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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
ÈAnnual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended February 3, 2007
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number 000-51217
SEARS HOLDINGS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 20-1920798
(State of Incorporation) (I.R.S. Employer Identification No.)
3333 Beverly Road, Hoffman Estates, Illinois 60179
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (847) 286-2500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on Which Registered
Common Shares, par value $0.01 per share The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ÈNo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes No È
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes ÈNo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer (as defined in Exchange Act Rule 12b-2).
Large accelerated filer ÈAccelerated filer Non-accelerated filer
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes No È
On March 3, 2007, the Registrant had 153,810,297 common shares outstanding. The aggregate market value (based
on the closing price of the Registrant’s common shares for stocks quoted on the NASDAQ Global Select Market) of the
Registrant’s common shares owned by non-affiliates (which are assumed, solely for the purpose of this calculation, to be
stockholders other than (i) directors and executive officers of the Registrant and (ii) any person known by the Registrant to
beneficially own five percent or more of the Registrant’s common shares), as of July 29, 2006, the last business day of the
Registrant’s most recently completed second fiscal quarter, was approximately $8.4 billion.
Documents Incorporated By Reference
Part III of this Form 10-K incorporates by reference certain information from the Registrant’s definitive proxy
statement relating to its Annual Meeting of Stockholders to be held on May 4, 2007 (the “2007 Proxy Statement”),
which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to
which this Form 10-K relates.

Table of contents

  • Page 1
    ... (I.R.S. Employer Identification No.) 3333 Beverly Road, Hoffman Estates, Illinois (Address of principal executive offices) 60179 (Zip Code) Registrant's telephone number, including area code: (847) 286-2500 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name...

  • Page 2
    ... 100 Kmart stores were selling an assortment of Sears brand products, mainly within home appliances and tools. During the fall of fiscal 2006, the Company added Craftsman tool assortments into Kmart locations nationwide. In addition, as of February 3, 2007, approximately 180 Kmart stores were...

  • Page 3
    ..., floor care products, and heating and cooling systems categories. Smaller items for repair can be brought into Sears Parts & Repair Centers located throughout the United States or to any Sears full-line store. This business also offers protection agreements, product installation services and...

  • Page 4
    ...including Sears' credit products, to Kmart stores enhances the selection and value proposition offered to Kmart customers and helps to differentiate Kmart from its general merchandise competitors. During the fall of fiscal 2006, the Company added Craftsman brand tool assortments into Kmart locations...

  • Page 5
    ...282 million for the additional 17.8 million common shares acquired and has accounted for the acquisition of additional interests in Sears Canada as a purchase business combination for accounting purposes. The takeover bid expired on November 27, 2006. Real Estate Transactions In the normal course of...

  • Page 6
    ... Company's home appliance business, which accounted for approximately 15% of the Company's fiscal 2006 reported revenues. Sears Canada competes in Canada with Hudson's Bay Company and U.S.-based competitors, including those mentioned above, that are expanding into Canada. Success in this competitive...

  • Page 7
    ...operating on a national, regional or local level. Some of our competitors are actively engaged in new store expansion. Internet and catalog businesses, which handle similar lines of merchandise, also compete with us. In this competitive marketplace, success is based on factors such as price, product...

  • Page 8
    ...of available merchandise and superior customer service. We must also successfully respond to our customers' changing tastes. The performance of our competitors, as well as changes in their pricing policies, marketing activities, new store openings and other business strategies, could have a material...

  • Page 9
    ... key employees, for our future success. Although certain executives, including Mr. Lewis, have employment agreements with us, changes in our senior management and any future departures of key employees may disrupt our business and materially adversely affect our results of operations. Affiliates...

  • Page 10
    ... regulations or changes in the enforcement thereof. From time to time, we may be involved in lawsuits and regulatory actions relating to our business, certain of which may be in jurisdictions with reputations for aggressive application of laws and procedures against corporate defendants. Due...

