AGREEMENT AND PLAN OF MERGER

Agreement and Plan of Merger

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SEARS ROEBUCK &| CO | KMART HOLDING CORPORATION

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Title: AGREEMENT AND PLAN OF MERGER
Governing Law: Delaware Date: 11/18/2004
Industry: Retail (Department and Discount) Law Firm: Simpson Thacher & Bartlett LLP;Wachtell, Lipton, Rosen & Katz Sector: Services

AGREEMENT AND PLAN OF MERGER, Parties: sears roebuck &, co , kmart holding corporation

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EXHIBIT 2.1

EXECUTION COPY

AGREEMENT AND PLAN OF MERGER

DATED AS OF NOVEMBER 16, 2004

BY AND BETWEEN

KMART HOLDING CORPORATION

AND

SEARS, ROEBUCK AND CO.

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TABLE OF CONTENTS

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PAGE

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ARTICLE I THE MERGER..............................................................................................1

1.1. Organization of Holdco..........................................................................1

1.2. Directors and Officers of Holdco................................................................2

1.3. Organization of Merger Subs.....................................................................2

1.4. Actions of Directors and Officers...............................................................2

1.5. Actions of Sears and Kmart......................................................................2

1.6. The Mergers.....................................................................................3

1.7. Effective Time of the Mergers...................................................................3

1.8. Closing.........................................................................................3

1.9. Certificates of Incorporation and By-laws of the Surviving Corporations.........................3

1.10. Officers and Directors of the Surviving Corporations............................................4

ARTICLE II EFFECTS OF THE MERGERS.................................................................................4

2.1. Conversion of Sears Securities..................................................................4

(a) Conversion of Sears Common Stock.......................................................4

(b) Sears and Kmart-Owned Shares...........................................................5

(d) Adjustments............................................................................5

2.2. Sears Election Procedures.......................................................................5

2.3. Sears Proration.................................................................................7

2.4. Sears Dissenting Shares.........................................................................8

2.5. Conversion of Kmart Securities..................................................................8

(a) Conversion of Kmart Common Stock.......................................................8

(b) Kmart and Sears-Owned Shares...........................................................9

(d) Cancellation of Holdco Common Stock....................................................9

(e) Exchange of Certificates...............................................................9

2.6. Exchange of Certificates........................................................................9

(a) Deposit of Merger Consideration........................................................9

(b) Exchange Procedures....................................................................9

(d) No Fractional Shares..................................................................11

(e) Termination of Exchange Fund..........................................................12

(f) No Liability..........................................................................12

(g) Withholding...........................................................................12

2.7. Sears Options, Etc.............................................................................12

2.8. Kmart Options, Etc.............................................................................14

ARTICLE III REPRESENTATIONS AND WARRANTIES.......................................................................15

3.1. Representations and Warranties of Sears........................................................15

(a) Organization, Standing and Power......................................................15

(b) Capital Structure.....................................................................16

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(d) SEC Documents; Undisclosed Liabilities................................................19

(e) Information Supplied..................................................................19

(f) Compliance with Applicable Laws and Reporting Requirements............................20

(g) Legal Proceedings.....................................................................20

(h) Taxes.................................................................................21

(i) Certain Agreements....................................................................21

(j) Benefit Plans.........................................................................22

(k) Subsidiaries..........................................................................22

(l) Absence of Certain Changes or Events..................................................23

(m) Board Approval........................................................................23

(n) Vote Required.........................................................................23

(o) Properties............................................................................23

(p) Intellectual Property.................................................................24

(q) Environmental Matters.................................................................24

(r) Labor and Employment Matters..........................................................25

(s) Brokers or Finders....................................................................25

(t) Opinion of Sears Financial Advisor....................................................25

3.2. Representations and Warranties of Kmart........................................................25

(a) Organization, Standing and Power......................................................25

(b) Capital Structure.....................................................................26

(d) SEC Documents; Undisclosed Liabilities................................................28

(e) Information Supplied..................................................................28

(f) Compliance with Applicable Laws and Reporting Requirements............................29

(g) Legal Proceedings.....................................................................29

(h) Taxes.................................................................................30

(i) Certain Agreements....................................................................30

(j) Benefit Plans.........................................................................30

(k) Subsidiaries..........................................................................31

(l) Absence of Certain Changes or Events..................................................31

(m) Board Approval........................................................................31

(n) Vote Required.........................................................................32

(o) Properties............................................................................32

(p) Intellectual Property.................................................................32

(q) Environmental Matters.................................................................33

(r) Labor and Employment Matters..........................................................33

(s) Brokers or Finders....................................................................33

(t) Opinion of Kmart Financial Advisor....................................................33

ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS.............................................................34

4.1. Covenants of Sears.............................................................................34

(a) Ordinary Course.......................................................................34

(b) Dividends; Changes in Stock...........................................................34

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(d) Governing Documents, Etc..............................................................35

(e) No Acquisitions.......................................................................35

(f) No Dispositions.......................................................................35

(g) Indebtedness..........................................................................35

(h) Other Actions.........................................................................36

(i) Accounting Methods; Tax Matters.......................................................36

(j) Tax-Free Qualification................................................................36

(k) Compensation and Benefit Plans........................................................36

(l) No Liquidation........................................................................37

(m) Litigation............................................................................37

(n) No Restrictions on Business...........................................................37

(o) Other Agreements......................................................................37

4.2. Covenants of Kmart.............................................................................37

(a) Ordinary Course.......................................................................37

(b) Dividends; Changes in Stock...........................................................38

(d) Governing Documents...................................................................38

(e) No Acquisitions.......................................................................38

(f) No Dispositions.......................................................................39

(g) Indebtedness..........................................................................39

(h) Other Actions.........................................................................39

(i) Accounting Methods; Tax Matters.......................................................39

(j) Tax-Free Qualification................................................................39

(k) Compensation and Benefit Plans........................................................40

(l) No Liquidation........................................................................40

(m) Litigation............................................................................40

(n) No Restrictions on Business...........................................................40

(o) Other Agreements......................................................................41

4.3. Transition.....................................................................................41

4.4. Advice of Changes; Government Filings..........................................................41

4.5. Control of Other Party's Business..............................................................41

ARTICLE V ADDITIONAL AGREEMENTS..................................................................................42

5.1. Preparation of Proxy Statement; Stockholders Meetings..........................................42

5.2. Access to Information; Confidentiality.........................................................43

5.3. Reasonable Best Efforts........................................................................44

5.4. Acquisition Proposals..........................................................................46

5.5. Affiliates.....................................................................................49

5.6. Stock Exchange Listing.........................................................................49

5.7. Employee Benefit Plans.........................................................................49

5.8. Section 16 Matters.............................................................................50

5.9. Fees and Expenses..............................................................................51

5.10. Governance.....................................................................................51

5.11. Indemnification; Directors' and Officers' Insurance............................................51

5.12. Public Announcements...........................................................................53

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5.13. Additional Agreements..........................................................................53

ARTICLE VI CONDITIONS PRECEDENT..................................................................................53

6.1. Conditions to Each Party's Obligation To Effect the Merger.....................................53

(a) Stockholder Approval..................................................................53

(b) Exchange Listing......................................................................54

(d) Form S-4..............................................................................54

(e) No Injunctions or Restraints; Illegality..............................................54

(f) Effective Times.......................................................................54

6.2. Conditions to Obligations of Kmart.............................................................54

(a) Representations and Warranties........................................................54

(b) Performance of Obligations of Sears...................................................55

6.3. Conditions to Obligations of Sears.............................................................55

(a) Representations and Warranties........................................................55

(b) Performance of Obligations of Kmart...................................................56

ARTICLE VII TERMINATION AND AMENDMENT............................................................................56

7.1. Termination....................................................................................56

7.2. Effect of Termination..........................................................................57

7.3. Amendment......................................................................................59

7.4. Extension; Waiver..............................................................................59

ARTICLE VIII GENERAL PROVISIONS..................................................................................60

8.1. Non-survival of Representations, Warranties and Agreements.....................................60

8.2. Notices........................................................................................60

8.3. Interpretation.................................................................................61

8.4. Counterparts...................................................................................61

8.5. Entire Agreement; No Third Party Beneficiaries.................................................61

8.6. Governing Law..................................................................................62

8.7. Severability...................................................................................62

8.8. Assignment.....................................................................................62

8.9. Submission to Jurisdiction.....................................................................62

8.10. Enforcement....................................................................................62

8.11. WAIVER OF JURY TRIAL...........................................................................63

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EXHIBITS

Exhibit A Support Agreement

Exhibit 1.1(a) Holdco Certificate of Incorporation

Exhibit 1.1(b) Holdco By-laws

Exhibit 1.2 Holdco Directors and Officers Pre-Closing

Exhibit 1.10(a) Sears Directors and Officers Post-Closing

Exhibit 1.10(b) Kmart Directors and Officers Post-Closing

Exhibit 5.5 Form of Affiliate Agreement

Exhibit 5.10(a) Holdco Directors Post-Closing

Exhibit 5.10(b) Holdco Officers Post-Closing

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INDEX OF DEFINED TERMS

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SECTION

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<S> <C>

Acquisition Proposal............................................. 5.4(a)

Acquisitions..................................................... 4.1(e)

Agreement........................................................ Preamble

Applicable Antitrust Laws........................................ 3.1(c)

Benefit Plans.................................................... 3.1(j)

Book-Entry Shares................................................ 2.5(d)

Canadian Antitrust Laws.......................................... 3.1(c)

Cancelled Shares................................................. 2.1(b)

Cash Cap Number.................................................. 2.3(a)

Cash Consideration............................................... 2.1(a)

Cash Electing Sears Share........................................ 2.1(a)

Cash Election.................................................... 2.1(a)

Cash Election Number............................................. 2.3(b)

Cash Percentage.................................................. 2.3(a)

Certificates..................................................... 2.5(e)

Certificates of Merger........................................... 1.7(b)

Change in Kmart Recommendation................................... 5.1(c)

