10-Q 1 shldq32018.htm 10-Q Document


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 3, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-51217, 001-36693
SEARS HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
DELAWARE
20-1920798
(State of Incorporation)
(I.R.S. Employer Identification No.)
 
 
3333 BEVERLY ROAD, HOFFMAN ESTATES, ILLINOIS
60179
(Address of principal executive offices)
(Zip Code)
Registrant's Telephone Number, Including Area Code: (847) 286-2500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   x               No    ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes    x          No    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
 
Accelerated filer   x
Non-accelerated filer   ¨
 
Smaller reporting company  ¨
 
 
Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes    ¨            No    x
As of December 7, 2018, the registrant had 109,236,080 common shares, $0.01 par value, outstanding.
 



SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 and 39 Weeks Ended November 3, 2018 and October 28, 2017
 
 
 
 
Page
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (Debtor-in-Possession)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.





SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Condensed Consolidated Statements of Operations
(Unaudited)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Debtor-in-Possession)
 
13 Weeks Ended
 
39 Weeks Ended
millions, except per share data
November 3,
2018
 
October 28,
2017
 
November 3,
2018
 
October 28,
2017
REVENUES
 
 
 
 
 
 
 
Merchandise sales
$
2,069

 
$
2,810

 
$
6,709

 
$
9,553

Services and other(1)(2)
673

 
765

 
2,106

 
2,499

Total revenues
2,742

 
3,575

 
8,815

 
12,052

COSTS AND EXPENSES
 
 
 
 
 
 
 
Cost of sales, buying and occupancy - merchandise sales(3)
1,945

 
2,448

 
5,899

 
8,042

Cost of sales and occupancy - services and other(1)
370

 
423

 
1,182

 
1,403

Total cost of sales, buying and occupancy
2,315

 
2,871

 
7,081

 
9,445

Selling and administrative
856

 
1,091

 
2,626

 
3,435

Depreciation and amortization
65

 
89

 
198

 
259

Impairment charges
236

 
9

 
327

 
29

Gain on sales of assets
(76
)
 
(316
)
 
(344
)
 
(1,437
)
Total costs and expenses
3,396

 
3,744

 
9,888

 
11,731

Operating income (loss)
(654
)
 
(169
)
 
(1,073
)
 
321

Reorganization items, net
(131
)
 

 
(131
)
 

Interest expense
(178
)
 
(136
)
 
(532
)
 
(387
)
Interest and investment income (loss)
10

 

 
13

 
(14
)
Other loss
(37
)
 
(248
)
 
(209
)
 
(540
)
Loss before income taxes
(990
)
 
(553
)
 
(1,932
)
 
(620
)
Income tax (expense) benefit
40

 
(3
)
 
50

 
59

NET LOSS ATTRIBUTABLE TO HOLDINGS' SHAREHOLDERS
$
(950
)
 
$
(556
)
 
$
(1,882
)
 
$
(561
)
NET LOSS PER COMMON SHARE ATTRIBUTABLE TO HOLDINGS' SHAREHOLDERS
 
 
 
 
 
 
 
Basic loss per share
$
(8.72
)
 
$
(5.17
)
 
$
(17.35
)
 
$
(5.23
)
Diluted loss per share
$
(8.72
)
 
$
(5.17
)
 
$
(17.35
)
 
$
(5.23
)
Basic weighted average common shares outstanding
109.0

 
107.5

 
108.5

 
107.3

Diluted weighted average common shares outstanding
109.0

 
107.5

 
108.5

 
107.3

(1) 
Includes merchandise sales to Sears Hometown and Outlet Stores, Inc. ("SHO") of $157 million and $209 million for the 13 weeks ended November 3, 2018 and October 28, 2017, respectively, and $538 million and $720 million for the 39 weeks ended November 3, 2018 and October 28, 2017, respectively. Pursuant to the terms of the separation, merchandise is sold to SHO at cost.
(2) Includes revenue from Lands' End, Inc. ("Lands' End") for retail services and rent for Lands' End Shops at owned Sears locations, participation in the Shop Your Way® program and corporate shared services of $8 million and $12 million for the 13 weeks ended November 3, 2018 and October 28, 2017, respectively, and $24 million and $36 million for the 39 weeks ended November 3, 2018 and October 28, 2017, respectively.
(3) Includes rent expense (consisting of straight-line rent expense offset by amortization of a deferred gain on sale-leaseback) of $11 million and $17 million for the 13 weeks ended November 3, 2018 and October 28, 2017, respectively, and $38 million and $55 million for the 39 weeks ended November 3, 2018 and October 28, 2017, respectively, pursuant to the master lease with Seritage Growth Properties ("Seritage"). Also includes installment expenses of $8 million and $10 million for the 13 weeks ended November 3, 2018 and October 28, 2017, respectively, and $26 million and $34 million for the 39 weeks ended November 3, 2018 and October 28, 2017, respectively, pursuant to the master leases with Seritage.
See accompanying notes.