  • Page 11
    Item 2. Properties The following table summarizes the locations of the Company's Kmart and Sears Domestic stores as of February 3, 2007: Kmart Discount Stores Super Centers Sears Domestic Sears Full-line Essentials/ Specialty Mall Stores Grands Stores State/Territory Alabama ...Alaska ...Arizona...

  • Page 12
    ... Kmart headquarters building in Troy, Michigan. The Company still owns an 86,000 square foot office building in Troy, Michigan. As of February 3, 2007, Sears Canada operated a total of 123 full-line stores, 250 specialty stores (48 furniture and appliance stores, 158 dealer stores operated under...

  • Page 13
    ... and General Manager, Home Services Senior Vice President, General Counsel and Corporate Secretary Executive Vice President, Supply Chain and Operations Senior Vice President, Human Resources Executive Vice President, Chief Marketing Officer Vice President, Controller and Chief Accounting Officer...

  • Page 14
    ...Mr. Luse joined Sears as Vice President, HR Retail and Related Services in 2001. Ms. McGuire joined the Company as Executive Vice President and Chief Marketing Officer in October 2005. Prior to joining Holdings, she spent over 30 years at International Business Machines Corporation, most recently as...

  • Page 15
    ... from any of these transactions. Equity Compensation Plan Information The following table reflects information about securities authorized for issuance under the Company's equity compensation plans as of February 3, 2007. (a) Number of securities to be issued upon exercise of outstanding options...

  • Page 16
    ...2005, the first day of trading of the Company's common stock after the Merger, through February 2, 2007, the last trading day before the end of the Company's 2006 fiscal year, with the return on the S&P 500 Stock Index, the S&P 500 Retailing Index and the S&P 500 Department Stores Index for the same...

  • Page 17
    Purchase of Equity Securities The following table provides information about shares of common stock the Company acquired during the fourth quarter of fiscal 2006, including shares assigned to the Company as part of settlement agreements resolving claims arising from the Chapter 11 reorganization of ...

  • Page 18
    ... "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 and the Company's consolidated financial statements and notes thereto in Item 8. Predecessor Company 13 Weeks Ended April 30, Fiscal 2003 2002 dollars in millions, except per share data 2006 Fiscal...

  • Page 19
    ... depreciation on unimpaired assets to be disposed of following store closings, and a $10 million credit as a result of a change in the estimated expenses for 2002 cost reduction initiatives; Fiscal 2002, included $1,019 million for inventory write-downs in conjunction with accelerated mark-downs due...

  • Page 20
    ...24, 2005 Merger of these two companies. The Company is a broadline retailer and, at the end of fiscal 2006, had approximately 2,300 full-line and 1,100 specialty retail stores in the United States operating through Kmart and Sears and approximately 370 full-line and specialty retail stores in Canada...

  • Page 21
    ...Holdings' vision and mission throughout the organization in order to align all associates, from front-line store managers and store associates serving customers directly to those associates supporting stores in corporate and administrative functions, on common goals and culture. The Company believes...

  • Page 22
    ... those needs. Specific actions taken by the Company in 2006 to build long-term customer relationships and improve the profitability and/or daily operations include: • completed a national roll-out of Craftsman brand tools to Kmart locations nationwide, expanding the number of outlets carrying the...

  • Page 23
    ... points of distribution in response to competitor store growth. As of February 3, 2007, approximately 180 Kmart stores, including certain of the remodeled locations, offered broad assortments of home appliances. Certain of these initiatives and actions benefited the Company's fiscal 2006 operating...

  • Page 24
    ... 27, 2005, Kmart changed its method of accounting for certain indirect buying, warehousing and distribution costs and, accordingly, the Company recorded the cumulative effect of this change in accounting principle in fiscal 2005. Further information regarding this change in accounting is set forth...

  • Page 25
    ... 2004 2006 2004 Earnings per diluted share ...Less: Total return swap income ...Income tax settlements ...Visa/MasterCard settlement ...Legal reserve-AIG Annuity Insurance Co., et al. v. Sears Roebuck ...Gain on sale of assets ...Restructuring charges ...Cumulative effect of change in accounting...