Change in Recommendation......................................... 5.4(b)

Change in Sears Recommendation................................... 5.1(b)

Closing.......................................................... 1.8

Closing Date..................................................... 1.8

Code............................................................. Preamble

Confidentiality Agreements....................................... 5.2(b)

Converted Shares................................................. 2.1(b)

DGCL............................................................. 1.6(c)

Dissenting Shares................................................ 2.4(a)

Effective Time................................................... 1.7(c)

Electing Sears Share............................................. 2.1(a)

Election Date.................................................... 2.2(d)

Environmental Claim.............................................. 3.1(q)

Environmental Laws............................................... 3.1(q)

Environmental Permits............................................ 3.1(q)

ERISA............................................................ 3.1(j)

ESL.............................................................. Recitals

Exchange Act..................................................... 2.2(d)

Exchange Agent................................................... 2.2(a)

Exchange Fund.................................................... 2.6(a)

Exchange Ratio................................................... 2.1(a)

Excluded Shares.................................................. 2.1(b)

Form of Election................................................. 2.2(c)

Form S-4......................................................... 5.1(a)

Former Kmart Holders............................................. 2.6(b)

Former Kmart Shares.............................................. 2.6(b)

Governmental Entity.............................................. 3.1(c)

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SECTION

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<S> <C>

Holdco........................................................... 1.1

Holdco Common Stock.............................................. 1.1

HSR Act.......................................................... 3.1(c)

Indemnified Parties.............................................. 5.11(b)

Infringe......................................................... 3.1(p)

Injunction....................................................... 6.1(e)

Insiders......................................................... 5.8

Joint Proxy Statement/Prospectus................................. 5.1(a)

Kmart............................................................ Preamble

Kmart Benefit Plans.............................................. 3.2(j)

Kmart Board Approval............................................. 3.2(m)

Kmart Book-Entry Shares.......................................... 2.5(e)

Kmart Certificates............................................... 2.5(e)

Kmart Certificate of Merger...................................... 1.7(b)

Kmart Common Stock............................................... 2.5(a)

Kmart Consideration.............................................. 2.5(a)

Kmart Contracts.................................................. 3.2(i)

Kmart Disclosure Schedule........................................ 3.2

Kmart Indemnified Parties........................................ 5.11(b)

Kmart Intellectual Property...................................... 3.2(p)

Kmart Merger..................................................... 1.6(b)

Kmart Merger Sub................................................. 1.3(b)

Kmart Permits.................................................... 3.2(f)

Kmart Permitted Liens............................................ 3.2(o)

Kmart Preferred Stock............................................ 3.2(b)

Kmart Recommendation............................................. 5.1(c)

Kmart SEC Documents.............................................. 3.2(d)

Kmart Stock Option............................................... 2.8(a)

Kmart Stock Plans................................................ 3.2(b)

Kmart Stockholders Meeting....................................... 5.1(c)

Kmart Termination Fee............................................ 7.2(b)

Kmart's Current Premium.......................................... 5.11(d)

Lehman Brothers.................................................. 3.2(s)

material......................................................... 3.1(a)

material adverse effect.......................................... 3.1(a)

Mergers.......................................................... 1.6(b)

Merger Consideration............................................. 2.5(a)

Merger Subs...................................................... 1.3(b)

Morgan Stanley................................................... 3.1(t)

Nasdaq........................................................... 2.6(d)

New Plans........................................................ 5.7(b)

Non-Electing Sears Holders....................................... 2.6(b)

Non-Electing Sears Share......................................... 2.1(a)

NYBCL............................................................ 1.6(c)

NYSE............................................................. 3.2(c)

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SECTION

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<S> <C>

Other Kmart Stock-Based Awards................................... 2.8(a)

Other Sears Stock-Based Awards................................... 2.7(a)

Public Proposal.................................................. 7.2(b)

Required Kmart Vote.............................................. 3.2(n)

Required Sears Vote.............................................. 3.1(n)

Required Stockholder Votes....................................... 3.2(n)

Required Stockholders Meetings................................... 5.1(c)

Requisite Regulatory Approvals................................... 6.1(c)

Restricted Kmart Share........................................... 2.8(a)

Restricted Sears Share........................................... 2.7(a)

Sears............................................................ Preamble

Sears Benefit Plans.............................................. 3.1(j)

Sears Board Approval............................................. 3.1(m)

Sears Book-Entry Shares.......................................... 2.2(a)

Sears Certificates............................................... 2.2(a)

Sears Certificate of Merger...................................... 1.7(a)

Sears Common Stock............................................... 2.1(a)

Sears Consideration.............................................. 2.1(a)

Sears Contracts.................................................. 3.1(i)

Sears Disclosure Schedule........................................ 3.1

Sears Indemnified Parties........................................ 5.11(a)

Sears Intellectual Property...................................... 3.1(p)

Sears Merger..................................................... 1.6(a)

Sears Merger Sub................................................. 1.3(a)

Sears Option Cash-Out Amount..................................... 2.7(a)

Sears Permits.................................................... 3.1(f)

Sears Permitted Liens............................................ 3.1(o)

Sears Preferred Stock............................................ 3.1(b)

Sears Recommendation............................................. 5.1(b)

Sears SEC Documents.............................................. 3.1(d)

Sears SAR........................................................ 2.7(a)

Sears Stock Option............................................... 2.7(a)

Sears Stock Plans................................................ 3.1(b)

Sears Stock Valuation............................................ 2.7(a)

Sears Stockholders Meeting....................................... 5.1(b)

Sears Termination Fee............................................ 7.2(c)

Sears's Current Premium.......................................... 5.11(c)

Section 16 Information........................................... 5.8

SEC.............................................................. 3.1(a)

Securities Act................................................... 3.1(b)

Shortfall Number................................................. 2.3(c)

Significant Subsidiary........................................... 3.1(a)

Stock Consideration.............................................. 2.1(a)

Stock Electing Sears Share....................................... 2.1(a)

Stock Election................................................... 2.1(a)

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SECTION

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<S> <C>

Stock Percentage................................................. 2.7(a)

Subsidiary....................................................... 3.1(a)

Superior Proposal................................................ 5.4(f)

Support Agreement................................................ Recitals

tax, taxable, taxes.............................................. 3.1(h)

Violation........................................................ 3.1(c)

Voting Debt...................................................... 3.1(b)

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AGREEMENT AND PLAN OF MERGER dated as of November 16, 2004

(this "Agreement") is by and between Kmart Holding Corporation, a Delaware

corporation ("Kmart"), and Sears, Roebuck and Co., a New York corporation

("Sears").

WHEREAS, the Boards of Directors of Kmart and Sears have

approved, and deem it advisable and in the best interests of their respective

stockholders to consummate, their respective Mergers (as defined in Section

1.6(b)) in which the issued and outstanding shares of capital stock of each of

Kmart and Sears will be converted into the right to receive shares of capital

stock of Holdco (as defined in Section 1.1);

WHEREAS, the Boards of Directors of Kmart and Sears have each

determined that their respective Mergers and the other transactions contemplated

hereby are consistent with, and in furtherance of, their respective business

strategies and goals;

WHEREAS, Kmart and Sears desire to make certain

representations, warranties and agreements in connection with the Mergers and

also to prescribe various conditions to the Mergers;

WHEREAS, for Federal income tax purposes, (i) it is intended

that the exchange of Sears Common Stock and Kmart Common Stock for Holdco Common

Stock pursuant to the Mergers, taken together, shall qualify as a transaction

described in Section 351 of the Internal Revenue Code of 1986, as amended (the

"Code"); (ii) it is intended that the Kmart Merger shall qualify as a

reorganization within the meaning of Section 368(a) of the Code; and (iii) the

parties intend, by executing this Agreement, to adopt a plan of reorganization

within the meaning of Treasury Regulation Section 1.368-2(g); and

WHEREAS, as a condition and inducement to each of Kmart's and

Sears's willingness to enter into this Agreement, Kmart, Sears and certain

affiliates of ESL Investments, Inc. (collectively, "ESL") are entering into a

Support Agreement, dated as of the date hereof in the form of Exhibit A hereto

(the "Support Agreement"), pursuant to which, among other things, ESL has agreed

to vote all shares of Kmart Common Stock and Sears Common Stock beneficially

owned by ESL in favor of adoption of this Agreement, to make a Stock Election

(as defined herein) with respect to all shares of Sears Common Stock

beneficially owned by ESL and not to sell or otherwise transfer any shares of

Kmart Common Stock or Sears Common Stock prior to the termination of such

Support Agreement in accordance with its terms;

NOW, THEREFORE, in consideration of the foregoing and the

respective representations, warranties, covenants and agreements set forth

herein, the parties agree as follows:

ARTICLE I

THE MERGER

1.1. Organization of Holdco. As promptly as practicable following

the execution of this Agreement, Kmart shall organize a new corporation

("Holdco") under the laws of the State of Delaware for the sole purpose of

effectuating the Mergers and the other transactions contemplated hereby. The

Certificate of Incorporation and By-laws of Holdco shall initially be as agreed

upon by Kmart and Sears. The authorized capital stock of Holdco shall initially

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consist of 100 shares of common stock, par value $0.01 per share (the "Holdco

Common Stock"), of which only one share shall be issued to Kmart. Kmart shall

take, and shall cause Holdco to take, all requisite action to cause the

Certificate of Incorporation of Holdco to be in the form of Exhibit 1.1(a)

hereto and the By-laws of Holdco to be in the form of Exhibit 1.1(b) hereto

immediately following the Effective Time.

1.2. Directors and Officers of Holdco. Prior to the Effective Time,

the directors and officers of Holdco shall consist of the directors and officers

as set forth on Exhibit 1.2. Kmart shall take all requisite action to cause the

directors and officers of Holdco as of the Effective Time to be as provided in

Section 5.10.

