Sears 2008 Annual Report Download - page 42

Orchard Supply Hardware LLC (“LLC”) Credit Agreement
In fiscal 2005, OSH LLC entered into a five-year, $130 million senior secured revolving credit facility (the
“OSH LLC Facility”), which includes a $25 million letter of credit sublimit. The OSH LLC Facility was
subsequently amended in December 2006 to expire in December 2011. The OSH LLC Facility is available for
OSH LLC’s general corporate purposes and is secured by a first lien on substantially all of OSH LLC’s non-real
estate assets. Availability under the OSH LLC Facility is determined pursuant to a borrowing base formula based
on inventory and account and credit card receivables, subject to certain limitations. As of January 31, 2009, there
were no borrowings outstanding under the OSH LLC Facility and $0.4 million in outstanding letters of credit.
Benefit and Pension Plan Obligations
Contributions to our pension plans remain a significant use of our cash on an annual basis. While Sears
Holdings’ pension plan is frozen and thus associates do not currently earn pension benefits, the company has a
legacy pension obligation for past service performed by Kmart and Sears, Roebuck and Co. associates. The
annual pension expense included in our financial statements related to these legacy domestic pension plans has
been relatively minimal in recent years (the expense was $1 million in 2008). However, due to the severe decline
in the capital markets that occurred in the latter part of 2008 our domestic pension expense will increase by an
estimated $160 to $175 million in 2009. We expect to contribute approximately $170 million to our domestic
pension plan in fiscal 2009. Further, as a result of the severe decline in capital markets that occurred in the latter
part of 2008, our pension contributions are expected to increase to approximately $500 million in 2010 if pension
funding reform is not enacted and/or the financial markets do not recover.
Wholly-owned Insurance Subsidiary and Inter-company Notes
As noted in Note 1 of Notes to Consolidated Financial Statements, we have 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, we sell extended service contracts to our customers. The
associated risks are managed through our wholly-owned insurance subsidiary. In accordance with applicable
insurance regulations, the insurance subsidiary holds investment grade securities to support the insurance
coverage it provides.
We have 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 fee
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 our wholly-owned consolidated subsidiaries in support of our
insurance activities. At January 31, 2009 and February 2, 2008, the net book value of the securitized real estate
assets was approximately $1.0 billion. The net book value of the securitized intellectual property assets was
approximately $0.9 billion and $1.0 billion at January 31, 2009 and February 2, 2008, respectively.
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