  • Page 26
    ... in domestic comparable store sales results during fiscal 2007, the benefits derived from such efforts may be mitigated by the impact of continued market share pressure as competitors open additional locations and engage in heavy promotional activity. The Company expects these competitive trends to...

  • Page 27
    ... fashion apparel given poor customer response to Sears Domestic full-line store apparel offerings last year. Additionally, apparel gross margins at both Kmart and Sears Domestic benefited from fiscal 2006 efforts to procure products at a lower cost to the Company including increased utilization of...

  • Page 28
    ... the contract. Changes in fair value of the total return swaps are recognized currently in earnings. Reduction in Debt Assumed as Part of the Merger Debt levels were reduced by $0.4 billion in fiscal 2006. This debt was primarily Sears debt included in Holdings' consolidated balance sheet subsequent...

  • Page 29
    ...by Kmart to that of Sears. The Company changed its method of accounting for certain indirect overhead costs from inventoriable costs to period expenses. In accordance with Accounting Principles Board Opinion No. 20, "Accounting Changes," a change in accounting policy to conform the acquirer's policy...

  • Page 30
    ... to improvement in Sears Domestic's gross margin rate, mainly as a result of improved inventory management and the utilization of more targeted clearance and promotional markdowns versus historical reliance on storewide events. The selling and administrative expense rate was 22.0% (reported) and...

  • Page 31
    ... of reviewing operating performance and making asset-allocation decisions, senior management has continued to utilize principally the reporting structures that existed independently for Sears and Kmart prior to the Merger. As a result, the following discussion of the Company's business segments...

  • Page 32
    Kmart Kmart results and key statistics were as follows: millions, except for number of stores 2006 2005 2004 Merchandise sales and services ...Cost of sales, buying and occupancy ...Gross margin dollars ...Gross margin rate ...Selling and administrative ...Selling and administrative expenses as a ...

  • Page 33
    ... pre-tax gain recognized in fiscal 2006 in connection with the Company's 2005 sale of Kmart's former corporate headquarters in Troy, Michigan. Kmart recorded $946 million in gains on sales of assets during fiscal 2004 attributable to gains on multiple agreements as discussed in the above review...

  • Page 34
    ... by an increase in the total number of full-line stores in operation, as a number of Kmart locations have been converted to the Sears Essentials/Grand format during the past 18 months, increased sales within home services, and the fact that fiscal 2006 revenues benefited from $410 million in sales...

  • Page 35
    ...improved inventory management and the utilization of more targeted clearance and promotional markdowns versus historical reliance on storewide events. The margin benefit derived in fiscal 2005 from better inventory management was partially offset by lower expense leverage relative to occupancy costs...

  • Page 36
    ... are reported to Holdings on a one-month lag. Sears Canada results and key statistics were as follows: millions, except for number of stores Reported 2006 2005 Pro Forma 2005 2004 Merchandise sales and services ...Credit and Financial Products revenues ...Total revenues ...Cost of sales, buying and...

  • Page 37
    ... mainly from an increase in Sears Canada's share price subsequent to its announcement of a definitive agreement to sell substantially all assets and liabilities of its Credit and Financial Services operations, as well as changes in Sears Canada's associate stock plan to provide for early vesting...

  • Page 38
    ..., 2006 PreAs merger Purchase Pro Reported Activity(1) Acctng Forma Year Ended January 26, 2005 PreAs merger Purchase Pro Reported Activity(1) Acctng Forma millions, except per share data Merchandise sales and services ...$48,911 Credit and financial products revenues ...213 Total revenues ...Cost...

  • Page 39
    ... income tax effect of notes (2) through (6) above. Sears Domestic Year Ended January 28, 2006 PreAs merger Purchase Pro Reported Activity(1) Acctng Forma Year Ended January 29, 2005 PreAs merger Purchase Pro Reported Activity(1) Acctng Forma millions Merchandise sales and services ...$25,868 Cost...

