Act, the Equal Pay Act, and any other federal, state or local constitution, statute, regulation or ordinance, all common law claims including, but not limited to, claims for wrongful or retaliatory discharge, intentional infliction of emotional distress, negligence, defamation, invasion of privacy and breach of contract, and all claims under any Sears policy, handbook or practice, to the fullest extent permitted under the law.
This General Release and Waiver does not apply to any claims that may arise after the date I sign this General Release and Waiver. Also excluded from this General Release and Waiver are any claims that cannot be waived by law, including but not limited to (1) my right to file a charge with or participate in an investigation conducted by the Equal Employment Opportunity Commission and (2) my rights or claims to benefits accrued under benefit plans maintained by Sears and governed by ERISA. I do, however, waive any right to any monetary or other relief flowing from any agency or third-party claims or charges, including any charge I might file with any federal, state or local agency. I warrant and represent that I have not filed any complaint, charge, or lawsuit against Sears with any governmental agency or with any court.
I also waive any right to become, and promise not to consent to become a participant, member, or named representative of any class in any case in which claims are asserted against Sears that are related in any way to my employment or termination of employment at Sears, and that involve events that have occurred as of the date I sign this General Release and Waiver. If I, without my knowledge, am made a member of a class in any proceeding, I will opt out of the class at the first opportunity afforded to me after learning of my inclusion. In this regard, I agree

Page 1 of 2
Return both pages of the signed General Release and Waiver


GENERAL RELEASE AND WAIVER (continued)
that I will execute, without objection or delay, an “opt-out” form presented to me either by the court in which such proceeding is pending, by class counsel or by counsel for Sears.
I have read this General Release and Waiver and understand all of its terms.
I have signed it voluntarily with full knowledge of its legal significance.
I have had the opportunity to seek, and I have been advised in writing of my right to seek, legal counsel prior to signing this General Release and Waiver.
I was given at least twenty-one (21) days to consider signing this General Release and Waiver. I agree that any modification of this General Release and Waiver Agreement will not restart the twenty-one (21) day consideration period.
I understand that if I sign the General Release and Waiver, I can change my mind and revoke it within seven (7) days after signing it by notifying the General Counsel of Sears in writing at Sears Holdings Corporation, 3333 Beverly Road, Hoffman Estates, Illinois 60179. I understand the General Release and Waiver will not be effective until after the seven (7) day revocation period has expired.
I understand that the delivery of the consideration herein stated does not constitute an admission of liability by Sears and that Sears expressly denies any wrongdoing or liability.

Date: SAMPLE ONLY - DO NOT DATE     Signed by: SAMPLE ONLY - DO NOT SIGN
Witness by: SAMPLE ONLY - DO NOT SIGN





Page 2 of 2
Return both pages of the signed General Release and Waiver     
 
EXHIBIT 10.59

OMNIBUS AMENDMENT TO LOAN DOCUMENTS AND REQUEST FOR ADVANCE

This Omnibus Amendment to Loan Documents and Request for Advance (this “ Amendment ”), dated as of January 12, 2017, by and between JPP, LLC and JPP II, LLC, , each a Delaware limited liability company (together with its successors and assigns, “ Lender ”), and SEARS, ROEBUCK AND CO., KMART STORES OF ILLINOIS LLC, KMART OF WASHINGTON LLC, KMART CORPORATION, SHC DESERT SPRINGS, LLC , INNOVEL SOLUTIONS, INC, SEARS HOLDINGS MANAGEMENT CORPORATION, MAXSERV, INC. and TROY COOLIDGE NO. 13, LLC , collectively as borrower (individually or collectively, as the context may require, jointly and severally, together with their respective permitted successors and assigns, “ Borrower ”), amends that certain Loan Agreement, dated as of January 3, 2017 (the “ Loan Agreement ”; all capitalized terms used but not defined herein shall have the respective meanings ascribed to such terms in the Loan Agreement) and the other Loan Documents (as defined in the Loan Agreement).
WHEREAS, on January 3, 2017, Lender advanced to Borrower a portion of the loan (the “ Loan ”) made pursuant to the Loan Agreement in the amount of $321,231,646;
WHEREAS, Lender and Borrower desire to, among other things, amend the Loan Documents in connection with a second advance of the Loan by Lender to Borrower in the amount of $164,026,106 made as of the date hereof.
NOW THEREFORE, in consideration of the mutual premises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby represent, warrant, covenant and agree as follows:
Section 1.     Amendment of Loan Documents . Lender and Borrower hereby agree to amend the terms of the Loan Documents as follows:
(a)     In the “DEFINITIONS” section of the Loan Agreement, the defined term “Borrower or Borrowers” is hereby deleted in it is entirety and replaced with the following:
““ Borrower or Borrowers ” means, collectively, jointly and severally, Sears Roebuck and Co., a New York corporation; Kmart Stores of Illinois LLC, an Illinois limited liability company; Kmart of Washington LLC, a Washington limited liability company; Kmart Corporation, a Michigan corporation; SHC Desert Springs, LLC, a Delaware limited liability company; Innovel Solutions, Inc., a Delaware corporation; Sears Holdings Management Corporation, a Delaware corporation; Maxserv, Inc., a Delaware corporation and Troy Coolidge No. 13, LLC, a Michigan limited liability company.”
(b)    The last sentence of Section 1.1(b) of the Loan Agreement is hereby amended by changing the reference to “$30,000,000” in such sentence to “$14,000,000”.
(c)     The first sentence of Section 3.14 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: “As of the date that the final Delayed Advance


hereunder is made by Lender, 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.”
(d)     All references to “Borrower” in the Environmental Indemnity and the Guaranty shall mean, collectively, jointly and severally, Sears Roebuck and Co., a New York corporation; Kmart Stores of Illinois LLC, an Illinois limited liability company; Kmart of Washington LLC, a Washington limited liability company; Kmart Corporation, a Michigan corporation; SHC Desert Springs, LLC, a Delaware limited liability company; Innovel Solutions, Inc., a Delaware corporation; Sears Holdings Management Corporation, a Delaware corporation; Maxserv, Inc., a Delaware corporation and Troy Coolidge No. 13, LLC, a Michigan limited liability company.
(e)    All references to “Maker” in the Note(s) shall mean, collectively, jointly and severally, Sears Roebuck and Co., a New York corporation; Kmart Stores of Illinois LLC, an Illinois limited liability company; Kmart of Washington LLC, a Washington limited liability company; Kmart Corporation, a Michigan corporation; SHC Desert Springs, LLC, a Delaware limited liability company; Innovel Solutions, Inc., a Delaware corporation; Sears Holdings Management Corporation, a Delaware corporation; Maxserv, Inc., a Delaware corporation and Troy Coolidge No. 13, LLC, a Michigan limited liability company
(f)    All references to “Loan Agreement” in each of the Loan Documents shall mean the Loan Agreement, as amended by this Amendment, and all references to “Loan Documents” in each of the Loan Documents shall mean the Loan Documents as amended by this Amendment.
Section 2. Request for Advance .
(a) Borrower hereby requests a Delayed Advance in an aggregate principal amount of $164,026,106 be made as of the date hereof. Solely with respect to the Delayed Advance referenced in the immediately preceding sentence, Lender hereby waives (x) the conditions to such Delayed Advance set forth in Section 1.1(b)(i) and (ii) of the Loan agreement; provided , however , that (1) all other conditions to such Delayed Advance set forth in the Loan Agreement shall not be waived and remain in full force and effect and (2) except for the condition contained in the last sentence of Section 2.1(a) requiring that reasonably acceptable Title Insurance Policies for each of the Properties be delivered prior to the making of any Delayed Advance, the requirements of Section 2.1 of the Loan Agreement are in no way modified by the waiver contained in this sentence and remain in full force and effect; and (y) the requirement that a request for a Delayed Advance be made at least six Business Days prior to the date on which such Delayed Advance is made.
(b) Lender acknowledges that Borrower is unable to comply with the requirements of clause (i) of Section 2.2(b) of the Loan Agreement with respect to the Delayed Advance being made as of the date hereof, because all of the final Appraisals have not yet been received; accordingly, Lender hereby waives such requirements, solely with respect to the satisfaction thereof in connection with such Delayed Advance; provided , however , for the avoidance of


doubt, upon availability of all final Appraisals, Borrower shall comply with the requirements of clause (i) of Section 2.2(b) of the Loan Agreement. Borrower hereby represents and warrants that, as of the date hereof, Appraisals have been ordered for each of the Properties (including the Properties for which Mortgages are being delivered in connection with the Delayed Advance being made as of the date hereof) and all Appraisals received by Borrower since the Closing Date have been delivered to Lender.
Section 3.     Miscellaneous .
(a)    All of the terms and conditions of the Loan Agreement are incorporated herein by reference with the same force and effect as if fully set forth herein. Except as expressly amended hereby (or waived pursuant to Section 2 above), the Loan Agreement and each of the other Loan Documents remains in full force and effect in accordance with its terms. Any waiver of any condition or covenant pursuant to this Amendment is effective solely with respect to the Delayed Advance made as of the date hereof and shall not be effective with respect to any other Delayed Advance or any other matter related to the Loan or the Loan Documents.
(b)    Borrower hereby represents and warrants that (i) Borrower has the power and authority to enter into this Amendment, to perform its obligations under the Loan Agreement as amended hereby, (ii) Borrower has by proper action duly authorized the execution and delivery of this Amendment by Borrower and (iii) this Amendment has been duly executed and delivered by Borrower and constitutes Borrower’s legal, valid and binding obligations, enforceable in accordance with its terms, subject to bankruptcy, insolvency and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles.
(c)    This Amendment shall be governed by and construed and interpreted in accordance with the laws of the State of New York without regard to principles of conflicts of law.
(d)    Borrower hereby (1) unconditionally ratifies and confirms, renews and reaffirms all of its obligations under the Loan Agreement and each of the other Loan Documents, (2) acknowledges and agrees that such obligations remain in full force and effect, binding on and enforceable against it in accordance with the terms, covenants and conditions of the Loan Agreement as amended hereby and the other Loan Documents, in each case, without impairment, and (3) represents, warrants and covenants that it is not in default under the Loan Agreement or any of the other Loan Documents beyond any applicable notice and cure periods, and there are no defenses, offsets or counterclaims against the Indebtedness.
(e)    Sears Holdings Corporation hereby (1) unconditionally approves and consents to the execution by Borrower of this Amendment and the modifications to the Loan Documents effected thereby, (2) unconditionally ratifies, confirms, renews and reaffirms all of its obligations under the Guaranty, (3) acknowledges and agrees that its obligations under the Guaranty remain in full force and effect, binding on and enforceable against it in accordance with the terms, covenants and conditions of such documents without impairment, and (4) represents, warrants and covenants that (i) it is not in default under the Guaranty beyond any applicable notice and cure periods, (ii) there are no defenses, offsets or counterclaims against its


obligations under the Guaranty and (iii) it has the power and authority to enter into this Amendment and has by proper action duly authorized its execution and delivery of this Amendment.
(f)    This Amendment 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 Amendment.

[Signatures appear on following page]


IN WITNESS WHEREOF, for good and valuable consideration, the sufficiency of which is hereby acknowledged and agreed, the parties hereto have executed and delivered this Amendment as of the date first hereinabove set forth.
 
LENDER:

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






 
LENDER:

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

  


 


 



 
 



 
SEARS, ROEBUCK AND CO.,
a New York corporation



By: /s/ Robert A. Riecker ____________________
         Name: Robert A. Riecker
Title: Vice President, Controller and  
                Chief Accounting Officer

KMART CORPORATION,
a Michigan corporation



By: /s/ Robert A. Riecker ____________________
         Name: Robert A. Riecker
Title: Vice President, Controller and  
                Chief Accounting Officer

KMART STORES OF ILLINOIS LLC,
an Illinois limited liability company

By: Kmart Corporation, a Michigan corporation, as Sole Member


By: /s/ Robert A. Riecker ____________________
         Name: Robert A. Riecker
Title: Vice President, Controller and  
                Chief Accounting Officer


KMART OF WASHINGTON LLC,
a Washington limited liability company

By: Kmart Corporation, a Michigan corporation, as Sole Member


By: /s/ Robert A. Riecker ____________________
         Name: Robert A. Riecker
Title: Vice President, Controller and  
                Chief Accounting Officer



 
SHC DESERT SPRINGS, LLC,
a Delaware limited liability company

By: Kmart Corporation, a Michigan corporation,
       its sole member


By: /s/ Robert A. Riecker ____________________
        Name: Robert A. Riecker
Title: Vice President, Controller and  
              Chief Accounting Officer



 
INNOVEL SOLUTIONS, INC.,
a Delaware corporation



By: /s/ Robert A. Riecker ____________________
         Name: Robert A. Riecker
Title: Vice President



 
SEARS HOLDINGS MANAGEMENT CORPORATION,
a Delaware corporation



By: /s/ Robert A. Riecker ____________________
         Name: Robert A. Riecker
Title: President



 
MAXSERV, INC.,
a Delaware corporation



By: /s/ Lawrence Meerschaert ______________
         Name: Lawrence Meerschaert
Title: Vice President



 
TROY COOLIDGE NO. 13, LLC,
a Michigan limited liability company


By: Kmart Corporation, a Michigan corporation,
       its sole member


By: /s/ Robert A. Riecker ____________________
        Name: Robert A. Riecker
Title: Vice President, Controller and  
              Chief Accounting Officer





 
Solely with respect to Section 3(e)  hereof:
GUARANTOR :

SEARS HOLDINGS CORPORATION, a Delaware corporation

By: /s/ Robert A. Riecker   _______________
         Name:    Robert A. Riecker

 
 Title:    Vice President, Controller and  
    
 
Chief Accounting Officer
 
 




EXHIBIT 10.60

EXECUTION VERSION



FIRST AMENDMENT TO
LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT

FIRST AMENDMENT TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT (this “ Amendment ”) dated as of March 2, 2017 between
SEARS HOLDINGS CORPORATION, a Delaware corporation (“ Holdings ”),
SEARS ROEBUCK ACCEPTANCE CORP., a Delaware corporation, and KMART CORPORATION, a Michigan corporation (the “ Borrowers ”),
JPP, LLC and JPP II, LLC, as L/C Lenders, and
CITIBANK, N.A., as Administrative Agent (the “ Agent ”) and Issuing Bank (the “ Issuing Bank ”),
in consideration of the mutual covenants herein contained and benefits to be derived herefrom.


W I T N E S S E T H :

WHEREAS, Holdings, the Borrowers, the L/C Lenders party thereto, the Agent and the Issuing Bank, are party to that certain Letter of Credit and Reimbursement Agreement (the “ Existing LC Facility Agreement ”; the Existing LC Facility Agreement as amended hereby, the “ Amended LC Facility Agreement ”);

WHEREAS, on February 10, 2017, the Existing Credit Agreement was amended pursuant to that certain Second Amendment thereto, by and among Holdings, the Borrowers, the Existing Agent and the ABL Lenders party thereto, including Citibank, N.A. (the Existing Credit Agreement as amended thereby, the “ Amended Credit Agreement ”); and

WHEREAS, Holdings, the Borrowers, the Required L/C Lenders, the Issuing Bank and the Agent have agreed to amend the Existing LC Facility Agreement.

NOW THEREFORE, in consideration of the mutual promises and agreements herein contained, the parties hereto hereby agree as follows:

1.
Incorporation of Terms. All capitalized terms not otherwise defined herein shall have the same meaning as in the Existing LC Facility Agreement.

2.
Consent to Amended Credit Agreement. Each of the Issuing Bank, the Agent and the L/C Lenders hereby confirms that it has consented to the Amended Credit Agreement to the extent such consent is required under the Existing LC Facility Agreement.

3.
Representations and Warranties . Each Borrower hereby represents and warrants that (i) no Default or Event of Default exists under the Existing LC Facility Agreement or

    
    

under any other Loan Document as of the date hereof, and (ii) all representations and warranties contained in the Amended LC Facility Agreement and the other Loan Documents are true and correct in all material respects as of the date hereof, except to the extent that (A) such representations or warranties are qualified by a materiality standard, in which case they are true and correct in all respects, and (B) such representations or warranties expressly relate to an earlier date (in which case such representations and warranties are true and correct in all material respects as of such earlier date).

4.
Release by Borrowers . Each Borrower hereby acknowledges and agrees that it has no actual knowledge of any defenses or claims against any L/C Lender, the Agent, the Issuing Bank, any of their Affiliates, or any of their respective officers, directors, employees, attorneys, representatives, predecessors, successors, or assigns with respect to the Obligations, and that if such Borrower now has, or ever did have, any defenses or claims with respect to the Obligations against any L/C Lender, the Agent, the Issuing Bank or any of their respective officers, directors, employees, attorneys, representatives, predecessors, successors, or assigns, whether known or unknown, at law or in equity, from the beginning of the world through this date and through the time of effectiveness of this Amendment, all of them are hereby expressly WAIVED, and each Borrower hereby RELEASES each L/C Lender, the Agent, the Issuing Bank and their respective officers, directors, employees, attorneys, representatives, predecessors, successors, and assigns from any liability therefor.

5.
Amendments to Existing LC Facility Agreement . The Existing LC Facility Agreement is hereby amended to delete the red stricken text (indicated textually in the same manner as the following example: stricken text ) and to add the blue double-underlined text (indicated textually in the same manner as the following example: double-underlined ) as set forth in the pages of the Amended LC Facility Agreement attached as Annex A hereto. Except as provided herein and in the Amended LC Facility Agreement, all of the terms and conditions of the Existing LC Facility Agreement shall remain in full force and effect.

6.
Limited Waiver of Mandatory Reduction of L/C Commitments . In accordance with the last sentence of Section 2.11 of the Amended LC Facility Agreement, the L/C Lenders hereby waive any required reduction of the L/C Commitments pursuant to Section 2.11 on account of all L/C Lenders and Issuing Bank until August 1, 2017 (such date, the “ Waiver Expiration Date ”). The Borrowers shall use their reasonable best efforts to reduce the aggregate L/C Commitments on the Waiver Expiration Date by causing the beneficiaries of outstanding Letters of Credit (A) to permanently reduce the face amount thereof or (B) to return Letters of Credit to Citi for cancellation, in each case, in an aggregate amount at least equal to the amount by which the L/C Commitments would have been automatically reduced in accordance with Section 2.11 but for foregoing limited waiver. For purposes of clause (c) of the first sentence of Section 2.11 of the Amended LC Facility Agreement, any such reduction in L/C Commitments on the Waiver Expiration Date shall be deemed to have occurred substantially concurrently with the receipt of the applicable Designated Transaction Proceeds.



-2-


7.
Conditions to Effectiveness . This Amendment shall become effective on the date (the “ Amendment Effective Date ”) that each of the following conditions precedent has been fulfilled as determined by the Agent:

a.
This Amendment shall have been duly executed and delivered by Holdings, the Borrowers, the Required L/C Lenders, the Issuing Bank and the Agent, and the Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto.

b.
All action on the part of Holdings and the Borrowers necessary for the valid execution, delivery and performance by the Borrowers of this Amendment shall have been duly taken. The Agent shall have received corporate resolutions of Holdings authorizing the entrance of Holdings into this Amendment.

c.
Since January 30, 2016, there shall not have been any event or effect that has had or would be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.

d.
After giving effect to this Amendment and the transactions contemplated hereunder, Capped Excess Availability shall not be less than $150,000,000.

e.
After giving effect to this Amendment and the transactions contemplated hereunder, no Default or Event of Default shall have occurred and be continuing under the Amended LC Facility Agreement.

f.
The Borrowers shall have paid all fees, expenses and other amounts due and owing to the Agent, the Issuing Bank and the L/C Lenders that have executed this Amendment, including a consent fee to each L/C Lender that has executed this Amendment in an amount equal to 0.10% times the L/C Commitment of such L/C Lender immediately prior to the Amendment Effective Date.

8.
Binding Effect . The terms and provisions hereof shall be binding upon and inure to the benefit of the parties hereto, the L/C Lenders, the Issuing Bank and their respective successors and assigns.

9.
Expenses . The Borrowers shall reimburse the Agent and the L/C Lenders for all reasonable and documented out-of-pocket expenses incurred in connection herewith, including, without limitation, reasonable attorneys’ fees.

10.
Multiple Counterparts . This Amendment may be executed in multiple counterparts, each of which shall constitute an original and together which shall constitute but one and the same instrument. Delivery of an executed counterpart of a signature page of this Agreement by facsimile or in electronic (i.e. “pdf” or “tif”) format shall be effective as delivery of a manually executed counterpart of this Agreement.



-3-


11.
Governing Law . THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF OTHER THAN SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW.

[Remainder of page intentionally left blank; Signature pages follow.]


-4-



IN WITNESS WHEREOF, this Amendment has been duly executed and delivered by each of the parties hereto as of the date first above written.


HOLDINGS :

SEARS HOLDINGS CORPORATION
By: /s/ Robert A. Riecker    
Name: Robert A. Riecker
Title: Controller and Head of Capital Markets Activities

BORROWERS :

SEARS ROEBUCK ACCEPTANCE CORP.
By: /s/ Robert A. Riecker    
Name: Robert A. Riecker
Title: Vice President, Finance

KMART CORPORATION
By: /s/ Robert A. Riecker    
Name: Robert A. Riecker
Title: Controller and Head of Capital Markets Activities

[Signature page to LC and Reimbursement Agreement Amendment ]


Citibank, N.A. , as Agent and as Issuing Bank

By:     /s/ David Smith___ ___________________
Name: David Smith
Title: Vice President and Director



[Signature page to LC and Reimbursement Agreement Amendment]


JPP, LLC, as an L/C Lender

By:     /s/ Edward S. Lampert __________________
Name: Edward S. Lampert
Title: Member


JPP II, LLC, as an L/C Lender
By: RBS Partners, L.P., as Manager
By: ESL Investments, Inc., as General Partner

By:     /s/ Edward S. Lampert __________________
Name: Edward S. Lampert
Title: Chairman and Chief Executive Officer



[Signature page to LC and Reimbursement Agreement Amendment]




Annex A

Conformed LC Facility Agreement

[See Attached]







ANNEX A
LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT
dated as of December 28, 2016
as amended March 2, 2017
among
SEARS HOLDINGS CORPORATION
and
SEARS ROEBUCK ACCEPTANCE CORP.
and
KMART CORPORATION ,
as Borrowers
and
CERTAIN FINANCIAL INSTITUTIONS ,
as L/C Lenders
and
CITIBANK, N.A. ,
as Administrative Agent and Issuing Bank




ANNEX A


LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT
dated as of December 28, 2016
as amended March 2, 2017
among
SEARS HOLDINGS CORPORATION
and
SEARS ROEBUCK ACCEPTANCE CORP.
and
KMART CORPORATION ,
as Borrowers
and
CERTAIN FINANCIAL INSTITUTIONS ,
as L/C Lenders
and
CITIBANK, N.A. ,
as Administrative Agent and Issuing Bank






TABLE OF CONTENTS

 
 
 
Page
 
 
 
 
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS
2
 
Section 1.01
Certain Defined Terms
2
 
Section 1.02
Computation of Time Periods
32 33

 
Section 1.03
Accounting Terms
32 33

 
Section 1.04
Other Interpretive Provisions
32 33

 
Section 1.05
Change of Currency
32 34

 
 
 
 
ARTICLE II Payments; Taxes; Lender Cash Collateral Account; Etc.
33 35

 
Section 2.01
[Reserved]
33 35

 
Section 2.02
[Reserved]
33 35

 
Section 2.03
[Reserved]
33 35

 
Section 2.04
[Reserved]
33 35

 
Section 2.05
Fees
33 35

 
Section 2.06
Optional Termination or Reduction of the L/C Commitments
34 35

 
Section 2.07
[Reserved]
35 36

 
Section 2.08
[Reserved]
35 36

 
Section 2.09
[Reserved]
35 36

 
Section 2.10
[Reserved]
35 36

 
Section 2.11
Mandatory Reduction of L/C Commitments
35 36

 
Section 2.12
Increased Costs
35 36

 
Section 2.13
[Reserved]
36 37

 
Section 2.14
Payments and Computations
36 37

 
Section 2.15
Taxes
37 39

 
Section 2.16
Sharing of Payments, Etc
41 42

 
Section 2.17
Increase of L/C Commitments
42 43

 
 
 
 
ARTICLE III AMOUNT AND TERMS OF THE LETTERS OF CREDIT
42 43

 
Section 3.01
L/C Commitment
42 43

 
Section 3.02
Procedure for Issuance of Letter of Credit
43 45

 
Section 3.03
Fees and Other Charges
44 45

 
Section 3.04
Letter of Credit Participations
44 45

 
Section 3.05
Reimbursement Obligation of the Borrowers
46 47

 
Section 3.06
Obligations Absolute
46 47

 
Section 3.07
Letter of Credit Payments
46 48

 
Section 3.08
Applications
47 48

 
Section 3.09
Use of Letters of Credit
47 48

 
Section 3.10
Currency Equivalents Generally; Exchange Rates
47 48

 
Section 3.11
Borrowers Cash Collateral
47 49

 
Section 3.12
Replacement and Cancellation of Letters of Credit
49 50



i




ARTICLE IV CONDITIONS TO EFFECTIVENESS
49 50

 
Section 4.01
Conditions Precedent to Effectiveness
49 50

 
Section 4.02
Conditions Precedent to Each Issuance of a Letter of Credit
51 52

 
 
 
 
ARTICLE V REPRESENTATIONS AND WARRANTIES
52 53

 
Section 5.01
Representations and Warranties of the Borrowers
52 53

 
Section 5.02
Representations and Warranties of the Lenders
58 59

 
 
 
 
ARTICLE VI COVENANTS
58 59

 
Section 6.01
Affirmative Covenants
58 59

 
Section 6.02
Negative Covenants
66 67

 
Section 6.03
Financial Covenant
71 72

 
 
 
 
ARTICLE VII EVENTS OF DEFAULT
71 72

 
Section 7.01
Events of Default
71 72

 
 
 
 
ARTICLE VIII THE AGENT
74 76

 
Section 8.01
Appointment
74 76

 
Section 8.02
Delegation of Duties
75 76

 
Section 8.03
Exculpatory Provisions
75 76

 
Section 8.04
Reliance by Agent
75 77

 
Section 8.05
Notice of Default
76 77

 
Section 8.06
Non-Reliance on Agent and Other Lenders
76 77

 
Section 8.07
Reports and Financial Statements
76 78

 
Section 8.08
Indemnification
77 78

 
Section 8.09
Agent in Its Individual Capacity
77 79

 
Section 8.10
Successor Agent
78 79

 
Section 8.11
[Reserved]
78 80

 
Section 8.12
[Reserved]
78 80

 
 
 
 
ARTICLE IX MISCELLANEOUS
78 80

 
Section 9.01
Amendments, Etc
78 80

 
Section 9.02
Notices, Etc
81 82

 
Section 9.03
No Waiver; Remedies
82 83

 
Section 9.04
Costs and Expenses
83 84

 
Section 9.05
Right to Set-off
84 85

 
Section 9.06
Binding Effect; Effectiveness
84 85

 
Section 9.07
Assignments and Participations
84 85

 
Section 9.08
Confidentiality
88 89

 
Section 9.09
Governing Law
88 89

 
Section 9.10
Execution in Counterpart
88 89

 
Section 9.11
Jurisdiction, Etc
89 90

 
Section 9.12
WAIVER OF JURY TRIAL
89 90

 
Section 9.13
Release of Collateral or Guarantee Obligation
89 90


ii




 
Section 9.14
PATRIOT Act Notice
90 91

 
Section 9.15
Integration
90 91

 
Section 9.16
Replacement of L/C Lenders
91 92

 
Section 9.17
No Advisory or Fiduciary Capacity
91 92

 
Section 9.18
Acknowledgment and Consent to Bail-In of EEA Financial Institutions
92 93

 
Section 9.19
Reinstatement
93 94

 
Section 9.20
Existing Agent Acknowledgment
93 94


iii




 
 
 
 
 
 
SCHEDULES
 
 
 
Schedule 1.01(a)
 
Lenders L/C Commitments
Schedule 1.01(b)
 
Real Estate Collateral
Schedule 5.01(n)
 
Pension Plan Issues
Schedule 5.01(p)
 
UCC Financing Statements Control Agreements
Schedule 5.01(t)
 
Labor Matters
Schedule 5.01(aa)
 
Bank Products and Cash Management Services
Schedule 6.02(k)(ii)
 
Investment Policy
 
 
 
 
 
 
EXHIBITS
 
Exhibit A
Form of Assignment and Acceptance
Exhibit B
Form of Compliance Certificate
Exhibit C
Form of Existing Agent Acknowledgement and Consent


iv




LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT (this “ Agreement ”) dated as of December 28, 2016, as amended March 2, 2017 (the “Amendment No. 1 Effective Date”), among SEARS HOLDINGS CORPORATION, a Delaware corporation (“ Holdings ”), SEARS ROEBUCK ACCEPTANCE CORP., a Delaware corporation (“ SRAC ”), KMART CORPORATION, a Michigan corporation (“ Kmart Corp. ”), CITIBANK, N.A. (the “ Bank ”), as administrative agent (in such capacity, the “ Agent ”), and as the Issuing Bank (as further defined below, the “ Issuing Bank ”) and financial institutions from time to time party hereto as L/C lenders (each an “ L/C Lender ”).
W I T N E S S E T H:
WHEREAS, Holdings, SRAC, Kmart Corp., Wells Fargo Bank, National Association (f/k/a Wells Fargo Retail Finance, LLC) and Bank of America, N.A., as co-collateral agents (together with their successors and permitted assigns under the Existing Credit Agreement, the “ Co-Collateral Agents ”), and Bank of America, N.A., as administrative agent (the “ Existing Agent ”), are party to that certain Third Amended and Restated Credit Agreement, dated as of July 21, 2015 (as amended by the First Amendment to the Third Amended and Restated Credit Agreement, dated as of, April 8, 2016, the “ Existing Credit Agreement ”);
WHEREAS, the Existing Credit Agreement was amended on February 10, 2017, pursuant to the Second Amendment to the Third Amended and Restated Credit Agreement (as amended the “Amended Credit Agreement”);
WHEREAS, the ABL Obligations are secured by the ABL Collateral;
WHEREAS, each Borrower has requested that (a) the Issuing Bank issue Letters of Credit for its account or the account of its subsidiaries pursuant to the terms of this Agreement and (b) on and after the Effective Date, this Agreement, the Letters of Credit issued hereunder, and all other Obligations shall be designated as, and shall constitute, Bank Products and an Other LC Facility under the Existing Credit Agreement; and
WHEREAS, the Existing Agent and the Loan Parties have agreed that this Agreement, the Letters of Credit issued hereunder, and all other Obligations constitute “Bank Products”, an “Other LC Facility” and “Obligations” as each such term is defined under the Existing Credit Agreement.
WHEREAS, it is a condition to the obligations of the Issuing Bank and the L/C Lenders to provide extensions of credit hereunder that the Obligations be secured by a first priority security interest in the ABL Collateral, subject to the ABL Loan Documents, and that each of the L/C Lenders maintains at all times an amount in the Lender Cash Collateral Account of such L/C Lender equal to or greater than one hundred two percent (102%) of the L/C Commitment of such L/C Lender;
WHEREAS, concurrently herewith, the Loan Parties party to the Guarantee and Collateral Agreement will execute and deliver the Reaffirmation Agreement;
NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth in this Agreement, and for good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows:





ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
Section 1.01     Certain Defined Terms . For each term defined herein by reference to the Existing Credit Agreement as in effect on the Effective Date, (i) each capitalized term used in such definition in the Existing Credit Agreement shall, for purposes of this Agreement and the other Loan Documents, have the meaning assigned to such term in the Existing Credit Agreement as in effect on the Effective Date and (ii) such definitions shall continue to apply for purposes of the Loan Documents regardless of whether the Existing Credit Agreement or any other ABL Loan Document is terminated, replaced, or refinanced, and regardless of whether the Obligations thereunder have been paid in full or discharged. As used in this Agreement (including the preamble and the recitals), the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):
“ ABL Advances ” means the “Advances” as defined in the Existing Credit Agreement as in effect on the Effective Date.
“ ABL Collateral ” means the “Collateral” as defined in the Existing Credit Agreement as in effect on the Effective Date.
“ ABL Lenders ” means the “Lenders” as defined in the Existing Credit Agreement as in effect on the Effective Date.
“ ABL Loan Documents ” means the “Loan Documents” as defined in the Existing Credit Agreement as in effect on the Effective Date.
“ ABL Loan Parties ” means each Group Member that is a party to an ABL Loan Document.
“ ABL Obligations ” means the “Obligations” as defined in the Existing Credit Agreement as in effect on the Effective Date.
“ Accelerated Borrowing Base Delivery Event ” has the meaning assigned to such term in the Existing Credit Agreement as in effect on the Effective Date.
“ Acquisition ” means, with respect to any Person (a) a purchase of a controlling interest in, the equity interests of any other Person, (b) a purchase or other acquisition of all or substantially all of the assets or properties of, another Person or of any business unit of another Person, or (c) any merger or consolidation of such Person with any other Person or other transaction or series of transactions resulting in the acquisition of all or substantially all of the assets, or a controlling interest in the equity interests, of any Person, in each case in any transaction or group of transactions which are part of a common plan.
“ Additional ABL Availability Amount ” means any increase in availability under the revolving facility of the Existing Credit Agreement above the amount reported in the borrowing base certificate most recently delivered to the Co-Collateral Agents prior to the Effective Date

2



(the “ Specified BBC ”), other than increases arising solely as a result of (i) increases or decreases in usage of, and/or borrowings and repayments under, the Existing Credit Agreement or (ii) changes resulting from the Borrowers’ delivery of Borrowing Base Certificates after the Effective Date that calculate availability in a manner consistent with, and including reserve amounts equal to or greater than (on a percentage or absolute basis, as applicable) those reported in, the Specified BBC, in each case without giving effect to any amendments, consent or waivers to the Existing Credit Agreement.
“ Adjusted Consolidated EBITDA ” has the meaning assigned to such term in the Existing Credit Agreement as in effect on the Effective Date.
“ Affiliate ” means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. For purposes of this definition, the term “control” (including the terms “controlling”, “controlled by” and “under common control with”) of a Person means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person by contract or otherwise.
“ Agent ” has the meaning provided in the preamble to this Agreement, or any successor thereto.
“ Agent’s Account ” means an account maintained by the Agent and designated from time to time by the Agent in writing to the Borrowers and the L/C Lenders.
“ Aggregate L/C Commitments ” means, at any time, the sum of the L/C Commitments of all the L/C Lenders at such time. As of the Effective Date, the Aggregate L/C Commitments are $200,000,000.
“ Alternative Currency ” means any currency other than Dollars.
“ Alternative Currency Equivalent ” means, at any time, with respect to any amount denominated in Dollars, the equivalent amount thereof in the applicable Alternative Currency as determined by the Agent or the Issuing Bank, as the case may be, at such time on the basis of the Spot Rate (determined in respect of the most recent Revaluation Date) for the purchase of such Alternative Currency with Dollars.
“Amendment No. 1 Effective Date” has the meaning provided in the preamble to this Agreement.
“ Applicable Office ” means, with respect to each Lender, the office of such Lender specified as its “Applicable Office” on the signature pages hereof or in the Assignment and Acceptance pursuant to which it became a Lender, or such other office of such Lender as such Lender may from time to time specify to the Borrowers and the Agent.
“ Application ” means an application, in such form as the Issuing Bank may specify from time to time, requesting the Issuing Bank to open a Letter of Credit.