1.3. Organization of Merger Subs. As promptly as practicable

following the execution of this Agreement, Kmart shall cause Holdco to organize

for the sole purpose of effectuating the Mergers:

(a) a corporation organized under the laws of the State of New

York ("Sears Merger Sub"); the Certificate of Incorporation and By-laws of Sears

Merger Sub shall be in such forms as shall be determined by Holdco, Kmart and

Sears as soon as practicable following the execution of this Agreement; and the

authorized capital stock of Sears Merger Sub shall initially consist of 100

shares of common stock, par value $0.01 per share, all of which shares shall be

issued to Holdco at a price of $1.00 per share; and

(b) a corporation organized under the laws of the State of

Delaware ("Kmart Merger Sub" and, together with Sears Merger Sub, the "Merger

Subs"); the Certificate of Incorporation and By-laws of Kmart Merger Sub shall

be in such forms as shall be determined by Holdco, Kmart and Sears as soon as

practicable following the execution of this Agreement; and the authorized

capital stock of Kmart Merger Sub shall initially consist of 100 shares of

common stock, par value $0.01 per share, all of which shares shall be issued to

Holdco at a price of $1.00 per share.

1.4. Actions of Directors and Officers. As promptly as practicable

following the execution of this Agreement, Kmart shall take all requisite action

to designate the directors and officers of Holdco (subject to Sears's consent)

and each of the Merger Subs and to take such steps as may be necessary or

appropriate to complete the organization of Holdco as contemplated by Sections

1.1 and 1.2 and the Merger Subs as contemplated by Section 1.3. Kmart (and, if

applicable, Sears) shall cause the directors of Holdco to ratify and approve

this Agreement and to cause the directors of the Merger Subs to ratify and

approve this Agreement.

1.5. Actions of Sears and Kmart. As promptly as practicable

following the execution of this Agreement, Kmart, as the holder of all the

outstanding shares of Holdco Common Stock, shall cause Holdco to enter into and

become a party to this Agreement and adopt this Agreement and shall cause

Holdco, as the sole stockholder of each of the Merger Subs, to cause the Merger

Subs to enter into and become a party to this Agreement and adopt this

Agreement. Kmart shall cause Holdco, and Holdco shall cause the Merger Subs, to

perform their respective obligations under this Agreement. As promptly as

practicable after the date hereof the parties shall cause this Agreement to be

amended to add Holdco and the Merger Subs as parties, and each Merger Sub shall

become a constituent corporation in its respective Merger.

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1.6. The Mergers. At the Effective Time (as defined in Section

1.7(c)):

(a) Sears Merger Sub shall be merged with and into Sears (the

"Sears Merger"). Sears will be the surviving corporation in the Sears Merger,

and the separate existence of Sears Merger Sub shall cease. As a result of the

Sears Merger, Sears shall become a wholly-owned Subsidiary of Holdco.

(b) Kmart Merger Sub shall be merged with and into Kmart (the

"Kmart Merger" and, together with the Sears Merger, the "Mergers"). Kmart will

be the surviving corporation in the Kmart Merger, and the separate existence of

Kmart Merger Sub shall cease. As a result of the Kmart Merger, Kmart shall

become a wholly-owned Subsidiary of Holdco.

New York Business Corporation Law (the "NYBCL"), and the Kmart Merger will have

the effects set forth in the Delaware General Corporation Law (the "DGCL").

1.7. Effective Time of the Mergers. Subject to the provisions of

this Agreement, on the Closing Date (as defined in Section 1.8), the parties

shall (and shall cause their Subsidiaries to) cause the following to occur:

(a) Sears Merger Sub and Sears shall execute and deliver for

filing a certificate of merger (the "Sears Certificate of Merger") to the

Department of State for the State of New York, in such form and manner provided

in the NYBCL. The applicable parties thereto shall make all other filings or

recordings required under Section 904(b) and any other provision of the NYBCL to

effect the Sears Merger.

(b) Kmart Merger Sub and Kmart shall execute and deliver for

filing a certificate of merger (the "Kmart Certificate of Merger" and, together

with the Sears Certificate of Merger, the "Certificates of Merger") to the

Secretary of State for the State of Delaware, in such form and manner provided

in the DGCL. The applicable parties thereto shall make all other filings or

recordings required under the DGCL to effect the Kmart Merger.

Certificates of Merger with the Department of State for the State of New York

and the Secretary of State for the State of Delaware or, in each case, at such

time thereafter as is provided in such Certificates of Merger as agreed between

the parties; provided that the Mergers shall become effective at the same time

(such time as the Mergers become effective, the "Effective Time").

1.8. Closing. The closing of the Merger (the "Closing") will take

place at 10:00 a.m. on the date (the "Closing Date") that is the second business

day after the satisfaction or waiver (subject to applicable law) of the

conditions set forth in Article VI (excluding conditions that, by their terms,

are to be satisfied on the Closing Date, but subject to the satisfaction or

wavier or such conditions), unless another time or date is agreed to in writing.

The Closing shall be held at the offices of Simpson Thacher & Bartlett LLP, 425

Lexington Avenue, New York, New York 10017, unless another place is agreed to in

writing.

1.9. Certificates of Incorporation and By-laws of the Surviving

Corporations. (a) At the Effective Time, the Restated Certificate of

Incorporation and By-laws of Sears shall be

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amended so as to read in their entirety as the Certificate of Incorporation and

By-laws of Sears Merger Sub as in effect immediately prior to the Effective

Time, except for the agent and except that the surviving corporation in the

Sears Merger shall retain Sears's name.

(b) At the Effective Time, the Amended and Restated

Certificate of Incorporation and By-laws of Kmart shall be amended so as to read

in their entirety as the Certificate of Incorporation and By-laws of Kmart

Merger Sub as in effect immediately prior to the Effective Time, except for the

incorporator and except that the surviving corporation in the Kmart Merger shall

retain Kmart's name.

1.10. Officers and Directors of the Surviving Corporations. (a) At

the Effective Time, the persons indicated in Exhibit 1.10(a) shall be the

directors and officers (with the offices indicated therein) of Sears, as the

surviving corporation in the Sears Merger.

(b) At the Effective Time, the persons indicated in Exhibit

1.10(b) shall be the directors and officers (with the offices indicated therein)

of Kmart, as the surviving corporation in the Kmart Merger.

ARTICLE II

EFFECTS OF THE MERGERS

2.1. Conversion of Sears Securities. At the Effective Time, by

virtue of the Sears Merger and without any action on the part of Holdco, Sears

Merger Sub, Sears or the holders of any of the following securities:

(a) Conversion of Sears Common Stock. Each common share, par

value $0.75 per share, of Sears ("Sears Common Stock") issued and outstanding

immediately prior to the Effective Time (other than any Excluded Shares (as

defined in Section 2.1(b)) and any Dissenting Shares (as defined in Section

2.4(a)) shall, subject to Sections 2.3 and 2.6(d), be converted into the right

to receive the following consideration (the "Sears Consideration"):

(i) Each share of Sears Common Stock with respect to which an

election to receive cash (a "Cash Election") has been effectively

made and not revoked or lost pursuant to Section 2.2 (each, a "Cash

Electing Sears Share") shall be converted into the right to receive

$50.00 in cash without interest (the "Cash Consideration").

(ii) Each share of Sears Common Stock with respect to which an

election to receive stock consideration (a "Stock Election") is

properly made and not revoked or lost pursuant to Section 2.2 (each,

a "Stock Electing Sears Share" and, together with each Cash Electing

Sears Shares, an "Electing Sears Share") shall be converted into the

right to receive 0.5 shares (the "Exchange Ratio"), subject to

adjustment in accordance with Section 2.1(d), of validly issued,

fully paid and non-assessable shares of Holdco Common Stock

(together with any cash in lieu of fractional shares of Holdco

Common Stock to be paid pursuant to Section 2.6(d), the "Stock

Consideration").

(iii) Each share of Sears Common Stock other than shares of

Sears Common Stock with respect to which a Cash Election or a Stock

Election is properly made and not revoked or lost pursuant to

Section 2.2 (each, a "Non-Electing Sears Share") shall be

<PAGE>

converted into the right to receive the Cash Consideration or the

Stock Consideration or a combination of both, subject to Section

2.3.

(b) Sears and Kmart-Owned Shares. Each share of Sears Common

Stock owned by Sears or Sears Merger Sub ("Cancelled Shares"), in each case

immediately prior to the Effective Time, shall be canceled without any

conversion thereof, and no consideration shall be paid with respect thereto.

Each share of Sears Common Stock owned by Kmart or any direct or indirect

wholly-owned Subsidiary of Sears or Kmart (the "Converted Shares" and, together

with the Cancelled Shares, the "Excluded Shares"), in each case immediately

prior to the Effective Time, shall be converted into the right to receive the

Stock Consideration. The Stock Consideration paid pursuant to this Section

2.1(b) shall not be subject to proration under Section 2.3.

stock of Sears Merger Sub issued and outstanding immediately prior to the

Effective Time shall be converted into one fully paid and, subject to the NYBCL,

non-assessable common share of Sears, as the surviving corporation in the Sears

Merger.

(d) Adjustments. If, after the date hereof and prior to the

Effective Time, either (i) Kmart pays a dividend in, splits, combines into a

smaller number of shares, or issues by reclassification any shares of Kmart

Common Stock or (ii) Sears pays a dividend in, splits, combines into a smaller

number of shares, or issues by reclassification any shares of Sears Common

Stock, then the Merger Consideration and Exchange Ratio and any other similarly

dependent items, as the case may be, shall be appropriately adjusted to provide

to the holders of Sears Common Stock the same economic effect as contemplated by

this Agreement prior to such action, and as so adjusted shall, from and after

the date of such event, be the Merger Consideration, Exchange Ratio or other

dependent item, as applicable, subject to further adjustment in accordance with

this sentence.

2.2. Sears Election Procedures. (a) Not less than three business

days prior to the mailing of the Joint Proxy Statement/Prospectus, Kmart and

Sears shall jointly designate a bank or trust company to act as exchange agent

hereunder (the "Exchange Agent") for the purpose of exchanging certificates that

immediately prior to the Effective Time represented shares of Sears Common Stock

(the "Sears Certificates") and shares of Sears Common Stock represented by

book-entry ("Sears Book-Entry Shares").

