Aake adjustments to the reported financial statement by backing out the impact of the ollowing items: 1) The company's higher level of markdowns and inventory reserves related to the company's new strategy * Page 25 - Gross Margin 2) Net gain on sale or redemption of non-operating assets * page 27 - Real Estate and Other 3) Expense associated with store impairments * page 27 - Real Estate and Other 4) Expense associated with operating asset impairments * page 27 - Real Estate and Other 5) Expense associated with restructuring and management transition * page 28 - Restructuring and Management Transitions Gross margin for 2012 was $4,066 million, a decrease of $2,152 million compared to $6,218 million in 2011 . Gross margin as a percentage of sales in 2012 was 31.3% compared to 36.0% in 2011 . The net 470 basis point decrease resulted from the following: - higher margins realized on "everyday value" priced merchandise sales, despite a lower percentage of sales sold as "everyday value" (+240 basis points); - lower margins achieved on clearance merchandise sales combined with a greater penetration of clearance sales (-460 basis points); - lower margins on services and other activities, which includes the impact of free haircuts and promotionally prioed photography servioes during 2012 (-130 basis points); - higher levels of markdowns and inventory reserves related to our new strategy ( 70 basis points); and - reduced vendor cost concessions in connection with our simplified pricing strategy ( 50 basis points). Monetization of Non-operating Assets As part of our strategy to monetize assets that are not core to our operations, we generated $526 million of cash and recognized a net gain of $397 million from the sale or redemption of several non-operating assets during 2012 . The monetization of non-operating assets primarily included the following: REITAssets On July 20, 2012, SPG redeemed two million of our REIT units at a price of $124.00 per unit for a total redemption price of $246 million, net of fees. As of the market close on July 19, 2012, the SPG REIT units had a fair market value of $158.13 per unit. In connection with the redemption, we realized a net gain of $200 million determined using the first-in-first-out method for determining the cost of REIT units sold. Following the transaction, we continue to hold approximately 205,000 REIT units in SPG. On October 23, 2012, we sold all of our CBL REIT shares at a price of $21.35 per share for a total price of $40 million, net of fees. In connection with the sale, we realized a net gain of $15 million. Leveraged Leases During the third quarter of 2012 , we sold all of our leveraged lease assets for $146 million, net of fees. The investments in the leveraged lease assets as of the dates of the sales were $118 million and we recorded a net gain of $28 million. Joint Ventures During the third quarter of 2012, we sold our investments in four joint ventures that own regional mall properties for $90 million, resulting in net gains totaling $151 million. The gain exceeded the cash proceeds as a result of distributions of cash related to refinancing transactions in prior periods that were recorded as net reductions in the carrying amount of the investments. The cumulative net book value of the joint venture investments was a negative $61 million. Building During the third quarter of 2012 , we sold a building used in our former drugstore operations with a net book value of zero for $3 million resulting in a net gain of $3 million. Supply chain As a result of consolidating and streamlining our supply chain organization as part of a restructuring program that began in 2011 , during 2012 and 2011, we recorded charges of $19 million and $41 million, respectively, related to increased depreciation, termination benefits and unit closing costs. Increased depreciation resulted from shortening the useful lives of assets related to the closing and consolidating of selected facilities. This restructuring activity was completed during the third quarter of 2012. Catalog and catalog outlet stares On October 16, 2011, we sold the assets related to the operations of our catalog outlet stores. We sold fixed assets and inventory with combined net book values of approximately $31 million, for a total purchase price of $7 million, which resulted it During 2011, we also recorded \$10 million of severance costs related to the sale of our outlet stores. This restructuring activity was completed in 2011. During2012and2011,werecorded$109millionand$41Hameofficeandstares million, respectively, of net charges associated with employee termination benefits for actions to reduce our store and home office expenses. During the third quarter of 2012 , when substantially all employee exits related to 2012 were completed, we recorded a net curtailment gain of $7 million. The net curtailment gain was more than offset by 2012 charges associated