Sears 2006 Annual Report Download - page 71

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
Special Meeting of Sears Canada shareholders held on November 14, 2006, 58.3% of the Sears Canada shares
voted by minority shareholders were voted in favor of the proposed acquisition transaction. Notwithstanding that
the transaction received favorable votes from holders of a majority of the Sears Canada minority shares, as a
result of the OSC Order, the transaction is considered not to have received the majority of the minority approval
required for the transaction to proceed.
The takeover bid expired on November 27, 2006.
NOTE 5—SALE OF SEARS CANADA CREDIT AND FINANCIAL SERVICES OPERATIONS
On November 15, 2005, Sears Canada completed the sale of substantially all of the assets (principally net
credit card receivables of $1.3 billion and customer relationship intangibles of $0.4 billion) and liabilities of its
Credit and Financial Services operations to JPMorgan Chase & Co. (“JPMorgan Chase”) for approximately
$2.0 billion in cash proceeds, net of securitized receivables and other 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 at the time of the Merger, adjusted Sears
Canada’s assets and liabilities to fair value only to the extent of its proportionate share of ownership in these
assets and liabilities. The remaining portion of each asset and liability, representing the minority interest’s
proportionate ownership, was recorded at historical book value. Therefore, the excess of sales proceeds over the
recorded values for Sears Canada’s assets sold and liabilities transferred was attributable solely to the minority
shareholder interests, as the portion of proceeds allocable to the Company’s proportionate interest was equal to
the Merger assigned fair value for such assets and liabilities. Accordingly, the gain, solely allocable to the
minority interest, was properly eliminated via an increase in minority interest expense, resulting in no net gain to
Holdings.
Sears Canada used a portion of the cash proceeds it generated from the sale to fund an extraordinary cash
dividend and a tax-free return of stated capital to shareholders of record on December 16, 2005. Holdings, as
beneficial owner of approximately 54% of the outstanding common stock of Sears Canada at the time of the
distribution, received an after-tax distribution of approximately $877 million.
The following summarizes the assets and liabilities of the sold operations as of November 15, 2005.
millions
Credit card receivables, net of securitized amounts .......................... $1,347
Other assets, primarily credit card intangibles .............................. 425
Assets sold ..................................................... 1,772
Accounts payable and accrued liabilities .................................. 7
Net assets sold .................................................. $1,765
Prior to the sale of Sears Canada’s Credit and Financial Services operations, Sears Canada had securitized
certain of its credit card receivables through trusts. Sears Canada sold undivided co-ownership interests in its
portfolio of current and deferred charge accounts receivable to two separate trusts and retained the right to
receive the income generated by the undivided co-ownership interests sold to the trusts in excess of the trusts’
stipulated share of service charge revenues. The securitization trusts were transferred to JPMorgan Chase in
connection with the sale of this business. During fiscal 2005, the amounts recognized as income from the sale of
the credit card receivables to the trusts were not material.
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