Sears, Roebuck and Co. ("S/WSI/VRS") Proposed Election Merger with Kmart Holding Corporation ("KMRT/KTQ/KDU/YQH/YAS/VK/ODK")

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1 Research Circular DATE: November 23, 2004 TO: RE: FROM: Members Sears, Roebuck and Co. ("S/WSI/VRS") Proposed Election Merger with Kmart Holding Corporation ("KMRT/KTQ/KDU/YQH/YAS/VK/ODK") Scott Speer On November 17, 2004, Sears, Roebuck and Co. ("S/WSI/VRS") and Kmart Holding Corporation ("KMRT/KTQ/KDU/YQH/YAS/VK/ODK") announced that they had signed a definitive merger agreement to form a new, combined company, "Sears Holdings Corporation". Consummation of the transaction is subject to various conditions, including the approval of Shareholders of both companies. The merger is expected to become effective by the end of March Pursuant to the terms of the Merger, each share of S Common Stock outstanding immediately prior to the consummation of the Merger will be converted into one of the following merger considerations: 1) Approximately 45% of all outstanding S Common Shares will be converted into $50.00 in cash ("Cash Consideration"); OR 2) Approximately 55% of all outstanding S Common Shares will be converted into 0.50 Sears Holdings Corporation Common Shares ("Stock Consideration"). Cash will be paid in lieu of fractional shares. ("Stock Consideration"). The Election The merger will attain the aggregate results indicated above. However, individual S Shareholders will have an opportunity to: a) elect to receive $50.00 cash, for each S Common Share ("Cash Election"), OR b) elect to receive 0.50 Sears Holdings Company Common Shares for each S Common Share ("Stock Election"), OR c) register no preference by not electing to receive the Cash or Stock Consideration ("Non-Election") Under the terms of the election, shares which are not subject to an effective election will automatically be considered "non-electing" shares. Non-electing S Shares will receive either Cash, Sears Holding Corporation Common Stock, or a combination of Cash and Stock as

2 Page 2 determined by the pro-ration formulae described in the Agreement and Plan of Merger and the upcoming Proxy Statement/Prospectus. Elections must be submitted to the Exchange Agent. The election deadline is 5:00 PM, New York City time, on, 1) the date of the Sears, Roebuck and Company Shareholder Meeting or, 2) two business days preceding the effective date of the merger if the closing date is more than four business days following the Sears Shareholders Meeting. S Shareholders must observe all terms and conditions for the election as specified in the upcoming Proxy Statement/Prospectus. It is not known at this time if S Shares may be delivered pursuant to an election under "Notices of Guaranteed Delivery", IF THERE IS NO PROVISION FOR GUARANTEED DELIVERY, S CALL OPTION HOLDERS WHO INTEND TO PARTICIPATE IN THE ELECTION MUST EXERCISE THEIR OPTIONS AT LEAST THREE BUSINESS DAYS IN ADVANCE OF THE ELECTION DEADLINE. In all cases, Call Option holders exercising in order to obtain stock for an election must exercise in sufficient time to be able to make valid delivery pursuant of the election procedures. The merger is expected to become effective by the end of March THE FOREGOING IS AN UNOFFICIAL SUMMARY OF THE TERMS OF THE MERGER, PREPARED BY CBOE FOR THE CONVENIENCE OF ITS MEMBERS. CBOE ACCEPTS NO RESPONSIBILITY FOR THE ACCURACY OR COMPLETENESS OF THE SUMMARY. MEMBERS SHOULD REFER TO THE AGREEMENT AND PLAN OF MERGER DATED NOVEMBER 16, 2004 AND TO THE UPCOMING SEARS, ROEBUCK AND CO. AND KMART HOLDING CORPORATION JOINT PROXY STATEMENT/PROSPECTUS, FOR THE AUTHORITATIVE DESCRIPTION OF THE MERGER AND ALL OF ITS TERMS AND CONDITIONS. Contract Adjustments Pursuant to Article VI, Section 11, of OCC's By-Laws, all outstanding S/WSI/VRS options shall be adjusted as follows. On the business day immediately following the Effective Time of the Merger each adjusted Sears, Roebuck and Co. contract will require the receipt or delivery of: the appropriate amount of cash (if any), Sears Holding Corporation shares of Common Stock (if any) and cash in lieu of a fractional Sears Holding Corporation share (if any), where such amount of cash (if any), Sears Holding Corporation shares (if any) and cash in lieu of a fractional Sears Holding Corporation share (if any) is based on 100 times the Merger Consideration per S share to be received for a Non-Election, where cash in lieu would be paid for a fractional share of Sears Holding Corporation Common Stock, if any. Premiums for the adjusted Sears, Roebuck and Co. options will continue to be calculated on the basis of a multiplier of 100, i.e., for premium and strike-price extensions, 1.00 will equal $100. The Sears, Roebuck and Co. option symbols will change to option symbols to be determined. [Any FLEX series that may exist will be adjusted in a similar manner to the standardized option.]