  • Page 40
    Sears Canada Year Ended January 28, 2006 PreAs merger Purchase Reported Activity(1) Acctng Year Ended January 29, 2005 PreAs merger Purchase Pro Reported Activity(1) Acctng Forma millions Pro Forma Merchandise sales and services ...$3,949 $ 881 Credit and financial product revenues(5) ...213 86 ...

  • Page 41
    ...of three months or less at the date of purchase. The Company's cash and cash equivalents balances as of the fiscal years ended February 3, 2007 and January 28, 2006 are detailed in the following table. Millions 2006 2005 Domestic Cash and cash equivalents ...Cash posted as collateral ...Credit card...

  • Page 42
    ...a higher level of in-transit import inventory, planned increases in certain basic fashion categories ($130 million), increased inventory in hardline categories ($120 million) to place Sears products (Craftsman and appliances) in Kmart stores and pursue incremental Home Décor/Furniture business, and...

  • Page 43
    ...24, 2005 (pre-Merger period). Significant capital projects during fiscal 2006 included opening 16 Sears Essentials/Grand locations, as well as remodeling approximately 70 Kmart locations to include Sears brand products inside, most notably home appliances. The Company anticipates fiscal 2007 capital...

  • Page 44
    ... from operations or borrowings under the Credit Agreement. The Company's wholly-owned finance subsidiary, Sears Roebuck Acceptance Corp. ("SRAC"), has repurchased $158 million of its outstanding notes, including $2 million repurchased during fiscal 2006, thereby reducing the unused balance of this...

  • Page 45
    ...credit sublimit. The Credit Agreement is a revolving credit facility under which SRAC and Kmart Corporation are the borrowers. The Credit Agreement is guaranteed by Holdings and certain of its direct and indirect subsidiaries and is secured by a first lien on domestic inventory, credit card accounts...

  • Page 46
    ..., including workers' compensation, product and general liability, automobile, warranty, and asbestos and environmental claims. Also, as discussed in Note 1, the Company sells extended service contracts to its customers. The associated risks are managed through a wholly-owned insurance subsidiary of...

  • Page 47
    ... agreements. Other Commercial Commitments millions Bank Issued SRAC Issued Other Total Standby letters of credit ...Commercial letters of credit ...Secondary lease obligations and performance guarantee ... $888 71 - $119 178 - $- - 90 $1,007 249 90 Application of Critical Accounting Policies...

  • Page 48
    ... third-party insurance and/or self-insurance for a number of risks including workers' compensation, asbestos and environmental, automobile, warranty, product and general liability claims. General liability costs relate primarily to litigation that arises from store operations. Selfinsurance reserves...

  • Page 49
    ... earn additional benefits under the plans. Therefore, there are no assumptions related to future compensation costs relating to the Kmart pension plans. During the first quarter of 2005, Holdings announced that the Sears domestic pension plan would be frozen effective January 1, 2006. Accordingly...

  • Page 50
    ... on either the Company's results of operations or stockholders' equity. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures...

  • Page 51
    ...fuel costs on spending patterns, and the availability and level of consumer debt; marketplace demand for the Company's proprietary brand products and the products of the Company's key brand licensors; operational or financial difficulties at any of the Company's key vendors; the successful execution...

  • Page 52
    ... legal proceedings and bankruptcy claims; social and political conditions such as war, political unrest and terrorism or natural disasters; the possibility of negative investment returns in pension plans; volatility in financial markets; changes in debt ratings, credit spreads and cost of funds; the...

  • Page 53
    ..., totaling $400 million Canadian notional value and with a weighted average remaining life of 0.4 years, designed to hedge the Company's net investment in Sears Canada against adverse changes in exchange rates. The aggregate fair value of the forward contracts as of February 3, 2007 was $26 million...