3


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Condensed Consolidated Statements of Comprehensive Loss
 (Unaudited)
 
13 Weeks Ended
 
39 Weeks Ended
millions
November 3,
2018
 
October 28,
2017
 
November 3,
2018
 
October 28,
2017
Net loss
$
(950
)
 
$
(556
)
 
$
(1,882
)
 
$
(561
)
Other comprehensive income
 
 
 
 
 
 
 
Pension and postretirement adjustments, net of tax
45

 
200

 
299

 
377

Currency translation adjustments, net of tax
(3
)
 
1

 
(3
)
 
2

Total other comprehensive income
42

 
201

 
296

 
379

Comprehensive loss attributable to Holdings' shareholders
$
(908
)
 
$
(355
)
 
$
(1,586
)
 
$
(182
)






































See accompanying notes.

4


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Condensed Consolidated Balance Sheets
(Unaudited)

millions
November 3,
2018
 
October 28,
2017
 
February 3,
2018
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
526

 
$
200

 
$
182

Restricted cash
281

 
154

 
154

Accounts receivable(1)
354

 
378

 
343

Merchandise inventories
2,324

 
3,452

 
2,798

Prepaid expenses and other current assets(2)
310

 
364

 
346

Total current assets
3,795

 
4,548

 
3,823

Property and equipment (net of accumulated depreciation and amortization of $2,311, $2,451 and $2,381)
1,495

 
1,855

 
1,729

Goodwill
269

 
269

 
269

Trade names and other intangible assets
861

 
1,244

 
1,168

Other assets
257

 
294

 
284

TOTAL ASSETS
$
6,677

 
$
8,210

 
$
7,273

LIABILITIES
 
 
 
 
 
Current liabilities
 
 
 
 
 
Short-term borrowings(3)
$
934

 
$
1,061

 
$
915

Current portion of long-term debt and capitalized lease obligations(4)
513

 
1,310

 
968

Debtor-in-possession credit facility
112

 

 

Merchandise payables
102

 
772

 
576

Other current liabilities(5)
991

 
1,547

 
1,575

Unearned revenues
619

 
676

 
641

Other taxes
177

 
290

 
247

Total current liabilities
3,448

 
5,656

 
4,922

Long-term debt and capitalized lease obligations(6)
1,779

 
2,032

 
2,249

Pension and postretirement benefits
137

 
1,641

 
1,619

Deferred gain on sale-leaseback
249

 
446

 
362

Sale-leaseback financing obligation
424

 
247

 
247

Unearned revenues
809

 
563

 
539

Other long-term liabilities
464

 
1,001

 
935

Long-term deferred tax liabilities
83

 
634

 
126

Total liabilities not subject to compromise
7,393

 
12,220

 
10,999

Liabilities subject to compromise(7)
4,595

 

 

Commitments and contingencies


 


 


DEFICIT
 
 
 
 
 
Total Deficit
(5,311
)
 
(4,010
)
 