3



“ Approved Fund ” means any Fund that is administered or managed by (a) an L/C Lender, (b) an Affiliate of an L/C Lender or (c) an entity or an Affiliate of an entity that administers or manages an L/C Lender.
“ Assignment and Acceptance ” means an assignment and acceptance entered into by an L/C Lender and an Eligible Assignee, and accepted by the Agent, in substantially the form of Exhibit A hereto or such other form as the Agent may agree in its discretion.
“ Authorized Officer ” means, (i) as to Holdings, any Borrower or any other Loan Party, its president, chief executive officer, chief financial officer, vice president and controller, vice president and treasurer, vice president, finance, executive vice president, finance or any other person designated by it and acceptable to the Agent and (ii) as to any L/C Lender its member, manager, president, chief executive officer, chief financial officer, vice president and controller, vice president and treasurer, vice president, finance, executive vice president, finance or any other person designated by it and acceptable to the Agent. Any document delivered hereunder that is signed by an Authorized Officer of a Loan Party or L/C Lender shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of such Loan Party or L/C Lender, as applicable and such Authorized Officer shall be conclusively presumed to have acted on behalf of such Loan Party or L/C Lender, as applicable.
“ Available L/C Commitment ” means as to any L/C Lender at any time, an amount equal to the excess, if any, of (a) such L/C Lender’s L/C Commitment then in effect over (b) such L/C Lender’s L/C Extensions of Credit then outstanding.
“ Bail-In Action ” means the exercise of any Write-Down and Conversion Powers by the applicable EEA Resolution Authority in respect of any liability of an EEA Financial Institution.
“ Bail-In Legislation ” means, with respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of the European Union, the implementing law for such EEA Member Country from time to time which is described in the EU Bail-In Legislation Schedule.
“ Bank ” has the meaning provided in the preamble to this Agreement, and its successors.
“ Bank Product ” has the meaning assigned to such term in the Existing Credit Agreement as in effect on the Effective Date.
“ Base Rate ” means, for any day, a fluctuating rate per annum equal to the highest of (a) the NYFRB Rate plus one-half of one percent (0.50%), (b) the Eurodollar Rate (calculated utilizing a one-month interest period) plus one percent (1.00%), or (c) the rate of interest in effect for such day as publicly announced from time to time by the Bank as its “prime rate.” The “prime rate” is a rate set by the Bank based upon various factors including the Bank’s costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such rate announced by the Bank shall take effect at the opening of business on the day specified in the public announcement of such change.
“ Borrower Information ” has the meaning specified in Section 9.08 .

4



“ Borrowers ” means, collectively, SRAC and Kmart Corp.; provided that in the event SRAC is dissolved, merged with and into Holdings or any Subsidiary of Holdings or otherwise ceases to exist in accordance with Section 6.01(d) , then Holdings shall designate that Holdings or a direct wholly owned Domestic Subsidiary of Holdings become a Borrower for all purposes of the Loan Documents.
“Borrowing Base” has the meaning assigned to such term in the Amended Credit Agreement as in effect on the Amendment No. 1 Effective Date.
“ Borrowing Base Certificate ” means a certificate, signed by an Authorized Officer of Holdings, substantially in the form delivered from time to time pursuant to the Existing Credit Agreement.
“ Business Day ” means a day of the year on which banks are not required or authorized by law to close in New York, New York or Boston, Massachusetts or, in the case of matters relating to SRAC, Greenville, Delaware or, in the case of matters relating to Kmart Corp., Detroit, Michigan.
“ Capital Expenditures ” means, with respect to any Person for any period, all cash expenditures made or costs incurred for the acquisition or improvement of fixed or capital assets of such Person, in each case that are (or should be) set forth as capital expenditures in a consolidated statement of cash flows of such Person for such period, in each case prepared in accordance with GAAP.
“ Capital Lease Obligations ” means, with respect to any Person for any period, the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as liabilities on a balance sheet of such Person under GAAP and the amount of which obligations shall be the capitalized amount thereof determined in accordance with GAAP.
“ Capped Excess Availability ” has the meaning assigned to such term in the Existing Amended Credit Agreement as in effect on the Amendment No. 1 Effective Date.
“ Cash Collateral Agreement ” means a Cash Collateral Agreement in respect of the Lender Cash Collateral Accounts, duly executed by each L/C Lender, the Issuing Bank and the Collateral Agent (as defined in the Cash Collateral Agreement).
“ Cash Collateralize ” means, in respect of an obligation, provide and pledge (as a first priority perfected security interest) cash collateral in Dollars, at a location and pursuant to documentation in form and substance reasonably satisfactory to the Agent and the Issuing Bank (and “ Cash Collateralization ” and “ Cash Collateralizing ” have corresponding meanings).
“ Cash Equivalents ” means investments of Holdings and its Subsidiaries recorded as cash or cash equivalents in accordance with GAAP.
“ Cash Management Services ” has the meaning assigned to such term in the Existing Credit Agreement as in effect on the Effective Date.

5



“ Co-Collateral Agents ” has the meaning set forth in the recitals to this Agreement.
“ Collateral ” means (a) the ABL Collateral, (b) cash collateral provided by the Borrowers pursuant to the terms hereof (including Section 3.11 ), (c) from and after the delivery of Mortgages with respect to the Real Estate Collateral, the Real Estate Collateral and (d) all other property of the Loan Parties, now owned or hereafter acquired, upon which a Lien is created or purported to be created by any Security Document.
“ Collateral Coverage Event ” shall have the meaning assigned to such term in the Indenture for the Existing Second Lien Notes.
“ Commonly Controlled Entity ” means an entity, whether or not incorporated, that is under common control with any Borrower within the meaning of Section 4001 of ERISA or is part of a group that includes any Borrower and that is treated as a single employer under Section 414 of the Internal Revenue Code.
“ Consolidated ” refers to the consolidation of accounts of Holdings and its Subsidiaries in accordance with GAAP and as presented on a GAAP basis.
“ Consolidated Interest Expense ” means for any period for any Person, total interest expense of such Person (including that attributable to Capital Lease Obligations and other expenses classified as interest expense in accordance with GAAP) on a Consolidated basis with respect to all outstanding Debt of such Person, as determined in accordance with GAAP.
“ Covenant Compliance Event ” has the meaning assigned to such term in the Existing Amended Credit Agreement as in effect on the Amendment No. 1 Effective Date.
“Credit Card Program Assets” has the meaning assigned to such term in the Amended Credit Agreement as in effect on the Amendment No. 1 Effective Date.
“Credit Card Program Documents” has the meaning assigned to such term in the Amended Credit Agreement as in effect on the Amendment No. 1 Effective Date.
“Credit Card Royalty Securitization” has the meaning assigned to such term in the Amended Credit Agreement as in effect on the Amendment No. 1 Effective Date.
“Credit Card Royalty Securitization Subsidiary” has the meaning assigned to such term in the Amended Credit Agreement as in effect on the Amendment No. 1 Effective Date.
“ Credit Party ” or “ Credit Parties ” means (a) individually, (i) each L/C Lender and its Affiliates, (ii) the Agent, (iii) the Issuing Bank, and (iv) the successors and assigns of each of the foregoing, and (b) collectively, all of the foregoing.
“ DC ” means any distribution center owned or leased and operated by any Loan Party.
“ Debt ” of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money (excluding interest payable thereon unless such interest has been accrued and added to the principal amount of such indebtedness), (b) all obligations of such Person for the deferred purchase price of property or services (other than (i) trade payables incurred in the

6



ordinary course of such Person’s business and (ii) any such obligations which are due less than twelve months from the date of incurrence), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments (other than performance, surety and appeals bonds arising in the ordinary course of business and other than the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business) or in respect of bankers’ acceptances or letters of credit, (d) all obligations of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all obligations of such Person as lessee under leases that have been or should be, in accordance with GAAP, recorded as capital leases, (f) all direct recourse payment obligations of such Person in respect of any accounts receivable sold by such Person, (g) all Debt of others referred to in clauses (a) through (f) above or clause (h) below and other payment obligations guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (1) to pay or purchase such Debt or to advance or supply funds for the payment or purchase of such Debt, (2) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Debt or to assure the holder of such Debt against loss, (3) to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether such property is received or such services are rendered) or (4) otherwise to assure a creditor against loss, and (h) all Debt referred to in clauses (a) through (g) above secured by (or for which the holder of such Debt has an existing right, contingent or otherwise, to be secured by) any Lien on property (including accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Debt.
“ Debtor Relief Laws ” means the Bankruptcy Code of the United States, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally.
“ December Real Estate Loan ” means that certain term Loan Agreement between JPP, LLC, JPP II, LLC, the Loan Parties and/or certain affiliates of the Loan Parties, dated on or about the Effective Date, secured by the Real Estate Collateral.
“ Default ” means any Event of Default or any event that would constitute an Event of Default but for the requirement that notice be given or time elapse or both.
“ Designated Transaction Proceeds ” means an amount equal to the sum of:
(i) 100% of the Net Proceeds from any issuance or incurrence of Debt for borrowed money by Holdings or any of its Subsidiaries other than (v) borrowings under the December Real Estate Loan, (w) any proceeds from any Permitted Refinancing Debt in respect of the Real Estate Term Loan, (x) borrowings under the existing revolving facility under the Existing Credit Agreement (without giving effect to any increase in the amount thereof after the date hereof), (y) Debt of Holdings or any of its Subsidiaries that is owing to Holdings or any of its Subsidiaries to

7



the extent permitted to be incurred hereunder, and (z) amounts borrowed under commercial paper facilities; plus
(ii) 100% of the Net Proceeds from the sale or issuance of equity interests by and capital contributions to Holdings or any of its Subsidiaries other than (i) any sales or issuances of equity interests to or capital contributions from Holdings or any Subsidiary of Holdings (other than capital contributions from Holdings or any Subsidiary of Holdings made with the proceeds of equity issuance to Persons other than Holdings or any Subsidiary of Holdings), (ii) any issuance of directors’ qualifying shares or (iii) any sales or issuances of equity interests of Holdings or any Subsidiary to management or employees of Holdings or such Subsidiary under any employee stock option or stock purchase plan or employee benefit plan in existence at the Effective Date; plus
(iii) 100% of the Net Proceeds from any Disposition pursuant to clause (g) or , (i) (if such Disposition is to a Person that is neither a Loan Party nor a Subsidiary of Holdings) or (p) of the definition of Permitted Dispositions; plus
(iv) 100% of the Additional ABL Availability Amount.
“ Disposition ” means any sale, transfer, license, lease or other disposition (including any sale and leaseback transaction), whether in one transaction or in a series of transactions, of any property (including, without limitation, any Equity Interests).
“ Dollar Equivalent ” means, at any time, (a) with respect to any amount denominated in Dollars, such amount, and (b) with respect to any amount denominated in any Alternative Currency, the equivalent amount thereof in Dollars as determined by the Agent or the Issuing Bank, as the case may be, at such time on the basis of the Spot Rate (determined in respect of the most recent Revaluation Date) for the purchase of Dollars with such Alternative Currency.
“ Dollars ” and “ $ ” refers to lawful money of the United States.
“ Domestic Subsidiary ” means any Subsidiary organized under the laws of the United States of America, any State thereof or the District of Columbia (excluding, for the avoidance of doubt, any Subsidiary organized under the laws of Puerto Rico).
“ EEA Financial Institution ” means (a) any credit institution or investment firm established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution described in clause (a) of this definition, or (c) any financial institution established in an EEA Member Country which is a subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent;
“ EEA Member Country ” means any of the member states of the European Union, Iceland, Liechtenstein, and Norway.
“ EEA Resolution Authority ” means any public administrative authority or any person entrusted with public administrative authority of any EEA Member Country (including any delegee) having responsibility for the resolution of any EEA Financial Institution.

8



“ Effective Date ” means the date on which each of the conditions precedent in Section 4.02 are satisfied (or waived by the Agent, the Issuing Bank and the L/C Lenders in accordance with Section 9.01 ).
“ Eligible Assignee ” means (a) a commercial bank or any other Person engaged in the business of making asset based or commercial loans, or any fund or other Person (other than a natural Person) that invests in loans, which bank, Person or fund, together with its Affiliates, has a combined capital and surplus in excess of $300,000,000 and which bank, Person or fund is a Lender (as defined in the Existing Credit Agreement) or Affiliate of a Lender (as defined in the Existing Credit Agreement) under the Existing Credit Agreement and makes the representations and warranties set forth in Section 5.02 hereof and in the Assignment and Acceptance and is approved by the Agent and the Issuing Bank or (b) an existing L/C Lender or an Affiliate of an existing L/C Lender or an Approved Fund; provided that neither Holdings, the Borrowers nor any of their respective Subsidiaries nor an Affiliate of Holdings, any Borrower or any of their respective Subsidiaries (other than the Permitted Holders) shall qualify as an Eligible Assignee.
“ Eligible Inventory ” has the meaning assigned to such term in the Existing Credit Agreement as in effect on the Effective Date.
“ Environmental Action ” means any action, suit, demand, demand letter, claim, notice of non-compliance or violation, notice of liability or potential liability, investigation, proceeding, consent order or consent agreement relating in any way to any Environmental Law, Environmental Permit or Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment, including (a) by any governmental or regulatory authority for enforcement, cleanup, removal, response, remedial or other actions or damages and (b) by any governmental or regulatory authority or any third party for damages, contribution, indemnification, cost recovery, compensation or injunctive relief.
“ Environmental Law ” means any federal, state, local or foreign statute, law, ordinance, rule, regulation, code, order, judgment, decree or judicial or agency interpretation, policy or guidance relating to pollution or protection of the environment, health, safety or natural resources, including those relating to the use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Materials.
“ Environmental Liability ” means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of Holdings, the Borrowers, or any of their Subsidiaries directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.
“ Environmental Permit ” means any permit, approval, identification number, license or other authorization required under any Environmental Law.
“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and issued thereunder.

9



“ ERISA Affiliate ” means any Person that for purposes of Title IV of ERISA is a member of any Borrower’s controlled group, or under common control with such Borrower, within the meaning of Section 414 of the Internal Revenue Code.
“ ERISA Event ” means (a) (i) the occurrence of a Reportable Event, as defined herein, or (ii) the requirements of subsection (1) of Section 4043(b) of ERISA (without regard to Section 4043(b)(2)) are met with respect to a contributing sponsor, as defined in Section 4001(a)(13) of ERISA, of a Plan, and an event described in paragraph (9), (10), (11), (12) or (13) of Section 4043(c) of ERISA is reasonably expected to occur with respect to such Plan within the following 30 days; (b) the application for a minimum funding waiver with respect to a Plan; (c) the provision by the administrator of any Plan of a notice of intent to terminate such Plan pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA); (d) the cessation of operations at a facility of any Borrower or any ERISA Affiliate in the circumstances described in Section 4062(e) of ERISA; (e) the withdrawal by any Borrower or any ERISA Affiliate from a Multiple Employer Plan during a plan year for which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (f) the conditions for the imposition of a lien under Sections 303(k) or 4068(a) of ERISA shall have been met with respect to any Plan; (g) the institution by the PBGC of proceedings to terminate a Plan pursuant to Section 4042 of ERISA, or the occurrence of any event or condition described in Section 4042 of ERISA that constitutes grounds for the termination of, or the appointment of a trustee to administer, a Plan, or (h) the Borrowers or any ERISA Affiliate incur liabilities under Section 4069 of ERISA.
“ EU Bail-In Legislation Schedule ” means the EU Bail-In Legislation Schedule published by the Loan Market Association (or any successor person), as in effect from time to time.
“ Eurocurrency Liabilities ” has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time.
“ Eurodollar Rate ” means, on any date, the rate per annum (which shall in no event be less than zero) equal to (i) ICE Benchmark Administration Limited (“ ICE LIBOR ”), as published by Reuters (or other commercially available source providing quotations of ICE LIBOR as designated by the Agent from time to time) at approximately 11:00 a.m., London time determined two London Banking Days prior to such date for Dollar deposits being delivered in the London interbank market for a term of one month commencing that day or (ii) if such published rate is not available at such time for any reason, the rate per annum determined by the Agent (which shall in no event be less than zero) to be the rate at which deposits in Dollars for delivery on the date of determination in same day funds in the approximate amount of the outstanding Reimbursement Obligations and with a term equal to one month would be offered by the Bank’s London Branch to major banks in the London interbank Eurodollar market at their request at the date and time of determination.
“ Events of Default ” has the meaning specified in Section 7.01 .
“ Excluded Taxes ” means any of the following Taxes imposed on or with respect to any Recipient or required to be withheld or deducted from a payment to a Recipient, (a) Taxes imposed on or measured by net income (however denominated), franchise Taxes, and branch profits Taxes, in each case, (i) imposed as a result of such Recipient being organized under the

10



laws of, or having its principal office or, in the case of any Lender, its Applicable Office located in, the jurisdiction imposing such Tax (or any political subdivision thereof) or (ii) that are Other Connection Taxes, (b) U.S. federal withholding Taxes imposed on amounts payable to or for the account of such Recipient with respect to an applicable interest in any L/C Extensions of Credit or L/C Commitment pursuant to a law in effect on the date on which (i) such Recipient acquires such interest in such L/C Extensions of Credit or L/C Commitment (other than pursuant to an assignment request by the Borrower under Section 9.16 ) or (ii) in the case of a Lender, such Lender changes its Applicable Office, except in each case to the extent that, pursuant to Section 2.15 , amounts with respect to such Taxes were payable either to such Lender’s assignor immediately before such Lender became a party hereto or changed its Applicable Office, (c) Taxes attributable to such Recipient’s failure to comply with Section 2.15(e) , (f), or (g) and (d) any U.S. federal withholding Taxes imposed pursuant to FATCA.
“ Existing Agent ” has the meaning set forth in the recitals to this Agreement.
“ Existing Agent Acknowledgement and Consent ” means an acknowledgment and consent executed by Holdings, the Borrowers, and Bank of America, N.A., in its capacity as the Existing Agent, substantially in the form of Exhibit C hereto.
“ Existing Credit Agreement ” has the meaning set forth in the recitals to this Agreement.
“ Existing Intercreditor Agreement ” means the Amended and Restated Intercreditor Agreement, dated as of September 1, 2016, by and among the Co-Collateral Agents, as the ABL agents, and Wilmington Trust, National Association (as successor to Wells Fargo Bank, National Association), as the second lien agent.
“ Existing Second Lien Credit Agreement ” means that Second Lien Credit Agreement, dated as of September 1, 2016, between Holdings, SRAC, Kmart Corp., the lenders party thereto, and JPP, LLC, as administrative agent and collateral administrator.
“ Existing Second Lien Notes ” means $301,000,000 aggregate principal amount of 6 5⁄8% Senior Secured Notes due 2018 of Holdings outstanding as of the Effective Date and any notes issued in exchange therefor pursuant to that certain Indenture, dated as of October 12, 2010, by and among Holdings and the guarantors party thereto and Wells Fargo Bank, National Association, as trustee and collateral agent.
“ Facility Cap ” means five hundred million dollars ($500,000,000).
“ FATCA ” means Sections 1471 through 1474 of the Code, as of the Effective Date (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.
“ Fee Letter ” means the Fee Letter dated the date hereof, among Holdings, the Borrowers, and Citigroup Global Markets Inc., as amended from time to time.
“ Federal Funds Rate ” means, for any day, the rate calculated by the NYFRB based on such day’s federal funds transactions by depositary institutions, as determined in such manner as

11



the NYFRB shall set forth on its public website from time to time, and published on the next succeeding Business Day by the NYFRB as the federal funds effective rate.
“ Fixed Charge Ratio ” means, the ratio, determined as of the end of each fiscal month of the Borrowers for the most recently ended twelve fiscal months, of (a) Adjusted Consolidated EBITDA minus the unfinanced portion of Capital Expenditures (but including Capital Expenditures financed with proceeds of ABL Advances made under the Existing Credit Agreement) minus taxes paid in cash net of refunds (but in no event less than zero), to (b) Fixed Charges, all calculated on a Consolidated basis in accordance with GAAP.
“ Fixed Charges ” means, with reference to any period, without duplication, Consolidated Interest Expense paid or payable in cash, plus scheduled principal payments on Debt made during such period, plus Capital Lease Obligation payments made during such period, all calculated on a Consolidated basis.
“ Flood Compliance Documents ” means, with respect to each Real Property Collateral, the following documents and instruments in form and substance in order to comply with the Flood Laws: (1) a completed life of loan standard flood hazard determination form addressed to the mortgagee or beneficiary under the Mortgage and otherwise complying with the Flood Laws, (2) if the improvements to the Real Property Collateral are located in a special flood hazard area, a notification to such party as holds title to the applicable Real Property Collateral (“Borrower Notice”) and, if applicable, notification to such party that flood insurance coverage under the National Flood Insurance Program is not available because the community does not participate in the such program, (3) documentation evidencing receipt by such party as holds title to the Real Property Collateral of the Borrower Notice and (4) if the Borrower Notice is required to be given and flood insurance is available in the community in which the Real Property Collateral is located, a copy of the flood insurance policy, the application by the party as holds title to the Real Property Collateral for a flood insurance policy plus proof of premium payment, a declaration page confirming that flood insurance has been issued, and such other evidence of flood insurance reasonably requested by Agent for compliance with Flood Laws, each in a form and substance reasonably satisfactory to the Agent.
“ Flood Laws ” means, collectively, (i) National Flood Insurance Reform Act of 1994 (which comprehensively revised the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973) as now or hereafter in effect or any successor statute thereto, (ii) the Flood Insurance Reform Act of 2004 as now or hereafter in effect or any successor statute thereto and (iii) the Biggert-Waters Flood Insurance Reform Act of 2012 as now or hereafter in effect or any successor statute thereto and related legislation (including the regulations of the Board of Governors of the Federal Reserve System) and any substitution therefor and, if applicable, any regulations promulgated thereunder.
“ Fund ” means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.
“ GAAP ” has the meaning specified in Section 1.03 .

12



“ Governmental Authority ” means any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization (including the National Association of Insurance Commissioners).
“ Group Members ” means, collectively, Holdings, the Borrowers and their respective Subsidiaries.
“ Guarantee and Collateral Agreement ” means that certain Third Amended and Restated Guarantee and Collateral Agreement, dated as of July 21, 2015, among the ABL Loan Parties and the Co-Collateral Agents.
“ Hazardous Materials ” means (a) petroleum and petroleum products, byproducts or breakdown products, radioactive materials, asbestos-containing materials, polychlorinated biphenyls and radon gas and (b) any other chemicals, materials or substances designated, classified or regulated as hazardous or toxic or as a pollutant or contaminant under any Environmental Law.
“ Holdings ” has the meaning provided in the preamble to this Agreement.
“ Indemnified Taxes ” means Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by or on account of any obligation of any Loan Party under any Loan Document.
“ Insolvency ” means with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA.
“ Insolvent ” means pertaining to a condition of Insolvency.
“ Intellectual Property ” has the meaning set forth in the Guarantee and Collateral Agreement as in effect on the Effective Date.
“ Internal Revenue Code ” means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder.
“ Inventory ” as defined in the UCC.
“ Investment ” means, as to any Person, any direct or indirect acquisition or investment by such Person, whether by means of (a) the purchase or other acquisition of equity interests of another Person, (b) a loan, advance or capital contribution to, guarantee or assumption of debt of, or purchase or other acquisition of any other debt or interest in, another Person, or (c) any Acquisition.
“ ISP ” means, with respect to any Letter of Credit, the “International Standby Practices 1998” published by the Institute of International Banking Law & Practice (or such later version thereof as may be in effect at the time of issuance).

13



“ Issuer Exposure ” means at any time, an amount equal to the sum of (a) the aggregate then undrawn and unexpired maximum amount of all then outstanding Letters of Credit (whether or not (i) such maximum amount is then in effect under any such Letter of Credit if such maximum amount increases periodically pursuant to the terms of such Letter of Credit or (ii) the conditions to drawing can then be satisfied), but excluding any such Letter of Credit that is backstopped by a Satisfactory Letter of Credit; plus (b) the aggregate amount of drawings under Letters of Credit that have not then been reimbursed or discharged by (x) the Borrower, pursuant to Section 3.05 , or (y) where the L/C Lenders have reimbursed the Issuing Bank, including where the Issuing Bank has reimbursed itself using funds on deposit in the Lender Cash Collateral Accounts pursuant to Section 3.04 ; provided that if any payment or withdrawal has been made and such payment is required to be rescinded, restored or returned upon the insolvency, bankruptcy, or reorganization of any Person or otherwise, such payment or withdrawal shall be deemed not to have occurred hereunder; plus (c) [reserved.]; plus (d) the amount of Available L/C Commitments. For all purposes of this Agreement, (a) if on any date of determination a Letter of Credit has expired by its terms but any amount may still be drawn thereunder by reason of the operation of Rule 3.14 of the ISP, such Letter of Credit shall be deemed to be “outstanding” in the amount so remaining available to be drawn, and (b) with respect to any references to the Issuer Exposure being “zero” or no longer “outstanding”, the Available L/C Commitments referred to clause (d) hereof shall mean that all of the L/C Lenders’ L/C Commitments shall have been terminated or shall have expired, and the obligation of the Issuing Bank to issue Letters of Credit pursuant to Section 3.01(a) has been terminated.
“ Issuing Bank ” means the Bank, it being understood that the Issuing Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by its Affiliates, in which case the term “Issuing Bank” shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate.
“ Kmart ” means Kmart Holding Corporation, a Delaware corporation.
“ Kmart Corp. ” has the meaning provided in the preamble to this Agreement.
“ L/C Commitment ” means, as to any L/C Lender, the obligation of such L/C Lender to participate in Letters of Credit in an aggregate principal amount up to (a) the amount set forth opposite such L/C Lender’s name on Schedule 1.01(a) as such amount may be increased from time to time in accordance with Section 2.17 or (b) if such L/C Lender has entered into any Assignment and Acceptance, the amount set forth for such L/C Lender in the Register maintained by the Agent pursuant to Section 9.07(d) , in each case, as such amount may be reduced (i) pursuant to Section 2.06 , (ii) by an amount equal to the amount by which any Letter of Credit has been drawn to the extent the Issuing Bank has been reimbursed for such drawing (including by (x) the Borrower, pursuant to Section 3.05 , or (y) where the L/C Lenders have reimbursed the Issuing Bank, including where the Issuing Bank has reimbursed itself using funds on deposit in the Lender Cash Collateral Accounts pursuant to Section 3.04 ), (iii) by an amount equal to the face amount of any Letter of Credit that has been returned to Citi for cancellation, unless a replacement therefor is issued substantially simultaneously to the same or a related beneficiary and the Required L/C Lenders have provided their consent in writing to the issuance of such replacement, (iv) by an amount equal to the face amount of any Letter of Credit that has expired, unless a replacement therefor is issued substantially simultaneously to the same or a related beneficiary and the Required L/C Lenders have provided their consent in writing to the

14



issuance of such replacement, provided that, to the extent on any date of determination a Letter of Credit has expired by its terms but any amount may still be drawn thereunder by reason of the operation of Rule 3.14 of the ISP, such Letter of Credit shall be deemed to be “outstanding” in the amount so remaining available to be drawn, and (v) by the amount by which the face amount of any Letter of Credit has been permanently reduced.
“ L/C Commitment Percentage ” means, as to any L/C Lender at any time, the percentage which such L/C Lender’s L/C Commitment then constitutes of the Aggregate L/C Commitments or, at any time after the Aggregate L/C Commitments shall have expired or terminated, the percentage which the aggregate principal amount of such L/C Lender’s participation in L/C Obligations constitutes of the aggregate principal amount of the L/C Obligations then outstanding.
“ L/C Extension ” means, with respect to any Letter of Credit, the issuance, extension of the expiry date, or the renewal or increase of the amount thereof.
“ L/C Extensions of Credit ” means as to any L/C Lender at any time, an amount equal to such L/C Lender’s L/C Commitment Percentage of the Issuer Exposure (other than clause (d) of the definition thereof) then outstanding.
“ L/C Lender Insolvency Event ” means that (i) an L/C Lender or its Parent Company is insolvent, or is generally unable to pay its debts as they become due, or admits in writing its inability to pay its debts as they become due, or makes a general assignment for the benefit of its creditors, or (ii) such L/C Lender or its Parent Company is the subject of a bankruptcy, insolvency, reorganization, liquidation or similar proceeding, or a receiver, trustee, conservator, intervenor or sequestrator or the like has been appointed for such L/C Lender or its Parent Company, or such L/C Lender or its Parent Company has taken any action in furtherance of or indicating its consent to or acquiescence in any such proceeding or appointment.
“ L/C Lenders ” means, collectively, any Persons signatory hereto as an L/C Lender, and each Person that shall become a party hereto as an L/C Lender pursuant to Section 9.07 .
“ L/C Lender Exposure ” means at any time, an amount equal to the sum of (a) the aggregate then undrawn and unexpired maximum amount of all then outstanding Letters of Credit (whether or not (i) such maximum amount is then in effect under any such Letter of Credit if such maximum amount increases periodically pursuant to the terms of such Letter of Credit or (ii) the conditions to drawing can then be satisfied), but excluding any such Letter of Credit that is backstopped by a Satisfactory Letter of Credit; plus (b) the aggregate amount of drawings under Letters of Credit that have not then been reimbursed or discharged by the Borrower (including, pursuant to Section 3.05 (and, for the avoidance of doubt, in the case where the L/C Lenders have reimbursed the Issuing Bank, including where the Issuing Bank has reimbursed itself using funds on deposit in the Lender Cash Collateral Accounts pursuant to Section 3.04 , such drawings under Letters of Credit shall be considered to not have been reimbursed or discharged by the Borrower)); plus (c)[reserved.]; plus (d) the amount of Available L/C Commitments. For all purposes of this Agreement, (a) if on any date of determination a Letter of Credit has expired by its terms but any amount may still be drawn thereunder by reason of the operation of Rule 3.14 of the ISP, such Letter of Credit shall be deemed to be “outstanding” in the amount so remaining available to be drawn, and (b) with respect to any references to the L/C