(b) Each person who, on or prior to the Election Date (as

defined below), is a record holder of shares of Sears Common Stock other than

Dissenting Shares shall be entitled to specify the number of such holder's

shares of Sears Common Stock (and, if such shares to which the election relates

are represented by Sears Certificates, such particular shares) with respect to

which such holder makes a Cash Election or Stock Election.

S-4 a form of election (the "Form of Election") in form and substance reasonably

acceptable to Sears. The Form of Election shall specify that delivery shall be

effected, and risk of loss and title to any Sears Certificates shall pass only

upon proper delivery of the Form of Election and any Sears Certificates. Sears

shall mail the Form of Election with the Joint Proxy Statement/Prospectus (as

<PAGE>

defined in Section 5.1(a)) to all persons who are record holders of shares of

Sears Common Stock as of the record date for the Sears Stockholders Meeting (as

defined in Section 5.1(b)). The Form of Election shall be used by each record

holder of shares of Sears Common Stock (or, in the case of nominee record

holders, the beneficial owner through proper instructions and documentation) who

wishes to make a Cash Election or a Stock Election or a combination of both for

any and all shares of Sears Common Stock held by such holder. Sears shall use

its reasonable best efforts to make the Form of Election available to all

persons who become holders of shares of Sears Common Stock during the period

between the record date for the Sears Stockholders Meeting and the Election

Date.

(d) Any holder's election shall have been properly made only

if the Exchange Agent shall have received at its designated office, by 5:00

p.m., New York City time, on (1) the date of the Sears Stockholders Meeting or

(2) if the Closing Date is more than four business days following the Sears

Stockholders Meeting, two business days preceding the Closing Date (the

"Election Date"), a Form of Election properly completed and signed and

accompanied by (i) Certificates representing the shares of Sears Common Stock to

which such Form of Election relates, duly endorsed in blank or otherwise in form

acceptable for transfer on the books of Sears (or by an appropriate guarantee of

delivery of such Sears Certificates as set forth in such Form of Election from a

firm that is an "eligible guarantor institution" (as defined in Rule 17Ad-15

under the Securities Exchange Act of 1934, as amended (the "Exchange Act"));

provided that such Sears Certificates are in fact delivered to the Exchange

Agent by the time set forth in such guarantee of delivery) or (ii) in the case

of Sears Book-Entry Shares, any additional documents required by the procedures

set forth in the Form of Election. After a Cash Election or a Stock Election is

validly made with respect to any shares of Sears Common Stock, no further

registration of transfers of such shares shall be made on the stock transfer

books of Sears, unless and until such Cash Election or Stock Election is

properly revoked.

(e) Kmart and Sears shall publicly announce the anticipated

Election Date at least five business days prior to the anticipated Closing Date.

If the Closing Date is delayed to a subsequent date, the Election Date shall be

similarly delayed to a subsequent date, and Kmart and Sears shall promptly

announce any such delay and, when determined, the rescheduled Election Date.

(f) Any Cash Election or Stock Election may be revoked with

respect to all or a portion of the shares of Sears Common Stock subject thereto

by the holder who submitted the applicable Form of Election by written notice

received by the Exchange Agent prior to 5:00 p.m., New York City time, on the

Election Date. In addition, all Cash Elections and Stock Elections shall

automatically be revoked if this Agreement is terminated in accordance with

Article VII. If a Cash Election or Stock Election is revoked with respect to

shares of Sears Common Stock represented by Sears Certificates, Sears

Certificates representing such shares shall be promptly returned to the holder

that submitted the same to the Exchange Agent.

(g) The determination of the Exchange Agent (or the joint

determination of Kmart and Sears, in the event that the Exchange Agent declines

to make any such determination) shall be conclusive and binding as to whether or

not Cash Elections and Stock Elections shall have been properly made or revoked

pursuant to this Section 2.2 and as to when Cash Elections, Stock Elections and

revocations were received by the Exchange Agent. The Exchange Agent (or

<PAGE>

Kmart and Sears jointly, in the event that the Exchange Agent declines to make

the following computation) shall also make all computations as to the proration

contemplated by Section 2.3, and absent manifest error this computation shall be

conclusive and binding. The Exchange Agent may, with the written agreement of

Kmart, after Kmart's reasonable consultation with Sears, make any rules as are

consistent with this Section 2.2 for the implementation of the Cash Elections

and Stock Elections provided for in this Agreement as shall be necessary or

desirable to effect these Cash Elections and Stock Elections.

2.3. Sears Proration. Notwithstanding anything in this Agreement to

the contrary (but subject to Sections 2.1(b) and 2.4):

(a) The Cash Percentage (as defined below) of the shares of

Sears Common Stock (other than the Excluded Shares) issued and outstanding

immediately prior to the Effective Time (such number, the "Cash Cap Number")

shall be converted into the right to receive the Cash Consideration, and all

other shares of Sears Common Stock (other than the Excluded Shares) issued and

outstanding immediately prior to the Effective Time shall be converted into the

right to receive the Stock Consideration. The "Cash Percentage" shall be equal

to 45%, subject to adjustment as provided in Section 2.1(d).

(b) If the aggregate number of Cash Electing shares of Sears

Common Stock (such number, the "Cash Election Number") exceeds the Cash Cap

Number, then (i) all Stock Electing Sears Shares and Non-Electing Sears Shares

shall be converted into the right to receive the Stock Consideration and (ii)

the number of Cash Electing Sears Shares of each stockholder of Sears that shall

be converted into the right to receive the Cash Consideration shall be equal to

the product obtained by multiplying (A) the number of Cash Electing Sears Shares

of such stockholder by (B) a fraction, the numerator of which is the Cash Cap

Number and the denominator of which is the Cash Election Number, with the

remaining number of such holder's Cash Electing Sears Shares being converted

into the right to receive the Stock Consideration.

Number (such difference between the Cash Election Number and Cash Cap Number,

the "Shortfall Number"), then (x) all Cash Electing Sears Shares shall be

converted into the right to receive the Cash Consideration and (y) the Stock

Electing Sears Shares and Non-Electing Sears Shares shall be treated in the

following manner:

(i) if the Shortfall Number is less than or equal to the

aggregate number of Non-Electing Sears Shares, then (x) all Stock

Electing Sears Shares shall be converted into the right to receive

the Stock Consideration and (y) the Non-Electing Sears Shares of

each stockholder of Sears shall be converted into the right to

receive the Cash Consideration in respect of that number of

Non-Electing Sears Shares equal to the product obtained by

multiplying (1) the number of Non-Electing Sears Shares of such

stockholder by (2) a fraction, the numerator of which is the

Shortfall Number and the denominator of which is the aggregate

number of Non-Electing Sears Shares, with the remaining number of

such holder's Non-Electing Sears Shares being converted into the

right to receive the Stock Consideration; or

<PAGE>

(ii) if the Shortfall Number exceeds the aggregate number of

Non-Electing Sears Shares, then (x) all Non-Electing Sears Shares

shall be converted into the right to receive the Cash Consideration

and (y) the number of Stock Electing Sears Shares of each

stockholder of Sears that shall be converted into the right to

receive the Cash Consideration shall be equal to the product

obtained by multiplying (1) the number of Stock Electing Sears

Shares of such stockholder by (2) a fraction, the numerator of which

is the amount by which the Shortfall Number exceeds the aggregate

number of Non-Electing Sears Shares, and the denominator of which is

the aggregate number of Stock Electing Sears Shares, with the

remaining number of such holder's Stock Electing Sears Shares being

converted into the right to receive the Stock Consideration.

(d) For purposes of the calculations in this Section 2.3,

shares of Sears Common Stock that constitute Dissenting Shares immediately prior

to the Effective Time shall be deemed to be Non-Electing Shares.

2.4. Sears Dissenting Shares. (a) Shares of Sears Common Stock that

are issued and outstanding immediately prior to the Effective Time and that are

held by holders of shares of Sears Common Stock who have properly demanded and

perfected their rights to be paid the fair value of such shares in accordance

with Sections 623 and 910 of the NYBCL (the "Dissenting Shares") shall not be

converted into the right to receive the Merger Consideration, and the holders

thereof shall be entitled to only such rights as are granted by the NYBCL. If

any such stockholder of Sears shall fail to perfect or effectively shall

withdraw or lose such stockholder's right to be paid fair value under Sections

623 and 910 of the NYBCL, such stockholder's shares of Sears Common Stock shall

thereupon be deemed to have been converted, at the Effective Time, into the

right to receive the Merger Consideration payable or issuable in respect of

Non-Electing Sears Shares as set forth in Section 2.3 of this Agreement, without

any interest thereon.

(b) Sears shall give Kmart (or, after the Closing, Holdco) (i)

notice of any notice received by Sears of intent to demand the fair value of any

shares of Sears Common Stock, withdrawals of such notices and any other notices

served pursuant to Sections 623 and 910 of the NYBCL and received by Sears and

(ii) the opportunity to direct, jointly with Sears, all negotiations and

proceedings with respect to the exercise of such dissenters' rights under

Sections 623 and 910 of the NYBCL. Sears shall not, except with the prior

written consent of Kmart (or, after the Closing, Holdco) or as otherwise

required by applicable law, make any payment with respect to any such exercise

of dissenters' rights or offer to settle or settle any such rights.

2.5. Conversion of Kmart Securities. At the Effective Time, by

virtue of the Kmart Merger and without any action on the part of Holdco, Kmart

Merger Sub, Kmart or the holders of any of the following securities:

(a) Conversion of Kmart Common Stock. Each share of common

stock, par value $0.01 per share, of Kmart ("Kmart Common Stock") issued and

outstanding immediately prior to the Effective Time (other than any shares

cancelled pursuant to Section 2.5(b)) shall be converted into the right to

receive one validly issued, fully paid and non-assessable share of Holdco Common

Stock (the "Kmart Consideration" and, together with the Sears Consideration, the

"Merger Consideration").