  • Page 54
    ... of Shareholders' Equity for the years ended February 3, 2007, January 28, 2006 and January 26, 2005 ...Notes to Consolidated Financial Statements ...Schedule II-Valuation and Qualifying Accounts ...Management's Annual Report on Internal Control over Financial Reporting ...Reports of Independent...

  • Page 55
    SEARS HOLDINGS CORPORATION Consolidated Statements of Income millions, except per share data 2006 2005 2004 REVENUES Merchandise sales and services ...Credit and financial products revenues ...Total revenues ...COSTS AND EXPENSES Cost of sales, buying and occupancy ...Selling and administrative ......

  • Page 56
    ...February 3, 2007 January 28, 2006 ASSETS Current assets Cash and cash equivalents ...Accounts receivable ...Merchandise inventories ...Prepaid expenses and other current assets ...Deferred income taxes ...Total current assets ...Property and equipment Land ...Buildings and improvements ...Furniture...

  • Page 57
    ... card accounts ...Gain on total return swaps, net ...Gain on sales of assets ...Gain on sale of investments ...Change in operating assets and liabilities (net of acquisitions and dispositions): ...Deferred income taxes ...Credit card receivables ...Merchandise inventories ...Merchandise payables...

  • Page 58
    ... ...Proceeds from exercise of stock options ...Income tax benefit on non-qualified stock options ...Pre-petition tax settlements/valuation reserve adjustments ...Bankruptcy related settlement agreements ...Shares repurchased ...Other ...Balance at January 28, 2006 ...Comprehensive income Net income...

  • Page 59
    ... retail stores in Canada operating through Sears Canada Inc. ("Sears Canada"), a 70%-owned subsidiary. The Company has three reportable segments, Kmart, Sears Domestic and Sears Canada. For accounting purposes, the Merger was treated as a purchase business combination, with Kmart acquiring Sears...

  • Page 60
    ... 28, 2006, respectively. The Company's accounts receivable balance is comprised of various vendor-related and customer-related accounts receivable, including receivables related to the Company's pharmacy operations. Merchandise Inventories Merchandise inventories are valued at the lower of cost or...

  • Page 61
    ... of the LIFO method, merchandise inventories would have been $29 million higher at February 3, 2007 and $4 million higher at January 28, 2006. Effective January 27, 2005, the Company changed its method of accounting for certain indirect buying, warehousing and distribution costs. See Note 3 for...

  • Page 62
    ... Intangible Assets Tradenames acquired as part of the Merger account for the majority of the Company's intangible assets recognized in the consolidated balance sheet. The majority of these tradename assets, such as Kenmore, Craftsman and Lands' End, are expected to generate cash flows indefinitely...

  • Page 63
    ...) Changes in the carrying amount of goodwill by segment during fiscal 2006 are as follows: millions Sears Domestic Sears Canada Total Balance, January 29, 2006 ...Finalization of purchase accounting(1) ...Acquisition of additional interest in Sears Canada ...Tax settlements affecting Merger-related...

  • Page 64
    ... costs related to health, workers' compensation, asbestos and environmental, automobile, warranty, product and general liability claims. The Company obtains third-party insurance coverage to limit its exposure to certain of these self-insured risks. A portion of these self-insured risks is managed...

  • Page 65
    ... store occupancy costs, product repair and home service and installation costs, customer shipping and handling costs, vendor allowances, markdowns and physical inventory losses. Selling and Administrative Expenses Selling and administrative expenses are comprised principally of payroll and benefits...

  • Page 66
    ... classification of excess tax benefits associated with share-based compensation deductions as cash from financing activities rather than cash from operating activities. The Company recognizes compensation expense as awards vest on a straight-line basis over the requisite service period of the award...

  • Page 67
    ... on either the Company's results of operations or stockholder's equity. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures...

  • Page 68
    ..., primarily based on the receipt of additional information regarding the fair values of certain properties and certain pre-acquisition legal contingencies. The following summarizes the assets acquired and liabilities assumed as of the March 24, 2005 Merger date, based on the final purchase price...