15



Lender Exposure being “zero” or no longer “outstanding”, the Available L/C Commitments referred to clause (d) hereof shall mean that all of the L/C Lenders’ L/C Commitments shall have been terminated or shall have expired, and the obligation of the Issuing Bank to issue Letters of Credit pursuant to Section 3.01(a) has been terminated.
“ L/C Obligations ” means at any time, an amount equal to the sum of paragraphs (a) and (b) (but not (d)) of the definition of L/C Lender Exposure and all accrued and unpaid fees, taxes and expenses payable in connection with any Letter of Credit.
“ L/C Termination Date ” means the first anniversary of the Effective Date.
“ Lender Cash Collateral Account ” means, with respect to any L/C Lender, the Applicable Account (as defined in the Cash Collateral Agreement) of such L/C Lender, and " Lender Cash Collateral Accounts " means, collectively, all such Applicable Accounts.
“ Lenders ” means the Issuing Bank and the L/C Lenders.
“ Letters of Credit ” means the collective reference to irrevocable standby letters of credit under which the Issuing Bank agrees to make payments in Dollars for the account of any Borrower, on behalf of any Group Member in respect of obligations of such Group Member incurred pursuant to contracts made or performances undertaken or to be undertaken or like matters relating to contracts to which such Group Member is or proposes to become a party, including, without limiting the foregoing, for insurance purposes or in respect of advance payments or as bid or performance bonds or for any other purpose for which a standby letter of credit might be issued; individually, a “ Letter of Credit ”.
“ Lien ” means any lien, security interest or other charge or encumbrance of any kind or any other type of preferential arrangement, including the lien or retained security title of a conditional vendor, and any easement, right of way or other encumbrance on title to real property, but excluding consignments or bailments of goods of third parties and the interests of lessors under operating leases.
“ Line Cap ” has the meaning assigned to such term in the Existing Amended Credit Agreement as in effect on the Amendment No. 1 Effective Date.
“ Loan Documents ” means this Agreement, each Letter of Credit, the Reaffirmation Agreement, the Existing Agent Acknowledgement and Consent, each Security Document, and any other document or instrument pursuant to this Agreement now or hereafter designated by the Borrowers and the Agent as a “Loan Document” and any amendment, waiver, supplement or other modification to any of the foregoing.
“ Loan Parties ” means each ABL Loan Party and each other Group Member that is a party to a Loan Document.
“ Material Adverse Effect ” means a material adverse effect on (a) the business, condition (financial or otherwise), operations or assets of Holdings and its Subsidiaries taken as a whole, or (b) the ability of the Loan Parties taken as a whole to perform their material obligations under the Loan Documents or (c) the validity or enforceability of the Loan Documents taken as a whole or the rights and remedies of the Co-Collateral Agents, the Agent, the Issuing Bank or the L/C

16



Lenders thereunder taken as a whole (including, but not limited to, the enforceability or priority of any Liens granted to the Co-Collateral Agents under the ABL Loan Documents or to the Agent under the applicable Loan Documents).
“ Material Subsidiary Guarantor ” means a Subsidiary Guarantor that, at the time of determination, accounts for more than 2 5 % of both the total assets and total revenues of Holdings on a consolidated basis (and, together with all other Material Subsidiary Guarantors accounts for more than 5 10 % of both the total assets and total revenues of Holdings on a consolidated basis).
“ Mortgage ” means a mortgage, deed of trust, assignment of leases and rents or other security document granting a Lien on the Real Estate Collateral in favor of the Agent on behalf of the L/C Lenders and the Issuing Bank to secure the Obligations, as the same may be amended, amended and restated, supplemented or otherwise modified from time to time and in form and substance reasonably satisfactory to the L/C Lenders, the Agent, the Issuing Bank and the Borrowers, provided that (i) Mortgages that are substantially similar to the mortgages delivered in connection with the December Real Estate Loan shall be deemed to be reasonably satisfactory and (ii) each Mortgage shall contain an automatic termination provision incorporating the provisions of Section 9.13(c) of this Agreement.
“ Multiemployer Plan ” means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which Holdings or any ERISA Affiliate is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions.
“ Multiple Employer Plan ” means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of Holdings or any ERISA Affiliate and at least one Person other than Holdings and the ERISA Affiliates or (b) was so maintained and in respect of which Holdings or any ERISA Affiliate could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated.
“ Net Proceeds ” means, (a) with respect to any Disposition by Holdings or any of its Subsidiaries of any property or any casualty or condemnation of such property, the excess, if any, of (i) the sum of cash and cash equivalents received by Holdings or any of its Subsidiaries (including any cash or cash equivalents received by way of deferred payment pursuant to, or by monetization of, a note receivable or otherwise, but only as and when so received) over (ii) the sum of (A) the out-of-pocket expenses incurred by Holdings or such Subsidiary in connection with such transaction (including, without limitation, attorneys’ fees, accountants’ fees, investment banking fees, appraisals, and brokerage, legal, title and recording or transfer tax expenses and commissions) paid by Holdings or any of its Subsidiaries to third parties (other than Affiliates), (B) transfer taxes paid as a result thereof, (C) payments required to be made to governmental authorities and/or third parties in connection with such sale (including to obtain consents or approvals required for such sale) and amounts required by governmental authorities to be retained by applicable entities and (D) any Debt secured by such property that is required to be repaid from the proceeds of such sale (including, with respect to property that is collateral for the December Real Estate Loan, repayment of the December Real Estate Loan in an amount required pursuant to the terms of the December Real Estate Loan), and (b) with respect to any equity issuance, capital contribution and/or the incurrence of Debt for borrowed money by

17



Holdings or any of its Subsidiaries, the excess of (i) the sum of the cash and cash equivalents received by Holdings or any of its Subsidiaries in connection with such transaction over (ii) the underwriting discounts and commissions, and other out-of-pocket expenses, incurred by Holdings or any of its Subsidiaries in connection therewith.
“ Non-Consenting Lender ” has the meaning specified in Section 9.16 .
“ NYFRB ” means the Federal Reserve Bank of New York.
“ NYFRB Rate ” means, for any day, the greater of (a) the Federal Funds Rate in effect on such day and (b) the Overnight Bank Funding Rate in effect on such day (or for any day that is not a Business Day, for the immediately preceding Business Day); provided that if none of such rates are published for any day that is a Business Day, the term “ NYFRB Rate ” means the rate for a federal funds transaction quoted at 11:00 a.m. on such day received to the Agent from a Federal funds broker of recognized standing selected by it; provided , further , that if any of the aforesaid rates shall be less than zero, such rate shall be deemed to be zero for purposes of this Agreement.
“ Obligations ” shall mean all obligations and liabilities of each Loan Party, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under or in connection with this Agreement or any other Loan Document to which such Loan Party is a party, in each case whether on account of principal, interest (including, without limitation, any interest accruing (and interest that would have accrued but for the filing or commencement of such proceeding) at the then applicable rate provided in this Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding with respect to such Loan Party, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), guarantee obligations, reimbursement obligations, fees, indemnities, costs, expenses or amounts otherwise (including, without limitation, all fees and disbursements of counsel to the Agent or to any other Credit Party and all reimbursement obligations, fees, indemnities, costs, expenses or other amounts accruing (or that would have accrued but for the filing or commencement of such proceeding) after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding with respect to such Loan Party, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) that in each case are required to be paid by such Loan Party pursuant to the terms of this Agreement or any other Loan Document.
“ Other Connection Taxes ” means, with respect to any Recipient, Taxes imposed as a result of a present or former connection between such Recipient and the jurisdiction imposing such Tax (other than connections arising solely from such Recipient 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 any L/C Extensions of Credit or Loan Document pursuant to an assignment request by the Borrowers under Section 9.16 ).
“ Other LC Facility ” has the meaning assigned to such term in the Existing Credit Agreement as in effect on the Effective Date.

18



“ Other Taxes ” has the meaning specified in Section 2.15 .
“ Overnight Bank Funding Rate ” means, for any day, the rate comprised of both overnight federal funds and overnight Eurodollar borrowings by U.S.-managed banking offices of depository institutions, as such composite rate shall be determined by the NYFRB as set forth on its public website from time to time, and published on the next succeeding Business Day by the NYFRB as an overnight bank funding rate (from and after such date as the NYFRB shall commence to publish such composite rate).
“ PACA ” means the Perishable Agricultural Commodities Act of 1930, as amended.
“ Parent Company ” means, with respect to an L/C Lender, the bank holding company (as defined in Federal Reserve Board Regulation Y), if any, of such L/C Lender, and/or any Person of which such L/C Lender is a Subsidiary.
“ Participant Register ” has the meaning set forth in Section 9.07(f) .
“ PASA ” means the Packers and Stockyards Act of 1921, as amended.
“ PATRIOT Act ” means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Title III of Pub. L. 107-56 (signed into law October 26, 2001)).
“ PBGC ” means the Pension Benefit Guaranty Corporation (or any successor).
“ Pension Plan ” means any “employee pension benefit plan” (as such term is defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by Holdings or any ERISA Affiliate or to which Holdings or any ERISA Affiliate contributes or has an obligation to contribute, or in the case of a multiple employer or other plan described in Section 4064(a) of ERISA, has made contributions at any time during the immediately preceding five plan years.
“ Perfection Certificate ” means a certificate dated as of the Effective Date with respect to the Borrowers and the other Loan Parties in form reasonably satisfactory to the Agent.
“ Permitted Debt ” means each of the following as long as no Default or Event of Default exists at the time of incurrence thereof or would arise from the incurrence thereof:
(a)    Debt committed or outstanding on the Effective Date and set forth in the Perfection Certificate, excluding the Real Estate Term Loan, the December Real Estate Loan and any commercial paper but including, for the avoidance of doubt, future draws under the Existing Credit Agreement to the extent not in excess of the commitments thereunder as of the Effective Date;
(b)    Debt of any Loan Party to any other Loan Party;
(c)    Debt of Holdings or any Subsidiary of Holdings which is not a Loan Party to any Loan Party; provided , that (1) such Debt is incurred in the ordinary course of business consistent with past practices in connection with cash management, (2) such Debt shall

19



not exceed $100,000,000 in the aggregate at any one time outstanding or (3) (i) at the time of incurrence of any such Debt and immediately after giving pro forma effect thereto, no Default or Event of Default shall have occurred and be continuing, and (ii) after giving effect to any such Debt (A) the Pro Forma and Projected Capped Excess Availability is at least 15% of the Line Cap, and (B) the Pro Forma Fixed Charge Ratio shall be at least 1.0 to 1.0;
(d)    Debt of any Group Member to any Subsidiary of Holdings which is not a Loan Party;
(e)    (i) purchase money Debt used to finance the acquisition of any fixed or capital assets, including Capital Lease Obligations, and any Debt assumed in connection with the acquisition of any such assets or secured solely by a Lien on any such assets prior to the acquisition thereof, and (ii) Debt incurred in connection with sale-leaseback transactions with respect to assets not constituting Collateral;
(f)    Debt of any Person that becomes a Subsidiary in an Acquisition permitted in accordance with Section 6.02(c), which Debt is existing at the time such Person becomes a Subsidiary (other than Debt incurred solely in contemplation of such Person’s becoming a Subsidiary);
(g)    the Obligations;
(h)    other Debt in an aggregate amount outstanding at any time, inclusive of the Real Estate Term Loan and any commercial paper, not to exceed the greater of (x) $ 750,000,000 1,000,000,000; provided that not more than $500,000,000 of such Debt shall consist of Short Term Debt (including, without limitation, Short Term commercial paper) and (y) the amount permitted to be incurred under clause (h) of the definition of “Permitted Debt” in the Existing ABL Amended Credit Agreement (as the same may be amended from time to time);
(i)    Debt described in Section 6.02(a)(vi), provided, that such Debt (i) does not have a maturity date which is earlier than the L/C Termination Date, (ii) is incurred on arm’s-length terms, (iii) is subject to an intercreditor agreement in the form of the Existing Intercreditor Agreement or Exhibit F to the Existing Credit Agreement (or such other forms as the Co-Collateral Agents may agree in their Permitted Discretion), and (iv) the security documents, if any, with respect to such Debt are reasonably satisfactory to the Co-Collateral Agents in their Permitted Discretion;
(j)    any other Debt, provided, that such Debt (i) does not require the repayment of principal prior to the L/C Termination Date in excess of 1.0% of the original principal amount thereof per annum (excluding, for the avoidance of doubt, repayments required as a result of the sale of assets and repayments required in connection with an event that would constitute an Event of Default under Section 7.01(g) hereof) (ii) does not have a maturity date which is earlier than the L/C Termination Date, and (iii) is incurred on arm’s-length terms;
(k)    Debt of the type specified in clause (g) of the definition thereof to the extent such Debt constitutes a Permitted Investment;
(l)    Debt in respect of performance bonds, bid bonds, appeal bonds, surety bonds and completion guarantees and similar obligations (including, in each case, letters

20



of credit issued to provide such bonds, guaranties and similar obligations), in each case provided in the ordinary course of business, including those incurred to secure health, safety and environmental obligations in the ordinary course of business;
(m)    Debt arising from overdraft facilities and/or the honoring by a bank or other financial institution of a check, draft or similar instrument drawn against insufficient funds in the ordinary course of business or other cash management services (including, but not limited to, intraday, automated clearing house transfers, credit cards, and purchasing card/T&E services) in the ordinary course of business; provided , that (x) such Debt (other than credit cards or purchase cards) is extinguished within ten Business Days of notification to the applicable Loan Party of its incurrence and (y) such Debt in respect of credit cards or purchase cards is extinguished within 60 days from its incurrence;
(n)    Debt arising from agreements of Holdings or any Subsidiary providing for indemnification, adjustment of purchase or acquisition price or similar obligations, in each case, incurred or assumed in connection with any the disposition of any business, assets or any Subsidiary not prohibited by this Agreement, other than guarantees of Debt incurred by any Person acquiring all or any portion of such business, assets or any Subsidiary for the purpose of financing such Acquisition;
(o)    Debt consisting of (i) the financing of insurance premiums or (ii) take or pay obligations contained in supply arrangements, in each case, in the ordinary course of business;
(p)    Debt on account of Other LC Facilities and on account of letters of credit issued for the account of any Loan Party by any other Person
(q)      Debt arising from a Credit Card Royalty Securitization in an amount not to exceed $500,000,000, so long as the Net Proceeds (as defined in the Amended Credit Agreement) of such Credit Card Securitization received by Holdings or any Subsidiary are applied as required by clause (q) of the definition of “Permitted Debt” in the Amended Credit Agreement ; and
(r)      (q) Permitted Refinancing Debt.
“ Permitted Discretion ” means a determination made in good faith and in the exercise of commercially reasonable business judgment.
“ Permitted Dispositions ” means any of the following:
(a)    transfers and Dispositions of Inventory in the ordinary course of business;
(b)    transfers and Dispositions among the Loan Parties;
(c)    transfers and Dispositions by any Subsidiary of Holdings which is not a Loan Party to any Loan Party;

21



(d)    transfers and Dispositions by any Subsidiary of Holdings which is not a Loan Party to other Subsidiaries which are not Loan Parties;
(e)    transfers and Dispositions (other than transfers and Dispositions of Collateral) to any Subsidiary of Holdings which is not a Loan Party by any Loan Party provided , that any such Disposition of Collateral shall be (i) undertaken in the ordinary course of business or (ii) on terms that are fair and reasonable and no less favorable to the Loan Party than it would obtain in a comparable arm’s length transaction with a Person that is not a Subsidiary of Holdings;
(f)    the sale of surplus, obsolete or worn out equipment or other property in the ordinary course of business by the Borrowers or any Subsidiary;
(g)    transfers and Dispositions of all or any portion of any assets of Holdings or any of its Subsidiaries Subsidiary of Holdings as follows:
(i)      Dispositions of real property securing the December Real Estate Loan so long as the Net Proceeds (as defined in the Amended Credit Agreement) of such Disposition are applied as required by clause (g)(i) of the definition of “Permitted Dispositions” in the Amended Credit Agreement;
(ii)      Transfers and Dispositions of any assets held by Holdings or any Subsidiary of Holdings , including any equity interests of its Subsidiaries in any Subsidiary (other than the equity interests or of either Borrower or of Sears), in exchange for total consideration in an amount not to exceed $1,000,000 with respect to any transaction or series of related transactions; and
(iii)    Other transfers and Dispositions of any assets held by Holdings or any of its Subsidiaries, including any equity interests of its Subsidiaries (other than substantially all of the assets of either Borrower or of Sears), including, but not limited to, (v) any equity interests of any Subsidiaries (other than the equity interests of either Borrower or of Sears), (w) real property, (x) Intellectual Property (including, without limitation, the Kenmore, Craftsman and Die Hard brands), (y) the Sears Automotive Center business and (z) the Home Services Business of Holdings and its Subsidiaries, provided , that immediately after giving effect to any such disposition such Disposition and the application of the proceeds thereof , (i) no Default or Event of Default then exists, (ii) either (A) the Pro Forma and Projected Capped Excess Availability is at least 15% of the Line Cap ( provided that, with respect to the transfer or Disposition of the assets of, or any equity interest in, a Material Subsidiary Guarantor (other than Sears), such Pro Forma and Projected Capped Excess Availability is at least the greater of (x) 25% of the Line Cap or (y) $750,000,000), or (B) such Loan Party uses the Net Proceeds of such Disposition to (1) to reduce the L/C Commitments and Cash Collateralize any amounts pursuant to Section 2.11 and/or (2) repay revolving advances under the Existing Credit Agreement, in an amount equal to the lesser of (x) 100% of such Net Proceeds and (y) an amount sufficient to cause Pro Forma and Projected Capped Excess Availability to be 15% or more of the Line Cap (or, with respect to the transfer or Disposition of the assets of, or any equity interest

22



in, a Material Subsidiary Guarantor (other than Sears), an amount sufficient to cause Pro Forma and Projected Capped Excess Availability to be the greater of (x) 25% of the Line Cap or (y) $750,000,000) in a manner consistent with clause (ii)(B) of the provisio to clause (g)(iii) of the definition of “Permitted Dispositions” in the Amended Credit Agreement , (iii) if the Disposition is to a Subsidiary or Affiliate of a Loan Party which is not a Loan Party, such Disposition shall be on terms that are fair and reasonable and no less favorable to the Loan Party than it would obtain in a comparable arm’s length transaction with a Person that is not a Subsidiary or Affiliate of a Loan Party, and (iv) Capped Excess Availability is no less than Capped Excess Availability immediately prior to such Disposition;
(h)    transfers and Dispositions which constitute Restricted Payments or Permitted Investments that are otherwise permitted hereunder;
(i)    Dispositions permitted pursuant to Section 6.02(b) hereof;
(j)    the sale of other Policy Investments in the ordinary course of business;
(k)    the sale or Disposition of defaulted receivables and the compromise, settlement and collection of receivables in the ordinary course of business or in bankruptcy or other proceedings concerning the other account party thereon and not as part of an accounts receivable financing transaction;
(l)    leases, licenses or subleases or sublicenses of any real or personal property not constituting Collateral in the ordinary course of business;
(m)    any surrender or waiver of contract rights or the settlement, release, recovery on or surrender of contract, tort or other claims of any kind (other than, in each case, with respect to rights to license the Related Intellectual Property, unless the limited license granted to the Co-Collateral Agents in such Related Intellectual Property pursuant to the ABL Loan Documents remains in effect and is acknowledged by the licensee) to the extent that any of the foregoing could not reasonably be expected to have a Material Adverse Effect;
(n)    sales of Inventory (other than Eligible Inventory) determined by the management of the applicable Loan Party not to be saleable in the ordinary course of business of such Loan Party or any of the Loan Parties; and
(o)    transfers of assets, including Inventory, in connection with Store closings (and/or department closings within Stores) permitted pursuant to Section 6.02(l) ; and
(p)      Dispositions of Credit Card Program Assets to or by a Credit Card Royalty Securitization Subsidiary pursuant to a Credit Card Royalty Securitization so long as the Net Proceeds (as defined in the Amended Credit Agreement) of such Credit Card Royalty Securitization are applied consistent with clause (q) of the definition of “Permitted Dispositions” in the Amended Credit Agreement .
“ Permitted Holder ” means ESL Investments, Inc. and any of its Affiliates other than a Group Member.

23



“ Permitted Investments ” means each of the following as long as no Default or Event of Default exists at the time of the making such of Investment or would arise from the making of such Investment:
(a)    Investments existing on, or contractually committed as of, the "Effective Date" (as defined in the Existing Credit Agreement as in effect on the Effective Date) and set forth in the Perfection Certificate;
(b)    (i) Investments by any Loan Party and its Subsidiaries in their respective Subsidiaries outstanding on the Effective Date, (ii) Investments by any Loan Party and its Subsidiaries in Loan Parties, and (iii) Investments by Subsidiaries that are not Loan Parties in Holdings or any Subsidiary;
(c)    other Investments of any Loan Party in any other Subsidiary of Holdings which is not a Loan Party; provided , that (1) such Investment is incurred in the ordinary course of business consistent with past practices in connection with cash management, (2) such Investments shall not exceed $100,000,000 in the aggregate at any one time outstanding and the Pro Forma and Projected Capped Excess Availability is at least 25% of the Line Cap, or (3) (a) at the time of any such Investment and immediately after giving pro forma effect thereto, no Default or Event of Default shall have occurred and be continuing, and (b) after giving effect to any such Investment (A) the Pro Forma and Projected Capped Excess Availability is at least 15% of the Line Cap, and (B) the Pro Forma Fixed Charge Ratio shall be at least 1.0 to 1.0;
(d)    Investments of any Loan Party in any other Person not constituting an Acquisition; provided that (a) at the time of any such Investment and immediately after giving pro forma effect thereto, no Default or Event of Default shall have occurred and be continuing, and (b) after giving effect to any such Investment (A) the Pro Forma and Projected Capped Excess Availability is at least 15% of the Line Cap, and (B) the Pro Forma Fixed Charge Ratio shall be at least 1.0 to 1.0;
(e)    Investments arising out of the receipt of non-cash consideration for the sale of assets otherwise permitted under this Agreement;
(f)    Policy Investments;
(g)    Investments in Swap Contracts not entered into for speculative purposes;
(h)    to the extent not prohibited by applicable law, (1) advances to officers, directors and employees and consultants of the Loan Parties made for travel, entertainment, relocation and other ordinary business purposes and (2) advances to officers, directors and employees and consultants of non-Loan Parties made for travel, entertainment, relocation and other ordinary business purposes, provided, in the case of this clause (2), such advances are made by non-Loan Parties and not with the proceeds of any Investments made by any Loan Party in such non-Loan Party unless otherwise permitted hereunder;
(i)    Investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts and disputes with or judgments against, customers and suppliers, in each case in the ordinary course of business or Investments acquired

24



by any Group Member as a result of a foreclosure by any Loan Party with respect to any secured Investments or other transfer of title with respect to any secured Investment in default;
(j)    any Investment made prior to the Effective Date under paragraph (e) of the definition of “Permitted Investment” (as defined in the Existing Credit Agreement as in effect on the Effective Date);
(k)      (i) Investments consisting of contributions of Credit Card Program Assets to a Credit Card Royalty Securitization Subsidiary in connection with a Credit Card Royalty Securitization and/or (ii) Investments made with the common stock of Holdings;
(l)    accounts receivable, security deposits and prepayments arising and trade credit granted in the ordinary course of business;
(m)    Guarantees by Holdings or any Subsidiary of operating leases (other than Capital Lease Obligations) or of other obligations that do not constitute Debt, in each case entered into by Holdings or any Subsidiary in the ordinary course of business;
(n)    (1) advances in the form of a prepayment of expenses of any Loan Party, so long as such expenses are being paid in accordance with customary trade terms of the applicable Loan Party and (2) advances in the form of a prepayment of expenses of any non-Loan Party, so long as such expenses are being paid in accordance with customary trade terms of the applicable non-Loan Party, provided, in the case of this clause (2), such advances are made by non-Loan Parties and not with the proceeds of any Investments made by any Loan Party in such non-Loan Party unless otherwise permitted hereunder;
(o)    Investments consisting of the licensing or contribution of Intellectual Property pursuant to joint marketing arrangements with other Persons, provided that no such Investment shall impair in any manner the limited license granted to the Co-Collateral Agents in such Intellectual Property pursuant to the ABL Loan Documents;
(p)    Investments in joint ventures that own real properties upon which Stores are located existing as of the "Effective Date" (as defined in the Existing Credit Agreement as in effect on the Effective Date) and entered into hereafter in the ordinary course of business; and
(q)    other Investments in an amount not to exceed $ 250,000,000 50,000,000 in the aggregate outstanding at any time ; provided that no Investment pursuant to this clause (q) shall be made by any Loan Party in any Subsidiary of Holdings which is not a Loan Party. , subject to compliance with the proviso to clause (r) of the definition of “Permitted Investments” in the Amended Credit Agreement ; and
(r)      Investments in joint ventures made pursuant to a contribution of assets (other than cash or cash equivalents) constituting all or a portion of the Sears Automotive Center business and/or the DieHard business (including related trademarks and other intellectual property),subject to compliance with the proviso to clause (s) of the definition of “Permitted Investments” in the Amended Credit Agreement .

“ Permitted Liens ” means:

25



(a)    Liens for taxes, assessments and governmental charges or levies to the extent such taxes, assessments or governmental charges are being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained;
(b)    Liens imposed by law, such as materialmen’s, mechanics’, carriers’, workmen’s and repairmen’s Liens and other similar Liens arising in the ordinary course of business securing obligations that are not overdue for a period of more than 30 days or that are being contested in good faith by appropriate proceedings and as to which appropriate reserves are being maintained;
(c)    landlords’ Liens arising in the ordinary course of business securing (i) rents not yet due and payable, (ii) rent for Stores in an amount not to exceed the monthly base rent due for the immediately preceding calendar month and (iii) rents for Stores in excess of the amount set forth in the preceding clause (ii) so long as such amounts are being contested in good faith by appropriate proceedings and as to which appropriate reserves are being maintained;
(d)    any attachment or judgment lien not constituting an Event of Default under Section 7.01(f) ;
(e)    Liens presently existing or hereafter created in favor of (i) the Co-Collateral Agents to secure the ABL Obligations, and (ii) the Co-Collateral Agents or the Agent to secure the Obligations;
(f)    Liens arising by the terms of commercial letters of credit entered into in the ordinary course of business to secure reimbursement obligations thereunder; provided that such Liens only encumber the title documents and underlying goods relating to such letters of credit or cash and cash equivalents as permitted under clause (m) hereof;
(g)    claims under PACA and PASA;
(h)    Liens in favor of issuers of credit cards arising in the ordinary course of business securing the obligation to pay customary fees and expenses in connection with credit card arrangements;
(i)    Liens incurred or deposits made by any Group Member in the ordinary course of business in connection with workers’ compensation and other casualty insurance lines, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money);
(j)    easements, rights-of-way, covenants, conditions, restrictions (including zoning restrictions), declarations, rights of reverter, minor defects or irregularities in title and other similar charges or encumbrances, whether or not of record, that do not, in the aggregate, interfere in any material respect with the ordinary course of business, or in respect of any real property which is part of the Collateral, any title defects, liens, charges or encumbrances (other than such prohibited monetary Liens) which the title company is prepared to endorse or insure by exclusion or affirmative endorsement reasonably acceptable to the Agent and which is included in any title policy, and as to Real Estate Collateral, the Liens securing the December

26



Real Estate Loan and any Liens permitted to encumber the Real Estate Collateral pursuant to the terms of the December Real Estate Loan;
(k)    any interest or title of a lessor or sublessor under, and Liens arising from precautionary UCC financing statements (or equivalent filings, registrations or agreements in foreign jurisdictions) relating to, leases and subleases permitted by this Agreement;
(l)    normal and customary rights of setoff upon deposits of cash or other Liens originating solely by virtue of any statutory or common law provision, or ordinary course contractual obligation, relating to bankers’ liens, rights of setoff or similar rights in favor of banks or other depository institutions;
(m)    Liens on cash and cash equivalents securing obligations in respect of Other L/C Facilities (as defined in the Existing Credit Agreement) and in respect of standby or trade letters of credit not constituting ABL Obligations or trade related bank guarantees;
(n)    Liens granted to consignors who have properly perfected on consigned Inventory owned by such consignors and created in the ordinary course of business;
(o)    Liens on premium rebates securing financing arrangements with respect to insurance premiums;
(p)    deposits and other customary Liens to secure the performance of bids, trade contracts (other than for Debt), leases (other than Capital Lease Obligations), statutory and regulatory obligations, surety and appeal bonds, performance and return of money bonds, bids, leases, government contracts, trade contracts, agreements with utilities, and other obligations of a like nature incurred in the ordinary course of business, including those incurred to secure health, safety and environmental obligations in the ordinary course of business;
(q)    Liens that are contractual rights of set-off (i) relating to the establishment of depository relations with banks not given in connection with the issuance of Debt or (ii) relating to pooled deposit or sweep accounts of the Borrowers or any Subsidiary to permit satisfaction of overdraft or similar obligations incurred in the ordinary course of business of the Borrowers or any Subsidiary;
(r)    Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods;
(s)    Liens solely on any cash earnest money deposits made by any Borrower or any of its Subsidiaries in connection with any letter of intent or purchase agreement in respect of any Investment permitted hereunder;
(t)    Liens on securities that are the subject of repurchase agreements constituting Policy Investments;
(u)    Liens on cash and cash equivalents securing Swap Contracts incurred in the ordinary course of business; and

27



(v)    other Liens on cash and cash equivalents in an amount not to exceed $25,000,000 held by a third party as security for any obligation (other than Debt) permitted to be incurred by any Group Member hereunder.
“ Permitted Refinancing Debt ” shall mean any Debt issued in exchange for, or the Net Proceeds of which are used to extend, refinance, renew, replace, defease or refund (collectively, to “ Refinance ”), the Debt being Refinanced (or previous refinancings thereof constituting Permitted Refinancing Debt); provided , that (a) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Debt does not exceed the principal amount (or accreted value, if applicable) of the Debt so Refinanced (plus unpaid accrued interest and premium (including tender premiums) thereon and underwriting discounts, defeasance costs, fees, commissions and expenses), (b) the maturity date of such Permitted Refinancing Debt shall not be earlier than the maturity date of the Debt being Refinanced and weighted average life to maturity of such Permitted Refinancing Debt shall be greater than or equal to the weighted average life to maturity of the Debt being Refinanced, (c) if the Debt being Refinanced is subordinated in right of payment to the Obligations under this Agreement, such Permitted Refinancing Debt shall be subordinated in right of payment to such Obligations on terms at least as favorable to the L/C Lenders as those contained in the documentation governing the Debt being Refinanced, (d) other than with respect to any Refinancing of the Real Estate Term Loan, no Permitted Refinancing Debt shall have different obligors, or greater guarantees or security, or higher priority guarantees or security, than the Debt being Refinanced; and (e) the Permitted Refinancing Debt shall otherwise be on terms which would not reasonably likely result in a Material Adverse Effect.
“ Person ” means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company or other entity, or a government or any political subdivision or agency thereof.
“ Plan ” means a Single Employer Plan or a Multiple Employer Plan.
“ Policy Investments ” means Investments made in accordance with the investment policy of the Loan Parties set forth on Schedule 6.02(k)(ii) , as such policy may be amended from time to time with the reasonable consent of the Agent, such consent not to be unreasonably withheld.
“ Pro Forma and Projected Capped Excess Availability ” shall mean, for any date of calculation, after giving effect to the applicable transaction or payment, the pro forma and projected Capped Excess Availability for the subsequent twelve (12) fiscal month period, determined as of the last day of each fiscal month in such period and based on Holdings’ good faith projections that are used to run the businesses of the Borrowers and prepared in accordance with past practice, which projections shall be reasonably satisfactory to the Agent.
“ Pro Forma and Projected Suppressed Availability ” shall mean, for any date of calculation, after giving effect to the applicable transaction or payment, the pro forma and projected Suppressed Availability for the subsequent twelve (12) fiscal month period, determined as of the last day of each fiscal month in such period and based on Holdings’ good faith projections that are used to run the businesses of the Borrowers and prepared in accordance with past practice, which projections shall be reasonably satisfactory to the Agent.

28



“ Pro Forma Fixed Charge Ratio ” shall mean, for any date of calculation, the Fixed Charge Ratio as of the last day of the most recently completed fiscal quarter for which financial statements are available or were required to have been delivered pursuant to Section 6.01(j) (the “ Reference Date ”), after giving pro forma effect to any applicable transaction or payment as if such transaction or payment had occurred on the first day of the four fiscal quarter period ending on the Reference Date.
“ Property ” means each parcel of real property that constitutes Real Estate Collateral, as described in greater detail under the applicable Mortgage, together with all buildings and other improvements thereon and all personal property encumbered by the Mortgages, together with all rights pertaining to such property.
“ Reaffirmation Agreement ” means a reaffirmation agreement, dated as of the Effective Date, in form and substance reasonably satisfactory to the Agent, duly executed by each Loan Party party to the Guarantee and Collateral Agreement, reaffirming the guaranty and the liens granted thereunder.
“ Real Estate Collateral ” means (a) the real property of the Borrowers or its Subsidiaries set forth in Schedule 1.01(b) and (b) any additional real property that serves as collateral under the December Real Estate Loan, as may be amended, restated or supplemented from time to time, but excluding in each case any property with respect to which the cost of compliance with Flood Laws would be unreasonably large in comparison with the benefit of delivering a Mortgage with respect to such property hereunder, as reasonably determined by the Required L/C Lenders and for the avoidance of doubt no Mortgage shall be delivered with respect to any such property.
“ Real Estate Term Loan ” means, the Loan Agreement, dated as of April 8, 2016, between JPP, LLC and JPP II, LLC, each a Delaware limited liability company and Cascade Investment, L.L.C., as initial lenders, and Sears, Sears Development Co., Innovel Solutions, Inc., Big Beaver of Florida Development, LLC, and Kmart Corp., collectively, as borrower.
“ Recipient ” means the Agent, the Issuing Bank, any L/C Lender or any other recipient of any payment to be made by or on account of any obligation of any Loan Party hereunder.
“ Register ” has the meaning specified in Section 9.07(d) .
“ Reimbursement Obligation ” means the obligation of the Borrowers to reimburse the Issuing Bank pursuant to Section 3.05 for amounts drawn under Letters of Credit.
“ Related Intellectual Property ” means such rights with respect to the Intellectual Property of Holdings and its Subsidiaries as are reasonably necessary to permit the Co-Collateral Agents to enforce their rights and remedies under the ABL Loan Documents with respect to the ABL Collateral.
“ REMIC Certificates ” means the SRC Commercial Mortgage Trust 2003-1 Mortgage Pass-Through Certificates in the aggregate face amount of $1,312,416,000 (as amended, supplemented or otherwise modified, replaced or refinanced, in any case in a manner not materially adverse to the L/C Lenders).

