Sears 2014 Annual Report Download - page 69

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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements
69
NOTE 1—SUMMARY OF SIGNFICANT ACCOUNTING POLICIES
Nature of Operations, Consolidation and Basis of Presentation
Sears Holdings Corporation ("Holdings") is the parent company of Kmart Holding Corporation ("Kmart") and
Sears, Roebuck and Co. ("Sears"). Holdings (together with its subsidiaries, "we," "us," "our," or the "Company")
was formed as a Delaware corporation in 2004 in connection with the merger of Kmart and Sears (the "Merger"), on
March 24, 2005. We are an integrated retailer with 1,725 full-line and specialty retail stores in the United States,
operating through Kmart and Sears. Through the third quarter of 2014, we conducted our operations under three
reportable segments: Kmart, Sears Domestic and Sears Canada. Following the de-consolidation of Sears Canada
discussed in Note 2, we have operated under two reportable segments: Kmart and Sears Domestic.
The consolidated financial statements include all majority-owned subsidiaries in which Holdings exercises
control. Investments in companies in which Holdings exercises significant influence, but which we do not control
(generally 20% to 50% ownership interest), are accounted for under the equity method of accounting. Investments in
companies in which we have less than a 20% ownership interest and do not exercise significant influence are
accounted for at cost. All intercompany transactions and balances have been eliminated.
Separation of Lands' End, Inc.
On April 4, 2014, we completed the separation of our Lands' End business through a spin-off transaction. The
separation was structured to be tax free to our U.S. shareholders for U.S. federal income tax purposes. Prior to the
separation, Lands' End, Inc. ("Lands' End") entered into an asset-based senior secured revolving credit facility,
which provided for maximum borrowings of approximately $175 million with a letter of credit sub-limit, and a
senior secured term loan facility of approximately $515 million. The proceeds of the term loan facility were used to
fund a $500 million dividend to Holdings and pay fees and expenses associated with the foregoing facilities. We
accounted for this spin-off in accordance with accounting standards applicable to spin-off transactions. Accordingly,
we classified the carrying value of net assets of $323 million contributed to Lands' End as a reduction of capital in
excess of par value in the Consolidated Statement of Equity (Deficit) for the year ended January 31, 2015.
Additionally, as a result of Mr. Lampert's role as our Chairman and Chief Executive Officer, and Chairman and
Chief Executive Officer of ESL Investments, Inc. (together with its affiliated fund, "ESL"), and the continuing
arrangements between Holdings and Lands' End (as further described in Note 15), Holdings has determined that it
has significant influence over Lands' End. Accordingly, the operating results for Lands' End through the date of the
spin-off are presented within the consolidated continuing operations of Holdings and the Sears Domestic segment in
the accompanying Consolidated Financial Statements.
In connection with the separation, Holdings and certain of its subsidiaries entered into various agreements with
Lands' End under the terms described in Note 15.
Separation of Sears Hometown and Outlet Businesses
On October 11, 2012, we completed the separation of our Sears Hometown and Outlet businesses through a
rights offering transaction. Holdings received gross proceeds of $446.5 million with respect to the transaction,
consisting of $346.5 million for the sale of Sears Hometown and Outlet Stores, Inc. ("SHO") common shares and
$100 million through a dividend from SHO prior to the separation. Prior to the separation, SHO entered into an
asset-based senior secured revolving credit facility with a group of financial institutions to provide (subject to
availability under a borrowing base) for aggregate maximum borrowings of $250 million. Borrowings of $100
million from this revolving credit facility were used to fund the dividend paid to Holdings. We accounted for this
separation in accordance with accounting standards applicable to common control transactions as ESL was a
majority shareholder of Holdings and became a majority shareholder of SHO as a result of exercising subscription
rights pursuant to the rights offering. Accordingly, we classified the difference between the proceeds received and
the carrying value of net assets contributed to SHO as a reduction of capital in excess of par value in the
Consolidated Statement of Equity (Deficit) for the period ended February 2, 2013.