3 Page 3 Settlement The OCC will delay settlement of the adjusted Sears, Roebuck and Co. option contracts exercise and assignment activity until the end of "when issued" trading in Sears Holdings Corporation, if any, and until the determination of the cash-in-lieu amount for fractional Sears Holdings Corporation shares, if any. GTC Order Conversion On the Effective Date of the Merger, immediately after the CBOE close, the system will convert or cancel all resting orders in the S/WSI/VRS order book. If your firm has requested, all EBook orders (phone, wire, and electronic) and all ORS orders residing outside the book (booth or crowd routed) will be converted reflecting the adjustments. If your firm has requested, all EBook orders and ORS orders residing outside of the book will be canceled. If your firm receives EBook CXL drops, the CXL confirms will print at your booth at 3:15 p.m. ORS CXLs will also be transmitted electronically to your branches. Immediately after the close, the book staff will return a final written report listing the orders that are converted or canceled to all firms. If converted, this list will also show how the new orders will be adjusted. This report will be available on request anytime during the day prior to the night of the adjustment. Important Exercise Considerations After the merger is consummated and the contract adjustment described above is effected, outstanding adjusted Sears, Roebuck and Co. Call option holders will receive upon exercise (and Put holders deliver upon exercise) the aggregate Non-Electing merger consideration (on a per contract basis). IF S/WSI/VRS CALL OPTION HOLDERS DO NOT WISH TO RECEIVE THE NON-ELECTING CONSIDERATION UPON EXERCISE AFTER THE CONTRACT ADJUSTMENT, THEY MUST EXERCISE IN ADVANCE OF THE ELECTION DEADLINE AND SUBMIT ELECTIONS PURSUANT TO THE ELECTION PROCEDURES DESCRIBED IN THE UPCOMING PROXY STATEMENT/PROSPECTUS. Exercisers must exercise in sufficient time, and observe all terms and conditions for making a valid election. Protect Provisions

4 Page 4 Until the contract adjustment is effected, exercises of S/WSI/VRS options will continue to be settled in the regular manner, through National Stock Clearing Corporation ("NSCC"). Where an exercise is settled through NSCC, the rights of the exercising or assigned Clearing Member are governed by the rules of the NSCC. The Options Clearing Corporation (the "OCC") understands that the NSCC has rules or procedures designed to enable purchasers of stock subject to an election, tender, or similar event, to protect themselves for the value accruing to that event. These rules generally provide that persons effecting purchase transactions (including call exercises) on or before a deadline (including any election deadline) can be protected for the value of the event if Shares are not delivered to them in sufficient time to enable them to participate in the event, provided timely and proper notice of a participant's need and desire for protection is given to the NSCC. These rules are generally referred to as "protect" or "liability notice" procedures. Sellers of stock (including assigned call writers), who fail to make timely delivery to the NSCC, may be subject to liability under these procedures. Clearing Members should review these procedures of the NSCC to determine the appropriate timing for actions required to be taken to protect themselves with respect to the S election. Specific questions as to these rules should be addressed to the NSCC. Special Risks CALL OPTIONS - Writers of call options who are uncovered with respect to deliverable securities subject to deadlines or cut-off times (such as expirations of tender offers, rights subscriptions, elections, or similar events) should be aware of a risk associated with the timing of their possible assignments: Equity option exercise settlement normally occurs 3 business days after the exercise date, and 2 business days after the assignment date. An uncovered call writer who has an obligation to deliver securities in 2 business days of his assignment may not be able to fulfill his delivery obligation by effecting a regular-way purchase (3 business-day settlement) or call option exercise (3 business-day settlement after exercise). Such uncovered writer may nevertheless be subject to liability under the "protect" provisions of NSCC (see above) with respect to his assignment delivery obligation, because he cannot make delivery in 2 business days. Additionally, Cash Market (same-day, or less-than-3-business day settlement) may not be available, or may be expensive for buyers. PUT OPTIONS Writers of put options should be aware that events such as expiration of election deadlines or similar events may have significant-- possibly adverse--effects on the market value of the underlying security put writers would be obligated to buy if assigned as a result of an exercise done after the expiration of such deadlines, insofar as such securities would no longer be subject to elections, tenders, or similar actions.

5 Page 5 Questions regarding this memo can be addressed to Options Industry Services at OPTIONS ( ). CBOE contract adjustment memos can also be accessed from CBOE.com at the following web address: