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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
District Court denied CSC’s motion for a preliminary injunction and granted Sears’ motion to compel arbitration.
On April 22, 2005 the District Court denied CSC’s motion for reconsideration of the District Court’s April 14th
ruling, and CSC appealed the District Court’s ruling to the United States Court of Appeals for the Seventh
Circuit. On February 21, 2007, the Court dismissed the appeal. On December 12, 2006, both Sears and CSC filed
separate Statements of Claim and Demands for Arbitration with the American Arbitration Association. The
parties have begun selecting an arbitration panel.
In Capital Factors v. Kmart Corporation, the United States District Court for the Northern District of Illinois
ruled that the Bankruptcy Court did not have the authority to authorize the payment of pre-petition claims of
certain trade vendors by the Company. An appeal of the ruling and subsequent motions for rehearing were
denied. In order to satisfy its fiduciary responsibility to pursue claims against the critical vendors during the
pendency of the appeal, in January 2004 the Company filed suit against a total of 1,189 vendors that received
these payments seeking to recover in excess of $174 million paid to the critical vendors. To date, Kmart has
settled approximately 1,135 critical vendor claims for a total recovery the Company values at approximately
$80 million.
As previously reported in Kmart’s Annual Report on Form 10-K for its fiscal year ended January 26, 2005,
the staff of the Securities and Exchange Commission has been investigating, and the U.S. Attorney for the
Eastern District of Michigan has undertaken an inquiry into, the manner in which Kmart recorded vendor
allowances before a change in accounting principles at the end of fiscal 2001 and the disclosure of certain events
bearing on the Predecessor Company’s liquidity in the fall of 2001. Kmart has cooperated with the SEC and the
U.S. Attorney’s office with respect to these matters, which are ongoing.
On August 23, 2005, the SEC filed a complaint in the United States District Court for the Eastern District of
Michigan against the Predecessor Company’s former chief executive officer and its former chief financial officer
alleging that they misled investors about the Predecessor Company’s liquidity and related matters in the months
preceding its bankruptcy in violation of federal securities law. The complaint seeks permanent injunctions,
disgorgement with interest, civil penalties and officer and director bars. Kmart is not named as a defendant in the
action. In its press release announcing the filing of the complaint, the SEC stated that its Kmart investigation is
continuing.
In re: Sears Holdings Corporation Securities Litigation—In May and July 2006, two putative class action
lawsuits, which each name as defendants Sears Holdings Corporation and Edward Lampert, were filed in United
States District Court for the Southern District of New York, purportedly on behalf of a class of persons that sold
shares of Kmart Holding Corp stock on or after May 6, 2003 through June 4, 2004. The plaintiffs in each case
allege that Kmart’s Plan of Reorganization and Disclosure Statement filed on January 24, 2003 and amended on
February 25, 2003 misrepresented Kmart’s assets, particularly its real estate holdings, as evidenced by the prices
at which Kmart subsequently sold certain of its stores in June 2004 to Home Depot and Sears. The plaintiffs seek
damages for alleged misrepresentations. On December 19, 2006, the Court consolidated the actions. Plaintiffs’
consolidated complaint is due on or before March 30, 2007.
AIG Annuity Insurance Company, et al. v. Sears, Roebuck and Co.—On October 12, 2004, an action was
filed against Sears in the District Court, 192nd Judicial District, Dallas County, Texas by several holders of
certain bonds issued by Sears from 1991 through 1993. Plaintiffs purport to allege under theories of breach of
contract and misrepresentation, that Sears prematurely redeemed the bonds in 2004 following Sears’ sale of the
credit business in 2003. On February 2, 2007, a jury in the case reached a verdict against Sears and awarded
plaintiffs approximately $73.5 million, not including interest which may also be awarded by the Court. Sears will
file post-trial motions seeking a new trial and, if necessary, appeal any adverse decisions.
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