  • Page 69
    ...'s supply chain to realize cost savings from the Merger, the closure of certain facilities and the combined capacity of the existing distribution and headquarters facilities. In accordance with Accounting Principles Board Opinion ("APB") No. 20, "Accounting Changes," changes in accounting policy to...

  • Page 70
    ... interests in Sears Canada as a purchase business combination for accounting purposes. The total amount paid for shares acquired has been allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the respective acquisition dates. Total consideration...

  • Page 71
    ... related costs and taxes. The Company's fiscal 2005 operating income reflects a pretax gain of $317 million from the sale of this business. The sale, however, had no impact on Holdings net income. In applying purchase accounting for the Merger, the Company, as 54% beneficial owner of Sears Canada...

  • Page 72
    ... Canada's Credit and Financial Services operations from March 25, 2005 up to November 14, 2005. NOTE 6-RESTRUCTURING ACTIVITIES In fiscal 2005, the Company initiated a number of restructuring activities including actions to integrate the home office functions of Kmart and Sears Domestic and align...

  • Page 73
    ...debt is as follows: ISSUE millions February 3, 2007 January 28, 2006 SEARS ROEBUCK ACCEPTANCE CORP. 6.25% to 7.50% Notes, due 2007 to 2043 ...5.20% to 7.50% Medium-Term Notes, due 2007 to 2013 ...SEARS DC CORP. 9.07% to 9.20% Medium-Term Notes, due 2012 ...ORCHARD SUPPLY HARDWARE STORES CORPORATION...

  • Page 74
    ..., Sears Roebuck Acceptance Corp. ("SRAC"), has repurchased $158 million of its outstanding notes, including $2 million repurchased during fiscal 2006, thereby reducing the unused balance of this authorization to $342 million. Credit Agreement The Company's $4.0 billion, five-year credit agreement...

  • Page 75
    ... February 3, 2007 and January 28, 2006, $32 million and $98 million of cash, respectively, was posted as collateral for self-insurance programs. Orchard Supply Hardware LLC ("LLC") Credit Agreement In November 2005, LLC entered into a five-year, $130 million senior secured revolving credit facility...

  • Page 76
    ..., including workers' compensation, product and general liability, automobile, warranty, and asbestos and environmental claims. Also, as discussed in Note 1, the Company sells extended service contracts to its customers. The associated risks are managed through a wholly-owned insurance subsidiary of...

  • Page 77
    ... the Company's current estimate of potential obligations related to these leases. The performance guarantee relates to certain municipal bonds issued in connection with the Company's headquarters building. Payments under this guarantee were $18 million in fiscal 2006. This guarantee expires in 2007...

  • Page 78
    ...-year option to purchase, for $127 million, additional shares in OSH that represented 30.2% of OSH's outstanding voting stock at the time of the option's issuance. The Company has recorded the fair value of this option as a liability on its consolidated balance sheet, and changes in the fair value...

  • Page 79
    ... future cost-sharing changes that are consistent with the Company's expressed intent to increase the retiree contribution rate annually. The accrued post-retirement benefit costs were $0 million and $1 million as of February 3, 2007 and January 28, 2006, respectively. Sears' Benefit Plans Expense...

  • Page 80
    ... 3, 2007. In fiscal 2005, the Company changed the measurement date of its benefit programs from the last Wednesday in January to December 31. The Company believes the one-month change of the measurement date is a preferable change as it allows more time for management to plan and execute its review...

  • Page 81
    ... and valuation characteristics. In addition, various techniques are utilized to monitor, measure and manage risk. Plan assets were invested in the following classes of securities (none of which were securities of the Company): Plan Assets as of February 3, January 28, 2007 2006 Equity securities...

  • Page 82
    ... date ...Change in plan assets at fair value: Beginning of year balance ...Actual return on plan assets ...Company contributions ...Plan participants' contributions ...Benefits paid ...Other ...Balance as of the measurement date ...Funded status ...Employer contributions after measurement date...

