Sears 2006 Annual Report Download - page 78

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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
In addition, in November 2005, Holdings issued a call option to the private equity fund of Ares Management
LLC (“Ares”) in connection with Ares’ 19.9% investment in the voting stock of OSH. Ares paid the Company
$59 million in cash for the 19.9% equity interest and the call option, a three-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 of the option have been recorded as a component of other income in
the Company’s consolidated statement of income.
NOTE 9—INTEREST AND INVESTMENT INCOME
The following table sets forth the components of interest and investment income as reported in the
Company’s consolidated statements of income. The Company has reclassified previously reported amounts for
interest income and other investment income to conform to current-period presentation.
millions 2006 2005 2004
Interest income on cash and cash equivalents .......................... $151 $ 85 $ 38
Total return swap income ......................................... 74 — —
Other investment income ......................................... 29 42 3
Total ......................................................... $254 $127 $ 41
Interest Income on Cash and Cash Equivalents
The Company recorded interest income of $151 million, $85 million and $38 million for fiscal 2006, fiscal
2005 and fiscal 2004, respectively, primarily related to interest earned on cash and cash equivalents. These cash
and cash equivalents include all highly liquid investments with original maturities of three months or less at the
date of purchase. The Company’s invested cash may include, from time to time, investments in, but not limited
to, commercial paper, U.S. federal, state and municipal government securities, floating-rate notes, repurchase
agreements and money market funds. All invested cash amounts are readily available to the Company.
Total Return Swap Income
As discussed above in Note 8, the Company, from time to time, invests its surplus cash in various securities
and financial instruments, including total return swaps. During fiscal 2006, the Company entered into total return
swaps and recognized $74 million of investment income consisting of realized gains of $84 million and
unrealized losses of $2 million less $8 million of interest cost.
Other Investment Income
Other investment income primarily includes income generated by (and sales of investments in) certain real
estate joint ventures and other equity investments in which the Company does not have a controlling interest.
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