<PAGE>

(b) Kmart and Sears-Owned Shares. Each share of Kmart Common

Stock owned by Kmart or Kmart Merger Sub, in each case immediately prior to the

Effective Time, shall be cancelled without any conversion thereof, and no

consideration shall be paid with respect thereto. Each share of Kmart Common

Stock owned by Sears or any direct or indirect wholly-owned Subsidiary of Sears

or Kmart, in each case immediately prior to the Effective Time, shall be

converted into the right to receive the Kmart Consideration.

stock of Kmart Merger Sub issued and outstanding immediately prior to the

Effective Time shall be converted into one fully paid and non-assessable share

of common stock of Kmart, as the surviving corporation in the Kmart Merger.

(d) Cancellation of Holdco Common Stock. Each share of Holdco

Common Stock held by Kmart immediately prior to the Effective Time shall be

cancelled, and no consideration shall be paid with respect thereto.

(e) Exchange of Certificates. Certificates that immediately

prior to the Effective Time represented shares of Kmart Common Stock (the "Kmart

Certificates" and, together with the Sears Certificates, the "Certificates") and

shares of Kmart Common Stock represented by book-entry ("Kmart Book-Entry

Shares" and, together with the Sears Book-Entry Shares, the "Book-Entry Shares")

shall be exchanged in accordance with Section 2.6.

2.6. Exchange of Certificates.

(a) Deposit of Merger Consideration. (i) As of and from time

to time after the Effective Time, Holdco shall deposit with the Exchange Agent,

for the benefit of the stockholders of Sears and Kmart, (A) certificates or, at

Holdco's option, evidence of shares in book entry form, representing shares of

Holdco Common Stock in denominations as the Exchange Agent may reasonably

specify and (B) cash, in each case as are issuable or payable, respectively,

pursuant to this Article II in respect of shares of Sears Common Stock for which

Sears Certificates or Sears Book-Entry Shares have been properly delivered to

the Exchange Agent or the cash to be paid in lieu of fractional shares. Such

certificates (or evidence of book-entry form, as the case may be) for shares of

Holdco Common Stock and such cash so deposited, together with any dividends or

distributions with respect thereto, are hereinafter referred to as the "Exchange

Fund".

(ii) The Exchange Agent shall invest any cash deposited with

the Exchange Agent by Holdco as directed by Holdco, provided that no such

investment or losses thereon shall affect the Cash Consideration payable to

holders of shares of Sears Common Stock entitled to receive such consideration

or cash in lieu of fractional interests, and Holdco and Kmart shall promptly

provide additional funds to the Exchange Agent for the benefit of holders of

shares of Sears Common Stock entitled to receive such consideration in the

amount of any such losses. Any interest or income produced by such investments

shall not be deemed part of the Exchange Fund and shall be payable to Holdco or

Kmart, as Holdco directs.

(b) Exchange Procedures. (i) As soon as reasonably practicable

after the Effective Time, Holdco shall cause to be mailed to (x) each record

holder, as of the Effective

<PAGE>

Time, of Non-Electing Sears Shares (such holders, "Non-Electing Sears Holders")

and (y) each record holder, as of the Effective Time, of shares of Kmart Common

Stock (such holders, "Former Kmart Holders" and such shares, "Former Kmart

Shares")): (i) a letter of transmittal (which shall specify that delivery shall

be effected, and risk of loss and title to the Certificates held by such holder

representing such Non-Electing Sears Shares or Former Kmart Shares, as the case

may be, shall pass, only upon proper delivery of the Certificates to the

Exchange Agent or, in the case of Book-Entry Shares, upon adherence to the

procedures set forth in the letter of transmittal) and (ii) instructions for use

in effecting the surrender of the Certificates or, in the case of Book-Entry

Shares, the surrender of such shares, for payment of the Merger Consideration

therefor. Such letter of transmittal shall be in such form and have such other

provisions as Holdco may specify.

(ii) (x) Each former stockholder of Sears who properly made

and did not revoke a Cash Election or Stock Election shall be entitled to

receive in exchange for such stockholder's Electing Sears Shares the following

as specified in clauses (A) and (B), and (y) upon surrender by a Non-Electing

Sears Holder to the Exchange Agent of a Certificate or Book-Entry Shares, as

applicable, together with a letter of transmittal, duly completed and validly

executed in accordance with the instructions thereto, and such other documents

as may be required pursuant to such instructions, each Non-Electing Sears Holder

shall be entitled to receive in exchange therefor: (A) the number of whole

shares of Holdco Common Stock, if any, into which such holder's shares of Sears

Common Stock represented by such holder's properly surrendered Certificates or

Book-Entry Shares, as applicable, were converted in accordance with this Article

II (after taking into account all shares of Sears Common Stock to which an

election or non-election of the same type were made), and such Certificates or

Book-Entry Shares so surrendered shall be forthwith cancelled, and (B) a check

in an amount of U.S. dollars (after giving effect to any required withholdings

pursuant to Section 2.6(g)) equal to (I) the amount of cash (including the Cash

Consideration and cash in lieu of fractional interests in shares of Holdco

Common Stock to be paid pursuant to Section 2.6(d)), if any, into which such

holder's shares of Sears Common Stock represented by such holder's properly

surrendered Certificates or Book-Entry Shares, as applicable, were converted in

accordance with this Article II, plus (II) any cash dividends or other

distributions that such holder has the right to receive pursuant to Section

2.6(c).

(iii) Upon surrender by a Former Kmart Holder to the Exchange

Agent of a Certificate or Book-Entry Shares, as applicable, together with a

letter of transmittal, duly completed and validly executed in accordance with

the instructions thereto, and such other documents as may be required pursuant

to such instructions, each Former Kmart Holder shall be entitled to receive in

exchange therefor: (A) the number of whole shares of Holdco Common Stock into

which such holder's shares of Kmart Common Stock represented by such holder's

properly surrendered Certificates or Book-Entry Shares, as applicable, were

converted in accordance with this Article II, and such Certificates or

Book-Entry Shares so surrendered shall be forthwith cancelled, and (B) a check

in an amount of U.S. dollars (after giving effect to any required withholdings

pursuant to Section 2.6(g)) equal to any cash dividends or other distributions

that such holder has the right to receive pursuant to Section 2.6(c).

(iv) If payment or issuance of the Merger Consideration is to

be made to a person other than the person in whose name the surrendered

Certificate is registered, it shall be a

<PAGE>

condition of payment or issuance that the Certificate so surrendered shall be

properly endorsed or shall be otherwise in proper form for transfer and that the

person requesting such payment or issuance shall have paid to the Exchange Agent

any transfer and other taxes required by reason of the payment or issuance of

the Merger Consideration to a person other than the registered holder of the

Certificate surrendered or shall have established to the satisfaction of the

Exchange Agent that such tax either has been paid or is not applicable. In the

event that any Certificate shall have been lost, stolen or destroyed, upon the

holder's compliance with the replacement requirements established by the

Exchange Agent, including, if necessary, the posting by the holder of a bond in

customary amount as indemnity against any claim that may be made against it with

respect to the Certificate, the Exchange Agent shall deliver in exchange for the

lost, stolen or destroyed Certificate the applicable Merger Consideration

payable in respect of the shares of Sears Common Stock or Kmart Common Stock, as

the case may be, represented by the Certificate pursuant to this Article II.

(v) No interest shall be paid or accrued for the benefit of

holders of the Certificates or Book-Entry Shares on the Merger Consideration

payable in respect of the Certificates or Book-Entry Shares. Until surrendered

as contemplated hereby, each Certificate or Book-Entry Share shall, after the

Effective Time, represent for all purposes only the right to receive upon such

surrender the applicable Merger Consideration as contemplated by this Article

II, the issuance or payment of which (including any cash in lieu of fractional

shares) shall be deemed to be the satisfaction in full of all rights pertaining

to shares of Sears Common Stock converted in the Sears Merger and shares of

Kmart Common Stock converted in the Kmart Merger.

(vi) At the Effective Time, the stock transfer books of Sears

and Kmart shall be closed, and thereafter there shall be no further registration

of transfers of shares of Sears Common Stock or Kmart Common Stock,

respectively, that were outstanding prior to the Effective Time. After the

Effective Time, Certificates or Book-Entry Shares presented to Sears or Kmart

for transfer shall be canceled and exchanged for the consideration provided for,

and in accordance with the procedures set forth, in this Article II.

dividends or other distributions with respect to shares of Holdco Common Stock

issuable with respect to the shares of Sears Common Stock or Kmart Common Stock

shall be paid to the holder of any unsurrendered Certificates or Book-Entry

Shares until those Certificates or Book-Entry Shares are surrendered as provided

in this Article II. Upon surrender, there shall be issued and/or paid to the

holder of the shares of Holdco Common Stock issued in exchange therefor, without

interest, (A) at the time of surrender, the dividends or other distributions

payable with respect to those shares of Holdco Common Stock with a record date

on or after the date of the Effective Time and a payment date on or prior to the

date of this surrender and not previously paid and (B) at the appropriate

payment date, the dividends or other distributions payable with respect to those

shares of Holdco Common Stock with a record date on or after the date of the

Effective Time but with a payment date subsequent to surrender.

(d) No Fractional Shares. No certificates or scrip

representing fractional shares of Holdco Common Stock shall be issued upon the

surrender for exchange of Certificates or Book-Entry Shares evidencing Sears

Common Stock, and such fractional share interests will

<PAGE>

not entitle the owner thereof to vote or to any rights of a stockholder of

Holdco. In lieu thereof, upon surrender of the applicable Certificates or

Book-Entry Shares, Holdco shall pay each holder of Sears Common Stock an amount

in cash equal to the product obtained by multiplying (a) the fractional share

interest to which such holder (after taking into account all shares of Sears

Common Stock held at the Effective Time and for which an election or

non-election of the same type was made by such holder) would otherwise be

entitled, by (b) the closing price on the NASDAQ National Market ("Nasdaq") for

a share of Kmart Common Stock on the last trading day immediately preceding the

Effective Time.