  • Page 83
    ... net cost for years ended are as follows: 2006 Sears Domestic Sears Canada 2005 Sears Domestic Sears Canada Kmart Kmart 2004 Pension benefits: Discount Rate ...Return of plan assets ...Rate of compensation increases ...Postretirement benefits: Discount Rate ...Return of plan assets ...Rate...

  • Page 84
    ... of net periodic benefit cost during fiscal 2007. Information regarding expected future cash flows for the Company's benefit plans is as follows: millions Kmart Sears Domestic Sears Canada Total Pension benefits: Employer contributions: Fiscal 2007 (expected) ...Expected benefit payments: Fiscal...

  • Page 85
    ...over the next approximately 3 years. The Company does not currently have an employee stock option plan. As of February 3, 2007, all outstanding options relate to grants made either prior to, or in connection with, the Merger. Changes in employee stock options for fiscal 2006, fiscal 2005, and fiscal...

  • Page 86
    ... Company's common stock on the date of grant. The Company does not currently have a program that provides for restricted stock awards on an annual basis. Changes in restricted stock awards for fiscal 2006, fiscal 2005, and fiscal 2004 were as follows: 2006 WeightedAverage Fair Value on Date Shares...

  • Page 87
    ... outstanding equity securities of the Predecessor Company, as well as substantially all of its pre-petition liabilities were cancelled. On the day of emergence, 89.7 million shares of Kmart common stock and 8.2 million options to purchase shares of Kmart common stock were issued pursuant to the Plan...

  • Page 88
    ... April 30, 2007, and any remaining shares left over after all Class 5 claims are settled will be distributed to the Class 5 creditors in proportion to their allowed claims. Bankruptcy-Related Settlements In fiscal 2006, fiscal 2005, and fiscal 2004, the Company recognized recoveries of $14 million...

  • Page 89
    ... Financial Statements-(Continued) 2006 2005 2004 Effective tax rate reconciliation Federal income tax rate ...State and local taxes net of federal tax benefit ...Tax credits ...Equity in net income of affiliated companies ...Basis difference in domestic subsidiary ...Canada capital gain exemption...

  • Page 90
    ... claims settlements. In fiscal years 2006, 2005 and 2004, the Company also received a tax benefit of $4 million, $91 million and $67 million, respectively, relating to certain Class 5 and 6 pre-petition claims paid with equity. Additionally, in fiscal 2006, the Company increased its deferred tax...

  • Page 91
    ... a $41 million pre-tax gain on the sale of the Company's former Kmart corporate headquarters. During fiscal 2004, the Company entered into multiple agreements with Home Depot U.S.A., Inc. (a subsidiary of The Home Depot, Inc.) to sell four properties and assign 14 leased properties for an aggregate...

  • Page 92
    ... as a director, officer or employee of the Company, (b) control investments in companies in the mass merchandising, retailing, commercial appliance distribution, product protection agreements, residential and commercial product installation and repair services and automotive repair and maintenance...

  • Page 93
    ... Estate for the Company is also employed by ESL. On January 18, 2007, Sears made a payment to plaintiffs in the case of In re: Sears, Roebuck and Co. Securities Litigation of approximately $215 million pursuant to the terms of a settlement dated September 14, 2006. See Note 20. Certain affiliates...

  • Page 94
    ... results of operations of Sears subsequent to March 24, 2005, the date of the Merger. Sears Canada's results are reported to Holdings on a one-month lag. Therefore, the results of operations for the years ended February 3, 2007 and January 28, 2006 include operating results for Sears Canada for the...

  • Page 95
    ... 15, 2002, several actions were filed in the United States District Court for the Northern District of Illinois against Sears, certain officers and directors, and alleged fiduciaries of Sears' 401(k) Savings Plan (the "Plan"), seeking damages and equitable relief under the Employee Retirement Income...