29



“ Reorganization ” means with respect to any Multiemployer Plan, the condition that such Plan is in reorganization within the meaning of Section 4241 of ERISA.
“ Reportable Event ” means any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty day notice period is waived under subsections .27, .28, .29, .30, .31, .32, .34 or .35 of PBGC Reg. § 4043.
“ Required L/C Lenders ” means, at any time, the holders of more than 50% of the sum of the Aggregate L/C Commitments then in effect, or, if the Aggregate L/C Commitments have been terminated, the holders of more than 50% of the L/C Lender Exposure then outstanding.
“ Requirements of Law ” means as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.
“ Rescinded Amount ” means “Rescinded Amount” as defined in Section 9.19(b) of this Agreement.
“ Restricted Payment ” means any dividend or other distribution (whether in cash, securities or other property) with respect to any equity interests in Holdings or any Subsidiary of Holdings, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such equity interests in Holdings or any Subsidiary of Holdings or any option, warrant or other right to acquire any such equity interests in Holdings or any Subsidiary of Holdings.
“ Revaluation Date ” means with respect to any Letter of Credit or other Obligations denominated in an Alternative Currency, each of the following: (a) each date of issuance of a Letter of Credit, (b) each date of an amendment of any such Letter of Credit, (c) each date of any payment by the Issuing Bank under any such Letter of Credit, (d) the first Business Day of each fiscal month and (e) such additional dates as the Agent or the Issuing Bank shall determine or the Required L/C Lenders shall require.
“ Satisfactory Letter of Credit ” means a letter of credit from a financial institution reasonably acceptable to the Issuing Bank and in a form reasonably acceptable to the Issuing Bank, other than any letter of credit issued under the Existing ABL Credit Agreement or any letter of credit that is recourse, directly or indirectly, to Holdings, any of the Borrowers or any of their respective Subsidiaries.
“ Sears ” means Sears, Roebuck and Co., a New York corporation.
“ SEC ” means the United States Securities and Exchange Commission.
“ Security Documents ” means the collective reference to (i) the Guarantee and Collateral Agreement, and all other security documents hereafter delivered to the Co-Collateral Agents granting a Lien on any property of any Person to secure the Obligations and the ABL Obligations, (ii) the Reaffirmation Agreement, and (iii) the Mortgages.

30



“ Senior Unsecured Notes ” means those certain 8% senior unsecured notes due 2019 issued by Holdings pursuant to the First Supplemental Indenture dated November 19, 2014 by and between Holdings, as Issuer and Computershare Trust Company, N.A. as Trustee.
“Short Term” has the meaning assigned to such term in the Amended Credit Agreement as in effect on the Amendment No. 1 Effective Date.
“ Single Employer Plan ” means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of any Borrower or any ERISA Affiliate and no Person other than such Borrower and the ERISA Affiliates or (b) was so maintained and in respect of which any Borrower or any ERISA Affiliate could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated.
“ Solvent ” means, when used with respect to any Person, that, as of any date of determination, (a) the amount of the “present fair saleable value” of the assets of such Person will, as of such date, exceed the amount of all “liabilities of such Person, contingent or otherwise”, as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b) such Person will not have, as of such date, an unreasonably small amount of capital with which to conduct its business, and (c) such Person will be able to pay its debts as they mature.
“ Spot Rate ” for a currency means the rate determined by the Agent to be the rate quoted by the Person acting in such capacity as the spot rate for the purchase by such Person of such currency with another currency through its principal foreign exchange trading office at approximately 11:00 a.m. on the date two Business Days prior to the date of such determination; provided that the Agent may obtain such spot rate from another financial institution designated by the Agent if the Person acting in such capacity does not have as of the date of determination a spot buying rate for any such currency.
“ SRAC ” has the meaning provided in the preamble to this Agreement.
“ Store ” means any store owned or leased and operated by any Loan Party.
“ Store Closure Sale ” means a store closure sale that, if including more than twenty (20) stores (whether in one transaction or a series of related transactions), is properly managed by an independent, nationally recognized, professional retail inventory liquidation firm reasonably acceptable to the Co-Collateral Agents, over a defined period that is anticipated by the Borrowers not to exceed 12 weeks (on average) from the date of the same commencement.
“ Subsidiary ” of any Person means any corporation, partnership, joint venture, limited liability company, trust or estate of which (or in which) more than 50% of the issued and outstanding capital stock or other equity interests having ordinary voting power to elect a majority of the Board of Directors or other governing body of such corporation, partnership, joint venture, limited liability company, trust or estate (irrespective of whether at the time capital stock or other equity interests of any other class or classes of such corporation, partnership, joint venture, limited liability company, trust or estate shall or might have voting power upon the occurrence of any contingency), is at the time directly or indirectly owned by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person’s other Subsidiaries.

31



“ Subsidiary Guarantor ” means each Person that is a “Subsidiary Guarantor” from time to time under the Existing Credit Agreement or each other direct or indirect wholly owned Domestic Subsidiary of Holdings that becomes a Subsidiary Guarantor pursuant to Section 6.01(i)(vii) .
“ Suppressed Availability ” has the meaning assigned to such term in the Existing Amended Credit Agreement as in effect on the Amendment No. 1 Effective Date.
“ Swap Contract ” means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a “ Master Agreement ”), including any such obligations or liabilities under any Master Agreement.
“ Taxes ” means all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.
“ Third Party Payors ” means any private health insurance company that is obligated to reimburse or otherwise make payments to pharmacies which sell prescription drugs to eligible patients under any insurance contract with such private health insurer.
“ Trading With the Enemy Act ” means 50 U.S.C. § 1 et seq., as amended.
“ UCC ” means the Uniform Commercial Code as from time to time in effect in the State of New York; provided , however , that if a term is defined in Article 9 of the Uniform Commercial Code differently than in another Article thereof, the term shall have the meaning set forth in Article 9; provided , further that, if by reason of mandatory provisions of law, perfection, or the effect of perfection or non-perfection, of a security interest in any Collateral or the availability of any remedy hereunder is governed by the Uniform Commercial Code as in effect in a jurisdiction other than New York, “Uniform Commercial Code” means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection or availability of such remedy, as the case may be.
“ UCP ” means the Uniform Customs and Practices for Documentary Credit Operations (UCP 600).

32



“ Unfunded Pension Liability ” means the excess of a Pension Plan’s benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Pension Plan’s assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Internal Revenue Code for the applicable plan year“ Voting Stock ” means capital stock issued by a corporation, or equivalent interests in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even if the right so to vote has been suspended by the happening of such a contingency.“ Write-Down and Conversion Powers ” means, with respect to any EEA Resolution Authority, the write-down and conversion powers of such EEA Resolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, which write-down and conversion powers are described in the EU Bail-In Legislation Schedule.
Section 1.02     Computation of Time Periods . In this Agreement, unless otherwise specified, (a) in the computation of periods of time from a specified date to a later specified date, the word “ from ” means “ from and including ” and the words “ to ” and “ until ” each mean “ to but excluding ” (b) “ including ” means “ including without limitation ”; and (c) any reference to a time of day means Eastern time.
Section 1.03     Accounting Terms . All accounting terms not specifically defined herein or in the other Loan Documents shall be construed in accordance with U.S. generally accepted accounting principles (“ GAAP ”) which for purposes of Section 6.03 shall be consistently applied. If at any time any change in U.S. generally accepted accounting principles would affect the computation of any financial ratio or requirement set forth herein, and either the Borrowers or the Required L/C Lenders shall so request, the Agent and the Borrowers shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP (subject to the approval of the Required L/C Lenders which shall not be unreasonably withheld); provided that, until so amended, (i) such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change in principles, and (ii) the Borrowers shall provide to the Agent and the Lenders financial statements and other documents required under this Agreement or as reasonably requested hereunder setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP. For the avoidance of doubt, no retroactive change in GAAP shall apply to the construction of accounting terms under this Agreement in the absence of an amendment hereto in accordance with the terms of this Section 1.03 .
Section 1.04     Other Interpretive Provisions . With reference to this Agreement and each other Loan Document, unless otherwise specified herein or in such other Loan Document, the definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Unless the context requires otherwise, (i) any definition of or reference to any agreement, instrument or other document shall be construed as referring to such agreement, instrument or other document as from time to time amended, restated, supplemented or otherwise modified (subject to any restrictions on such amendments, restatements, supplements or modifications set forth herein or in any other Loan Document), (ii) any reference herein to any Person shall be construed to include such Person’s successors and assigns, (iii) the words “ herein ,” “ hereof ” and “ hereunder ,” and words of similar import when used in any Loan Document, shall be construed to refer to such Loan Document in its entirety and not to any particular provision thereof, (iv) all references in a Loan Document to Articles, Sections,

33



Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, the Loan Document in which such references appear, (v) any reference to any law shall include all statutory and regulatory provisions consolidating, amending replacing or interpreting such law and any reference to any law or regulation shall, unless otherwise specified, refer to such law or regulation as amended, modified or supplemented from time to time, and (vi) the words “ asset ” and “ property ” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.
Section 1.05     Change of Currency .
(a)    Each obligation of each Borrower to make a payment denominated in the national currency unit of any member state of the European Union that adopts the Euro as its lawful currency after the Effective Date shall be redenominated into Euro at the time of such adoption. If, in relation to the currency of any such member state, the basis of accrual of interest expressed in this Agreement in respect of that currency shall be inconsistent with any convention or practice in the London interbank market for the basis of accrual of interest in respect of the Euro, such expressed basis shall be replaced by such convention or practice with effect from the date on which such member state adopts the Euro as its lawful currency.
(b)    Each provision of this Agreement shall be subject to such reasonable changes of construction as the Agent may from time to time specify to be appropriate to reflect the adoption of the Euro by any member state of the European Union and any relevant market conventions or practices relating to the Euro.
(c)    Each provision of this Agreement also shall be subject to such reasonable changes of construction as the Agent may from time to time specify to be appropriate to reflect a change in currency of any other country and any relevant market conventions or practices relating to the change in currency.

ARTICLE II

Payments; Taxes; Lender Cash Collateral Account; Etc.
Section 2.01    [ Reserved ].
Section 2.02    [ Reserved ].
Section 2.03    [ Reserved ].
Section 2.04    [ Reserved ].
Section 2.05     Fees .
(a)     Commitment Fee . The Borrowers jointly and severally agree to pay to the Agent for the account of each L/C Lender a commitment fee on the average daily amount of funds required to be held and actually held, in the Lender Cash Collateral Account of

34



such L/C Lender during the period for which such payment is being made at a rate per annum equal to 5.75%, payable in arrears monthly on the 3rd day subsequent to the last day of each month and commencing on the Effective Date and ending on the date that the L/C Lender Exposure is reduced to zero. The L/C Lenders agree to provide the Agent with a statement of the amount due pursuant to this Section 2.05(a) on or before the 2nd day subsequent to the last day of each month, and the Borrowers agree that such statement shall be conclusive absent manifest error. The Agent may conclusively rely on such statement and shall have no duty to independently investigate amounts due pursuant to this Section 2.05(a) .
(b)     Upfront Fee .    The Borrowers jointly and severally agree to pay to the Agent for the account of each L/C Lender as of the Effective Date, an upfront fee equal to (i) 1.50% of the aggregate amount of funds deposited by such L/C Lender into the Lender Cash Collateral Account of such L/C Lender on the Effective Date, payable on the date that such L/C Lender funds such deposit, or if later, the Effective Date, and (ii) 1.50% of the amount of funds deposited by such L/C Lender into the Lender Cash Collateral Account of such L/C Lender in connection with any increase in L/C Commitments as of the effective date thereof in accordance with Section 2.17 , payable on the date that such L/C Lender funds such deposit, or if later, such effective date . In addition, the Borrowers jointly and severally agree to pay to each L/C Lender (or to the Agent for the account of each L/C Lender) an additional fee equal to 0.10% of the amount of any increase in L/C Commitment of such L/C Lender in accordance with Section 2.17, payable on the effective date of such increase .

(c)     Other Fees . Holdings and the Borrowers shall pay to the Agent the fees set forth in the Fee Letter.
(d)     Applicability of Fees and Interest after the L/C Termination Date .    Notwithstanding anything to the forgoing, all fees and interest payable to, or for the account of an L/C Lender, shall continue to be payable even after the L/C Termination Date, to the extent that (x) all funds have not been (or are not entitled to be) released from the Lender Cash Collateral Accounts, or (y) any reimbursement obligations of the Borrowers to any L/C Lenders are still outstanding, as applicable.
Section 2.06     Optional Termination or Reduction of the L/C Commitments .
(a)    Subject to Section 2.06(b) , the Borrowers shall have the right, without penalty or premium and upon at least three Business Days’ irrevocable notice to the Agent, to permanently terminate in whole or permanently reduce in part the unused portions of the respective L/C Commitments of the L/C Lenders; provided that no such termination or reduction of the L/C Commitments shall be permitted if, after giving effect thereto and to any payments of any Reimbursement Obligations made on the effective date thereof, the aggregate L/C Lender Exposure would exceed the aggregate amount of the L/C Commitments as so reduced. Any partial reduction of the L/C Commitments shall be in the aggregate amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof.
(b)    The Agent will promptly notify the L/C Lenders of any termination or reduction of the Aggregate L/C Commitments under Section 2.06(a) . Upon any reduction of the Aggregate L/C Commitments, the L/C Commitment of each L/C Lender shall be reduced by such L/C Lender’s L/C Commitment Percentage of such reduction amount.

35



Section 2.07    [ Reserved ].
Section 2.08    [ Reserved ].
Section 2.09    [ Reserved ].
Section 2.10    [ Reserved ].
Section 2.11     Mandatory Reduction of L/C Commitments . The L/C Commitments shall be reduced automatically and irrevocably by (a) 50% of the amount by which the Designated Transaction Proceeds since the Effective Date exceed $500,000,000 but do not exceed $1,000,000,000, plus (b) 100% of the amount by which the Designated Transaction Proceeds since the Effective Date exceed $ 1,000,000,000. 1,000,000,000, minus (c) the amount of any reduction of the L/C Commitments in accordance with Section 2.06 or clauses (iii) or (v) of the definition of “L/C Commitment” substantially concurrently with the receipt of any such Designated Transaction Proceeds. If, after giving effect to such reduction, the aggregate L/C Lender Exposure exceeds the Aggregate L/C Commitments, the Borrowers shall Cash Collateralize or provide backstop Satisfactory Letters of Credit in respect of such excess in accordance with Section 3.11 . Notwithstanding the foregoing, the Required L/C Lenders may decline or waive (in their sole discretion) any required reduction of the L/C Commitments pursuant to this Section 2.11 on account of all L/C Lenders and Issuing Bank.
Section 2.12     Increased Costs . (a) If, due to either (i) after the Effective Date the introduction of or any change in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law) made or issued after the Effective Date, there shall be any increase in the cost to any Lender of agreeing to issue, participate in, fund or maintain, or issuing, participating in, funding or maintaining Letters of Credit (excluding for purposes of this Section 2.12 any such increased costs resulting from (i) Taxes or Other Taxes (as to which Section 2.15 shall govern) and (ii) changes in the basis of taxation of overall net income or overall gross income by the United States or by the foreign jurisdiction or state under the laws of which such Lender is organized or has its Applicable Office or any political subdivision thereof), then the Borrowers shall from time to time, upon demand by such Lender (with a copy of such demand to the Agent), pay to the Agent for the account of such Lender additional amounts sufficient to compensate such Lender for such increased cost; provided that a Lender claiming additional amounts under this Section 2.12(a) agrees to use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Applicable Office and/or take other commercially reasonable action if the making of such a designation or the taking of such actions would avoid the need for, or reduce the amount of, such increased cost that may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. A certificate as to the amount of such increased cost, submitted to the Borrowers and the Agent by such Lender, shall be entitled to a presumption of correctness. If any Borrower so notifies the Agent after any L/C Lender notifies the Borrowers of any increased cost pursuant to the foregoing provisions of this Section 2.12(a) , such Borrower may, upon payment of such increased cost to such L/C Lender, replace such L/C Lender with a Person that is an Eligible Assignee in accordance with the terms of Section 9.16 (and the L/C Lender being so replaced shall take all action as may be necessary to assign its rights and obligations under this Agreement to such Eligible Assignee).

36



(b) If any Lender determines that compliance with any change after the Effective Date in law or regulation or any guideline or request after the Effective Date from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital or liquidity required or expected to be maintained by such Lender or any entity controlling such Lender and that the amount of such capital or liquidity is increased by or based upon the existence of such Lender’s commitment hereunder and other commitments of this type, then, upon demand by such Lender (with a copy of such demand to the Agent), the Borrowers shall pay to the Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender or such entity in the light of such circumstances, to the extent that such Lender reasonably determines such increase in capital or liquidity to be allocable to the existence of such Lender’s commitment hereunder. A certificate as to such amounts submitted to the Borrowers and the Agent by such Lender shall be entitled to a presumption of correctness. Notwithstanding anything herein to the contrary, the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines, requirements and directives thereunder issued in connection therewith or in implementation thereof and all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a change in law covered by this Section 2.12 regardless of the date enacted, adopted, issued or implemented.
(c) The Borrowers shall not be required to compensate a Lender pursuant to this Section for any increased costs or capital, liquidity or reserve requirement or pursuant to Section 2.15 for any Taxes incurred more than six months prior to the date that such Lender notifies the Borrowers of the change or issuance giving rise to such increased costs or capital, liquidity or reserve requirement or Tax and of such Lender’s intention to claim compensation therefor; provided that if the change or issuance giving rise to such increased costs or capital, liquidity or reserve requirement or Tax is retroactive, then the six-month period referred to above shall be extended to include the period of retroactive effect thereof.
Section 2.13     [Reserved ].
Section 2.14     Payments and Computations .
(a)    The Borrowers shall make each payment hereunder and under the other Loan Documents, without any right of counterclaim or set-off, not later than 2:00 P.M. on the day when due in U.S. dollars to the Agent at the Agent’s Account in same day funds. The Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or commitment fees ratably (other than amounts payable pursuant to Section 2.12 or 2.15 ) to the applicable L/C Lenders for the account of their respective Applicable Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 9.07(c) , from and after the effective date specified in such Assignment and Acceptance, the Agent shall make all payments hereunder and under the other Loan Documents in respect of the interest assigned thereby to the L/C Lender assignee thereunder, and the parties to such Assignment and

37



Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves.
(b)    Each Borrower hereby authorizes each Lender, if and to the extent payment owed by it to such Lender is not made when due hereunder or under the other Loan Documents, to charge from time to time against any or all of such Borrower’s accounts with such Lender any amount so due. Any such Lender so charging such accounts shall deliver the proceeds therefrom to the Agent for distribution to the Credit Parties in the manner set forth herein and in the other Loan Documents.
(c)    All computations of interest based on the Base Rate shall be made by the Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Federal Funds Rate and of letter of credit fees, commitment fees and other fees shall be made by the Agent on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or commitment fees are payable. Each determination by the Agent of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error.
(d)    Whenever any payment hereunder or under the other Loan Documents shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or commitment fee, as the case may be.
(e)    Unless the Agent shall have received notice from any Borrower prior to the date on which any payment is due by it to the Lenders hereunder that such Borrower will not make such payment in full, the Agent may assume that the applicable Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each applicable Lender on such due date an amount equal to the amount then due such Lender. If and to the extent such Borrower shall not have so made such payment in full to the Agent, each Lender shall repay to the Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Agent, at the Federal Funds Rate.
Section 2.15     Taxes .
(a)    Any and all payments by the Borrowers to or for the account of any Recipient hereunder or under the other Loan Documents or any other documents to be delivered hereunder shall be made, in accordance with Section 2.14 or the applicable provisions of such other documents, free and clear of and without deduction for any and all present or future Taxes (except as required by applicable law). If the Borrowers and/or Agent shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any other Loan Document or any other documents to be delivered hereunder to any Recipient, (i) to the extent that the withholding or deduction is made on account of Indemnified Taxes, the sum payable shall be increased as may be necessary so that after making all required deductions for Indemnified Taxes (including deductions for Indemnified Taxes applicable to additional sums payable under this Section 2.15 ) such Recipient receives an amount equal to the sum it would have received had no such deductions of Indemnified Taxes been made, (ii) the Borrowers and/or

38



Agent shall make such deductions as are determined by such Borrowers and/or Agent to be required based upon the information and documentation it has received pursuant to Sections 2.15(e) and (f) and (iii) the Borrowers and/or Agent shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law.
(b)    In addition, the Borrowers shall pay any present or future stamp or documentary taxes or any other excise taxes, charges or similar levies that arise from any payment made hereunder or under the other Loan Documents or from the execution, delivery or registration of, performing under, or otherwise with respect to, this Agreement or the other Loan Documents or any other documents to be delivered hereunder, but excluding any such taxes that are Other Connection Taxes imposed with respect to an assignment (other than an assignment made pursuant to Section 9.16 ) (hereinafter referred to as “ Other Taxes ”). Other Taxes shall not include any Taxes imposed on, or measured by reference to, gross income, net income or gain.
(c)    Without duplication of any additional amounts paid pursuant to Section 2.15(a) , the Borrowers shall jointly and severally indemnify each Recipient for and hold it harmless against the full amount of Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted by any Governmental Authority on amounts payable under this Section 2.15 ) imposed on or paid by such Recipient or withheld or deducted from a payment to such Recipient and any liability (including penalties, interest and reasonable expenses) arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. This indemnification shall be made within 30 days from the date such Recipient or the Agent (as the case may be) makes written demand therefor.
(d)    Within 30 days after the date of any payment of Indemnified Taxes, the Borrowers shall furnish to the Agent, at its address referred to in Section 9.02 , the original or a certified copy of a receipt evidencing such payment to the extent such a receipt is issued therefor, or other written proof of payment thereof that is reasonably satisfactory to the Agent.
(e)    Any Lender or other Recipient that is entitled to an exemption from or reduction of withholding tax with respect to payments made under any Loan Document shall deliver to the Borrowers and the Agent, at the time or times reasonably requested by the Borrowers or the Agent, such properly completed and executed documentation reasonably requested by the Borrowers or the Agent as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Lender or other Recipient, if reasonably requested by the Borrowers or the Agent, shall deliver such other documentation prescribed by applicable law or reasonably requested by the Borrowers or the Agent as will enable the Borrowers or the Agent to determine whether or not such Lender or other Recipient is subject to backup withholding or information reporting requirements.
(i)    Without limiting the generality of the foregoing:
(1)    each Lender that is a United States person (or is a disregarded entity within the meaning of Treasury Regulation Section 301.7701-3 of a United States person), on or prior to the date of its execution and delivery of this Agreement and on the date of the Assignment and Acceptance pursuant to which it becomes a Lender, and from time to time thereafter as reasonably requested in writing by the Borrowers or the Agent,

39



shall provide each of the Agent and the Borrowers with two executed originals of Internal Revenue Service Form W-9 certifying that such Lender (or, in the case or a disregarded entity, its owner) is exempt from U.S. federal backup withholding tax on payments pursuant to this Agreement or the other Loan Documents; and
(2)    each Lender that is not a United States person (and is not a disregarded entity within the meaning of Treasury Regulation Section 301.7701-3 of a United States person):
(A) on or prior to the date of its execution and delivery of this Agreement and on the date of the Assignment and Acceptance pursuant to which it becomes a Lender and from time to time thereafter as reasonably requested in writing by the Borrowers (but only so long as such Lender remains lawfully able to do so), shall provide each of the Agent and the Borrowers with two executed originals of Internal Revenue Service Forms W-8BEN, W-8BEN-E or W-8ECI, as appropriate, or any successor or other form prescribed by the Internal Revenue Service, certifying that such Lender (or, in the case of a disregarded entity, its owner) is exempt from or entitled to a reduced rate of United States withholding tax on payments pursuant to this Agreement or the other Loan Documents; and
(B) on or prior to the date of its execution and delivery of this Agreement and on the date of the Assignment and Acceptance pursuant to which it becomes a Lender and from time to time thereafter as reasonably requested in writing by the Borrowers (but only so long as such Lender remains lawfully able to do so), shall provide each of the Agent and the Borrowers with executed originals of any other form prescribed by applicable law as a basis for claiming exemption from or a reduction in U.S. federal withholding tax, duly completed, together with supplementary documentation as may be prescribed by applicable law to permit the Borrowers or the Agent to determine the withholding or deduction required to be made.
If the form provided by a Lender or other Recipient at the time such Lender or other Recipient first becomes a party to this Agreement (or, with respect to a Lender, changes its Applicable Office) indicates a United States interest withholding tax rate in excess of zero (or if no form is provided at such time), withholding tax at such rate (or, respectively, at the maximum rate) shall be considered excluded from Indemnified Taxes unless and until such Lender or other Recipient provides the appropriate forms certifying that a lesser rate applies, whereupon withholding tax at such lesser rate only shall be considered excluded from Indemnified Taxes for periods governed by such form; provided , however , that, if at the date of the Assignment and Acceptance pursuant to which a Lender assignee becomes a party to this Agreement, the Lender assignor was entitled to payments under Section 2.15(a) in respect of United States withholding tax with respect to interest paid at such date, then, to such extent, the term Indemnified Taxes shall include (in addition to withholding taxes that may be imposed in the future or other amounts otherwise includable in Indemnified Taxes) United States withholding tax, if any, applicable with respect to the Lender assignee on such date. If any form or document referred to in this Section 2.15(e) requires the disclosure of information, other than information necessary to compute the tax payable and information required on the date hereof by Internal Revenue Service Form W-8BEN, W-8BEN-E, or W-8ECI, that the Lender or other Recipient reasonably considers to be

40



confidential, the Lender or other Recipient shall give notice thereof to the Borrowers and shall not be obligated to include in such form or document such confidential information. For purposes of this Section 2.15(e) , the terms “ United States ” and “ United States person ” shall have the meanings specified in Section 7701 of the Internal Revenue Code.
(f)    For any period with respect to which a Lender or other Recipient has failed to provide the Borrowers with the appropriate form, certificate or other document described in Section 2.15(e) ( other than if such failure is due to a change in law, or in the interpretation or application thereof, occurring subsequent to the date on which a form, certificate or other document originally was required to be provided, or if such form, certificate or other document otherwise is not required under Section 2.15(e) ), such Lender or other Recipient shall not be entitled to indemnification under Section 2.15(a) or (c) with respect to Indemnified Taxes imposed by the United States by reason of such failure; provided , however , that should a Lender or other Recipient become subject to Indemnified Taxes because of its failure to deliver a form, certificate or other document required hereunder, the Borrowers shall take such steps as the Lender or other Recipient shall reasonably request to assist the Lender or other Recipient to recover such Indemnified Taxes. Further, if a payment made to a Lender or other Recipient under any Loan Document would be subject to U.S. federal withholding tax imposed by FATCA if such Lender or other Recipient 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 or other Recipient shall deliver to the Borrowers and the Agent at the time or times prescribed by law and at such time or times reasonably requested by the Borrowers or the Agent such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Internal Revenue Code) and such additional documentation reasonably requested by the Borrowers or the Agent as may be necessary for the Borrowers and the Agent to comply with their obligations under FATCA and to determine that such Lender or other Recipient has complied with such Lender’s or other Recipient’s obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this paragraph (f), “FATCA” shall include any amendments made to FATCA after the Effective Date.
(g)    Each Lender and other Recipient agrees that if any form or certification it previously delivered pursuant to this Section 2.15 expires or becomes obsolete or inaccurate in any respect, it shall update such form or certification or promptly notify the Borrowers and the Agent in writing of its legal inability to do so.
(h)    Any Lender claiming any additional amounts payable pursuant to this Section 2.15 agrees to use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Applicable Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts that may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender.
(i)    If any Lender or other Recipient determines, in its sole discretion exercised in good faith, that it has actually and finally realized, by reason of a refund, a deduction or credit of any Indemnified Taxes paid or reimbursed by the Borrowers pursuant to Section 2.15(a) or Section 2.15(c) above in respect of payments under this Agreement or the other Loan Documents, a current monetary benefit that it would otherwise not have obtained, and

41



that would result in the total payments under this Section 2.15 exceeding the amount needed to make such Lender or other Recipient whole, such Lender or other Recipient shall pay to the Borrowers, with reasonable promptness following the date on which it actually realizes such benefit, an amount equal to the amount of such excess, net of all out-of-pocket expenses incurred by such Lender or other Recipient reasonably allocable in securing such refund, deduction or credit and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund), provided that the Borrowers, upon the request of such Lender or other Recipient, agree to repay the amount paid over to the Borrowers to such Lender or other Recipient (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) in the event such Lender or other Recipient is required to repay such refund to such jurisdiction. Nothing in this Section 2.15(i) shall be construed to require any Lender or other Recipient to make available to the Borrowers or any other Person its tax returns or any confidential tax information.
(j)    If the Agent or any Lender or other Recipient, as the case may be, shall become aware that it is entitled to claim a refund from a Governmental Authority in respect of Indemnified Taxes or Other Taxes paid by Borrower pursuant to this Section 2.15 , including Indemnified Taxes or Other Taxes as to which it has been indemnified by Borrower, or with respect to which Borrower or a Group Member that is a signatory hereto has paid additional amounts pursuant to this Section 2.15 , it shall notify Borrower of the availability of such refund claim and, if the Agent or any Lender or other Recipient, as the case may be, determines in good faith that making a claim for refund will not have any adverse consequence to its taxes or business operations, shall, after receipt of a request by Borrower, make a claim to such Governmental Authority for such refund at Borrower’s expense.
Section 2.16     Sharing of Payments, Etc . If any L/C Lender shall obtain any payment from any Group Member (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Reimbursement Obligations or other amounts owing to it (other than pursuant to Section 2.12 or 2.15 ) in excess of its ratable share, such L/C Lender shall forthwith purchase from the other L/C Lenders such participations or other amounts owing to them as shall be necessary to cause such purchasing L/C Lender to share the excess payment ratably with each of them; provided , however , that if all or any portion of such excess payment is thereafter recovered from such purchasing L/C Lender, such purchase from each L/C Lender shall be rescinded and such L/C Lender shall repay to the purchasing L/C Lender the purchase price to the extent of such recovery together with an amount equal to such L/C Lender’s ratable share (according to the proportion of (i) the amount of such L/C Lender’s required repayment to (ii) the total amount so recovered from the purchasing L/C Lender) of any interest or other amount paid or payable by the purchasing L/C Lender in respect of the total amount so recovered. The Borrowers agree that any L/C Lender so purchasing a participation from another L/C Lender pursuant to this Section 2.16 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such L/C Lender were the direct creditor of the Borrowers in the amount of such participation.
Section 2.17     Increase of L/C Commitments . At any time and from time to time, upon the request of the Borrowers and with notice to the Agent and the Issuing Bank, any L/C Lender may increase its L/C Commitment by electing (in its sole discretion) to deposit or cause to be deposited into the Lender Cash Collateral Account of such L/C Lender an amount equal to

42



102% of such increase; provided , in no event shall the aggregate L/C Commitments exceed the Facility Cap, provided , further , that each increase after the Effective Date shall be in increments of not less than $25,000,000.

