Sears 2006 Annual Report Download - page 46

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The Company also posts cash collateral for certain self-insurance programs. The Company continues to
classify the cash collateral posted for self-insurance programs as cash and cash equivalents due to the Company’s
ability to substitute letters of credit for the cash at any time at its discretion. As of February 3, 2007, $32 million
of cash 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 (the
“LLC Facility”), which includes a $25 million letter of credit sublimit. The LLC Facility is available for LLC’s
general corporate purposes and is secured by a first lien on substantially all of LLC’s non-real estate assets.
Availability under the LLC Facility is determined pursuant to a borrowing base formula based on inventory and
accounts and credit card accounts receivable, subject to certain limitations. As of February 3, 2007, $36 million
was outstanding under this facility consisting of $34 million in borrowings and $2 million in outstanding letters
of credit.
Wholly-owned Insurance Subsidiary and Inter-company Notes
As noted in Note 1 of Notes to Consolidated Financial Statements, the Company has numerous types of
insurable risks, 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 the
Company. In accordance with applicable insurance regulations, the insurance subsidiary holds investment grade
securities to support the insurance coverage it provides.
The Company has transferred certain domestic real estate and intellectual property (i.e. trademarks) into
separate wholly-owned, bankruptcy remote subsidiaries. These bankruptcy remote subsidiaries lease the real
estate property to Sears and license the use of the trademarks to Sears and Kmart. Further, the bankruptcy remote
subsidiaries have issued asset-backed notes that are collateralized by the aforementioned real estate rental
streams and intellectual property licensing fee streams. Cash flows received from rental streams and licensing
fees streams paid by Sears, Kmart and, potentially in the future, other affiliates or third parties will be used for
the payment of fees, interest and principal on the asset-backed notes issued. Since the inception of these
subsidiaries, the debt securities have been entirely held by wholly-owned consolidated subsidiaries of the
Company in support of the Company’s insurance activities. The net book value of the securitized real estate
assets was approximately $1.0 billion and $1.1 billion at February 3, 2007 and January 28, 2006, respectively.
The net book value of the securitized intellectual property assets was approximately $1.0 billion and $0.0 billion
at February 3, 2007 and January 28, 2006, respectively.
46