  • Page 96
    ... disproportionate benefits, and that the defendants failed to take appropriate steps to maximize the value of a merger transaction for Sears' stockholders. On September 7, 2006, plaintiffs filed a notice of appeal of the court's August 8, 2006 order dismissing plaintiffs' amended complaint. Briefing...

  • Page 97
    ...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...

  • Page 98
    SEARS HOLDINGS CORPORATION Notes to Consolidated Financial Statements-(Continued) The Company is subject to various other legal and governmental proceedings, many involving litigation incidental to its businesses. Some matters contain class action allegations, employment claims, environmental and ...

  • Page 99
    ... in pre-tax charges ($0.16 per diluted share) for merger-related restructuring activities. (4) The first quarter of 2005 includes an after-tax charge of $90 million ($0.58 per diluted share) for the cumulative effect of a change in accounting for certain indirect overhead costs included in inventory...

  • Page 100
    ... 3, 2007, management continues to believe that all of the Company's pre-petition net deferred tax assets will more likely than not be realized due to the Merger and the actual and forecasted levels of profitability, and as such the related valuation allowance was reduced to zero at January 28, 2006...

  • Page 101
    ...board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures...

  • Page 102
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Sears Holdings Corporation We have audited the accompanying consolidated balance sheet of Sears Holdings Corporation and subsidiaries (the "Company") as of February 3, 2007 and January 28, 2006 and ...

  • Page 103
    ... Company changed its method of accounting for pension and other postretirement benefits in both fiscal 2006 and fiscal 2005, and its method of accounting for certain indirect buying, warehousing and distribution costs in fiscal 2005. /s/ DELOITTE & TOUCHE LLP Deloitte & Touche LLP Chicago, Illinois...

  • Page 104
    ... respects, the results of operations and cash flows of Kmart Holding Corporation and subsidiaries for the year ended January 26, 2005 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the schedule for the year ended January 26, 2005...

  • Page 105
    ...be completed over the next two years. For fiscal 2007, the Company's information technology plan involves the conversions of a number of key financial systems, including the general ledger and stock ledger, among others. Such conversions involve significant changes to internal processes and internal...

  • Page 106
    ... and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference to the material under the heading "Amount and Nature of Beneficial Ownership" of the 2007 Proxy Statement. See also "Equity Compensation Plan...

  • Page 107
    ... All other schedules have been omitted because they are not required under the instructions contained in Regulation S-X because the information called for is contained in the financial statements and notes thereto. 3. Exhibits An "Exhibit Index" has been filed as part of this Report beginning on...

  • Page 108
    ... 27, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities stated and on the dates indicated. * AYLWIN B. LEWIS Aylwin B. Lewis Director, Chief Executive Officer and...

  • Page 109
    ... 10.(ii)(11) to Sears, Roebuck and Co.'s Annual Report on Form 10-K for the fiscal year ended January 1, 2000 (File No. 1-416)).** Sears Holdings Corporation 2006 Stock Plan, as amended (incorporated by reference to Appendix C to Registrant's Proxy Statement dated March 15, 2006 (File No. 000-51217...

  • Page 110
    ... Program (incorporated by reference to Exhibit 10(b) to Registrant's Current Report on Form 8-K dated September 29, 2005 (File No. 00051217)).** Letter of Credit Agreement, dated as of August 13, 2004 among Kmart Corporation, Bank of America, National Association and Fleet National Bank as issuing...

  • Page 111
    ... ended January 3, 2004 (File No. 1-416)). Five-Year Credit Agreement, dated as of February 22, 2005 (the "Credit Agreement"), among Sears Holdings Corporation, Sears Roebuck Acceptance Corp. and Kmart Corporation as Borrowers, the Initial Lenders named therein, Citicorp USA, Inc. and Bank of America...

  • Page 112
    ... fiscal quarter ended September 27, 2003 (File No. 1-416)). Amended and Restated Program Agreement, dated as of July 15, 2003, amended and restated as of November 3, 2003, by and between Sears, Roebuck and Co., Sears Intellectual Property Management Company and Citibank (USA) N.A. (incorporated by...