with employee termination benefits of $116 million. Software and systems During 2012, we recorded a charge of $36 million related to the disposal of software and systems that based on our evaluation no longer support our new st Included in this amount is $3 million of consulting fees related to that evaluation. Store fixtures During 2012, we recorded $53 million of charges related to the removal of store fixtures in our department stores. In addition, we recorded $25 million of increased depreciation as a result of shortening the useful lives of fixtures in our department stores that are expected to be replaced throughout 2013 with the build out of additional shops. As we continue to design and implement new shops in conjunction with our efforts to re-organize our department stores, we anticipate additional store fixture write-offs and increased depreciation. Management transition During 2012 and 2011, we implemented several changes within our management leadership team that resulted in management transition costs of $41 million and $130 million, respectively, for both incoming and outgoing members of management. Ronald B. Johnson became Chief Executive Officer on November 1, 2011, succeeding Myron E. Ullman, III. Mr. Ullman was Executive Chairman of the Board of Directors until January 27, 2012, at which time he retired from the Company. During 2011, we incurred transition charges of $53 million and \$29 million related to Mr. Johnson and Mr. Ullman, respectively. In October 2011, Michael R. Francis was appointed President and as part of his employment package, he was awarded a one-time sign-on bonus of $12 million. In November 2011 , Michael W. Kramer and Daniel E. Walker were appointed Chief Operating Officer and Chief Talent Officer, respectively, and as part of their respective employment packages, they were awarded one-time sign-on bonuses of $4 million and $8 million, respectively. In 2012 and 2011 , we recorded $41 million and $24 million, respectively, of management transition charges related to other members of management. VERP As a part of several restructuring and cost-savings initiatives designed to reduce salary and related costs across the Company, in August of 2011 we announced a VERP which was offered to approximately 8,000 eligible associates. In the third quarter of 2011 , we incurred a total charge of $179 million related to the VERP. Charges included $176 million related to enhanced retirement benefits Aake adjustments to the reported financial statement by backing out the impact of the ollowing items: 1) The company's higher level of markdowns and inventory reserves related to the company's new strategy * Page 25 - Gross Margin 2) Net gain on sale or redemption of non-operating assets * page 27 - Real Estate and Other 3) Expense associated with store impairments * page 27 - Real Estate and Other 4) Expense associated with operating asset impairments * page 27 - Real Estate and Other 5) Expense associated with restructuring and management transition * page 28 - Restructuring and Management Transitions Gross margin for 2012 was $4,066 million, a decrease of $2,152 million compared to $6,218 million in 2011 . Gross margin as a percentage of sales in 2012 was 31.3% compared to 36.0% in 2011 . The net 470 basis point decrease resulted from the following: - higher margins realized on "everyday value" priced merchandise sales, despite a lower percentage of sales sold as "everyday value" (+240 basis points); - lower margins achieved on clearance merchandise sales combined with a greater penetration of clearance sales (-460 basis points); - lower margins on services and other activities, which includes the impact of free haircuts and promotionally prioed photography servioes during 2012 (-130 basis points); - higher levels of markdowns and inventory reserves related to our new strategy ( 70 basis points); and - reduced vendor cost concessions in connection with our simplified pricing strategy ( 50 basis points). Monetization of Non-operating Assets As part of our strategy to monetize assets that are not core to our operations, we generated $526 million of cash and recognized a net gain of $397 million from the sale or redemption of several non-operating assets during 2012 . The monetization of non-operating assets primarily included the following: REITAssets On July 20, 2012, SPG redeemed two million of our REIT units at a price of $124.00 per unit for a total redemption price of $246 million, net of fees. As of the market close on July 19, 2012, the SPG REIT units had a fair market value of $158.13 per unit. In connection with the redemption, we realized a net gain of $200 million determined using the first-in-first-out method for determining the cost of REIT units sold. Following the transaction, we continue to hold approximately 205,000 REIT units in SPG. On October 23, 2012, we sold all of our CBL REIT shares at a price of $21.35 per share for a total price of $40 million, net of fees. In connection with the sale, we realized a net gain of $15 million. Leveraged Leases During the third quarter of 2012 , we sold all of our leveraged lease assets for $146 million, net of fees. The investments in the leveraged lease assets as of the dates of the sales were $118 million and we recorded a net gain of $28 million. Joint Ventures During the third quarter of 2012, we sold our investments in four joint ventures that own regional mall properties for $90 million, resulting in net gains totaling $151 million. The gain exceeded the cash proceeds as a result of distributions of cash related to refinancing transactions in prior periods that were recorded as net reductions in the carrying amount of the investments. The cumulative net book value of the joint venture investments was a negative $61 million. Building During the third quarter of 2012 , we sold a building used in our former drugstore operations with a net book value of zero for $3 million resulting in a net gain of $3 million. Supply chain As a result of consolidating and streamlining our supply chain organization as part of a restructuring program that began in 2011 , during 2012 and 2011, we recorded charges of $19 million and $41 million, respectively, related to increased depreciation, termination benefits and unit closing costs. Increased depreciation resulted from shortening the useful lives of assets related to the closing and consolidating of selected facilities. This restructuring activity was completed during the third quarter of 2012. Catalog and catalog outlet stares On October 16, 2011, we sold the assets related to the operations of our catalog outlet stores. We sold fixed assets and inventory with combined net book values of approximately $31 million, for a total purchase price of $7 million, which resulted it During 2011, we also recorded \$10 million of severance costs related to the sale of our outlet stores. This restructuring activity was completed in 2011. During2012and2011,werecorded$109millionand$41Hameofficeandstares million, respectively, of net charges associated with employee termination benefits for actions to reduce our store and home office expenses. During the third quarter of 2012 , when substantially all employee exits related to 2012 were completed, we recorded a net curtailment gain of $7 million. The net curtailment gain was more than offset by 2012 charges associated with employee termination benefits of $116 million. Software and systems During 2012, we recorded a charge of $36 million related to the disposal of software and systems that based on our evaluation no longer support our new st Included in this amount is $3 million of consulting fees related to that evaluation. Store fixtures During 2012, we recorded $53 million of charges related to the removal of store fixtures in our department stores. In addition, we recorded $25 million of increased depreciation as a result of shortening the useful lives of fixtures in our department stores that are expected to be replaced throughout 2013 with the build out of additional shops. As we continue to design and implement new shops in conjunction with our efforts to re-organize our department stores, we anticipate additional store fixture write-offs and increased depreciation. Management transition During 2012 and 2011, we implemented several changes within our management leadership team that resulted in management transition costs of $41 million and $130 million, respectively, for both incoming and outgoing members of management. Ronald B. Johnson became Chief Executive Officer on November 1, 2011, succeeding Myron E. Ullman, III. Mr. Ullman was Executive Chairman of the Board of Directors until January 27, 2012, at which time he retired from the Company. During 2011, we incurred transition charges of $53 million and \$29 million related to Mr. Johnson and Mr. Ullman, respectively. In October 2011, Michael R. Francis was appointed President and as part of his employment package, he was awarded a one-time sign-on bonus of $12 million. In November 2011 , Michael W. Kramer and Daniel E. Walker were appointed Chief Operating Officer and Chief Talent Officer, respectively, and as part of their respective employment packages, they were awarded one-time sign-on bonuses of $4 million and $8 million, respectively. In 2012 and 2011 , we recorded $41 million and $24 million, respectively, of management transition charges related to other members of management. VERP As a part of several restructuring and cost-savings initiatives designed to reduce salary and related costs across the Company, in August of 2011 we announced a VERP which was offered to approximately 8,000 eligible associates. In the third quarter of 2011 , we incurred a total charge of $179 million related to the VERP. Charges included $176 million related to enhanced retirement benefits