ARTICLE III
AMOUNT AND TERMS OF THE LETTERS OF CREDIT
Section 3.01     L/C Commitment .
(a)    Subject to the terms and conditions hereof, the Issuing Bank, in reliance on the agreements of the L/C Lenders set forth in Section 3.04(a) , agrees to issue Letters of Credit for the account of any Borrower (on behalf of such Borrower or on behalf of any other Group Member) on any Business Day during the period from the Effective Date until the date that is thirty (30) days prior to the L/C Termination Date in such form as may be approved from time to time by the Issuing Bank; provided that the Issuing Bank shall not have any obligation to issue any Letter of Credit if after giving effect to such issuance, (x) the Issuer Exposure would exceed the lesser of (1) the aggregate L/C Commitments of all L/C Lenders and (2) the Facility Cap, or (y) the aggregate amount in the Lender Cash Collateral Accounts would be less than 102% of the Issuer Exposure.
(b)     Each Letter of Credit shall (i) be denominated in Dollars or any other lawful foreign currency which is approved in writing on a case by case basis by the Issuing Bank, the Required L/C Lenders and the Agent in their sole and absolute discretion and (ii) expire no later than one year following the date of issuance of such Letter of Credit; provided that, in the event that any Letter of Credit is outstanding on the date that is thirty (30) days prior to the L/C Termination Date, the Borrowers shall on or before such date, Cash Collateralize an amount equal to 102% of the L/C Obligations with respect to all such Letters of Credit pursuant to Section 3.11 . Each Application and each Letter of Credit shall be subject to either the International Standby Practices (ISP 98) of the International Chamber of Commerce or the UCP, and, to the extent not inconsistent therewith, the laws of the State of New York.
(c)    The Issuing Bank shall not at any time be obligated to issue any Letter of Credit if (i) such issuance would conflict with, or cause the Issuing Bank or any L/C Lender to exceed any limits imposed by, any applicable Requirement of Law, (ii) any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain the Issuing Bank from issuing such Letter of Credit, or any law applicable to the Issuing Bank or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over the Issuing Bank shall prohibit, or request that the Issuing Bank refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon the Issuing Bank with respect to such Letter of Credit any restriction, reserve or capital requirement (for which the Issuing Bank is not otherwise compensated hereunder) not in effect on the Effective Date, or shall impose upon the Issuing Bank any unreimbursed loss, cost or expense which was not applicable on the Effective Date and which the Issuing Bank in good faith deems material to it; (iii) such issuance would violate one or more policies of the Issuing Bank applicable to letters of credit generally; (iv) the conditions precedent to each issuance of a Letter of Credit set forth in Section 4.02 have not been satisfied; (v) at the time of such issuance (x) the Cash Collateral Agreement shall have ceased for any

43



reason to be in full force and effect or (y) any L/C Lender or Loan Party shall so state in writing or (z) any Lien created by the Cash Collateral Agreement shall cease to be enforceable and of the same effect and priority purported to be created thereby; or (vi) at the time of such proposed L/C Extension there has been a drawing on any Letter of Credit outstanding hereunder for which the Borrowers have not made all payments required to be made by the Borrowers under Section 3.05 .
(d)    Unless previously terminated, the L/C Commitments of each L/C Lender shall terminate and be reduced to zero on the L/C Termination Date.
(e)    Notwithstanding Section 3.01(c) :
(i)    the Issuing Bank shall not, other than with the written consent of the Required L/C Lenders, issue any Letter of Credit if such Letter of Credit contains any provisions for automatic reinstatement of all or any portion of the stated amount thereof after any drawing thereunder or after the expiry date of such Letter of Credit;
(ii)    the Issuing Bank shall not issue a Letter of Credit which includes a provision whereby such Letter of Credit shall be renewed or extended automatically for additional consecutive periods unless (x) the Required L/C Lenders have provided their written consent, (y) pursuant to the terms of the Letter of Credit, the Issuing Bank may notify the beneficiary thereof within the time period specified in such Letter of Credit (which shall not exceed ninety (90) days prior to the then-applicable expiration date), or, if no such time period is specified, at least thirty (30) days prior to the then-applicable expiration date, that such Letter of Credit will not be renewed or extended, and (z) the Issuing Bank shall make such notification to the beneficiary as described in clause (y) above promptly upon request by the Required L/C Lenders.
Section 3.02     Procedure for Issuance of Letter of Credit . Any Borrower may from time to time request that the Issuing Bank issue a Letter of Credit for its account (on behalf of such Borrower or on behalf of any other Group Member) by delivering to the Issuing Bank and the Agent at their addresses for notices specified herein an Application therefor, completed to the satisfaction of the Issuing Bank, and such other certificates, documents and other papers and information as the Issuing Bank may reasonably request. Upon receipt of any Application, the Issuing Bank will process such Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby (but in no event shall the Issuing Bank be required to issue any Letter of Credit earlier than three Business Days after its receipt of the Application therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed to by the Issuing Bank and the applicable Borrower. The Issuing Bank shall furnish a copy of such Letter of Credit to the applicable Borrower promptly following the issuance thereof. The Issuing Bank shall promptly notify the Agent of the issuance, extension or amendment of Letters of Credit and any drawings or other payments under Letters of Credit issued by the Issuing Bank. A request by a Borrower for issuance of a Letter of Credit

44



may be subject to the effectiveness of an increase in the L/C Commitments of one of more L/C Lenders pursuant to Section 2.17 .
Section 3.03     Fees and Other Charges .
(a)    The Borrowers shall pay to the Issuing Bank for its own account a fronting fee of 0.125% per annum on the undrawn and unexpired amount of each Letter of Credit, payable monthly in arrears on the 3rd day subsequent to the last day of each month after the issuance date.
(b)    In addition to the foregoing fees, the Borrowers shall pay or reimburse the Issuing Bank for such normal and customary costs and expenses as are incurred or charged by the Issuing Bank in issuing, negotiating, effecting payment under, amending or otherwise administering any Letter of Credit issued by the Issuing Bank, unless otherwise agreed.
Section 3.04     Letter of Credit Participations .
(a)    The Issuing Bank irrevocably agrees to grant and hereby grants to each L/C Lender, and, to induce the Issuing Bank to issue Letters of Credit, each L/C Lender irrevocably agrees to accept and purchase and hereby accepts and purchases from the Issuing Bank, on the terms and conditions set forth below, for such L/C Lender’s own account and risk an undivided interest equal to such L/C Lender’s L/C Commitment Percentage in the Issuing Bank’s obligations and rights under and in respect of each Letter of Credit issued by the Issuing Bank and the amount of each draft paid by the Issuing Bank thereunder. Each L/C Lender agrees with the Issuing Bank that, if a draft is paid under any Letter of Credit issued by the Issuing Bank for which the Issuing Bank is not reimbursed in full by the Borrowers in accordance with the terms of this Agreement, such L/C Lender shall pay to the Issuing Bank upon demand at the Issuing Bank’s address for notices specified herein an amount equal to such L/C Lender’s L/C Commitment Percentage of the amount of such draft, or any part thereof, that is not so reimbursed, provided that (x) in lieu of making any demands under this Section 3.04(a) , the Issuing Bank may withdraw funds from such L/C Lender’s Lender Cash Collateral Account; or (y) so long as funds sufficient to pay such amount are in such L/C Lender's Lender Cash Collateral Account and are available to the Issuing Bank without stay or delay, such L/C Lender may satisfy any demands made under this Section 3.04(a) by the Issuing Bank, by directing the Issuing Bank to withdraw funds from such L/C Lender's Lender Cash Collateral Account, in each case, to satisfy such payment obligations in accordance with Section 4 of the Cash Collateral Agreement. The Issuing Bank shall give prompt notice of such withdrawal in accordance with the Cash Collateral Agreement. Each L/C Lender’s obligation to pay such amount shall be absolute and unconditional and shall not be affected by any circumstance, including (i) any set-off, counterclaim, recoupment, defense or other right that such L/C Lender may have against the Issuing Bank, the Borrowers or any other Person for any reason whatsoever, (ii) the occurrence or continuance of a Default or an Event of Default or the failure to satisfy any of the other conditions specified in Article IV , (iii) any adverse change in the condition (financial or otherwise) of the Borrowers or any other Loan Party, (iv) any breach of this Agreement or any other Loan Document by the Borrowers, any other Loan Party or any other Lender or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the

45



foregoing; provided that each L/C Lender shall only be obligated to make any such payment in Dollars (and not any foreign currency) in accordance with the provisions of Section 3.10 hereof.
(b)    If any amount required to be paid by any L/C Lender to the Issuing Bank pursuant to Section 3.04(a) in respect of any unreimbursed portion of any payment made by the Issuing Bank under any Letter of Credit is paid to the Issuing Bank within three Business Days after the date such payment is due, such L/C Lender shall pay to the Issuing Bank on demand an amount equal to the product of (i) such amount, times (ii) the daily average Federal Funds Rate during the period from and including the date such payment is required to the date on which such payment is immediately available to the Issuing Bank, times (iii) a fraction the numerator of which is the number of days that elapse during such period and the denominator of which is 360. If any such amount required to be paid by any L/C Lender pursuant to Section 3.04(a) is not made available to the Issuing Bank by such L/C Lender within three Business Days after the date such payment is due, the Issuing Bank shall be entitled to recover from such L/C Lender, on demand, the Base Rate plus 5.25% per annum. A certificate of the Issuing Bank submitted to any L/C Lender with respect to any amounts owing under this Section shall be conclusive in the absence of manifest error, provided that (x) in lieu of making any demands under this Section 3.04(b) , the Issuing Bank may withdraw funds from such L/C Lender’s Lender Cash Collateral Account; or (y) so long as funds sufficient to pay such amount are in such L/C Lender's Lender Cash Collateral Account and are available to the Issuing Bank without stay or delay, such L/C Lender may satisfy any demands made under this Section 3.04(b) by the Issuing Bank, by directing the Issuing Bank to withdraw funds from such L/C Lender's Lender Cash Collateral Account, in each case, to satisfy such payment obligations in accordance with Section 4 of the Cash Collateral Agreement. The Issuing Bank shall give prompt notice of such withdrawal in accordance with the Cash Collateral Agreement.
(c)    Whenever, at any time after the Issuing Bank has made payment under any Letter of Credit issued by the Issuing Bank and has received from any L/C Lender its pro rata share of such payment in accordance with Section 3.04(a) or (b) , the Issuing Bank receives any payment related to such Letter of Credit (whether directly from the applicable Borrower or otherwise, including proceeds of collateral applied thereto by the Issuing Bank), or any payment of interest on account thereof, the Issuing Bank will distribute to such L/C Lender its pro rata share thereof; provided , however , that in the event that any such payment received by the Issuing Bank shall be required to be rescinded, restored or returned by the Issuing Bank upon the bankruptcy, insolvency or reorganization of any Person or otherwise, such L/C Lender shall return to the Issuing Bank the portion thereof previously distributed by the Issuing Bank to it, provided , further , that if such L/C Lender (x) is an L/C Lender with respect to which an L/C Lender Insolvency Event has occurred and is continuing with respect to such L/C Lender or its Parent Company, or if such L/C Lender or its Parent Company has become the subject of a Bail-In Action, and (y) such L/C Lender has defaulted on its obligations to the Issuing Bank, then the Issuing Bank may apply any such proceeds first to such defaulted obligations and after such defaulted obligations are paid in full, pay any remainder to such L/C Lender.
Section 3.05     Reimbursement Obligation of the Borrowers . If any draft is paid under any Letter of Credit, the applicable Borrower shall reimburse the Issuing Bank for the amount of (a) the draft so paid and (b) any taxes, fees, charges or other costs or expenses incurred by the Issuing Bank in connection with such payment, not later than 12:00 Noon on (i) the Business Day immediately following the day that the applicable draft is paid if Borrower

46



receives notice of such draft on such day prior to 10:00 A.M. or (ii) if clause (i) above does not apply, the second Business Day immediately following the day that the draft is paid. Interest shall be payable on any such amounts from the date on which the relevant draft is drawn until paid at (x) until the Business Day next succeeding the date of the relevant drawing, a rate equal to the Base Rate plus 5.25% per annum, and (y) thereafter, at a rate per annum equal to the Base Rate plus 8.25%.
Section 3.06     Obligations Absolute . Each Borrower’s obligations under this Article III shall be absolute and unconditional under any and all circumstances and irrespective of any set-off, counterclaim or defense to payment that any Borrower may have or have had against the Issuing Bank, any beneficiary of a Letter of Credit or any other Person. Each Borrower also agrees with the Issuing Bank that the Issuing Bank shall not be responsible for, and such Borrower’s Reimbursement Obligations under Section 3.05 shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or any dispute between or among such Borrower and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or any claims whatsoever of such Borrower against any beneficiary of such Letter of Credit or any such transferee. The Issuing Bank shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Issuing Bank that issued such Letter of Credit. Each Borrower agrees that any action taken or omitted by the Issuing Bank under or in connection with any Letter of Credit issued by the Issuing Bank or the related drafts or documents, if done in the absence of gross negligence or willful misconduct, shall be binding on such Borrower and shall not result in any liability of the Issuing Bank to such Borrower.
Section 3.07     Letter of Credit Payments . If any draft shall be presented for payment under any Letter of Credit, the Issuing Bank shall promptly notify the applicable Borrower of the date and amount thereof. The responsibility of the Issuing Bank to the Borrowers in connection with any draft presented for payment under any Letter of Credit issued by the Issuing Bank shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in connection with such presentment are substantially in conformity with such Letter of Credit.
Section 3.08     Applications . To the extent that any provision of any Application related to any Letter of Credit is inconsistent with the provisions of this Article III , the provisions of this Article III shall apply.
Section 3.09     Use of Letters of Credit . The Letters of Credit shall be available (and each Borrower agrees that it shall use such Letters of Credit) for general corporate purposes of Holdings and its Subsidiaries.


Section 3.10     Currency Equivalents Generally; Exchange Rates .

47



(a)    The Agent or the Issuing Bank, as applicable, shall determine the Spot Rates as of each Revaluation Date to be used for calculating Dollar Equivalent amounts of Letters of Credit and other Obligations denominated in Alternative Currencies. Such Spot Rates shall become effective as of such Revaluation Date and shall be the Spot Rates employed in converting any amounts between the applicable currencies until the next Revaluation Date occurs. Except for purposes of financial statements delivered by Loan Parties hereunder or calculating financial covenants hereunder or except as otherwise provided herein, the applicable amount of any Alternative Currency for purposes of the Loan Documents shall be such Dollar Equivalent amount as determined by the Agent or the Issuing Bank, as applicable, in accordance with the first sentence of this clause (a) . The Borrowers and the L/C Lenders will be promptly informed of the results of such calculations. Notwithstanding the foregoing, for purposes of this Agreement and the other Loan Documents, where the permissibility of a transaction or determinations of required actions or circumstances (excluding in connection with the matters referred to in clause (b) below) depend upon compliance with, or are determined by reference to, amounts stated in Dollars, such amounts shall be deemed to refer to Dollars or Dollar Equivalents and any requisite currency translation shall be based on the Spot Rate, and the permissibility of actions taken under Section 6.02 shall not be affected by subsequent fluctuations in exchange rates; provided that if Permitted Refinancing Debt is incurred to refinance other Debt, and such Permitted Refinancing Debt would cause the applicable Dollar denominated limitation to be exceeded if calculated at the Spot Rate in effect on the Business Day immediately preceding the date of such refinancing, such Dollar denominated restriction shall be deemed not to have been exceeded so long as the principal amount of Permitted Refinancing Debt does not exceed the principal amount of such Debt being refinanced except as permitted hereunder.
(b)    Wherever in this Agreement in connection with any payment of any Obligations or the issuance, amendment or extension of a Letter of Credit, an amount, such as a required minimum or multiple amount, is expressed in Dollars, but such Obligation or Letter of Credit is denominated in an Alternative Currency, such amount shall be the relevant Alternative Currency Equivalent of such Dollar amount (rounded to the nearest unit of such Alternative Currency, with 0.5 of a unit being rounded upward), as determined by the Agent or the Issuing Bank, as the case may be.
Section 3.11     Borrowers Cash Collateral .
(a)     If:
(i)    any Event of Default occurs and is continuing and the Required L/C Lenders require the Borrowers to Cash Collateralize the L/C Lender Exposure;
(ii)    an Event of Default set forth under Section 7.01(e) occurs and is continuing;
(iii)    for any reason, any Letter of Credit is outstanding at the time of termination in full of the L/C Commitments and backstop Satisfactory Letters of Credit are not in place;

48



(iv)    for any reason, any Letter of Credit is outstanding at the time that the aggregate L/C Lender Exposure exceed the L/C Commitments (including as a result of a reduction pursuant to Section 2.11) and backstop Satisfactory Letters of Credit are not in place; or
(v)    any Letter of Credit is outstanding at the time the Existing Credit Agreement or the Guarantee and Collateral Agreement is terminated, replaced or refinanced and backstop Satisfactory Letters of Credit are not in place,
then the Borrowers shall at such time deposit in a cash collateral account maintained by the Agent, an amount equal to 102% of the aggregate L/C Lender Exposure (or, in the case of clause (iv), 102% of the amount of such excess), and shall do so not later than 2:00 P.M. on (x) in the case of the immediately preceding clause (i), (iii) or (iv), (1) the first Business Day immediately following the day that the Borrowers receives notice thereof, if such notice is received on such day prior to 12:00 noon or (2) if clause (1) above does not apply, the second Business Day immediately following the day that the Borrowers receive such notice and (y) in the case of the immediately preceding clause (ii) or (v), the Business Day on which an Event of Default set forth under Section 7.01(e) occurs or, if such day is not a Business Day, the Business Day immediately succeeding such day.
(b)    The Borrowers hereby grant to the Agent, for the benefit of the L/C Lenders, a security interest in all cash collateral accounts established pursuant to Section 3.11(a), and all cash deposited and all balances therein and all proceeds of the foregoing. Cash collateral held by the Agent pursuant to this Agreement (including pursuant to Article VII) may be invested in cash equivalents selected by the Agent in its sole discretion. Upon the drawing of any Letter of Credit for which funds are on deposit as cash collateral, such funds shall be applied, to the extent permitted under applicable Requirements of Law, to reimburse the Issuing Bank, or, to the extent any L/C Lender has paid the Issuing Bank in respect of any amounts not reimbursed by the Borrowers pursuant to Section 3.04(a) , to reimburse the L/C Lenders. To the extent the amount of any such cash collateral exceeds the then current amount of all L/C Lender Exposure and so long as no Event of Default has occurred and is continuing, the excess shall be refunded to the Borrowers. In the case of clause (i) or (ii) above, if such Event of Default is cured or waived and no other Event of Default is then occurring and continuing, the amount of any such cash collateral shall be refunded to the Borrowers.
Section 3.12     Replacement and Cancellation of Letters of Credit . Notwithstanding anything to the contrary in this Agreement or in any other Loan Document, to the extent that the Issuer Exposure exceeds the Aggregate L/C Commitments at any time, whether as a result of Section 2.11 , the occurrence of the L/C Termination Date, or otherwise, and regardless of whether there are backstop Satisfactory Letters of Credit, the Borrowers shall use their reasonable best efforts to cause a replacement letter of credit to be issued, or other credit support or collateral to be provided to the applicable beneficiaries thereof and cause the Letters of Credit to be returned to the Issuing Bank and cancelled, such that after giving effect to all returns and cancellations pursuant to this sentence, the Issuer Exposure does not exceed the Aggregate L/C Commitments.

49




ARTICLE IV
CONDITIONS TO EFFECTIVENESS
Section 4.01     Conditions Precedent to Effectiveness . The effectiveness of this Agreement is conditioned upon satisfaction of the following conditions precedent:
(a)    The Agent’s receipt of the following, each of which shall be originals or pdf copies (followed promptly by originals) unless otherwise specified, each properly executed by an Authorized Officer of the signing Loan Party (or, in the case of this Agreement, the Cash Collateral Agreement and any other document, certificate or instrument required to be signed by the L/C Lenders, the signing L/C Lender), each dated as of the Effective Date (or, in the case of certificates of governmental officials, a recent date before the Effective Date) and each in form and substance satisfactory to the Agent:
(i)    this Agreement duly executed by each of Holdings, the Borrowers, the Agent, and the Lenders.
(ii)    The Reaffirmation Agreement duly executed by each Loan Party party to the Guarantee and Collateral Agreement;
(iii)    a duly executed Cash Collateral Agreement;
(iv)    all other Loan Documents to the extent reasonably requested by the Agent, each duly executed by the applicable Loan Parties;
(v)    the Perfection Certificate duly executed by each of Holdings and the other Loan Parties;
(vi)    such certificates of resolutions or other action, incumbency certificates and/or other certificates of Authorized Officers of each Loan Party and each L/C Lender as the Agent may reasonably require evidencing (A) the authority of each Loan Party or L/C Lender to enter into this Agreement and the other Loan Documents to which such Loan Party or L/C Lender is a party or is to be a party and (B) the identity, authority and capacity of each Authorized Officer thereof authorized to act as an Authorized Officer in connection with this Agreement and the other Loan Documents to which such Loan Party is a party or is to be a party;
(vii)copies of each Loan Party’s and L/C Lender’s organization or other governing documents and such other documents and certifications as the Agent may reasonably require to evidence that each Loan Party or L/C Lender is duly organized or formed, and that each Loan Party or L/C Lender is validly existing, in good standing and qualified to engage in business in each jurisdiction where failure to so qualify could reasonably be expected to have a Material Adverse Effect;
(viii)(A) An opinion of in house counsel to Holdings and of one or more special or local counsel to Holdings, the Borrowers, a

50



nd the other Loan Parties, addressed to the Agent and each Lender as to such matters as the Agent may reasonably request and (B) an opinion of counsel to the L/C Lenders, addressed to the Agent and Issuing Bank as to such matters as the Agent may reasonably request;
(ix)    a certificate signed by an Authorized Officer of Holdings and the Borrowers certifying (A) that the conditions specified in Section 4.02 have been satisfied, (B) to the Solvency of the Loan Parties, taken as a whole, as of the Effective Date after giving effect to the transactions contemplated hereby, (C) that the Perfection Certificate is true and correct in all material respects, and (D) that attached to such certificates are the true and correct executed copies of the Guarantee and Collateral Agreement and the Existing Intercreditor Agreement;
(x)    results of searches or other evidence reasonably satisfactory to the Agent (in each case dated as of a date reasonably satisfactory to the Agent) indicating the absence of Liens on the assets of the Loan Parties, except for Liens permitted by Section 6.02(a) ;
(xi)    such other customary certificates, documents or consents as the Agent reasonably may require; and
(xii)the Existing Agent Acknowledgement and Consent, duly executed by the Existing Agent and Holdings, and the Borrowers.
(b)    The conditions set forth in Section 4.02 (other than clause (v) thereof) shall be satisfied.
(c)    There shall have been no event or circumstance since January 30, 2016 that has had or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect.
(d)    All fees required to be paid to the Agent on or before the Effective Date shall have been paid in full, and all fees required to be paid to the Lenders on or before the Effective Date shall have been paid in full.
(e)    The Borrowers shall have paid all costs and expenses of the Agent (to the extent set forth in Section 9.04(a) ) incurred in connection with or relating to this Agreement and the other Loan Documents, including reasonable fees, charges and disbursements of counsel to the Agent, to the extent invoiced prior to or on the Effective Date; provided that such payment shall not thereafter preclude a final settling of accounts between the Borrowers and the Agent.
Section 4.02     Conditions Precedent to Each Issuance of a Letter of Credit . The obligation of the Issuing Bank to issue a Letter of Credit on any date shall be subject to the conditions precedent that the effectiveness of this Agreement shall have occurred and on the date of such L/C Extension the following statements shall be true (and each Application for a Letter of Credit shall constitute a representation and warranty by the applicable Borrower that on the date of such Application such statements are true):

51



(i)    the representations and warranties made by (x) each Loan Party in or pursuant to the Loan Documents and (y) by the L/C Lenders in Section 5.02 hereof in or pursuant to the Cash Collateral Agreement or any Assignment and Acceptance, assumption, joinder or similar agreement pursuant to which such L/C Lender becomes a party hereto, in each case, are true and correct on and as of such date in all material respects, before and after giving effect to such L/C Extension, as though made on and as of such date, except to the extent that (A) such representations or warranties are qualified by a materiality standard, in which case they shall be true and correct in all respects, and (B) such representations or warranties expressly relate to an earlier date (in which case such representations and warranties shall be true and correct in all material respects as of such earlier date);
(ii)    no event has occurred and is continuing, or would result from such L/C Extension, that constitutes a Default or an Event of Default;
(iii)    after giving effect to such L/C Extension, no Collateral Coverage Event (as defined in the Indenture for the Existing Second Lien Notes) shall result therefrom;
(iv)    the Issuing Bank and Agent shall have received a certificate from each L/C Lender executed by an Authorized Officer of such L/C Lender confirming the accuracy of such L/C Lender’s representations and warranties as set forth in Section 4.02(i)(y) above;
(v)    the Issuer Exposure shall not exceed the L/C Commitments, and the aggregate amount on deposit in the Lender Cash Collateral Accounts shall not be less than 102% of the Issuer Exposure, in each case, after giving effect to such L/C Extension; and
(vi)    if the Letter of Credit to be issued is of the type described in Section 3.01(e)(i) or (e)(ii) the Issuing Bank and the Agent shall have received an instruction letter from the Required L/C Lenders requiring the Issuing Bank to issue such Letter of Credit; provided that by executing and delivering this Agreement, the Required L/C Lenders hereby direct the Issuing Bank to issue a Letter of Credit in the amount of $200,000,000 contemplated to be issued to the party previously disclosed by the Borrowers to the Issuing Bank, on or about the Effective Date, pursuant to Section 3.01(e) .
The conditions set forth in this Section 4.02 are for the sole benefit of the Credit Parties but until the Required L/C Lenders otherwise direct the Agent to cease issuing Letters of Credit, the L/C Lenders will participate in all Letters of Credit whenever issued, which are requested by a Borrower and which, notwithstanding the failure of the Loan Parties to comply with the provisions of this Article IV , are agreed to by the Agent acting in the interests of the Credit Parties, provided , however , the issuance of any such Letters of Credit shall not be deemed a modification or waiver by any Credit Party of the provisions of this Article IV on any future occasion or a waiver of any rights or the Credit Parties as a result of any such failure to comply.

52




ARTICLE V
REPRESENTATIONS AND WARRANTIES
Section 5.01     Representations and Warranties of the Borrowers . Holdings and the Borrowers hereby jointly and severally represent and warrant as follows:
(a)    Each Loan Party (i) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and (ii) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect.
(b)    The execution, delivery and performance by each Loan Party of the Loan Documents to which it is a party, and the consummation of the transactions contemplated hereby or thereby, are within such Loan Party’s powers, have been duly authorized by all necessary organizational action, and (x) will not result in a breach of any of the terms and provisions of, or constitute a default under, the Existing ABL Credit Agreement, and (y) do not contravene (i) the charter or by-laws or other organizational or governing documents of such Loan Party or (ii) law or any contractual restriction binding on or affecting any Loan Party, except, for purposes of this clause (ii), to the extent such contravention would not reasonably be expected to have a Material Adverse Effect.
(c)    No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is required for the due execution, delivery and performance by any Loan Party of any Loan Document to which it is a party that has not already been obtained if the failure to obtain such authorization, approval or other action could reasonably be expected to result in a Material Adverse Effect.
(d)    Each Loan Document has been duly executed and delivered by each Loan Party party thereto. This Agreement constitutes, and each other Loan Document will constitute upon execution, the legal, valid and binding obligation of each Loan Party party thereto enforceable against such Loan Party in accordance with its respective terms subject to the effect of any applicable bankruptcy, insolvency, reorganization or moratorium or similar laws affecting the rights of creditors generally and subject to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity).
(e)    The consolidated balance sheet of Holdings and its Subsidiaries as at January 30, 2016, and the related consolidated statements of income and cash flows of Holdings and its Subsidiaries for the fiscal year then ended, accompanied by an opinion of Deloitte & Touche LLP, independent public accountants, copies of which have been furnished to the Agent, fairly present the consolidated financial condition of Holdings and its Subsidiaries as at such date and the consolidated results of the operations of Holdings and its Subsidiaries for the period ended on such date, all in accordance with GAAP consistently applied.
(f)    Since January 30, 2016, there has been no event or circumstance, either individually or in the aggregate, that has had or would reasonably be expected to have a Material Adverse Effect.

53



(g)    There is no action, suit, investigation, litigation or proceeding, including any Environmental Action, which is pending or, to Holdings or any Borrower’s knowledge, threatened affecting Holdings, the Borrowers or any of their respective Subsidiaries before any court, Governmental Authority or arbitrator that would, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect other than as reported in filings with the SEC made prior to the date hereof.
(h)    Following each L/C Extension, not more than five (5%) percent of the value of the assets of the Borrowers and their respective Subsidiaries on a consolidated basis will be margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System).
(i)    No Loan Party is an “investment company”, or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940, as amended.
(j)    All United States Federal income tax returns and all other material tax returns which are required to be filed have been filed by or on behalf of Holdings, the Borrowers and their respective Subsidiaries, and all taxes due with respect to Holdings, the Borrowers and their respective Subsidiaries pursuant to such returns or pursuant to any assessment received by Holdings, the Borrowers or any Subsidiary have been paid except to the extent permitted in Section 6.01(b) . The charges, accruals and reserves on the books of Holdings, the Borrowers and their Subsidiaries in respect of taxes or other governmental charges have been made in accordance with, and to the extent required by, GAAP.
(k)    All written factual information heretofore furnished by Holdings, the Borrowers or their Subsidiaries to the Agent or any Lender (including the Perfection Certificate) for purposes of or in connection with this Agreement or any other Loan Document, taken as a whole, was true and correct in all material respects on the date as of which such information was stated or certified; provided that with respect to projected financial information, the Loan Parties represent only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time.
(l)    (i) Each Loan Party has title in fee simple to, or a valid leasehold interest in, all its real property, and good title to, or a valid leasehold interest in, all its other property necessary for the conduct of its business and except as, in the aggregate, would not reasonably be expected to have a Material Adverse Effect, and (ii) no Collateral, DC or Related Intellectual Property is subject to any Lien except as permitted by Section 6.02(a) .
(m)    Except as, in the aggregate, would not reasonably be expected to have a Material Adverse Effect: (i) each Loan Party owns, or is licensed to use, all Intellectual Property necessary for the conduct of its business as currently conducted; (ii) no material claim has been asserted and is pending by any Person challenging or questioning the use of any Intellectual Property or the validity or effectiveness of any Intellectual Property, nor do Holdings or the Borrowers know of any valid basis for any such claim; and (iii) the use of Intellectual Property by each Group Member does not infringe on the rights of any Person in any material respect.