(e) Termination of Exchange Fund. Any portion of the Exchange

Fund that remains undistributed to the stockholders of Sears and Kmart on the

first anniversary of the Effective Time shall be delivered to Holdco, upon

demand by Holdco, and any stockholders of Sears or Kmart who have not

theretofore complied with this Article II shall thereafter look only to Holdco

for payment of their claim for any part of the Merger Consideration, any cash in

lieu of fractional shares of Holdco Common Stock and any dividends or

distributions with respect to Holdco Common Stock.

(f) No Liability. None of Kmart, Sears or Holdco shall be

liable to any holder of shares of Sears Common Stock or Kmart Common Stock for

cash or shares of Holdco Common Stock (or dividends or distributions with

respect thereto) from the Exchange Fund delivered to a public official pursuant

to any applicable abandoned property, escheat or similar law.

(g) Withholding. Holdco and the Exchange Agent shall be

entitled to deduct and withhold from the consideration otherwise payable

pursuant to this Agreement to any holder of shares of Sears Common Stock,

Dissenting Shares or shares of Kmart Common Stock such amounts as it is required

to deduct and withhold with respect to the making of such payment under the Code

and the rules and regulations promulgated thereunder, or any provision of state,

local or foreign tax law. To the extent that amounts are so withheld by Holdco

or the Exchange Agent, such withheld amounts shall be treated for all purposes

of this Agreement as having been paid to the holder of the shares of Sears

Common Stock, Dissenting Shares or shares of Kmart Common Stock in respect of

which such deduction and withholding was made by Holdco or the Exchange Agent.

2.7. Sears Options, Etc. (a) The Board of Directors of Sears or the

appropriate committee thereof shall take all action necessary so that:

(i) Each option or other right to acquire Sears Common Stock

under any Sears Stock Plan (as defined in Section 3.1(b)) (a "Sears

Stock Option") and any stock appreciation right granted under any

Sears Stock Plan (a "Sears SAR"), which, in each case, is

outstanding immediately prior to the Effective Time (whether vested

or unvested) shall, as of the Effective Time, cease to represent an

option or other right to acquire, or to be a stock appreciation

right with respect to, as the case may be, shares of Sears Common

Stock and shall instead represent the right to receive, as soon as

practicable after the Effective Time, an amount of cash equal to the

product of (i) the excess, if any, of (A) the Sears Option Cash-Out

Amount of a share of Sears Common Stock over (B) the exercise price

per share of such stock option or stock appreciation right

multiplied by (ii) the

<PAGE>

number of shares of Sears Common Stock subject to such stock option

or stock appreciation right, less any required withholding taxes.

For the purposes of this Section 2.7, the "Sears Option Cash-Out

Amount" of a share of Sears Common Stock means the sum of (x) the

Cash Percentage multiplied by the Cash Consideration, plus (y) the

product of (1) the Stock Percentage (as defined below) multiplied by

(2) the product of the Exchange Ratio multiplied by the closing

price on Nasdaq for a share of Kmart Common Stock on the last

trading day immediately preceding the Effective Time. The "Stock

Percentage" means 100% minus the Cash Percentage.

(ii) Each issued and outstanding share of Sears Common Stock

subject to vesting or other lapse restrictions pursuant to the Sears

Stock Plans immediately prior to the Effective Time (a "Restricted

Sears Share") shall, as of the Effective Time, vest and become free

of such restrictions to the extent required by the terms thereof and

shall be converted into the right to receive the Stock Consideration

in accordance with Section 2.1(a)(ii) and the other provisions of

this Article II; provided that any fractional shares resulting from

such conversion shall be rounded to the nearest whole share; and

provided, further, that all Holdco Common Stock issuable upon

conversion of such Restricted Sears Shares shall be subject to the

same terms (including the vesting terms taking into account any

required acceleration thereof by virtue of the transactions

contemplated hereby) as were applicable to such Restricted Sears

Shares in respect of which they are issued; and

(iii) All stock-based awards, other than Sears Stock Options,

Sears SARs and Restricted Sears Shares ("Other Sears Stock-Based

Awards"), granted under any Sears Stock Plan and outstanding

immediately prior to the Effective Time shall, as of the Effective

Time, vest and become free of restrictions to the extent required by

the terms thereof and shall be converted automatically at the

Effective Time into a right or award with respect to a number of

shares of Holdco Common Stock equal to the product of the number of

shares of Sears Common Stock subject to such Other Sears Stock-Based

Award multiplied by the Exchange Ratio; provided that all such

converted stock-based rights or awards shall be subject to the same

terms (including the vesting terms taking into account any required

acceleration thereof by virtue of the transactions contemplated

hereby) as were applicable to such Other Sears Stock-Based Awards in

respect of which they are issued.

(b) As soon as practicable after the Effective Time, Holdco

shall deliver to the holders of Restricted Sears Shares and Other Sears

Stock-Based Awards appropriate notices setting forth such holders' rights

pursuant to the Sears Stock Plans, and the agreements evidencing the grants of

such Restricted Sears Shares and Other Sears Stock-Based Awards, as the case may

be, shall continue in effect on the same terms and conditions (subject to the

adjustments required by this Section 2.7 after giving effect to the Sears Merger

and the assumption by Holdco as set forth above).

reserve for issuance a sufficient number of shares of Holdco Common Stock for

delivery with respect to Restricted Sears Shares and Other Sears Stock-Based

Awards assumed by it in accordance with this Section 2.7. As of the Effective

Time, Holdco shall file a registration statement on Form S-8 (or any successor

or other appropriate form) with respect to the shares of Holdco Common Stock

subject

<PAGE>

to such Sears equity awards and shall maintain the effectiveness of such

registration statement or registration statements (and maintain the current

status of the prospectus or prospectuses contained therein) for so long as such

Sears equity awards remain outstanding. With respect to those individuals who

subsequent to the Sears Merger will be subject to the reporting requirements

under Section 16(a) of the Exchange Act, where applicable, Holdco shall

administer the Sears Stock Plans assumed pursuant to this Section 2.7 in a

manner that complies with Rule 16b-3 promulgated under the Exchange Act to the

extent the applicable Sears Stock Plan complied with such rule prior to the

Sears Merger.

2.8. Kmart Options, Etc. (a) The Board of Directors of Kmart or the

appropriate committee thereof shall take all action necessary so that:

(i) Each option or other right to acquire Kmart Common Stock

granted under any Kmart Stock Plan (as defined in Section 3.2(b)) (a

"Kmart Stock Option") that is outstanding immediately prior to the

Effective Time shall, as of the Effective Time, cease to represent

an option or other right to acquire shares of Kmart Common Stock and

shall be converted, at the Effective Time, into an option to

acquire, on the same terms and conditions as were applicable under

the Kmart Stock Option (but taking into account any changes thereto

provided for in the applicable Kmart Stock Plan, in any award

agreement or in such option), that number of shares of Holdco Common

Stock equal to the number of shares of Kmart Common Stock subject to

such Kmart Stock Option immediately prior to the Effective Time, at

a price per share equal to the per share exercise price specified in

such Kmart Stock Option immediately prior to the Effective Time;

(ii) Each issued and outstanding share of Kmart Common Stock

subject to vesting or other lapse restrictions pursuant to the Kmart

Stock Plans immediately prior to the Effective Time (a "Restricted

Kmart Share") shall, as of the Effective Time, vest and become free

of such restrictions to the extent required by the terms thereof and

shall be converted into the right to receive the Kmart Consideration

in accordance with Section 2.5(a) and the other provisions of this

Article II; provided that all Holdco Common Stock issuable upon

conversion of such Restricted Kmart Shares shall be subject to the

same terms (including the vesting terms) as were applicable to such

Restricted Kmart Shares in respect of which they are issued; and

(iii) All stock-based awards, other than Kmart Stock Options

and Restricted Kmart Shares ("Other Kmart Stock-Based Awards"),

granted under any Kmart Stock Plan and outstanding immediately prior

to the Effective Time shall, as of the Effective Time, vest and

become free of restrictions to the extent required by the terms

thereof and shall be converted automatically at the Effective Time

into a right or award with respect to the same number of shares of

Holdco Common Stock as they represented with respect to shares of

Kmart Common Stock immediately prior to the Effective Time; provided

that all such converted stock-based rights or awards shall be

subject to the same terms (including the vesting terms) as were

applicable to such Other Kmart Stock-Based Awards in respect of

which they are issued.

