Sears 2009 Annual Report Download - page 43

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 30, 2010 and January 31, 2009, 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 at January 30, 2010 and January 31, 2009.
Contractual Obligations and Off-Balance Sheet Arrangements
Information concerning our obligations and commitments to make future payments under contracts such as
debt and lease agreements, and under contingent commitments, is aggregated in the following tables.
Payments Due by Period
Contractual Obligations Total Within 1 Year 1-3 Years 4-5 Years After 5 Years Other
millions
Operating leases ....................... $ 5,786 $ 810 $1,372 $ 978 $2,626 $—
Short-term debt ....................... 325 325 — — — —
Capital lease obligations ................ 1,089 130 248 223 488 —
Royalty license fees(1) .................. 102 74 19 9 — —
Purchase obligations ................... 62 8 30 24 — —
Pension funding obligations .............. 2,227 278 1,074 875 — —
Long-term debt ........................ 2,166 427 573 411 755 —
Liability and interest related to uncertain tax
positions(2) ......................... 381 — — — — 381
Total contractual obligations ............. $12,138 $2,052 $3,316 $2,520 $3,869 $381
(1) We pay royalties under various merchandise license agreements, which are generally based on sales of
products covered under these agreements. We currently have license agreements for which we pay royalties,
including those to use Jaclyn Smith and Joe Boxer. Royalty license fees represent the minimum Holdings is
obligated to pay, regardless of sales, as guaranteed royalties under these license agreements.
(2) As of January 30, 2010, our uncertain tax position liability and gross interest payable were $310 million and
$71 million, respectively. We are unable to reasonably estimate the timing of liabilities and interest
payments arising from uncertain tax positions in individual years due to the uncertainties in the timing of the
effective settlement of tax positions.
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