54



(n)    Except as set forth on Schedule 5.01(n) or as would not reasonably be expected to result in a Material Adverse Effect, (i) neither a Reportable Event nor a failure to meet minimum required contributions (in accordance with Section 430 or any prior applicable section of the Internal Revenue Code or Section 302 of ERISA) has occurred during the five year period prior to the date on which this representation is made or deemed made with respect to any Plan, (ii) each Plan is in compliance with the applicable provisions of ERISA, the Internal Revenue Code and other applicable federal or state laws, and (iii) no termination of a Single Employer Plan has occurred. Except as set forth on Schedule 5.01(n) , no Lien imposed under the Internal Revenue Code or ERISA exists on account of any Plan, and no Lien in favor of the PBGC or a Plan has arisen, during such five-year period. Each Single Employer Plan that is intended to qualify under Section 401(a) of the Internal Revenue Code has received a favorable determination letter from the United States Internal Revenue Service (the “ IRS ”) and, to the best knowledge of Holdings and the Borrowers, nothing has occurred which would cause the loss of, such qualification. Except as set forth on Schedule 5.01(n) or as would not reasonably be expected to result in a Material Adverse Effect, the Loan Parties and each ERISA Affiliate have made all required contributions to each Plan subject to Section 430 of the Internal Revenue Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 430 of the Internal Revenue Code has been made with respect to any Plan. There are no pending or, to the best knowledge of Holdings and the Borrowers, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan that would reasonably be expected to have a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary duty rules with respect to any Plan that has resulted or could reasonably be expected to result in a Material Adverse Effect. No ERISA Event has occurred or is reasonably expected to occur, in each case that would reasonably be expected to result in a Material Adverse Effect. Neither any Loan Party nor any ERISA Affiliate has incurred, or would reasonably be expected to incur, any liability under Title IV of ERISA with respect to any Pension Plan, other than premiums due and not delinquent under Section 4007 of ERISA or as would not reasonably be expected to have a Material Adverse Effect; neither any Loan Party nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and, to the knowledge of the Borrowers, no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Sections 4201 or 4243 of ERISA with respect to a Multiemployer Plan except as would not reasonably be expected to have a Material Adverse Effect; and neither any Loan Party nor any ERISA Affiliate has engaged in a transaction that would reasonably be expected to be subject to Sections 4069 or 4212(c) of ERISA. Except as would not reasonably be expected to have a Material Adverse Effect, neither Holdings, the Borrowers nor any Commonly Controlled Entity has had a complete or partial withdrawal (as such terms are defined in Sections 4203 and 4205 of ERISA, respectively) from any Multiemployer Plan that has resulted or would reasonably be expected to result in a liability under ERISA. No such Multiemployer Plan is in Reorganization or Insolvent except as would not reasonably be expected to result in aggregate liability to Holdings and its Subsidiaries of $100,000,000 or more.
(o)    Except as, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect, no Group Member (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental

55



Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability.
(p)    The Guarantee and Collateral Agreement is effective to create in favor of the Co-Collateral Agents, for the benefit of the Credit Parties, a legal, valid and enforceable security interest in the ABL Collateral described therein and proceeds thereof. The Guarantee and Collateral Agreement constitutes, to the extent a security interest can be perfected by filing the UCC financing statements specified on Schedule 5.01(p) and by executing the control agreements described on Schedule 5.01(p), a fully perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in the ABL Collateral and the proceeds thereof, as security for the ABL Obligations, in each case prior and superior in right to the Lien or claim of any other Person (except Liens permitted by Section 6.02(a) which by operation of law would have priority over the Liens securing the ABL Obligations). Each Mortgage, upon execution and delivery thereof by the parties thereto, will create in favor of the Agent for the benefit of the L/C Lenders and the Issuing Bank, a legal, valid and enforceable second lien, subject to Permitted Liens, security interest in all the applicable mortgagor’s right, title and interest in and to the Real Estate Collateral subject thereto and the proceeds thereof, and when the Mortgages have been filed in the appropriate filing or recording office in the jurisdictions specified therein, the Mortgages will constitute a fully perfected security interest in all right, title and interest of the mortgagors in the Real Estate Collateral and the proceeds thereof, prior and superior to the rights of any other Person, except for rights secured by Liens permitted under Section 6.02.
(q)    The Loan Parties, taken as a whole, are, and after giving effect to the incurrence of all Debt and obligations incurred in connection herewith will be, Solvent.
(r)    The properties of the Loan Parties are insured as required pursuant to Section 6.01(c) hereof. Each insurance policy required to be maintained by the Loan Parties pursuant to Section 6.01(c) is in full force and effect and all premiums in respect thereof that are due and payable have been paid.
(s)    As of the Effective Date, the copies of the organization and governing documents of each Loan Party and each amendment thereto provided pursuant to Section 4.01 are true and correct copies of each such document, each of which is valid and in full force and effect.
(t)    As of the Effective Date, except as would not reasonably be expected to have individually or in the aggregate, a Material Adverse Effect, (a) there are no strikes, lockouts, slowdowns or other material labor disputes against any Loan Party or any Subsidiary thereof pending or, to the knowledge of Holdings or any Borrower, threatened, (b) the hours worked by and payments made to employees of the Loan Parties comply with the Fair Labor Standards Act and any other applicable federal, state, local or foreign law dealing with such matters, (c) all payments due from any Loan Party and its Subsidiaries, or for which any claim may be made against any Loan Party, on account of wages and employee health and welfare insurance and other benefits, have been paid or properly accrued in accordance with GAAP as a liability on the books of such Loan Party. Except as set forth on Schedule 5.01(t) (as updated by the Borrowers from time to time) (i) no Loan Party or any Subsidiary is a party to or bound by any collective bargaining agreement, management agreement or any material bonus, restricted stock, stock option, or stock appreciation plan or agreement or any similar plan,

56



agreement or arrangement (excluding in each case individual employment agreements) and (ii) no employee of a Loan Party is also an employee of the Permitted Holder. There are no representation proceedings pending or, to the knowledge of Holdings or any Borrower, threatened to be filed with the National Labor Relations Board, and no labor organization or group of employees of any Loan Party or any Subsidiary has made a pending demand for recognition, in each case which would individually or in the aggregate reasonably be expected to result in a Material Adverse Effect. There are no complaints, unfair labor practice charges, grievances, arbitrations, unfair employment practices charges or any other claims or complaints against any Loan Party or any Subsidiary pending or, to the knowledge of Holdings or any Borrower, threatened to be filed with any Governmental Authority or arbitrator based on, arising out of, in connection with, or otherwise relating to the employment or termination of employment of any employee of any Loan Party or any of its Subsidiaries which would, individually or in the aggregate, be reasonably expected to result in a Material Adverse Effect. The consummation of the transactions contemplated by the Loan Documents will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which any Loan Party or any of its Subsidiaries is bound, except as would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
(u)    No broker or finder brought about the obtaining, making or closing of the transactions contemplated by this Agreement and the other Loan Documents, and, other than amounts payable pursuant to the Fee Letter, no Loan Party or Affiliate thereof has any obligation to any Person in respect of any finder’s or brokerage fees in connection therewith.
(v)    No Loan Party has any obligation to any Permitted Holder with respect to any consulting, management or similar fee; provided , that, for the avoidance of doubt, the foregoing shall not apply to (i) any arrangement disclosed in Holdings’ annual report on form 10-K for the fiscal year ended January 30, 2016; (ii) any employment arrangement between any Loan Party and an individual Person who is also an employee of a Permitted Holder, so long as such employment arrangements are (x) on terms that are fair and reasonable and comparable to terms provided to employees in comparable positions for companies of a comparable size and no less favorable to such Loan Party than it would obtain in a comparable arm’s length transaction with a Person that is not an employee of a Permitted Holder and (y) in the case of any officer (as defined in Rule 16a-1 under the Securities Exchange Act of 1934) or director of Holdings, any beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of more than 10.0% of Holdings’ equity interests or any Person that ranks in the top five in compensation among all employees of the Loan Parties, approved by a majority of disinterested members of the board of directors of Holdings in good faith; or (iii) any obligation arising from any financial advisory, financing or underwriting services or other investment banking activities provided by a Permitted Holder so long as (x) such services directly relate to and are provided in conjunction with an acquisition or divestiture or other specific transaction conducted outside the ordinary course of business, (y) such services are on terms that are fair and reasonable and comparable to terms provided by independent financial advisory, financing or underwriting service provider or other investment banking service providers and (z) compensation for such services are approved by a majority of disinterested members of the board of directors of Holdings in good faith.
(w)    To the extent applicable, each Loan Party is in compliance, in all material respects, with (i) the United States Trading with the Enemy Act, as amended, and each

57



of the foreign assets control regulations of the United States Treasury Department (31 C.F.R., Subtitle B, Chapter V, as amended) and any other enabling legislation or executive order relating thereto, (ii) the PATRIOT Act, (iii) the United States Foreign Corrupt Practices Act of 1977, and (iv) the Corruption of Foreign Public Officials Act, as amended (the “ FCPA ”). No Letter of Credit or any part of any drawing thereunder will be used, directly or, to the Loan Parties’ knowledge, indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the FCPA.
(x)    None of Holdings, the Borrowers, nor any of their respective Subsidiaries, nor, to the knowledge of the Borrowers, any director, officer, employee, agent or affiliate of the Borrowers is an individual or entity (for purposes of this clause (x) , a “ Person ”) that is, or is owned or controlled by Persons that are the subject of any sanctions (A) administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control, the United Nations Security Council, the European Union, Her Majesty’s Treasury or other applicable sanctions authority or (B) pursuant to the U.S. Iran Sanctions Act, as amended, or Executive Order 13590 (collectively, “ Sanctions ”) or (C) located, organized or resident in a country or territory that is, or whose government is, the subject of Sanctions (including, without limitation, Iran, North Korea, Sudan, Crimea, Cuba and Syria). The Loan Parties will not, directly or, to their knowledge, indirectly, use or permit to be used any Letter of Credit or any part of any drawing thereunder or lend, contribute or otherwise make available the proceeds thereof to any Subsidiary, joint venture partner or other Person in any manner that would directly or indirectly result in a violation of Sanctions by any Person.
(y)    (i) This Agreement, each Letter of Credit, and all Obligations under the Loan Documents are Bank Products and “Bank Products” as defined in the Existing Intercreditor Agreement, (ii) this Agreement and each Letter of Credit is an Other LC Facility, (iii) the Obligations are “Borrower Obligations” and “Guarantor Obligations” as defined in the Guarantee and Collateral Agreement, and (iv) the Obligations are “ABL Obligations” as defined in the Existing Intercreditor Agreement.
(z)    No Loan Party is an EEA Financial Institution.
(aa)    Except for this Agreement, each Letter of Credit and all Obligations under this Loan Documents, and except as set forth on Schedule 5.01(aa) , none of the Loan Parties have any Bank Products or Cash Management Services.
Section 5.02     Representations and Warranties of the Lenders . Each of the L/C Lenders represents and warrants to the Borrowers that it is a “Lender” or an “Affiliate of a Lender” (in each case, as defined in the Existing Credit Agreement).


58




ARTICLE VI
COVENANTS
Section 6.01     Affirmative Covenants . So long as any L/C Lender Exposure is outstanding, each of Holdings and the Borrowers will, and will cause each of their Subsidiaries to:
(a)     Compliance with Laws, Etc . Comply in all respects with all applicable Requirements of Law, such compliance to include compliance with ERISA and Environmental Laws, except for such non-compliance as would not reasonably be expected to have a Material Adverse Effect.
(b)     Payment of Taxes, Etc . Pay and discharge before the same shall become delinquent, (i) all taxes, assessments and governmental charges or levies imposed upon it or upon its property (ii) all payments required to be made to any Pension Plan, and (iii) all lawful claims that, if unpaid, might by law become a Lien upon its property; provided that neither Holdings, the Borrowers nor any of their Subsidiaries shall be required to pay or discharge any such tax, assessment, charge or claim (x) that is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained, unless and until any Lien resulting therefrom attaches to its property and becomes enforceable against its other creditors or (y) if such non-payments, either individually or in the aggregate, would not be reasonably expected to have a Material Adverse Effect.
(c)     Maintenance of Insurance . At all times comply with the insurance requirements set forth in Section 6.01(c) of the Existing Credit Agreement, and each other insurance requirement set forth in each other ABL Loan Document, each as in effect on the Effective Date.
(d)     Preservation of Corporate Existence, Etc . Preserve and maintain its corporate existence, material rights (charter and statutory) and franchises; provided that (i) Holdings, the Borrowers and their Subsidiaries may consummate any merger or consolidation permitted under Section 6.02(b) ; (ii) neither Holdings nor the Borrowers nor any of their Subsidiaries shall be required to preserve or maintain the corporate existence of any Subsidiary (other than Sears, SRAC, Kmart Corp. or any Material Subsidiary Guarantors) if the Board of Directors of the parent of such Subsidiary, or an executive officer of such parent to whom such Board of Directors has delegated the requisite authority, shall determine that the preservation and maintenance thereof is no longer desirable in the conduct of the business of such parent and that the loss thereof is not disadvantageous in any material respect to the Borrowers, Sears, any Material Subsidiary Guarantor, such parent or the Lenders; (iii) Sears shall not be required to preserve or maintain the corporate existence of SRAC; provided that in the event SRAC is dissolved, merged with or into Holdings or any Subsidiary of Holdings or otherwise ceases to exist, then Sears shall or shall cause a direct wholly owned Domestic Subsidiary of Sears to, execute and deliver to the Agent an assumption agreement with respect to SRAC’s obligations under the Loan Documents in form and substance reasonably satisfactory to the Agent and such other officer certificates, legal opinions, financing statements (if applicable) and documentation as the Agent reasonably requests; (iv) none of Holdings, the Borrowers or any of Material Subsidiary Guarantors shall be required to preserve any right or franchise of any Subsidiary

59



(other than a Material Subsidiary Guarantor) if the Board of Directors of Holdings, such Borrower or such Material Subsidiary Guarantor shall determine that the preservation thereof is no longer desirable in the conduct of its business and that the loss thereof is not disadvantageous in any material respect to Holdings, the Borrowers, such Material Subsidiary Guarantor or the Lenders and (v) no Subsidiary Guarantor which is not a Material Subsidiary Guarantor shall be required to preserve or maintain its corporate existence if (A) no Default or Event of Default has occurred and is continuing, and (B) such Subsidiary Guarantor is merged or liquidated into another Subsidiary Guarantor; provided that contemporaneously with the occurrence of any of the actions permitted to be taken pursuant to clauses (i) – (v) above, the Borrowers shall furnish to the Agent an updated Borrowing Base Certificate.
(e)     Inspection Rights . In addition to the Agent’s rights under Section 6.01(k) hereof, subject to reasonable confidentiality limitations and requirements imposed by Holdings or the Borrowers due to competitive concerns or otherwise, at any reasonable time and from time to time (but no more than twice a year unless a Default or an Event of Default has occurred and is continuing), permit the Agent or any of the Lenders or any agents or representatives thereof, at the Lenders’ expense, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, Holdings, the Borrowers and any of their Subsidiaries, and to discuss the affairs, finances and accounts of Holdings, the Borrowers and any of their Subsidiaries, as the case may be, with any of their officers or directors and with their independent certified public accountants.
(f)     Keeping of Books . Keep proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of Holdings, the Borrowers and each such Subsidiary in accordance with GAAP in effect from time to time.
(g)     Maintenance of Properties, Etc . Except as otherwise permitted pursuant to Section 6.02(b) , or where the failure to do so, either individually or in the aggregate, would not be reasonably expected to have a Material Adverse Effect, maintain and preserve all of its properties that are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted.
(h)     Transactions with Affiliates . Conduct all transactions otherwise permitted under this Agreement with any of their Affiliates on terms that are fair and reasonable and no less favorable to Holdings, the applicable Borrower or their respective Subsidiaries than it would obtain in a comparable arm’s-length transaction with a Person not an Affiliate other than (i) as required by any applicable Requirement of Law, (ii) so long as no Default or Event of Default has occurred and is continuing, transactions between or among the Loan Parties and any of their Subsidiaries, to the extent not prohibited hereunder, or (iii) if a Default or Event of Default has occurred and is continuing, transactions in the ordinary course of business between or among the Loan Parties and any of their Subsidiaries and transactions between or among Loan Parties, to the extent not prohibited hereunder; provided , that the foregoing shall not prohibit (x) any Loan Party or any Subsidiary thereof from entering into employment arrangements with its officers and retention and other agreements with officers and directors pursuant to the reasonable requirements of its business or (y) any transactions in effect on the "Effective Date" (as defined in the Existing Credit Agreement as in effect on the Effective Date).

60



(i)     Further Assurances .
(i)    At all times comply with the further assurances requirements set forth in Section 6.01(i) of the Existing Amended Credit Agreement, and each other further assurance or similar requirement set forth in each other ABL Loan Document, each as in effect on the Amendment No. 1 Effective Date.
(ii)     With respect to any (i) ABL Collateral acquired after the Effective Date by any Group Member that is or is required to become a Loan Party hereunder and (ii) any property required to become subject to a perfected Lien in favor of the Co-Collateral Agents pursuant to the Existing Credit Agreement, promptly (i) execute and deliver to the Co-Collateral Agents such amendments to the Guarantee and Collateral Agreement or such other documents as the Agent may reasonably request in order to grant to the Co-Collateral Agents, for the benefit of the Credit Parties, a security interest in such property and (ii) take all actions as the Agent, may reasonably request to grant to the Co-Collateral Agents, for the benefit of the Credit Parties, a perfected security interest in such property with the priority required herein, including the filing of Uniform Commercial Code financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement or by law or as may be requested by the Agent and the delivery of blocked account and other control agreements as may be reasonably requested by the Agent.
(iii)    With respect to any new Domestic Subsidiary (other than any Credit Card Royalty Securitization Subsidiary) which is created or acquired after the Effective Date by any Group Member and which owns any ABL Collateral, promptly cause such new Domestic Subsidiary to (i) become a party to the Guarantee and Collateral Agreement, (ii) take such actions as the Agent, may reasonably request to grant to the Co-Collateral Agents for the benefit of the Credit Parties a security interest, with the priority and perfection required herein, in the ABL Collateral held by such new Domestic Subsidiary, including, to the extent applicable, the filing of Uniform Commercial Code financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement or by law or as may be reasonably requested by the Agent and the delivery of blocked account and other control agreements, (iii) if requested by the Agent, deliver to the Agent an officer’s certificate with respect to such Domestic Subsidiary in form and substance reasonably satisfactory to the Agent, and (iv) if requested by the Agent, deliver to the Agent legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Agent.
(iv)    In the event the Borrowers or the other Loan Parties open a new deposit account in which funds of any of the Loan Parties are concentrated, or commence concentrating funds in an existing deposit account that is not subject to a control agreement, at the request of the Agent, the Borrowers shall deliver or cause to be delivered to the Co-Collateral Agents with

61



a copy to the Agent a control agreement reasonably satisfactory in form and substance to the Agent with respect to such account.
(v)    In the event that the ABL Collateral owned by Private Brands, Ltd. at any time exceeds $50,000,000, if requested by the Agent, deliver to the Agent legal opinions with respect to perfection of the Co-Collateral Agents’ Liens and such other matters as the Agent may reasonably request, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Agent.
(vi)    As promptly as practicable, and in any event (A) with respect to real property that falls within clause (a) of the definition of Real Estate Collateral, within 30 days after the Effective Date and (B) with respect to any real property that falls within clause (b) of the definition of Real Estate Collateral, 30 days after the date on which such real property becomes subject to a Mortgage securing the December Real Estate Loan, or in each case, such other date as may be reasonably agreed in writing between the Borrowers and the Required L/C Lenders, the Borrowers shall, and shall cause each other Loan Party to (i) deliver Flood Compliance Documents (as applicable) for each Real Estate Collateral in compliance with the Flood Laws, (ii) deliver a title search lien report from a nationally recognized title insurance company for each real property that is Real Estate Collateral, (iii) deliver to a title company reasonably acceptable to the Agent an original fully assembled Mortgage with respect to each real property that is Real Estate Collateral duly executed, acknowledged and witnessed and delivered by the record owner of such real property that is Real Estate Collateral in escrow with the only condition of release to the Agent being notice by the Agent to such title company of the compliance with subsection (i) hereof, (iv) take actions as reasonably requested by the mortgagee or beneficiary under the Mortgage to permit it or its agent to make all appropriate filings in the recording offices in any relevant jurisdictions, such that the Mortgages will constitute a fully perfected second lien, subject to Permitted Liens, security interest in all right, title and interest of the mortgagors in the Real Estate Collateral, including, the payment of funds sufficient to pay applicable mortgage tax or other recording charge or amounts necessary for the recording of the Mortgage, (v) provide confirmation from local counsel or the title insurance company in each jurisdiction that the form of the Mortgage is in a form sufficient for recording in the applicable jurisdiction, and (vi) deliver such other instruments, documents or take other actions to as reasonably requested by the L/C Lenders in connection with the satisfaction of the delivers pursuant to this subsection (vi), provided that, the Required L/C Lenders may waive the requirements of clauses (iii) – (vi) of this Section 6.01(i)(vi) , including the requirement to deliver Mortgages with respect to any Property or all of the Properties upon written notice to the Borrowers (and, for the avoidance of doubt, without requiring the consent or approval of the Agent or Issuing Bank).
(vii)On or prior to the date that a Domestic Subsidiary of Holdings that is not a Loan Party executes and delivers a Mortgage, the Loan Parties shall cause such Domestic Subsidiary to (i) become a Subsidiary G

62



uarantor by completing a guarantee agreement in form and substance reasonably satisfactory to the Agent, (ii) if requested by the Agent or the Required L/C Lenders, deliver to the Agent and/or Required L/C Lenders an officer’s certificate with respect to such Domestic Subsidiary in form and substance reasonably satisfactory to the Agent and Required L/C Lenders, and such other documents that are consistent with those delivered pursuant to Section 4.01, and (iii) if requested by the Agent or Required L/C Lenders, deliver to the Agent and/or Required L/C Lenders legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Agent and Required L/C Lenders.
(j)     Reporting Requirements . Furnish to the Agent:
(i)    as soon as available and in any event within 50 days after the end of each of the first three fiscal quarters of each fiscal year of Holdings, (a) the consolidated balance sheet of Holdings and its Subsidiaries and the consolidated balance sheet of Holdings and its domestic Subsidiaries as of the end of such quarter and consolidated statements of income and cash flows of Holdings and its Subsidiaries and the consolidated statements of income and cash flows of Holdings and its domestic Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, duly certified (subject to year-end audit adjustments) by an Authorized Officer of Holdings as having been prepared in accordance with GAAP and (b) a certificate of an Authorized Officer of Holdings as to compliance with the terms of this Agreement and the other Loan Documents in the form of Exhibit B , including in reasonable detail the calculations necessary to determine the Fixed Charge Ratio (whether or not compliance therewith is then required under Section 6.03 ), provided that in the event of any change in GAAP used in the preparation of such financial statements, subject to Section 1.03 , the Borrowers shall also provide, if necessary for the calculation of the Fixed Charge Ratio, a statement of reconciliation conforming such financial statements to GAAP (the Borrowers being permitted to satisfy the requirements of clause (i)(a) by delivery, in the manner provided in Section 9.02(b) , of its quarterly report on form 10-Q (or any successor form), as filed with the SEC);
(ii)    as soon as available and in any event within 95 days after the end of each fiscal year of Holdings, (a) a copy of the annual audit report for such year for Holdings and its Subsidiaries, containing the consolidated balance sheet of Holdings and its Subsidiaries as of the end of such fiscal year and consolidated statements of income and cash flows of Holdings and its Subsidiaries for such fiscal year, in each case reported on without a “going concern” or like qualification or exception, or qualification arising out of the scope of the audit, by its Board-appointed auditor of national standing (b) a consolidated balance sheet of Holdings and its domestic Subsidiaries as of the end of such fiscal year and consolidated statements of income and cash flows of Holdings and its domestic Subsidiaries for such fiscal year duly certified by an Authorized Officer of Holdings as having been prepared in accordance with GAAP, and (c) a certificate of an Authorized Officer of Holdings as to compliance

63



with the terms of this Agreement and the other Loan Documents in the form of Exhibit B , including in reasonable detail the calculations necessary to determine the Fixed Charge Ratio (whether or not compliance therewith is then required under Section 6.03), provided that in the event of any change in GAAP used in the preparation of such financial statements, the Borrowers shall also provide, if necessary for the calculation of the Fixed Charge Ratio, a statement of reconciliation conforming such financial statements to GAAP (the Borrowers being permitted to satisfy the requirements of clause (ii)(a) by delivery, in the manner provided in Section 9.02(b) , of its annual report on form 10-K (or any successor form), as filed with the SEC);
(iii)    concurrently with the delivery of each Borrowing Base Certificate to the Existing Agent pursuant to the terms of the Existing Credit Agreement (and in any event within 10 Business Days of the end of each fiscal month or, upon the occurrence and during the continuance of an Accelerated Borrowing Base Delivery Event, no later than Friday of each week (or, if Friday is not a Business Day, on the next succeeding Business Day)), a copy of such Borrowing Base Certificate;
(iv)    promptly and in any event within five days after any Authorized Officer of Holdings or any Borrower has knowledge of the occurrence and continuance of a Default or Event of Default, a statement of an Authorized Officer of Holdings or such Borrower setting forth details of such Default or Event of Default and the action that Holdings or such Borrower has taken and proposes to take with respect thereto;
(v)    promptly after the sending or filing thereof, copies of all quarterly and annual reports and proxy solicitations that Holdings sends to its public security holders generally, and copies of all reports on form 8-K (or its equivalent) and registration statements for the public offering (other than pursuant to employee Plans) of securities that Holdings or any of its Subsidiaries files with the SEC or any national securities exchange;
(vi)    promptly after the commencement thereof, notice of all actions and proceedings before any court, governmental agency or arbitrator affecting Holdings, the Borrowers or any of their Subsidiaries of the type described in Section 5.01(g) ;
(vii)as soon as available, but in any event no later than 60 days after the end of each fiscal year of Holdings, forecasts prepared by management of Holdings for Holdings and its domestic Subsidiaries in form satisfactory to the Agent and containing information reasonably required by the Agent;
(viii)(A) contemporaneously with the delivery of the reports required pursuant to clauses (i) and (ii) above, a report (which may take the form of a footnote to Holdings’ quarterly and annual reports filed with the SEC and delivered to the Agent) setting forth the estimated Unfunded Pension L

64



iability of Holdings and its Subsidiaries, and (B) promptly after receipt thereof by the Loan Parties, a copy of the funded status report received from the Loan Parties’ actuaries with respect to amounts to be funded under the Loan Parties’ Pension Plan;
(ix)    promptly, notice of any event that the Loan Parties reasonably believes has resulted in a Material Adverse Effect;
(x)    concurrently with the delivery thereof to the Existing Agent or any Co-Collateral Agent, copies of all reports, certificates, notices and other information delivered to the Existing Agent or any Co-Collateral Agent in connection with the ABL Loan Documents;
(xi)    during the continuance of an Accelerated Borrowing Base Delivery Event, as soon as available and in any event within 30 days after the end of each fiscal month of each fiscal year of Holdings, (a) the consolidated balance sheet of Holdings and its Subsidiaries and the consolidated balance sheet of Holdings and its domestic Subsidiaries as of the end of such month and consolidated statements of income and cash flows of Holdings and its Subsidiaries and the consolidated statements of income and cash flows of Holdings and its domestic Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such month, duly certified (subject to year-end audit adjustments) by an Authorized Officer of Holdings as having been prepared in accordance with GAAP and (b) a certificate of an Authorized Officer of Holdings as to compliance with the terms of this Agreement and the other Loan Documents in the form of Exhibit B , including in reasonable detail the calculations necessary to determine the Fixed Charge Ratio (whether or not compliance therewith is then required under Section 6.03 ), provided that in the event of any change in GAAP used in the preparation of such financial statements, subject to Section 1.03 , the Borrowers shall also provide, if necessary for the calculation of the Fixed Charge Ratio, a statement of reconciliation conforming such financial statements to GAAP; and
(xii)such other information respecting Holdings, the Borrowers or any of their Subsidiaries, or the Borrowing Base as the Agent or any Lender through the Agent may from time to time reasonably request.
Reports and financial statements required to be delivered by the Borrowers pursuant to clauses (i)(a), (ii)(a) and (v) of this subsection (j) shall be deemed to have been delivered on the date on which Holdings causes such reports, or reports containing such financial statements, to be posted on the Internet at www.sec.gov or at such other website identified by the Borrowers in a notice to the Agent and the Lenders and that is accessible by the Lenders without charge.
(k)     Collateral Monitoring and Review . Upon the request of the Required L/C Lenders, after reasonable notice and during normal business hours, permit the Agent or professionals (including, consultants, accountants, and/or appraisers) retained by the Agent to conduct appraisals, commercial finance examinations and other evaluations, including, without limitation, of (i) the Loan Parties’ practices in the computation of the Borrowing Base

65



and (ii) the assets included in the Borrowing Base and financial information such as, but not limited to, sales, gross margins, payables, accruals and reserves, related to the calculation of the Borrowing Base. The Borrowers shall pay the reasonable out-of-pocket fees and expenses of the Agent (including, without limitation, the reasonable charges of professionals) in connection with two inventory appraisals and two commercial finance examinations each fiscal year (which the Agent shall be obligated to undertake for the benefit of the Credit Parties), in each case to the extent requested by the Required L/C Lenders. Notwithstanding the foregoing, the Agent may cause (i) additional appraisals and commercial finance examinations to be undertaken (A) as it in its Permitted Discretion deems necessary or appropriate, at its own expense, and (B) if required by applicable law or if a Default or an Event of Default has occurred and is continuing, in each case, at the expense of the Borrowers. Any inventory appraisal or commercial finance examination requested by the Agent shall be scheduled at such time as the Agent, in consultation with the Borrowers, may agree in order to minimize any disruption to the conduct of the Borrowers’ business.
(l)     Landlord Waivers, Access Agreements and Customs Broker Agreements . At all times comply with the requirements set forth in Section 6.01(l) of the Existing Credit Agreement, and each other similar requirement set forth in each other ABL Loan Document, each as in effect on the Effective Date.
(m)     Cash Management . At all times comply with the cash management requirements set forth in Sections 6.01(i) and (m) of the Existing Credit Agreement, and each other cash management requirement set forth in each other ABL Loan Document, each as in effect on the Effective Date.
(n)     Liens on Non-Collateral Assets . At all times comply with the requirements set forth in Section 6.01(n) of the Existing Credit Agreement, and each other similar requirement set forth in each other ABL Loan Document, each as in effect on the Effective Date.
(o)     Physical Inventories . Cause physical inventories and periodic cycle counts to be undertaken, at the expense of the Loan Parties, in each case consistent with past practices (but in no event less frequently than one physical inventory per fiscal year), conducted by such inventory takers and following such methodology as is consistent with the immediately preceding inventory or as otherwise may be satisfactory to the Agent in its Permitted Discretion. The Agent, at the expense of the Loan Parties, may participate in and/or observe each scheduled physical count of Inventory which is undertaken on behalf of any Loan Party. The Loan Parties, within five (5) days following the completion of any such inventory, shall provide the Agent with a reconciliation of the results of such inventory (as well as of any other physical inventory or cycle counts undertaken by a Loan Party) and shall post such results to the Loan Parties’ stock ledgers and general ledgers, as applicable.
(p)     Obligations and Loan Documents are Bank Products and an Other LC Facility . Ensure that at all times (i) this Agreement, each Letter of Credit, and all Obligations under the Loan Documents are Bank Products and “Bank Products” as defined in the Existing Intercreditor Agreement, (ii) this Agreement and each Letter of Credit is an Other LC Facility, (iii) the Obligations are “Borrower Obligations” and “Guarantor Obligations” as defined in the

66



Guarantee and Collateral Agreement, and (iv) the Obligations are “ABL Obligations” as defined in the Existing Intercreditor Agreement.
Section 6.02     Negative Covenants . So long as any L/C Lender Exposure is outstanding, each of Holdings and the Borrowers will not, and will not permit any of their Subsidiaries to:
(a)     Liens, Etc . Create or suffer to exist any Lien upon property of Holdings, the Borrowers or any Domestic Subsidiary constituting Collateral or any Related Intellectual Property, other than:
(i)    Permitted Liens,
(ii)    the Liens existing on the "Effective Date" (as defined in the Existing Credit Agreement as in effect on the Effective Date) and set forth in the Perfection Certificate,
(iii)    the replacement, extension or renewal of any Lien permitted by clause (ii) above upon or on the same property theretofore subject thereto (and on any additions to any such property and in any property taken in replacement or substitution for any such property), or the replacement, extension or renewal (without increase in the amount) of the Debt secured thereby,
(iv)    to the extent any Liens permitted by clause (ii) above are terminated (and not replaced, extended or renewed in accordance with clause (iii) above), Liens not otherwise permitted by clause (iii) above securing Debt in an amount up to the amount of Debt secured by such terminated Liens; provided that (A) any such Lien (and the Debt secured thereby) shall be incurred no later than ninety (90) days after the termination of the Lien permitted by clause (ii) above, and (B) any such Lien shall be granted on the same property (and on any additions to such property or any property taken by the Loan Parties in replacement or substitution for such property) as the terminated Lien,
(v)    Liens on Related Intellectual Property with Persons that have entered into an agreement, reasonably satisfactory to the Co-Collateral Agents, acknowledging the limited license granted to the Co-Collateral Agents in such trademarks or trade names pursuant to the ABL Loan Documents and agreeing to abide by, and not interfere with, such limited license; and
(vi)    Liens on the Collateral (other than the Real Estate Collateral) to secure (A) the Existing Second Lien Notes, the Existing Second Lien Term Loan and any Permitted Refinancing Debt with respect to either of them and (B) additional Debt of the Borrowers for borrowed money in an aggregate principal amount not to exceed, at any time outstanding, the difference between $2,000,000,000 and the principal amount of Debt outstanding pursuant to the preceding clause (A), provided , that , (1) no Default or Event of Default then exists or would arise from the incurrence of such Debt or the granting of such Lien, (2 ) in the case of clause (B) only, the Pro Forma and Projected Capped Excess Availability is at least 15% of the Line Cap immediately after giving effect

67



to the incurrence of such Debt, (3 ) such Lien shall be subordinate to the Lien of the Co-Collateral Agents and the holder of such Lien shall have entered into an intercreditor agreement substantially in the form of the Existing Intercreditor Agreement, or such other form as the Co-Collateral Agents may reasonably agree, ( 4 3 ) if the Debt secured by such Liens is secured by both Collateral and by property and assets of any Loan Party which do not constitute Collateral, the Co-Collateral Agents shall have obtained a Lien on such property and assets that do not otherwise constitute Collateral to secure the Obligations, subordinate to the Lien of the holder of such Debt pursuant to an intercreditor agreement substantially in the form of the Existing Intercreditor Agreement, or such other form as the Co-Collateral Agents may reasonably agree, and ( 5 4 ) the documentation granting such Lien shall be in form and substance reasonably satisfactory to the Co-Collateral Agents in their Permitted Discretion ; and
(vii) Liens arising under or in connection with a Credit Card Royalty Securitization; provided that any Liens granted by a Loan Party pursuant to this clause (vii) shall be limited to Credit Card Program Assets .
(b)     Fundamental Changes . Merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or substantially all of its assets (in each case, whether now owned or hereafter acquired), or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default or Event of Default shall have occurred and be continuing (i) any Subsidiary of any Borrower may merge into such Borrower in a transaction in which such Borrower is the surviving entity, (ii) any Subsidiary of Holdings may merge into Holdings or any other Subsidiary of Holdings (provided that (A) if Kmart Corp. is a party to such merger, such merger shall be with Holdings, Kmart or a direct Subsidiary of Kmart Corp. and Kmart Corp. shall be the continuing or surviving entity, (B) if any Subsidiary Guarantor is a party to such merger (other than with a Borrower or Holdings), such Subsidiary Guarantor shall be the continuing or surviving entity or the continuing or surviving entity shall become a Subsidiary Guarantor and (C) if SRAC is a party to such merger, then Sears shall comply with the requirements of Section 6.01(d) ), (iii) any Subsidiary of Holdings other than the Borrowers may sell, transfer, lease or otherwise dispose of its assets to any Borrower, to Holdings or to a Subsidiary of Holdings (provided that if such sale or transfer includes Collateral and the transferee is not the Borrower or Holdings, the transferee shall be a Subsidiary Guarantor), (iv) any Subsidiary of Holdings other than the Borrowers or Sears may sell, transfer, lease or otherwise dispose of its assets to a Person that is not a Subsidiary or merge with a Person that is not a Subsidiary, in each case pursuant to a Permitted Disposition, (v) any Subsidiary of Holdings other than the Borrowers, Sears or any Material Subsidiary Guarantor (except, in the case of SRAC, as provided in Section 6.01(d) ) may liquidate or dissolve if Holdings and the Borrowers determine in good faith that such liquidation or dissolution is in the best interests of Holdings, the Borrowers, Sears, the other Material Subsidiary Guarantors and their Subsidiaries and is not disadvantageous in any material respect to Holdings, the Borrowers, Sears, the other Material Subsidiary Guarantors or the Lenders; provided , that a Material Subsidiary Guarantor may liquidate or dissolve into a Person that is a Subsidiary of Holdings immediately prior to such liquidation or dissolution, if the continuing or surviving entity is or shall become a Subsidiary Guarantor in accordance with Section 6.01(i) , and (vi) Holdings or any Subsidiary of Holdings may merge with a Person that is not a Subsidiary of Holdings