(b) As soon as practicable after the Effective Time, Holdco

shall deliver to the holders of Kmart Stock Options, Restricted Kmart Shares and

Other Kmart Stock-Based Awards

<PAGE>

appropriate notices setting forth such holders' rights pursuant to the Kmart

Stock Plans, and the agreements evidencing the grants of such Kmart Stock

Options, Restricted Kmart Shares and Other Kmart Stock-Based Awards, as the case

may be, shall continue in effect on the same terms and conditions (subject to

the adjustments required by this Section 2.8 after giving effect to the Kmart

Merger and the assumption by Holdco as set forth above).

reserve for issuance a sufficient number of shares of Holdco Common Stock for

delivery with respect to Kmart Stock Options, Restricted Kmart Shares and Other

Kmart Stock-Based Awards assumed by it in accordance with this Section 2.8. As

of the Effective Time, if requested by Kmart prior to the Effective Time, Holdco

shall file a registration statement on Form S-8 (or any successor or other

appropriate form) with respect to the shares of Holdco Common Stock subject to

such Kmart equity awards and shall maintain the effectiveness of such

registration statement or registration statements (and maintain the current

status of the prospectus or prospectuses contained therein) for so long as such

Kmart equity awards remain outstanding. With respect to those individuals who

subsequent to the Kmart Merger will be subject to the reporting requirements

under Section 16(a) of the Exchange Act, where applicable, Holdco shall

administer the Kmart Stock Plans assumed pursuant to this Section 2.8 in a

manner that complies with Rule 16b-3 promulgated under the Exchange Act to the

extent the applicable Kmart Stock Plan complied with such rule prior to the

Kmart Merger.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

3.1. Representations and Warranties of Sears. Except (x) with

respect to any subsection of this Section 3.1, as set forth in the

correspondingly identified subsection of the disclosure schedule delivered by

Sears to Kmart concurrently herewith (the "Sears Disclosure Schedule") (it being

understood by the parties that any information disclosed in one subsection of

the Sears Disclosure Schedule shall be deemed to be disclosed for purposes of

each other subsection of the Sears Disclosure Schedule to which the relevance of

such information is reasonably apparent) or (y) as disclosed in the Sears SEC

Documents (as defined below) filed with the SEC prior to the date hereof, Sears

represents and warrants to Kmart as follows:

(a) Organization, Standing and Power. Each of Sears and its

Significant Subsidiaries (as defined below) is a corporation or other entity

duly organized, validly existing and, if applicable, in good standing under the

laws of its jurisdiction of incorporation, has all requisite power and authority

to own, lease and operate its properties and to carry on its business as now

being conducted, and is duly qualified and, if applicable, in good standing to

do business in each jurisdiction in which the nature of its business or the

ownership or leasing of its properties makes such qualification necessary, in

each case, other than as would not, either individually or in the aggregate,

reasonably be expected to have a material adverse effect on Sears. The Restated

Certificate of Incorporation and By-laws of Sears, copies of which have been

made available to Kmart, are true, complete and correct copies of such documents

as in effect on the date hereof. As used in this Agreement:

(i) the word "Subsidiary" when used with respect to any party

means any corporation or other organization, whether incorporated or

unincorporated, (A) of which such

<PAGE>

party or any other Subsidiary of such party is a general partner (excluding

partnerships, the general partnership interests of which held by such party or

any Subsidiary of such party do not have a majority of the voting interests in

such partnership), or (B) at least a majority of the stock or other equity

interests of which that have by their terms ordinary voting power to elect a

majority of the board of directors or others performing similar functions with

respect to such corporation or other organization is directly or indirectly

owned or controlled by such party or by any one or more of its Subsidiaries, or

by such party and one or more of its Subsidiaries;

(ii) a "Significant Subsidiary" means any Subsidiary of Sears

or Kmart, as the case may be, that constitutes a Significant Subsidiary of such

party within the meaning of Rule 1-02 of Regulation S-X of the Securities and

Exchange Commission (the "SEC");

(iii) any reference to any event, change or effect being

"material" with respect to any entity means an event, change or effect that is

material in relation to the financial condition businesses or results of

operations of such entity and its Subsidiaries taken as a whole; and

(iv) the term "material adverse effect" means, with respect to

any entity, a material adverse effect on the financial condition, businesses or

results of operations of such entity and its Subsidiaries taken as a whole;

provided that, for purposes of this clause (iii) above and this clause (iv) the

following shall not be deemed "material" or to have a "material adverse effect":

any change or event caused by or resulting from (A) changes, after the date

hereof, in prevailing economic or market conditions in the United States or

elsewhere (except to the extent those changes have a materially disproportionate

effect on such entity and its Subsidiaries relative to other similarly situated

participants in the industries in which they operate), (B) changes or events,

after the date hereof, affecting the industries in which they operate generally

(except to the extent those changes or events have a materially disproportionate

effect on such entity and its Subsidiaries relative to other similarly situated

participants in the industries in which they operate), (C) changes, after the

date hereof, in generally accepted accounting principles or requirements

applicable to such entity and its Subsidiaries, (D) changes, after the date

hereof, in laws, rules or regulations of general applicability or

interpretations thereof by any Governmental Entity (as defined in Section

3.1(c)(iii)), (E) the execution, delivery and performance of this Agreement or

the Support Agreement or the consummation of any transaction contemplated hereby

or thereby or the announcement thereof, or (F) any outbreak of major hostilities

in which the United States is involved or any act of terrorism within the United

States or directed against its facilities or citizens wherever located.

(b) Capital Structure. (i) The authorized capital stock of

Sears consists of 1,000,000,000 shares of Sears Common Stock and 50,000,000

preferred shares, par value $1.00 per share (the "Sears Preferred Stock"), of

which 3,250,000 shares of Sears Preferred Stock are designated 8.88% Preferred

Shares and 7,187,500 shares of Sears Preferred Stock are designated Series A

Mandatorily Exchangeable Preferred Shares. As of the close of business on

October 30, 2004 (A) 430,615,224 shares of Sears Common Stock were issued

(including shares held in treasury), 33,062,583 shares of Sears Common Stock

were reserved for issuance upon the exercise or payment of outstanding stock

options, stock units or other awards or pursuant to any plans of Sears under

which any award, grant or other form of compensation issuable in the form of, or

based in whole or in part on the value of, Sears Common Stock, has been

conferred on any

<PAGE>

individual or entity (such stock options, units and other awards and plans,

collectively, the "Sears Stock Plans"), and 223,800,540 shares of Sears Common

Stock were held by Sears in its treasury or by its Subsidiaries; and (B) no

shares of Sears Preferred Stock were outstanding or reserved for issuance. All

outstanding shares of Sears Common Stock have been duly authorized and validly

issued and are fully paid and, except as set forth in the NYBCL, non-assessable

and are not subject to preemptive rights.

(ii) No bonds, debentures, notes or other indebtedness

generally having the right to vote on any matters on which stockholders may vote

("Voting Debt") of Sears are issued or outstanding.

(iii) Except for (A) this Agreement, (B) Sears Stock Options,

Sears SARs and Other Sears Stock-Based Awards that represented, as of October

30, 2004, the right to acquire up to an aggregate of 31,998,113 shares of Sears

Common Stock, and (C) agreements entered into and securities and other

instruments issued after the date hereof as permitted by Section 4.1, there are

no options, warrants, calls, rights, commitments or agreements of any character

to which Sears or any Subsidiary of Sears is a party or by which it or any such

Subsidiary is bound obligating Sears or any Subsidiary of Sears to issue,

deliver or sell, or cause to be issued, delivered or sold, additional shares of

capital stock or any Voting Debt or stock appreciation rights of Sears or of any

Subsidiary of Sears or obligating Sears or any Subsidiary of Sears to grant,

extend or enter into any such option, warrant, call, right, commitment or

agreement. There are no outstanding contractual obligations of Sears or any of

its Subsidiaries (A) to repurchase, redeem or otherwise acquire any shares of

capital stock of Sears or any of its Subsidiaries, or (B) pursuant to which

Sears or any of its Subsidiaries is or could be required to register shares of

Sears Common Stock or other securities under the Securities Act of 1933, as

amended (the "Securities Act"), except any such contractual obligations entered

into after the date hereof as permitted by Section 4.1.

(iv) Since October 30, 2004, except as permitted by Section

4.1, Sears has not (A) issued or permitted to be issued any shares of capital

stock, stock appreciation rights or securities exercisable or exchangeable for

or convertible into shares of capital stock of Sears or any of its Subsidiaries,

other than pursuant to and as required by the terms of the Sears Stock Plans and

any employee stock options and other awards issued under the Sears Stock Plans

prior to the date hereof (or issued after the date hereof in compliance with

Sections 4.1(c) and 4.1(k)); (B) repurchased, redeemed or otherwise acquired,

directly or indirectly through one or more Sears Subsidiaries, any shares of

capital stock of Sears or any of its Subsidiaries; or (C) declared, set aside,

made or paid to the stockholders of Sears dividends or other distributions on

the outstanding shares of capital stock of Sears, other than regular quarterly

cash dividends on the Sears Common Stock at an amount per share not in excess of

the regular quarterly cash dividend most recently declared by Sears prior to the

date hereof.

(v) The Sears employee stock purchase plan (A) will continue

until the Closing Date, and no further purchase periods will commence

thereafter, and (B) will be terminated by Sears immediately prior to and

effective as of the Closing Date. The optional cash purchase (but not the

dividend reinvestment) feature of any Sears dividend reinvestment and stock

purchase plan will be terminated within 30 days of a written request by Kmart

unless all

<PAGE>

such optional cash purchases are satisfied through open market purchases of

Sears Common Stock and not through new issuances of Sears Common Stock by Sears.

authority to enter into this Agreement and, subject in the case of the

consummation of the Sears Merger to the adoption of this Agreement by the

Required Sears Vote, to consummate the transactions contemplated hereby. The

execution and delivery of this Agreement and the consummation of the

transactions contemplated hereby have been duly authorized by all necessary

corporate action on the part of Sears, subject in the case of the consummation

of the Sears Merger to the adoption of this Agreement by the Required Sears

Vote. This Agreement has been duly executed and delivered by Sears and

constitutes a valid and binding obligation of Sears, enforceable against Sears

in accordance with its terms, subject to bankruptcy, insolvency, fraudulent

transfer, reorganization, moratorium and similar laws of general applicability

relating to or affecting creditors' rights and to general equitable principles.

(ii) The execution and delivery of this Agreement does not,

and the consummation of the transactions contemplated hereby will not, (A)

conflict with, or result in any violation of, or constitute a default (with or

without notice or lapse of time, or both) under, or give rise to a right of

termination, cancellation or acceleration of any obligation or the loss of a

material benefit under, or the creation of a lien, pledge, security interest,

charge or other encumbrance on any assets (any such conflict, violation,

default, right of termination, cancellation or acceleration, loss or creation, a

"Violation") pursuant to, any provision of the Restated Certificate of

Incorporation or By-laws of Sears or equivalent governing documents of any

Significant Subsidiary of Sears, or (B) subject to obtaining or making the

consents, approvals, orders, authorizations, registrations, declarations and

filings referred to in paragraph (iii) below, result in any Violation of any

loan or credit agreement, note, mortgage, indenture, lease, Sears Benefit Plan

(as defined in Section 3.1(j)) or other agreement, obligation, instrument,

permit, concession, franchise, license, judgment, order, decree, statute, law,

ordinance, rule or regulation applicable to Sears or any Subsidiary of Sears or

their respective properties or assets, which Violation, individually or in the

aggregate, would reasonably be expected to (x) have a material adverse effect on

Sears or (y) prevent, materially delay or materially impede Sears's ability to

perform its obligations hereunder or to consummate the transactions contemplated

hereby.

