RELATED-PARTY AGREEMENTS AND TRANSACTIONS AND CONTROLLED COMPANY STATUS
According to a Schedule 13D (Amendment No. 2) filed on October 11, 2012 with the Securities and Exchange Commissions by ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert (collectively, “ESL”), ESL beneficially owned on the filing date 62.5% of our outstanding shares of common stock. Based on publicly available data on October 27, 2012 ESL beneficially owned 62% of Sears Holdings' outstanding shares of common stock.
In connection with the Separation, we entered into various agreements with Sears Holdings which, among other things, (1) govern specified aspects of our relationship with Sears Holdings following the Separation, (2) establish terms under which subsidiaries of Sears Holdings are providing services to us, and (3) establish terms pursuant to which subsidiaries of Sears Holdings are obtaining merchandise inventories for us. The terms of these agreements were agreed to prior to the Separation in the context of a parent-subsidiary relationship and in the overall context of the Separation.
The following is a summary of the nature of the related-party transactions between SHO and Sears Holdings:
Hometown and Outlet receive revenues from Sears Holdings for the sale of merchandise made through www.sears.com and the sale of extended service contracts, and revenues relating to the use in Hometown and Outlet stores of Sears-branded credit cards.
We obtain a significant amount of our merchandise inventories from Sears Holdings, leveraging the benefit of the Sears Holdings purchasing activities. We have also entered into agreements with Sears Holdings for logistics, handling, warehouse and transportation services, the charges for which are based on merchandise inventory units. We pay a royalty related to the sale of products branded with the KENMORE®, CRAFTSMAN®, and DIEHARD® marks (which marks are owned by subsidiaries of Sears Holdings) and we pay fees for participation in Sears Holdings' SHOP YOUR WAY REWARDS® program.
Sears Holdings provides the Company with specified corporate services. These services include accounting and finance, human resources, information technology and real estate. Sears Holdings charges the Company for these corporate services based on actual usage or a pro rata charge based upon sales, head count or square footage.
The following table summarizes the transactions with Sears Holdings included in the Company’s Condensed Consolidated Financial Statements:
13 Weeks Ended
39 Weeks Ended
Net Commissions from Sears Holdings Corporation
Purchases related to cost of sales and occupancy
As a result of ESL's ownership of 62.5% of our outstanding shares of common stock, we qualify as, and have elected to become, a "controlled company" for the purposes of the Nasdaq Stock Market rules. This election allows us to rely on exemptions from specified corporate governance requirements applicable to Nasdaq-listed companies.
Following the Separation we incur payables to Sears Holdings for merchandise inventory purchases and service and occupancy charges (net of commissions) based on our Separation agreements. Prior to the Separation these amounts were recorded and settled through intercompany transfers to Sears Holdings.