68



immediately prior to such merger if, in the case of any merger involving Holdings, a Borrower or a Subsidiary Guarantor, Holdings, such Borrower or such Subsidiary Guarantor, as applicable, is the continuing or surviving entity or, in the case of any merger involving a Subsidiary Guarantor, the continuing or surviving entity shall become a Subsidiary Guarantor in accordance with Section 6.01(i) and (vii) any Credit Card Royalty Securitization Subsidiary may sell or otherwise finance or Dispose of the assets subject to the Credit Card Royalty Securitization ; provided that contemporaneously with (x) the occurrence of any of the actions permitted to be taken pursuant to the foregoing clauses (i) through (vi) of this clause (b) or (y) the consummation of a Credit Card Royalty Securitization , the Borrowers shall furnish to the Agent an updated Borrowing Base Certificate.
(c)     Acquisitions . Make any Acquisition.
(d)     Restricted Payments . Declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, except that (A) Holdings may declare and pay dividends with respect to its equity interests payable solely in additional shares of its common stock, (B) Subsidiaries of Holdings may declare and pay dividends to Holdings, the Borrowers or another wholly owned Subsidiary of any Borrower and (C) non-wholly-owned Subsidiaries may declare and pay dividends to the holders of their equity interests other than a Group Member on a ratable basis.
(e)     Negative Pledge Clauses . Enter into or suffer to exist or become effective any agreement that prohibits or limits the ability of Holdings or any Subsidiary of Holdings to create, incur, assume or suffer to exist any Lien in favor of (i) the Co-Collateral Agents upon the ABL Collateral (including assets which become Collateral pursuant to Section 6.01(n) ) or (ii) the Agent upon the Collateral (other than ABL Collateral), in each case whether now owned or hereafter acquired, other than any agreement relating to any Lien on cash and cash equivalents not prohibited by Section 6.02(a) .
(f)     Clauses Restricting Subsidiary Distributions . Enter into or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Subsidiary of Holdings other than a Loan Party to (a) make Restricted Payments in respect of any equity interests of such Subsidiary held by, or pay any indebtedness owed to, Holdings or any other Subsidiary of Holdings, (b) make loans or advances to, or other investments in, Holdings or any other Subsidiary of Holdings or (c) transfer any of its assets to Holdings or any other Subsidiary of Holdings, except for such encumbrances or restrictions existing under or by reason of (i) any restrictions existing under this Agreement and the other Loan Documents; (ii) any restrictions with respect to a Subsidiary imposed pursuant to an agreement that has been entered into in connection with the disposition of all or any portion of the equity interests or assets of such Subsidiary that is permitted by the terms of this Agreement; (iii) the provisions contained in any agreement governing Debt existing as of the Effective Date (and in any refinancing of such Debt that is permitted by the terms of this Agreement so long as no more restrictive than those contained in the respective agreement governing such existing Debt); (iv) customary provisions restricting subletting or assignment of any lease governing a leasehold interest of any Borrower or a Subsidiary of any Borrower entered into in the ordinary course of business, (v) customary restrictions and conditions contained in the documents relating to any Lien, so long as such Lien is not prohibited hereunder and such restrictions or conditions relate only to the specific asset subject to such Lien; (vi) customary provisions restricting assignment

69



of any contract entered into by any Borrower or any Subsidiary of any Borrower in the ordinary course of business, (vii) any agreement or instrument governing acquired debt, which restriction is not applicable to any Person or the properties or assets of any Person, other than the Person or the properties or assets of the Person acquired pursuant to the respective acquisition and so long as the respective encumbrances or restrictions were not created (or made more restrictive) in connection with or in anticipation of the respective acquisition; (viii) customary provisions restricting the assignment of licensing agreements, management agreements or franchise agreements entered into by any Borrower or any of its Subsidiaries in the ordinary course of business; (ix) restrictions on the transfer of assets securing purchase money obligations and Capital Lease Obligations; (x) customary net worth provisions contained in real property leases entered into by Subsidiaries of any Borrower, so long as the applicable Borrower has determined in good faith that such net worth provisions could not reasonably be expected to impair the ability of the Borrowers and their Subsidiaries to meet their ongoing obligations, (xi) restrictions in respect of the REMIC Certificates and the real property assets related thereto, the Intellectual Property held by KCD IP, LLC and any proceeds of the foregoing, and (xii (xii) restrictions governing a Subsidiary of Holdings in connection with a Credit Card Royalty Securitization and (xiii ) such other restrictions as the Borrowers and the Agent may agree.
(g)     Accounting Changes . Make or permit any change in accounting policies or reporting practices, except as required or permitted by GAAP.
(h)     Collateral Coverage Event . Permit or suffer to exist a Collateral Coverage Event.
(i)     Dispositions . Make any Disposition except Permitted Dispositions.
(j)     Debt; Prepayment of Debt .
(i)    Create, incur, assume, suffer to exist or otherwise become or remain liable with respect to, any Debt, except Permitted Debt; and
(ii)    Prepay any Debt other than (A) ABL Advances (x) ABL Advances or (y) to the extent required to be prepaid pursuant to the terms of the Amended Credit Agreement, other Debt outstanding under the Amended Credit Agreement); provided that any prepayment under this clause (ii)(A)(y) made from Designated Transaction Proceeds shall reduce the capacity under clause (ii)(C) by an equal amount , (B) any other Debt with the proceeds of Permitted Refinancing Debt with respect thereto or (C) in an amount up to the amount of Designated Transaction Proceeds received by the Loan Parties on or after the date hereof in respect of which the L/C Commitments are not automatically reduced in accordance with Section 2.11 . For the avoidance of doubt, the Borrowers shall be required to comply with Section 2.11 notwithstanding any prepayment of Debt using Designated Transaction Proceeds or otherwise.
(k)     Investments . Make any Investments, except Permitted Investments.
(l)     Store Closings . Close more than 250 full line Sears or Kmart Stores in any fiscal quarter or more than 500 full line Sears or Kmart Stores in any four consecutive

70



fiscal quarters without the consent of the Agent, such consent not to be unreasonably withheld and/or fail to comply with the requirements of the definition of Store Closure Sale when and as applicable.
(m)     Existing Credit Agreement and ABL Loan Documents .
(i)    Without the prior written consent of the Issuing Bank, the Agent and the Required L/C Lenders, enter into, request or permit to exist any amendment, restatement, replacement, supplement or other modification to, or waiver of, any provision of any ABL Loan Document, in each case that would (A) increase any advance rate percentage set forth in the definition of “Borrowing Base”, (B) amend, restate, supplement, modify or waive the definition of “Bank Products”, “Other L/C Facility” or Section 6.01(i) or (n) of the Existing Credit Agreement and any related definitions thereto, (C) amend, restate, supplement, modify or waive any provision of the Guaranty and Collateral Agreement, including any definition used therein that is defined by reference to the Existing Credit Agreement, (D) amend, restate, supplement, modify or waive any provision of the Existing Intercreditor Agreement, except in the case of this clause (D) ministerial amendments in connection with the addition or removal of Debt facilities subject thereto, (E) release all or substantially all of the “Collateral” (as defined in the Existing Credit Agreement) or release all or substantially all of the guarantors from their obligations under, or all or substantially all of the value of the guarantees under, the Guarantee and Collateral Agreement, or (F) except as expressly permitted under the Existing Credit Agreement or the “Loan Documents” (as defined in the Existing Credit Agreement), subordinate the Liens granted under the Existing Credit Agreement or under the other “Loan Documents” (as defined in the Existing Credit Agreement), to any other Lien; or amend Section 9.01 of the Existing Credit Agreement;
(ii)    Request any increases to any commitments under, or request that any additional term loans be made pursuant to any ABL Loan Document, otherwise exercise any rights under Section 2.19 of the Existing Credit Agreement, or enter into any agreement the effect of which would increase the commitments under, or result in the incurrence of additional term loans pursuant to, any ABL Loan Document;
(iii)    Request any FILO Facility (as defined in the Existing Credit Agreement), or otherwise exercise any rights under, Section 2.20 of the Existing Credit Agreement, or enter into any agreement the effect of which would establish a FILO Facility, or result in the incurrence of additional loans pursuant to a FILO Facility under any ABL Loan Document;
(iv)    Terminate, refinance in full or replace the Existing Credit Agreement unless the Obligations have been paid in full and the aggregate L/C Lender Exposure is reduced to zero; and

71



(v)    Enter, incur or otherwise become a party to any other Bank Products or Cash Management Services, other than Cash Management Services incurred in the ordinary course of business.
Section 6.03     Financial Covenant . During the continuance of a Covenant Compliance Event, each of Holdings and the Borrowers will not permit the Fixed Charge Ratio as of the last day of any fiscal month of Holdings to be less than 1.0 to 1.0.

ARTICLE VII
EVENTS OF DEFAULT
Section 7.01     Events of Default . If any of the following events (“ Events of Default ”) shall occur and be continuing:
(a)    Any Borrower shall fail to pay (i) any principal of any Reimbursement Obligation when the same becomes due and payable, or (ii) any interest on any Reimbursement Obligation or any fees, or any other amounts payable under this Agreement or any other Loan Document, in each case under this clause (ii), within three (3) days after the same becomes due and payable; provided, that no Event of Default shall occur under this clause (a) , if (i) the Issuing Bank has reimbursed itself using funds on deposit in the Lender Cash Collateral Accounts pursuant to Section 3.04(b) , (ii) there are no drawings that have not either been reimbursed by the Borrowers or by using funds in the Lender Cash Collateral Accounts, and (iii) the obligation to issue additional Letters of Credit has been terminated unless one or more of the L/C Lenders whose cash collateral was so applied shall have notified the Borrowers that it has elected to treat such occurrence as an Event of Default; or
(b)    Any representation or warranty made by any Loan Party herein or in any other Loan Document shall prove to have been incorrect in any material respect when made; or
(c)    (i) Any Loan Party shall fail to perform or observe any term, covenant or agreement contained in Section 2.11 , 3.11 , 3.12 , 6.01(d) , (e) , (h) , (j) (other than 6.01(j)(viii) ), (k) , (m) , or (p) , 6.02 , or 6.03 of this Agreement or (ii) any Loan Party shall fail to perform or observe any other term, covenant or agreement contained in this Agreement or any other Loan Document, if such failure shall remain unremedied for thirty (30) days after written notice thereof shall have been given to Holdings and the Borrowers by the Agent or any Lender; or
(d)    Any Group Member shall fail to pay principal under the Existing Credit Agreement or of at least $50,000,000 on any other Debt that is outstanding (but excluding Debt outstanding hereunder) when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and, other than with respect to the ABL Loan Documents, such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other event shall occur or condition shall exist under any ABL Loan Document, or any other agreement or instrument relating to any other Debt that is outstanding in a principal amount of at least $50,000,000, and shall continue after the applicable grace period, if any, specified in such ABL Loan Document or

72



such other agreement or instrument, if the effect of such event or condition is to accelerate the maturity of or terminate the commitments in respect of the Debt under the ABL Loan Documents or such other Debt; or the Debt under the Existing Credit Agreement or any other such Debt shall be declared to be due and payable, or required to be prepaid or redeemed, purchased or defeased, or an offer to prepay, redeem, purchase or defease such Debt shall be required to be made and is accepted in an amount of (other than in the case of Debt under the Existing Credit Agreement) at least $50,000,000 (in each case other than (i) a scheduled prepayment, redemption or purchase, or (ii) a mandatory prepayment, redemption or purchase, or a required offer to prepay, redeem or purchase, that results from the voluntary sale or transfer of property or assets), in each case prior to the stated maturity thereof; or
(e)    Any Group Member shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against any Group Member seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 90 days, or any of the actions sought in such proceeding (including the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur; or any Group Member shall take any corporate action to authorize any of the actions set forth above in this subsection (e); or
(f)    A judgment or order for the payment of money in excess of $50,000,000 (net of any portion of such judgment to be paid by a third-party insurer as to which coverage has not been disputed) shall be rendered against any Group Member and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or
(g)    (i) Any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its Subsidiaries, and any Person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) other than a Permitted Holder becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have “beneficial ownership” of all securities that such person or group has the right to acquire (such right, an “option right”), whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 35% or more of the equity securities of Holdings entitled to vote for members of the Board of Directors of Holdings on a fully-diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right) and such “person” or “group” shall beneficially own (as such term is used herein) a greater percentage of the equity Securities of Holdings entitled to vote for members of the Board of Directors than the Permitted Holders shall, collectively, beneficially own; or (ii) during any period of 12 consecutive months, a majority of the members of the Board of Directors or other

73



equivalent governing body of Holdings cease to be composed of individuals (x) who were members of that board or equivalent governing body on the first day of such period, (y) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (x) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (z) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (x) and (y) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body; or (iii) Holdings shall cease for any reason to own, directly or indirectly, 100% of the Voting Stock of Sears and Kmart; or
(h)    (i) Any Borrower or any of its ERISA Affiliates shall incur, or shall be reasonably likely to incur liability in excess of $100,000,000 in the aggregate as a result of one or more of the following: (i) the occurrence of any ERISA Event; (ii) the partial or complete withdrawal of such Borrower or any of its ERISA Affiliates from a Multiemployer Plan; or (iii) the reorganization or termination of a Multiemployer Plan; or (iv) the PBGC shall have filed a notice of Lien; or
(i)    Any of the Security Documents shall cease, for any reason, to be in full force and effect, or any Loan Party shall so state in writing, or any Lien created by any of the Security Documents shall cease to be enforceable and of the same effect and priority purported to be created thereby, including as a result of the failure to comply with Section 5.4 of the Guarantee and Collateral Agreement; or
(j)    The guarantee contained in Section 2 of the Guarantee and Collateral Agreement shall cease, for any reason, to be in full force and effect or any Loan Party shall so state in writing;
then, and in any such event, the Agent, at the request of the Required L/C Lenders shall, take any or all of the following actions upon notice to the Borrowers: (i) declare the L/C Commitment of each L/C Lender and the commitment of the Issuing Bank to issue Letters of Credit hereunder to be terminated, whereupon the same shall forthwith terminate; and (ii) declare all amounts payable under this Agreement and the other Loan Documents (including all amounts of the L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) to be forthwith due and payable, whereupon all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrowers; provided , however , that in the event of an actual or deemed entry of an order for relief with respect to any Loan Party under the United States Bankruptcy Code or any other Event of Default under Section 7.01(e) , (A) the L/C Commitment of each Lender shall automatically be terminated and (B) all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrowers.
With respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to this paragraph or for which the outstanding amount of any drawing under any Letters of Credit (including any taxes, fees, charges and other costs and expenses incurred by the Issuing Bank in connection therewith) have not then been fully reimbursed or discharged by the Borrowers pursuant to Section 3.05 , the Borrowers shall at

74



such time deposit in a cash collateral account maintained by the Agent, an amount equal to 102% of the L/C Obligations with respect to all such Letters of Credit and all other Reimbursement Obligations. Amounts held in such cash collateral account shall be applied by the Agent to the payment of drafts drawn under such Letters of Credit and the other Reimbursement Obligations, and the unused portion thereof after all such Letters of Credit shall have expired or been fully drawn upon and all Reimbursement Obligations fully reimbursed or discharged, if any, shall be applied to repay other Obligations hereunder and under the other Loan Documents. After all such Letters of Credit shall have expired or been fully drawn upon, all Reimbursement Obligations shall have been satisfied and all other Obligations hereunder and under the other Loan Documents shall have been paid in full, the balance, if any, in such cash collateral account shall be returned to the Borrowers (or such other Person as may be lawfully entitled thereto).

ARTICLE VIII
THE AGENT
Section 8.01     Appointment . Each Lender hereby irrevocably designates and appoints Bank as Agent under this Agreement and the other Loan Documents, and each such Lender irrevocably authorizes the Agent to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. For clarity, and notwithstanding anything to the contrary contained in this Agreement and the other Loan Documents, no consent of the Lenders shall be required to amend this Agreement or the Loan Documents to (i) cause additional assets to become Collateral or to add additional Subsidiaries as guarantors of the Obligations, or (ii) implement the provisions of Section 8.12 , and the Agent and the Loan Parties shall be entitled to execute any and all amendments necessary or desirable to accomplish any of the foregoing and such amendments shall be binding on the other parties hereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Agent shall not have any duties or responsibilities, except those expressly set forth in this Agreement and the other Loan Documents to which it is a party, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent.
Section 8.02     Delegation of Duties . Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care.
Section 8.03     Exculpatory Provisions . No Agent (for purposes of this Article VIII , “ Agent ” and “ Agents ” shall mean the collective reference to the Agent and any other Lender designated as an “Agent” for purposes of this Agreement, including any lead arrangers, syndication agent or documentation agent) nor any of their respective officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except to the extent that any of the foregoing are found by a final and

75



non-appealable decision of a court of competent jurisdiction to have resulted from its or such Person’s own gross negligence or willful misconduct); or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by any Loan Party or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Agents under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of any Loan Party that is a party thereto to perform its obligations hereunder or thereunder; provided that the Agent will not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Agent to liability or that is contrary to any Loan Document or any Requirement of Law, including for the avoidance of doubt, any action that may be in violation of the automatic stay under any Debtor Relief Law. The Agents shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of any Loan Party.
Section 8.04     Reliance by Agent . The Agent shall be entitled to rely, and shall be fully protected in relying, upon any instrument, writing, resolution, notice, consent, certificate, affidavit, letter, facsimile, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including counsel to Holdings or the Borrowers), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless they shall first receive such advice or concurrence of the Required L/C Lenders as they deem appropriate or they shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense that may be incurred by them by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required L/C Lenders (or, if so specified by this Agreement, all Lenders), and such request and any action taken or failure to act pursuant thereto shall be binding upon all present and future L/C Lenders and all future holders of the Reimbursement Obligations.
Section 8.05     Notice of Default . The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default unless the Agent has received notice from a Lender, Holdings or a Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a “notice of default”. In the event that the Agent receives such a notice, the Agent shall give notice thereof to the Lenders. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required L/C Lenders (or, if so specified by this Agreement, all Lenders); provided that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders.
Section 8.06     Non-Reliance on Agent and Other Lenders . Each Lender expressly acknowledges that neither the Agent nor any of its respective officers, directors, employees,

76



agents, attorneys-in-fact or affiliates have made any representations or warranties to it and that no act by the Agent hereafter taken, including any review of the affairs of a Loan Party or any affiliate of a Loan Party, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Loan Parties and their affiliates and made its own decision enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Loan Parties and their Affiliates. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of any Loan Party or any Affiliate of a Loan Party that may come into the possession of the Agent or any of their respective officers, directors, employees, agents, attorneys-in-fact or affiliates.
Section 8.07     Reports and Financial Statements . By signing this Agreement, each Lender:
(a)    is deemed to have requested that the Agent furnish such Lender, promptly after they become available, copies of all financial statements and reports required to be delivered by the Loan Parties hereunder and all commercial finance examinations and appraisals of the Collateral received by the Agent (collectively, the “ Reports ”);
(b)    expressly agrees and acknowledges that the Agent makes no representation or warranty as to the accuracy of the Reports, and shall not be liable for any information contained in any Report;
(c)    expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that the Agent or any other party performing any audit or examination will inspect only specific information regarding the Loan Parties and will rely significantly upon the Loan Parties’ books and records, as well as on representations of the Loan Parties’ personnel;
(d)    agrees to keep all Reports confidential in accordance with the provisions of this Agreement; and
(e)    without limiting the generality of any other indemnification provision contained in this Agreement, agrees: (i) to hold the Agent and any such other Lender or Person preparing a Report harmless from any action the indemnifying Lender may take or conclusion the indemnifying Lender may reach or draw from any Report in connection with any credit extensions that the indemnifying Lender has made or may make to the Borrowers, or the indemnifying Lender’s participation in any Letter of Credit, or the indemnifying Lender’s

77



purchase of, a Reimbursement Obligation; and (ii) to pay and protect, and indemnify, defend, and hold the Agent and any such other Lender or Person preparing a Report harmless from and against, the claims, actions, proceedings, damages, costs, expenses, and other amounts (including reasonable attorney costs) incurred by the Agent and any such other Lender or Person preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Lender.
Section 8.08     Indemnification . The Lenders agree to indemnify the Agent in its capacity as such (to the extent not reimbursed by Holdings or the Borrowers and without limiting the obligation of Holdings or the Borrowers to do so), ratably according to their respective L/C Commitment Percentages in effect on the date on which indemnification is sought under this Section (or, if indemnification is sought after the date upon which the L/C Commitments of any L/C Lender shall have terminated, in accordance with such L/C Commitment Percentages immediately prior to such date), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever that may at any time (whether before or after the payment Reimbursement Obligations) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of, the L/C Commitments, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements that are found by a final and non-appealable decision of a court of competent jurisdiction to have resulted from the Agent’s gross negligence or willful misconduct. The agreements in this Section shall survive the payment of the Obligations and all other amounts payable under the Loan Documents.
Section 8.09     Agent in Its Individual Capacity . The Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with any Loan Party as though the Agent were not an Agent. With respect to any Letter of Credit issued or participated in by it, the Agent shall have the same rights and powers under this Agreement and the other Loan Documents as the Issuing Bank or L/C Lender, as applicable, and may exercise the same as though it were not an Agent, and the terms “Issuing Bank”, “Lender” and “Lenders” shall include the Agent in its individual capacity.
Section 8.10     Successor Agent .
(a)    The Agent may resign as Agent upon 30 days’ notice to the Lenders and the Borrowers. If the Agent shall resign as Agent under this Agreement and the other Loan Documents, then the Required L/C Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent shall (unless an Event of Default shall have occurred and be continuing) be subject to approval by the Borrowers (which approval shall not be unreasonably withheld or delayed). If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Required L/C Lenders and the Borrowers (unless an Event of Default shall have occurred and be continuing), a successor agent from among the Lenders. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to the rights, powers and duties of the Agent, and the term “Agent” shall mean such successor agent effective upon such appointment and

78



approval, and the former Agent’s rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any holders of Reimbursement Obligations. If no successor agent has accepted appointment as Agent by the date that is 30 days following a retiring Agent’s notice of resignation, the retiring Agent’s resignation shall nevertheless thereupon become effective, and the Lenders shall assume and perform all of the duties of the Agent hereunder, until such time, if any, as the Required L/C Lenders appoint a successor agent as provided for above. After any retiring Agent’s resignation as Agent, the provisions of this Article VIII and Sections 9.04 , 9.09 , 9.11 and 9.12 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement and the other Loan Documents.
Section 8.11     [ Reserved ].
Section 8.12     [Reserved] .


ARTICLE IX
MISCELLANEOUS
Section 9.01     Amendments, Etc . No amendment or waiver of any provision of this Agreement or any other Loan Document, nor consent to any departure by any Borrower or any Loan Party therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required L/C Lenders (or by the Agent with the approval of the Required L/C Lenders), and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided , however , that no amendment, waiver or consent shall:
(a)    unless in writing and also signed by each L/C Lender directly affected thereby, do any of the following:
(i)    increase the amount or extend the expiration date of any L/C Lender’s Commitment;
(ii)    reduce the principal of, or interest on the Reimbursement Obligations, the amounts deposited in any Lender Cash Collateral Account, or any fees or other amounts payable hereunder; or
(iii)    postpone any date fixed for any payment of principal of, or interest on, the Reimbursement Obligations or Cash Collateralization of the L/C Lender Exposure, Issuer Exposure, L/C Obligations or any fees or other amounts payable hereunder, provided that this clause (iii) shall not apply to a waiver or amendment of the terms of Section 2.11 hereof;
(b)    unless in writing and signed by all of the Lenders, do any of the following:

79



(i)    change the percentage of the L/C Commitments, L/C Extensions of Credit or of the aggregate unpaid principal amount of the Reimbursement Obligations or the number of Lenders, that shall be required for the Lenders or any of them to take any action hereunder;
(ii)    other than in accordance with Section 9.13 , release all or substantially all of the Collateral (other than the Real Estate Collateral, which may be released upon the sole consent of the Required L/C Lenders at the request of the Borrowers or pursuant to Section 9.13(c) ) or release all or substantially all of the guarantors from their obligations under, or all or substantially all of the value of the guarantees under, the Guarantee and Collateral Agreement;
(iii)    except as expressly permitted herein or in any other Loan Document, subordinate the Liens granted hereunder or under the other Loan Documents (other than Liens in respect of the Real Estate Collateral), to any other Lien;
(iv)    amend this Section 9.01 ;
(v)    amend the definition of “Required L/C Lenders”; or
(vi)    other than in accordance with Section 6.01(d) , release either Borrower from all of its obligations hereunder;
(c)     [reserved];
(d)    unless in writing and signed by the Agent (in addition to the Lenders required above to take such action), amend, modify or waive any provision of Article VIII or affect the rights or duties of the Agent under this Agreement or any other Loan Document;
(e)    [reserved];
(f)    unless in writing and signed by the Issuing Bank (in addition to the L/C Lenders required above to take such action):
(i)    amend, modify or waive, Section 2.12 , Section 2.14 , Section 2.15 (other than where such proposed amendment or waiver applies only to an L/C Lender(s) and does not apply to or adversely affect the Issuing Bank), Section 2.17 , Section 4.01 , Section 4.02 , or any provision of Article III (or amend, modify or waive any defined term as such term is used in such Section or Article),
(ii)    amend, modify or waive any provision of Article V , Article VI or Article VII (or amend, modify or waive any defined term as such term is used in such Article) if the effect of such amendment, modification or waiver would result, directly or indirectly, in:

80



(1)    to the extent such amendment, modification or waiver has a comparable provision in the Existing Credit Agreement, the representations, warranties, covenants or Events of Default herein being less restrictive on the Borrowers than the comparable provision, if any, in the Existing Credit Agreement (after giving effect to any such amendment, modification or waiver in the Existing Credit Agreement after the Effective Date); or
(2)    to the extent such amendment, modification or waiver has a comparable provision in the Existing Credit Agreement, a waiver or elimination of an Event of Default hereunder unless the comparable "Event of Default" (as defined in the Existing Credit Agreement) has been waived or eliminated under the Existing Credit Agreement (after giving effect to any such amendment, modification or waiver in the Existing Credit Agreement after the Effective Date); or
(3)    a waiver of any Event of Default resulting, directly or indirectly, from the failure of the Borrowers to make any payment due under Article III or to make any other payment due to the Issuing Bank or Agent hereunder; provided that, notwithstanding the foregoing provisions of this clause, the Required L/C Lenders may waive any Event of Default due to the failure of the Borrowers to make payments to the Issuing Bank if both (x) the Issuing Bank has been reimbursed for all outstanding drawings by either the Borrowers or use of cash collateral provided by the L/C Lenders and (y) there are no outstanding Letters of Credit that is not backstopped by a Satisfactory Letter of Credit;
(g)    amend, modify or waive any provision of this Article IX (or defined terms used herein) in a manner adverse to the Issuing Bank, unless in writing and signed by the Issuing Bank;
(h)    amend, modify or waive any provision expressly requiring the Issuing Bank’s consent hereunder without consent of the Issuing Bank; or
(i)    amend, modify or waive any provision if the effect is to permit Mortgages to be delivered, accepted or released from escrow prior to the satisfaction of the Flood Compliance Documents unless consented to in writing by the Issuing Bank and the Agent.
Section 9.02     Notices, Etc .
(a)    All notices and other communications provided for hereunder shall be in writing (including facsimile communication) and mailed, faxed or delivered, (i) if to Holdings, any Borrower or any Subsidiary Guarantor, at its address at 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; (ii) if to any Lender, at its address set forth in its completed administrative questionnaire delivered to the Agent; (iii) if to the Agent, at its address at Citibank, N.A., 390 Greenwich Street, 1 st Floor, New York, NY 10013, Attention: David L. Smith, with a copy to Skadden, Arps, Slate, Meagher & Flom LLP, 155 N Wacker Dr., Suite 2800, Chicago, IL 60606, Attention: Seth Jacobson and (iv) if to the Issuing Bank, Citibank, N.A., 390 Greenwich Street, 1 st Floor, New York, NY

81



10013, Attention: David L. Smith, with a copy to Skadden, Arps, Slate, Meagher & Flom LLP, 155 N Wacker Dr., Suite 2800, Chicago, IL 60606, Attention: Seth Jacobson and (v) as to each other party, at such other address as shall be designated by such party in a written notice to the Borrowers, the Agent and the Issuing Bank; provided that notices required to be delivered pursuant to Section 6.01(j)(i) , (ii) , (iii) , and (v) shall be delivered to the Agent and the Lenders as specified in Section 9.02(b) . All such notices and communications shall, when mailed, faxed, telegraphed or emailed, be effective when deposited in the mails, faxed, delivered to the telegraph company or confirmed by email, respectively, except that notices and communications to the Agent pursuant to Article II , III or VIII shall not be effective until received by the Agent. Delivery by facsimile of an executed counterpart of any amendment or waiver of any provision of this Agreement or any Loan Document or of any exhibit hereto or thereto to be executed and delivered hereunder shall be effective as delivery of a manually executed counterpart thereof.
(b)    Holdings and the Borrowers agree that materials required to be delivered pursuant to Sections 6.01(j)(i) , (ii) , (iii) and (v) , shall be deemed delivered to the Agent (solely to the extent such reports and financial statements comply with the requirements of Sections 6.01(j)(i) , (ii) , (iii) and (v) , as applicable) on the date on which Holdings causes such reports, or reports containing such financial statements, to be posted on the Internet at www.sec.gov or at such other website identified by the Borrowers in a written notice to the Agent and the Lenders and that is accessible by the Lenders without charge or if not so posted, may be delivered to the Agent in an electronic medium in a format acceptable to the Agent by email to david.l2.smith@citi.com. Holdings and the Borrowers agree that the Agent may make such materials, as well as any other written information, documents, instruments and other material relating to Holdings, the Borrowers, any of their Subsidiaries or any other materials or matters relating to this Agreement, the Loan Documents or any of the transactions contemplated hereby (collectively, the “ Communications ”) available to the Lenders by posting such notices on Intralinks or a substantially similar electronic system (the “ Platform ”). Holdings and the Borrowers acknowledge that (i) the distribution of material through an electronic medium is not necessarily secure and that there are confidentiality and other risks associated with such distribution, (ii) the Platform is provided “as is” and “as available” and (iii) neither the Agent nor any of its Affiliates warrants the accuracy, adequacy or completeness of the Communications or the Platform and each expressly disclaims liability for errors or omissions in the Communications or the Platform. No warranty of any kind, express, implied or statutory, including any warranty of merchantability, fitness for a particular purpose, non-infringement of third party rights or freedom from viruses or other code defects, is made by the Agent or any of its Affiliates in connection with the Platform.
(c)    Each Lender agrees that notice to it (as provided in the next sentence) (a “ Notice ”) specifying that any Communications have been posted to the Platform shall constitute effective delivery of such information, documents or other materials to such Lender for purposes of this Agreement; provided that if requested by any Lender the Agent shall deliver a copy of the Communications to such Lender by email or facsimile. Each Lender agrees (i) to notify the Agent in writing of such Lender’s e-mail address to which a Notice may be sent by electronic transmission (including by electronic communication) on or before the date such Lender becomes a party to this Agreement (and from time to time thereafter to ensure that the Agent has on record an effective e-mail address for such Lender) and (ii) that any Notice may be sent to such e-mail address.

82



Section 9.03     No Waiver; Remedies . No failure on the part of any Lender or the Agent to exercise, and no delay in exercising, any right hereunder or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.