(iii) No consent, approval, order or authorization of, or

registration, declaration or filing with, any court, administrative agency or

commission or other governmental authority or instrumentality, domestic or

foreign, or self-regulatory organization (a "Governmental Entity") is required

by or with respect to Sears or any Subsidiary of Sears in connection with the

execution and delivery of this Agreement by Sears or the consummation by Sears

of the transactions contemplated hereby, the failure to make or obtain that,

individually or in the aggregate, would reasonably be expected to (x) have a

material adverse effect on Sears or (y) prevent, materially delay or materially

impede Sears's ability to perform its obligations hereunder or to consummate the

transactions contemplated hereby, except for (A) the filing with the SEC of (1)

the Joint Proxy Statement/Prospectus and (2) such reports under Sections 13(a),

13(d), 13(g) and 16(a) of the Exchange Act, as may be required in connection

with this Agreement and the transactions contemplated hereby and the obtaining

from the SEC of such orders as may be required in connection therewith, (B) the

filing of the Sears Certificate of

<PAGE>

Merger with the applicable Governmental Entities required by the NYBCL, (C)

notices or filings under the Hart-Scott-Rodino Antitrust Improvements Act of

1976, as amended (the "HSR Act"), and (D) such authorizations required pursuant

the Competition Act (Canada) and the Investment Canada Act of 1985 (Canada)

(collectively, the "Canadian Antitrust Laws" and, together with the HSR Act, the

"Applicable Antitrust Laws").

(d) SEC Documents; Undisclosed Liabilities. (i) Sears has

filed all required reports, schedules, registration statements and other

documents with the SEC since December 29, 2002 (the "Sears SEC Documents"). As

of their respective dates of filing with the SEC (or, if amended or superseded

by a filing prior to the date hereof, as of the date of such filing), the Sears

SEC Documents complied in all material respects with the requirements of the

Securities Act or the Exchange Act, as the case may be, and the rules and

regulations of the SEC thereunder applicable to such Sears SEC Documents, and

none of the Sears SEC Documents when filed contained any untrue statement of a

material fact or omitted to state a material fact required to be stated therein

or necessary to make the statements therein, in light of the circumstances under

which they were made, not misleading. The financial statements of Sears included

in the Sears SEC Documents complied as to form, as of their respective dates of

filing with the SEC, in all material respects with all applicable accounting

requirements and with the published rules and regulations of the SEC with

respect thereto (except, in the case of unaudited statements, as permitted by

Form 10-Q of the SEC), have been prepared in accordance with generally accepted

accounting principles applied on a consistent basis during the periods involved

(except as may be disclosed therein) and fairly present in all material respects

the consolidated financial position of Sears and its consolidated Subsidiaries

and the consolidated results of operations, changes in stockholders' equity and

cash flows of such companies as of the dates and for the periods shown. As of

the date hereof, there are no outstanding written comments from the SEC with

respect to any of the Sears SEC Documents.

(ii) Except for (A) those liabilities that are appropriately

reflected or reserved for in the consolidated financial statements of Sears

included in its Quarterly Report on Form 10-Q for the fiscal quarter ended

October 2, 2004, as filed with the SEC prior to the date hereof, (B) liabilities

incurred since October 2, 2004 in the ordinary course of business consistent

with past practice, (C) liabilities that would not, individually or in the

aggregate, reasonably be expected to have a material adverse effect on Sears,

(D) liabilities incurred pursuant to the transactions contemplated by, or

permitted by, this Agreement, and (E) liabilities or obligations discharged or

paid in full prior to the date hereof in the ordinary course of business

consistent with past practice, Sears and its Subsidiaries do not have, any

liabilities or obligations of any nature whatsoever (whether accrued, absolute,

contingent or otherwise) that are required to be reflected in Sears's financial

statements in accordance with generally accepted accounting principles.

(e) Information Supplied. None of the information supplied or

to be supplied by Sears for inclusion or incorporation by reference in (i) the

Form S-4 will, at the time the Form S-4 is filed with the SEC and at the time it

becomes effective under the Securities Act, contain any untrue statement of a

material fact or omit to state any material fact required to be stated therein

or necessary to make the statements therein not misleading, and (ii) the Joint

Proxy Statement/Prospectus will, at the date of mailing to stockholders and at

the times of the meetings of stockholders to be held in connection with the

Mergers, contain any untrue statement of a

<PAGE>

material fact or omit to state any material fact required to be stated therein

or necessary in order to make the statements therein, in light of the

circumstances under which they were made, not misleading. The Proxy Statement

relating to the Sears Stockholders Meeting will comply as to form in all

material respects with the requirements of the Exchange Act and the rules and

regulations of the SEC thereunder. No representation or warranty is made by

Sears with respect to statements made or incorporated by reference therein based

on information supplied by Kmart for inclusion or incorporation by reference in

the Joint Proxy Statement/Prospectus.

(f) Compliance with Applicable Laws and Reporting

Requirements. (i) Sears and its Subsidiaries hold all permits, licenses,

variances, exemptions, orders and approvals of all Governmental Entities that

are material to the operation of the businesses of Sears and its Subsidiaries,

taken as a whole (the "Sears Permits"), and Sears and its Subsidiaries are and

have been in compliance with the terms of the Sears Permits and all applicable

laws and regulations, except where the failure so to hold or comply,

individually or in the aggregate, would not reasonably be expected to have a

material adverse effect on Sears. The businesses of Sears and its Subsidiaries

are not being and have not been conducted in violation of any law, ordinance or

regulation of any Governmental Entity (including the Sarbanes-Oxley Act of

2002), except for violations that, individually or in the aggregate, do not

have, and would not reasonably be expected to have, a material adverse effect on

Sears. To the knowledge of Sears, no investigation by any Governmental Entity

with respect to Sears or any of its Subsidiaries is pending or threatened, other

than, in each case, those the outcome of which, individually or in the

aggregate, would not reasonably be expected to have a material adverse effect on

Sears.

(ii) Sears and its Subsidiaries have designed and maintain a

system of internal controls over financial reporting (as defined in Rules

13a-15(f) and 15d-15(f) of the Exchange Act) sufficient to provide reasonable

assurances regarding the reliability of financial reporting and the preparation

of financial statements for external purposes in accordance with generally

accepted accounting principles. Sears (A) has designed and maintains disclosure

controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the

Exchange Act) to ensure that material information required to be disclosed by

Sears in the reports that it files or submits under the Exchange Act is

recorded, processed, summarized and reported within the time periods specified

in the SEC's rules and forms and is accumulated and communicated to Sears's

management as appropriate to allow timely decisions regarding required

disclosure, and (B) has disclosed, based on its most recent evaluation of such

disclosure controls and procedures prior to the date hereof, to Sears's auditors

and the audit committee of Sears's Board of Directors (1) any significant

deficiencies and material weaknesses in the design or operation of internal

controls over financial reporting that are reasonably likely to adversely affect

in any material respect Sears's ability to record, process, summarize and report

financial information and (2) any fraud, whether or not material, that involves

management or other employees who have a significant role in Sears's internal

controls over financial reporting. Sears has made available to Kmart a summary

of any such disclosure made by management to Sears's auditors and audit

committee since January 1, 2002.

(g) Legal Proceedings. There is no claim, suit, action,

investigation or other demand or proceeding (whether judicial, arbitral,

administrative or other) pending or, to the knowledge of Sears, threatened,

against or affecting Sears or any Subsidiary of Sears that would reasonably be

expected to have, individually or in the aggregate, a material adverse effect on

<PAGE>

Sears, nor is there any judgment, decree, injunction, rule or order of any

Governmental Entity or arbitrator outstanding against Sears or any Subsidiary of

Sears having or that would reasonably be expected to have, individually or in

the aggregate, a material adverse effect on Sears or on Holdco after the

Effective Time. No claim, suit, action, investigation, demand or proceeding

alleging that Sears or any of its Subsidiaries is liable for asbestos-related

matters, individually or in the aggregate, has, and none of them would

reasonably be likely to have, a material adverse effect on Sears.

(h) Taxes. Sears and each of its Subsidiaries have filed all

material tax returns required to be filed by any of them and have paid (or Sears

has paid on their behalf) all taxes shown as due on such returns, and the most

recent financial statements contained in the Sears SEC Documents reflect an

adequate reserve, in accordance with generally accepted accounting principles,

for all taxes payable by Sears and its Subsidiaries accrued through the date of

such financial statements. No material deficiencies or other claims for any

taxes have been proposed, asserted or assessed against Sears or any of its

Subsidiaries that are not adequately reserved for. For the purpose of this

Agreement, the term "tax" (including, with correlative meaning, the terms

"taxes" and "taxable") shall mean (i) all Federal, state, local and foreign

income, profits, franchise, gross receipts, payroll, sales, employment, use,

property, withholding, excise, occupancy and other taxes, duties or assessments

of any nature whatsoever, together with all interest, penalties and additions

imposed with respect to such amounts, (ii) liability for the payment of any

amounts of the type described in clause (i) as a result of being or having been

a member of an affiliated, consolidated, combined or unitary group, and (iii)

liability for the payment of any amounts as a result of being party to any tax

sharing agreement or as a result of any express or implied obligation to

indemnify any other person with respect to the payment of any amounts of the

type described in clause (i) or (ii). Neither Sears nor any of its Subsidiaries

has taken any action or knows of any fact, agreement, plan or other circumstance

that would reasonably be expected to prevent the exchange of Sears Common Stock

and Kmart Common Stock for Holdco Common Stock pur

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