83




Section 9.04     Costs and Expenses .
(a)    Holdings and the Borrowers jointly and severally agree to pay promptly all reasonable costs and expenses of the Agent, the Collateral Agent (as defined in the Cash Collateral Agreement), and the Lenders in connection with the preparation, execution, delivery, distribution (including via the internet or through a service such as Intralinks), administration, modification and amendment of this Agreement, the other Loan Documents and the other documents to be delivered hereunder, including, (A) all due diligence (including diligence with respect to the Collateral and in connection with real property surveys, appraisals, flood diligence, and title work), syndication (including printing, distribution and bank meetings), transportation, computer, duplication, appraisal, consultant, and audit expenses, (B) subject to Section 6.01(k) , all expenses incurred in connection with inspections, verifications, examinations and appraisals relating to the Borrowing Base and the Collateral, and (C) the reasonable fees and expenses of counsel for the Agent, the Collateral Agent, and the Lenders with respect thereto and with respect to advising the Agent, the Collateral Agent, and the Lenders as to its rights and responsibilities under this Agreement, the Cash Collateral Agreement and the other Loan Documents, including, without limitation, the fees and expenses set forth in the Fee Letter. Holdings and the Borrowers further jointly and severally agree to pay on demand all costs and expenses of the Agent, the Collateral Agent, and the Lenders, if any (including reasonable counsel fees and expenses), in connection with the enforcement of, or protection of their rights under, (whether through negotiations, legal proceedings or otherwise) this Agreement, the Cash Collateral Agreement, the other Loan Documents and the other documents to be delivered hereunder, including reasonable fees and expenses of one counsel for the Agent, one counsel for the Collateral Agent, and one counsel for the Lenders in connection with the enforcement of or protection rights under this Section 9.04(a) .
(b)    Holdings and the Borrowers jointly and severally agree to indemnify and hold harmless the Agent, the Collateral Agent, each Lender and each of their Affiliates and their officers, directors, employees, agents and advisors (each, an “ Indemnified Party ”) from and against any and all claims, damages, losses, liabilities and expenses (including reasonable fees and expenses of counsel) incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of (including in connection with any investigation, litigation or proceeding or preparation of a defense in connection therewith) (i) this Agreement, the other Loan Documents, any of the transactions contemplated herein or therein or the actual or proposed use of the Letters of Credit, and (ii) the actual or alleged presence of Hazardous Materials on any property of Holdings, the Borrowers or any of their Subsidiaries or any Environmental Action relating in any way to Holdings, the Borrowers or any of their Subsidiaries, except to the extent such claim, damage, loss, liability or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party’s gross negligence or willful misconduct. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 9.04(b) applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by Holdings, any Borrower, its directors, equityholders or creditors or an Indemnified Party or any other Person, whether or not any Indemnified Party is otherwise a party thereto and whether or not the transactions contemplated hereby are consummated. Holdings and the Borrowers also agree not to assert any claim for special, indirect, consequential or punitive damages against the

84



Agent, any Lender, any of their Affiliates, or any of their respective directors, officers, employees, attorneys and agents, on any theory of liability, arising out of or otherwise relating to this Agreement, the other Loan Documents, any of the transactions contemplated herein or the actual or proposed use of the Letters of Credit.
(c)    [Reserved].
(d)    Without prejudice to the survival of any other agreement of Holdings or any Borrower hereunder, the agreements and obligations of Holdings and the Borrowers contained in Sections 2.12 , 2.15 and 9.04 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the other Loan Documents.
Section 9.05     Right of Set-off . Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 7.01 , if applicable, to authorize the Agent to declare the L/C Obligations due and payable pursuant to the provisions of Section 7.01 , each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender or such Affiliate to or for the credit or the account of Holdings or any Loan Party against any and all of the obligations of Holdings and the Loan Parties now or hereafter existing under this Agreement, the other Loan Documents and the L/C Obligations of such Lender, whether or not such Lender shall have made any demand under this Agreement or the other Loan Documents. Each Lender agrees promptly to notify Holdings or the applicable Loan Party (with a copy to the Agent) after any such set-off and application; provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender and its Affiliate under this Section are in addition to other rights and remedies (including other rights of set-off) that such Lender and its Affiliate may have.
Section 9.06     Binding Effect; Effectiveness . When this Agreement has been executed by Holdings, the Borrowers, the Agent, and the Lenders, this Agreement shall thereafter be binding upon and inure to the benefit of Holdings, the Borrowers, the Agent, the Issuing Bank, each Lender and their respective successors and assigns; provided , that, except with respect to Sections 9.07 and 9.08 , this Agreement shall only become effective upon satisfaction of the conditions precedent set forth in Section 4.01 and none of the provisions of this Agreement, including without limitation provisions in respect of Letters of Credit to be made by or issued by the Issuing Bank, and in respect of any covenant, fee, indemnity, default, and expense reimbursement made by any Loan Party or for which any Loan Party is liable hereunder, shall become effective, nor shall any representation herein be deemed to be made, until the satisfaction of such conditions.
Section 9.07     Assignments and Participations .
(a)    Each L/C Lender may, upon notice to the Borrowers and the Agent and with the consent, not to be unreasonably withheld or delayed, of the Agent and the Issuing Bank and, unless an Event of Default has occurred and is continuing, the Borrowers, assign to one or more Persons all or a portion of its rights and obligations under this Agreement (including all or a portion of its L/C Commitment and other amounts owing to it); provided , however , that

85



(i) such assignee shall have deposited in the Lender Cash Collateral Account of such assignee an amount equal to 102% of any L/C Commitment assigned to it; (ii) [reserved], (iii) [reserved], (iv) except in the case of an assignment to a Person that, immediately prior to such assignment, was an L/C Lender, an Affiliate of an L/C Lender or an Approved Fund or an assignment of all of an L/C Lender’s rights and obligations under this Agreement, the amount of the L/C Commitment of the assigning L/C Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $10,000,000 (unless an Event of Default has occurred and is continuing, in which case not less than $5,000,000) or an integral multiple of $1,000,000 in excess thereof unless the Agent and the Borrowers otherwise agree, (v) each such assignment shall be to an Eligible Assignee, (vi) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, and the parties to such assignment (other than the Agent) shall deliver a processing and recordation fee of $3,500 (except no such fee shall be payable for assignments to an L/C Lender, an Affiliate of an L/C Lender or an Approved Fund), and (vii) any L/C Lender may assign all or a portion of its rights and obligations to any of its Affiliates or to another L/C Lender. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of an L/C Lender hereunder and (y) the L/C Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (other than its rights under Section 2.12 , 2.15 and 9.04 to the extent any claim thereunder relates to an event arising prior such assignment) and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning L/C Lender’s rights and obligations under this Agreement, such L/C Lender shall cease to be a party hereto).
(b)    [Reserved].
(c)    By executing and delivering an Assignment and Acceptance, the L/C Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, Section 5.02 hereof or in the Cash Collateral Agreement, such assigning L/C Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the other Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto; (ii) such assigning L/C Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Loan Parties or the performance or observance by the Borrowers of any of their obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 6.01(j) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such assigning L/C Lender or any other L/C Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in

86



taking or not taking action under this Agreement and the other Loan Documents; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement and the other Loan Documents as are delegated to the Agent by the terms hereof and thereof, together with such powers and discretion as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as an L/C Lender.
(d)    Upon its receipt of an Assignment and Acceptance executed by an assigning L/C Lender and an assignee representing that it is an Eligible Assignee, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit A hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrowers.
(e)    The Agent, acting solely for this purpose as a non-fiduciary agent of the Borrowers, shall maintain at its address referred to in Section 9.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the L/C Lenders and the L/C Commitment of, and principal amount (and stated interest) of the L/C Obligations owing to, each L/C Lender from time to time, and the account party, beneficiary, amount, expiration date, and other economic terms of each Letter of Credit issued hereunder (the “ Register ”). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrowers, the Agent and the L/C Lenders may treat each Person whose name is recorded in the Register as an L/C Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrowers or any Lender at any reasonable time and from time to time upon reasonable prior notice.
(f)    Each L/C Lender may, without the consent of the Agent or any Loan Party, sell participations to one or more banks or other entities (other than Holdings or any of its Subsidiaries) in or to all or a portion of its rights and obligations under this Agreement (including all or a portion of its L/C Commitment); provided , however , that (i) such L/C Lender’s obligations under this Agreement (including its L/C Commitment to the Borrowers and its obligations to the Issuing Bank hereunder) shall remain unchanged, (ii) such L/C Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) [reserved], (iv) the Borrowers, the Agent and the other Lenders shall continue to deal solely and directly with such L/C Lender in connection with such L/C Lender’s rights and obligations under this Agreement, and (v) no participant under any such participation shall have any right to approve any amendment or waiver of any provision of this Agreement or any Loan Document, or consent to any departure by any Borrower therefrom, except to the extent that such amendment, waiver or consent would require the affirmative vote of the L/C Lender from which it purchased its participation pursuant to Section 9.01(a) . Each L/C Lender that sells a participation shall, acting solely for this purpose as a non-fiduciary agent of the Borrowers, maintain a register on which it enters the name and address of each participant and the principal amounts (and stated interest) of each participant’s interest in the L/C Commitment, L/C Obligation or other obligations under the Loan Documents (the “Participant Register”); provided that no L/C Lender shall have any obligation to disclose all or any portion of the Participant Register (including the identity of any participant or any information relating to a participant's interest in any L/C Commitment, L/C Obligation or other obligations under the Loan Documents) to any Person except to the extent that such disclosure is necessary to establish that such L/C/ Commitment, L/C Obligation or other obligation under the Loan Documents is in

87



registered form under Section 5f.103-1(c) of the United States Treasury Regulations. The entries in the Participant Register shall be conclusive absent manifest error, and such L/C Lender shall treat each Person whose name is recorded in the Participant Register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary. For the avoidance of doubt, the Agent (in its capacity as Agent) shall have no responsibility for maintaining a Participant Register.
(g)    Any L/C Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 9.07 , disclose to the assignee or participant or proposed assignee or participant, any information relating to Holdings, the Borrowers or their Subsidiaries furnished to such L/C Lender by or on behalf of the Borrowers; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any Borrower Information relating to Holdings, the Borrowers or their Subsidiaries received by it from such L/C Lender in accordance with Section 9.08 .
(h)    Notwithstanding any other provision set forth in this Agreement, any L/C Lender may at any time (i) create a security interest in all or any portion of its rights under this Agreement, including, without limitation, in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System and (ii) assign to one or more special purpose funding vehicles (each, an “ SPV ”) all or any portion of its funded L/C Obligations (without the corresponding L/C Commitment), without the consent of any Person or the payment of a fee, by execution of a written assignment agreement in a form agreed to by such L/C Lender and such SPV, and may grant any such SPV the option, in such SPV’s sole discretion, to provide the Borrowers all or any part of any L/C Obligation that such L/C Lender would otherwise be obligated to fund pursuant to this Agreement. Such SPVs shall have all the rights which a L/C Lender making or holding such L/C Obligations would have under this Agreement, but no obligations; provided , that no SPV shall be entitled to compensation pursuant to Section 2.12 or 2.15 in excess of that to which the applicable L/C Lender would otherwise have been entitled. The L/C Lender shall remain liable for all its original obligations under this Agreement, including its L/C Commitment (although the unused portion thereof shall be reduced by the principal amount of any L/C Obligations held by an SPV). Notwithstanding such assignment, the Agent and Borrowers may deliver notices to the L/C Lender (as agent for the SPV) and not separately to the SPV unless the Agent and Borrowers are requested in writing by the SPV (or its agent) to deliver such notices separately to it.
(i)    [Reserved].
(j)    Neither Holdings nor any Borrower shall have the right to assign its rights hereunder or any interest herein without the prior written consent of the Agent and each of the Lenders (except, in the case of SRAC, pursuant to Section 6.01(d) ).
Section 9.08     Confidentiality . Neither the Agent nor any Lender may disclose to any Person any confidential, proprietary or non-public information of Holdings or the Borrowers furnished to the Agent or the Lenders by Holdings or the Borrowers (such information being referred to collectively herein as the “ Borrower Information ”), except that each of the Agent and each of the Lenders may disclose Borrower Information (i) to its and its Affiliates’ employees, officers, directors, agents and advisors to whom disclosure is required to enable the Agent or

88



such Lender to perform its obligations under this Agreement and the other Loan Documents or in connection with the administration or monitoring of this Agreement and the other Loan Documents by the Agent or such Lender (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Borrower Information and instructed to keep such Borrower Information confidential on substantially the same terms as provided herein), (ii) to the extent requested by any regulatory authority, (iii) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (iv) to any other party to this Agreement and the other Loan Documents, (v) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement and the other Loan Documents or the enforcement of rights hereunder or thereunder, (vi) subject to an agreement containing provisions substantially the same as those of this Section 9.08 , to any assignee or participant, or any prospective assignee or participant, (vii) to the extent such Borrower Information (A) is or becomes generally available to the public on a non-confidential basis other than as a result of a breach of this Section 9.08 by the Agent or such Lender, as the case may be, or (B) is or becomes available to the Agent or such Lender on a non-confidential basis from a source other than Holdings, the Borrowers or any of their Subsidiaries and (viii) with the consent of the Borrowers.
Section 9.09     Governing Law . This Agreement and the other Loan Documents shall be governed by, and construed in accordance with, the laws of the State of New York without regard to conflicts of laws principles thereof but including Section 5-1401 and 5-1402 of the New York General Obligations Law.
Section 9.10     Execution in Counterparts . This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by facsimile or electronic transmission in “.pdf” format shall be effective as delivery of a manually executed counterpart of this Agreement.

89



Section 9.11     Jurisdiction, Etc .
(a)    Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of any New York State court or federal court of the United States of America sitting in New York City, and any appellate court from any thereof ( provided that the Agent or the Required L/C Lenders may bring actions to enforce any Security Document governed by laws other than the State of New York in the jurisdiction of such other governing law, in which case Holdings and the Borrowers shall submit to the jurisdiction of a court of competent jurisdiction in such jurisdiction), in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the extent permitted by law, in such federal court. Holdings and each of the Borrowers hereby irrevocably consents to the service of process in any action or proceeding in such courts by the mailing thereof by any parties hereto by registered or certified mail, postage prepaid, to Holdings or such Borrower at its address specified pursuant to Section 9.02 . Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.
(b)    Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any New York State or federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
Section 9.12      WAIVER OF JURY TRIAL . EACH OF HOLDINGS, THE BORROWERS, THE AGENT, THE ISSUING BANK AND THE L/C LENDERS HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR THE ACTIONS OF THE AGENT, THE ISSUING BANK OR ANY L/C LENDER IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
Section 9.13     Release of Collateral or Guarantee Obligation .
(a)    Notwithstanding anything to the contrary contained herein or in any other Loan Document, the Co-Collateral Agents are (solely with respect to the ABL Collateral) and the Agent is (with respect to all other Collateral) hereby irrevocably authorized by each Lender (without requirement of consent of or notice to any Lender) to take, and hereby agree to take, any action requested by the Borrowers having the effect of releasing any Collateral or guarantee obligations (i) to the extent necessary to permit consummation of any transaction not prohibited by any Loan Document (including, without limitation, any Permitted Disposition) or that has been consented to in accordance with Section 9.01 ; provided that the guarantee obligations of Sears may not be released without the consent of the Required L/C Lenders and the Issuing Bank, or (ii) under the circumstances described in paragraph (b) below.

90



(b)    At such time as the aggregate L/C Lender Exposure is zero, the Collateral (other than the ABL Collateral except as provided in the Existing Credit Agreement) shall be released from the Liens created by the Security Documents (other than the Guarantee and Collateral Agreement except as provided in the Existing Credit Agreement), and the Security Documents (other than the Guarantee and Collateral Agreement except as provided in the Existing Credit Agreement) and all obligations (other than those expressly stated to survive such termination) of the Agent and each Loan Party under such Security Documents shall terminate, all without delivery of any instrument or performance of any act by any Person.
(c)    At such time as a Property is released from the liens of the mortgage securing the December Real Estate Loan (such released Property, a “ December Real Estate Loan Released Property ”), such December Real Estate Loan Released Property shall automatically and unconditionally be released from the Liens created by the Mortgage (x) without requiring the execution of a release of mortgage or the recording of any document (including a release of mortgage) in the land title records with respect to such termination or the taking of any other action, (y) without requiring any approval or consent of the Agent, Issuing Bank or L/C Lenders, and (z) notwithstanding any Default or Event of Default hereunder. Agent and Issuing Bank hereby agree (at Borrower’s sole cost and expense) that within 15 days’ following receipt of instructions from the Required L/C Lenders directing the release of Liens created by a Mortgage on a Property being released under the December Real Estate Loan, Agent and Issuing Bank shall, notwithstanding any Default or Event of Default hereunder nor any other event or condition affecting the Borrowers, the LC Lenders, the Issuing Bank or Agent, execute a release and discharge of the liens securing such Property subject to the December Real Estate Loan Property Release under the Mortgage (which may be in the form of a partial release of mortgage if such Mortgage covers multiple Properties) and deliver such release to the Borrower. Agent, Issuing Bank and LC Lenders hereby authorize any title company issuing a policy of title insurance with respect to a December Real Estate Loan Released Property to rely on this Section 9.13(c) .
Section 9.14     PATRIOT Act Notice . Each Lender that is subject to the PATRIOT Act and the Agent (for itself and not on behalf of any Lender) hereby notifies each Borrower, Holdings and each Subsidiary Guarantor that pursuant to the requirements of the PATRIOT Act, it is required to obtain, verify and record information that identifies each Borrower, Holdings and each Subsidiary Guarantor, which information includes the name and address of such Borrower, Holdings and such Subsidiary Guarantor and other information that will allow such Lender or the Agent, as applicable, to identify such Borrower, Holdings and such Subsidiary Guarantor in accordance with the PATRIOT Act. Each Borrower and Holdings hereby agrees for itself and on behalf of each Subsidiary Guarantor to provide such information promptly upon the request of any Lender or the Agent.
Section 9.15     Integration . This Agreement and the other Loan Documents represent the agreement of Holdings, the Borrowers, the Agent and the Lenders with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by the Agent or any Lender relative to subject matter hereof and thereof not expressly set forth or referred to herein or in the other Loan Documents.
Section 9.16     Replacement of L/C Lenders . If any L/C Lender requests compensation under Section 2.12 or if the Borrowers are required to pay any additional amount

91



to any L/C Lender or any Governmental Authority for the account of any L/C Lender pursuant to Section 2.15 , if any L/C Lender does not consent (a “ Non-Consenting Lender ”) to a proposed amendment, waiver, consent or release with respect to any Loan Document that requires the consent of each L/C Lender and that has been approved by the Required L/C Lenders, then the Borrowers may, at their sole expense and effort, upon notice to such L/C Lender and the Agent, require such L/C Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 9.07 ), all of its interests, rights and obligations under this Agreement and the related Loan Documents to an assignee that shall assume such obligations (which assignee may be another L/C Lender, if a L/C Lender accepts such assignment), provided that:
(a)    the Borrowers shall have paid to the Agent the assignment fee specified in Section 9.07 ;
(b)    such L/C Lender shall have received payment of an amount equal to its ratable share of the outstanding Reimbursement Obligations actually funded by such L/C Lender, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Loan Documents from the assignee (to the extent of such outstanding Reimbursement Obligations, interest and fees) or the Borrowers (in the case of all other amounts);
(c)    in the case of any such assignment resulting from a claim for compensation under Section 2.12 or payments required to be made pursuant to Section 2.15 , such assignment will result in a reduction in such compensation or payments thereafter;
(d)    with respect to the replacement of any Non-Consenting Lender, such amendment, waiver or consent can be effected as a result of such assignment (together with all other assignments required by the Agent to be made pursuant to this paragraph); and
(e)    such assignment does not conflict with applicable laws.
An L/C Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such L/C Lender or otherwise, the circumstances entitling the Borrowers to require such assignment and delegation cease to apply.
Section 9.17     No Advisory or Fiduciary Capacity . In connection with all aspects of each transaction contemplated hereby, the Loan Parties each acknowledge and agree that: (i) the letter of credit facility provided for hereunder and any related arranging, syndication or other services in connection therewith (including in connection with any amendment, restatement, consent, supplement, waiver or other modification hereof or of any other Loan Document) are an arm’s-length commercial transaction between the Loan Parties, on the one hand, and the Credit Parties, on the other hand, and each of the Loan Parties is capable of evaluating and understanding and understands and accepts the terms, risks and conditions of the transactions contemplated hereby and by the other Loan Documents (including any amendment, restatement, consent, supplement, waiver or other modification hereof or thereof); (ii) in connection with the process leading to such transaction, the each Credit Party is and has been acting solely as a principal and is not the financial advisor, agent or fiduciary, for the Loan Parties or any of their respective Affiliates, stockholders, creditors or employees or any other Person; (iii) none of the Credit Parties has assumed or will assume an advisory, agency or fiduciary responsibility in

92



favor of the Loan Parties with respect to any of the transactions contemplated hereby or the process leading thereto, including with respect to any amendment, restatement, consent, supplement, waiver or other modification hereof or of any other Loan Document (irrespective of whether any of the Credit Parties has advised or is currently advising any Loan Party or any of its Affiliates on other matters) and none of the Credit Parties has any obligation to any Loan Party or any of its Affiliates with respect to the transactions contemplated hereby except those obligations expressly set forth herein and in the other Loan Documents; (iv) the Credit Parties and their respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Loan Parties and their respective Affiliates, and none of the Credit Parties has any obligation to disclose any of such interests by virtue of any advisory, agency or fiduciary relationship; and (v) the Credit Parties have not provided and will not provide any legal, accounting, regulatory or tax advice with respect to any of the transactions contemplated hereby (including any amendment, restatement, consent, supplement, waiver or other modification hereof or of any other Loan Document) and each of the Loan Parties has consulted its own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate. Each of the Loan Parties hereby waives and releases, to the fullest extent permitted by law, any claims that it may have against each of the Credit Parties with respect to any breach or alleged breach of agency or fiduciary duty.
Section 9.18     Acknowledgement and Consent to Bail-In of EEA Financial Institutions . Notwithstanding anything to the contrary in any Loan Document or in any other agreement, arrangement or understanding among any such parties, each party hereto acknowledges that any liability of any EEA Financial Institution arising under any Loan Document, to the extent such liability is unsecured, may be subject to the write-down and conversion powers of an EEA Resolution Authority and agrees and consents to, and acknowledges and agrees to be bound by:
(a)    the application of any Write-Down and Conversion Powers by an EEA Resolution Authority to any such liabilities arising hereunder which may be payable to it by any party hereto that is an EEA Financial Institution; and
(b)    the effects of any Bail-in Action on any such liability, including, if applicable:
(i)    a reduction in full or in part or cancellation of any such liability;
(ii)    a conversion of all, or a portion of, such liability into shares or other instruments of ownership in such EEA Financial Institution, its parent undertaking, or a bridge institution that may be issued to it or otherwise conferred on it, and that such shares or other instruments of ownership will be accepted by it in lieu of any rights with respect to any such liability under this Agreement or any other Loan Document; or
(iii)    the variation of the terms of such liability in connection with the exercise of the write-down and conversion powers of any EEA Resolution Authority.

93



Section 9.19     Reinstatement.
(a)    If at any time any amount paid by any L/C Lender or by any other Person in respect of any “Obligations” as defined in the Cash Collateral Agreement is rescinded or must otherwise be restored or returned for any reason, including upon the insolvency, bankruptcy, or reorganization of any Person or otherwise, each L/C Lender’s obligations hereunder or under the Cash Collateral Agreement with respect to that payment shall be reinstated at such time and this Agreement and the Cash Collateral Agreement, if terminated, shall be reinstated in full force and effect, and such prior termination shall not diminish, release, discharge, impair or otherwise affect the obligations of the parties hereto. All rights, interests, agreements, and obligations of each L/C Lender under this Agreement and the Cash Collateral Agreement shall remain in full force and effect and shall continue irrespective of the commencement of, or any discharge, confirmation, conversion, or dismissal of, any insolvency proceeding by or against any L/C Lender or any other circumstance which otherwise might constitute a defense available to, or a discharge of any L/C Lender in respect of its obligations hereunder or under the Cash Collateral Agreement.
(b)    If at any time any amount paid by any Loan Party or by any other Person in respect of any Obligations is rescinded or must otherwise be restored or returned for any reason, including upon the insolvency, bankruptcy, or reorganization of any Person or otherwise (such amount, the “ Rescinded Amount ”), each L/C Lender’s and each Loan Party’s obligations under this Agreement and the Cash Collateral Agreement with respect to such Rescinded Amount and the obligations that gave rise to payment of such Rescinded Amount, including, without limitation, pursuant to Article III hereof, shall be reinstated at such time and this Agreement, if terminated, shall be reinstated in full force and effect, and such prior termination shall not diminish, release, discharge, impair or otherwise affect the obligations of the parties hereto. In addition, if, at any time, any Rescinded Amount has been paid or transferred by the Issuing Bank to any L/C Lender, such L/C Lender shall immediately pay to the Issuing Bank the amount of such Rescinded Amount received by such L/C Lender.
Section 9.20     Existing Agent Acknowledgment
(a)    Each of the Lenders, the Agent and the Loan Parties acknowledges that (i) in order for this Agreement and the Letters of Credit to qualify as Bank Products and an “Other L/C Facility” (as defined in the Existing Credit Agreement), Bank of America, N. A., in its capacity as Existing Agent and the "Borrowers" under the Existing Credit Agreement are required to agree to such designation, (ii) pursuant to the Existing Agent Acknowledgment and Consent attached as Exhibit C to this Agreement the Existing Agent and the "Borrowers" under the Existing Credit Agreement have agreed to such designation and (iii) such designation is subject to the conditions and limitations set forth in the Existing Agent Acknowledgment and Consent.
[Remainder of page intentionally left blank.]




94



IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.

SEARS HOLDINGS CORPORATION
By:    _____________________________
Name:    Robert A. Riecker
Title:    Vice President, Controller and
Chief Accounting Officer
SEARS ROEBUCK ACCEPTANCE CORP.
By:    ________________________________
Name:    Robert A. Riecker
Title:    Vice President, Finance
KMART CORPORATION
By:    _____________________________
Name:    Robert A. Riecker
Title:    Vice President, Controller and
    Chief Accounting Officer
















[Signature page to Letter of Credit and Reimbursement Agreement]




CITIBANK, N.A. , as Agent and as the Issuing Bank
By:    ________________________________
Name:    David Smith
Title:    Vice President





Applicable Office:

390 Greenwich St, 1 st Floor
    New York, NY 10013

[Signature page to Letter of Credit and Reimbursement Agreement]


JPP, LLC , as an L/C Lender



By:________________________________
Name:    Edward S. Lampert
Title:    Member





JPP II, LLC , as an L/C Lender

By: RBS Partners, L.P., as Manager
By: ESL Investments, Inc., as General Partner

By:    ________________________________
Name:    Edward S. Lampert
Title:    Chairman and Chief Executive Officer

 




Exhibit 12
COMPUTATION OF RATIO OF INCOME TO COMBINED FIXED CHARGES
SEARS HOLDINGS CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
 
 
Year Ended
(millions, except ratios)
 
2016
 
2015
 
2014
 
2013
 
2012
Fixed Charges
 
 
 
 
 
 
 
 
 
 
Interest and amortization of debt discount and expense on all indebtedness
 

$377

 

$289

 

$276

 

$214

 

$216

Add interest element implicit in rentals
 
249

 
240

 
241

 
259

 
280

 
 
626

 
529

 
517

 
473

 
496

Interest capitalized
 
—

 
2

 
2

 
2

 
1

Total fixed charges
 

$626

 

$531

 

$519

 

$475

 

$497

Income
 
 
 
 
 
 
 
 
 
 
Income before income taxes, noncontrolling interest, and extraordinary loss
 

($2,395
)
 

($1,385
)
 

($1,685
)
 

($972
)
 

($1,010
)
Deduct undistributed net income of unconsolidated companies
 
—

 
—

 
37

 
185

 
47

 
 
(2,395
)
 
(1,385
)
 
(1,722
)
 
(1,157
)
 
(1,057
)
Add
 
 
 
 
 
 
 
 
 
 
Fixed charges (excluding interest capitalized)
 
626

 
529

 
517

 
473

 
496

Income before fixed charges and income taxes
 

($1,769
)
 

($856
)
 

($1,205
)
 

($684
)
 

($561
)
Ratio of income to fixed charges
 
(2.83
)
 
(1.61
)
 
(2.32
)
 
(1.44
)
 
(1.13
)





EXHIBIT 21
Subsidiaries of the Registrant
The following is a list of subsidiaries of Sears Holdings Corporation, the names under which such subsidiaries do business, and the state or country in which each was organized, as of January 28, 2017 . The list does not include subsidiaries which would not, if considered in the aggregate as a single subsidiary, constitute a significant subsidiary within the meaning of Item 601(b)(21)(ii) of Regulation S-K.
Names
 
State or Other Jurisdiction of Organization
Consolidated Subsidiaries:
 
 
Kmart Holding Corporation *
 
Delaware
 
Kmart Corporation *
 
Michigan
 
 
KBL Holding Inc.
 
Delaware
 
 
 
BlueLight.com, Inc.
 
Delaware
 
 
 
 
Kmart.com LLC *
 
Delaware
 
 
KLC, Inc. *
 
Texas
 
 
Kmart of Michigan, Inc. *
 
Michigan
 
 
Kmart of Washington LLC *
 
Washington
 
 
Kmart Overseas Corporation
 
Nevada
 
 
 
Sears Holdings Global Sourcing Limited
 
Hong Kong
 
 
Kmart Stores of Illinois LLC *
 
Illinois
 
 
Kmart Stores of Texas LLC *
 
Texas
 
 
MyGofer LLC *
 
Delaware
Kmart Operations LLC *
 
Delaware
Sears Operations LLC *
 
Delaware
Sears, Roebuck and Co. *
 
New York
 
A&E Factory Service, LLC *
 
Delaware
 
A&E Home Delivery, LLC *
 
Delaware
 
A&E Lawn & Garden, LLC *
 
Delaware
 
A&E Signature Service, LLC *
 
Delaware
 
FBA Holdings Inc.
 
Delaware
 
 
California Builder Appliances, Inc. *
 
Delaware
 
 
Florida Builder Appliances, Inc. *
 
Delaware
 
 
SOE, Inc. *
 
Delaware
 
 
StarWest, LLC *
 
Delaware
 
Innovel Solutions, Inc.
 
Delaware
 
Private Brands, Ltd. *
 
Delaware
 
Sears Financial Holding Corporation
 
Delaware
 
Sears Holdings Management Corporation *1
 
Delaware
 
 
Sears Brands Business Unit Corporation
 
Illinois
 
 
 
Sears Brands, L.L.C.
 
Illinois
 
 
 
 
KCD IP, LLC 2
 
Delaware
 
 
 
Sears Buying Services, Inc.
 
Delaware
 
 
 
 
Sears Brands Management Corporation *
 
Delaware
 
Sears Home Improvement Products, Inc. *
 
Pennsylvania
 
Sears Insurance Services, L.L.C.
 
Illinois







Names
 
State or Other Jurisdiction of Organization
 
Sears International Holdings Corp.
 
Delaware
 
 
Sears Canada Holdings Corp.
 
Delaware
 
Sears Protection Company *
 
Illinois
 
 
Sears Protection Company (Florida), L.L.C. *
 
Florida
 
Sears Roebuck Acceptance Corp. *
 
Delaware
 
Sears, Roebuck de Puerto Rico, Inc. *
 
Delaware
 
SRC Depositor Corporation 3
 
Delaware
 
SRC O.P. Corporation 3
 
Delaware
 
 
SRC Facilities Statutory Trust No. 2003-A 3
 
Delaware
 
 
 
SRC Real Estate Holdings (TX), LLC 3
 
Delaware
 
Wally Labs LLC
 
Delaware
SRe Holding Corporation
 
Delaware
 
Sears Reinsurance Company Ltd.
 
Bermuda


 
 
*
Loan party under the Registrant's Third Amended and Restated Credit Agreement, dated as of July 21, 2015.
1
Shares are owned by Sears, Roebuck and Co. and Kmart Holding Corporation.
2
Bankruptcy remote, special purpose entity that owns the U.S. rights to the Kenmore, Craftsman and DieHard trademarks and issuer of intercompany securities backed by such trademark rights.

3
REMIC-related subsidiary.





Exhibit 23


CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-133247, 333-169747, 333-176859, and 333-188356 on Form S-8 of our report dated March 21, 2017, relating to the consolidated financial statements and consolidated financial statement schedule of Sears Holdings Corporation and subsidiaries, and the effectiveness of Sears Holdings Corporation and subsidiaries’ internal control over financial reporting, appearing in this Annual Report on Form 10-K of Sears Holdings Corporation and subsidiaries for the fiscal year ended January 28, 2017.

/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP
Chicago, Illinois
March 21, 2017

EXHIBIT 31.1


CERTIFICATIONS

I, Edward S. Lampert, certify that:
1.
 
I have reviewed this annual report on Form 10-K 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: March 21, 2017

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

EXHIBIT 31.2



CERTIFICATIONS

I, Jason Hollar, certify that:
1.
 
I have reviewed this annual report on Form 10-K 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: March 21, 2017

/s/ Jason Hollar          
Jason Hollar
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 Annual Report on Form 10-K for the fiscal year ended January 28, 2017 (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.

March 21, 2017


/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

Jason Hollar, Chief Financial 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 Annual Report on Form 10-K for the fiscal year ended January 28, 2017 (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.

March 21, 2017


/s/ Jason Hollar
Jason Hollar
Chief Financial Officer