(3,726
)
TOTAL LIABILITIES AND DEFICIT
$
6,677

 
$
8,210

 
$
7,273


(1) 
Includes $29 million, $26 million and $28 million of net amounts receivable from SHO, and $1 million, $7 million and $1 million of amounts receivable from Seritage at November 3, 2018, October 28, 2017 and February 3, 2018, respectively. Also includes $1 million of net amounts receivable from Lands' End at February 3, 2018.
(2) Includes $4 million and $6 million prepaid rent to Seritage at November 3, 2018 and February 3, 2018, respectively.
(3) Includes balances held by related parties of $553 million and $645 million at October 28, 2017 and February 3, 2018, respectively, related to our Line of Credit Loans and Incremental Loans at October 28, 2017 and February 3, 2018, and unsecured commercial paper at October 28, 2017. See Note 3 for defined terms and Notes 3 and 12 for further information.
(4) Includes balances held by related parties of $513 million at November 3, 2018 related to our Mezzanine Loan and Additional Mezzanine Loans and $199 million and $146 million at October 28, 2017 and February 3, 2018, respectively, related to our 2016 Secured Loan Facility and our Old Senior Secured Notes for both periods. See Note 3 for defined terms and Notes 3 and 12 for further information.
(5) Includes $2 million of amounts payable to Lands' End at November 3, 2018.
(6) 
Includes balances held by related parties of $1.0 billion, $1.2 billion and $1.5 billion at November 3, 2018, October 28, 2017 and February 3, 2018, respectively, related to our 2016 Term Loan for all periods presented, our Consolidated Secured Loan Facility and FILO Loan at November 3, 2018, our Term Loan Facility at November 3, 2018 and February 3, 2018, our 2017 Secured Loan Facility, Subsidiary Notes, Old Senior Unsecured Notes and Second Lien Term Loan at October 28, 2017 and February 3, 2018, and our Old Senior Secured Notes at October 28, 2017. See Note 3 for defined terms and Notes 3 and Note 12 for further information.
(7) 
Includes balances held by related parties of $1.3 billion at November 3, 2018 related to our Second Lien Term Loan, Line of Credit Loans, New Senior Secured Notes, Old Senior Unsecured Notes and New Senior Unsecured Notes.
See accompanying notes.

5


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
39 Weeks Ended
millions
November 3,
2018
 
October 28,
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(1,882
)
 
$
(561
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Deferred tax valuation allowance
(11
)
 
(120
)
Tax benefit resulting from Other Comprehensive Income allocation
(27
)
 

Depreciation and amortization
198

 
259

Reorganization items, net(1)
127

 

Impairment charges
327

 
29

Gain on sales of assets
(344
)
 
(1,437
)
Pension and postretirement plan contributions
(345
)
 
(271
)
Pension plan settlements
120

 
403

Payment for insurance transaction
(208
)
 

Proceeds from Citibank amendment
425

 

Mark-to-market adjustments of financial instruments

 
17

Amortization of deferred gain on sale-leaseback
(50
)
 
(59
)
Amortization of debt issuance costs and accretion of debt discount
92

 
93

Non-cash PIK interest
56

 

Other
(8
)
 
(36
)
Change in operating assets and liabilities (net of acquisitions and dispositions):
 
 
 
Deferred income taxes
(33
)
 
11

Merchandise inventories
474

 
490

Merchandise payables
185

 
(276
)
Income and other taxes
(53
)
 
(30
)
Other operating assets
(13
)
 

Other operating liabilities
(153
)
 
(413
)
Net cash used in operating activities
(1,123
)
 
(1,901
)
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Proceeds from sales of property and investments
402

 
867

Proceeds from Craftsman Sale

 
572

Proceeds from sales of receivables(2)

 
293

Purchases of property and equipment
(45
)
 
(59
)
Net cash provided by investing activities
357

 
1,673

 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Increase in debtor-in-possession credit facility
112

 

Debtor-in-possession credit facility debt issuance costs
(10
)
 

Proceeds from debt issuances(3)
1,423

 
638

Repayments of debt(4)
(1,024
)
 
(887
)
Increase in short-term borrowings, primarily 90 days or less
565

 
464

Proceeds from sale-leaseback financing
206

 
106

Debt issuance costs(5)
(35
)
 
(25
)
Net cash provided by financing activities
1,237

 
296

 
 
 
 
NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
471

 
68

TOTAL CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF YEAR
336

 
286

TOTAL CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
$
807

 
$
354

 
 
 
 
Supplemental Cash Flow Data:
 
 
 
Income taxes paid, net of refunds
$
16

 
$
33

Cash interest paid(6)
314

 
285

Unpaid liability to acquire equipment and software
18

 
9

PIK interest included within other operating liabilities
14

 


See accompanying notes.




6



(1) Reorganization items, net includes cash flows from financing activities of $10 million for debtor-in-possession credit facility debt issuance costs.
(2) Proceeds in 2017 include $63 million from JPP, LLC and JPP II, LLC, entities affiliated with ESL (as defined in Note 1), for the sale of receivables.
(3) Proceeds in 2018 include $928 million from related parties in connection with the Consolidated Secured Loan Facility, FILO Loan, Mezzanine Loan, Additional Mezzanine Loans, Line of Credit Loans and additional borrowings from the 2017 Secured Loan Facility. Proceeds in 2017 include $553 million from related parties in connection with the Line of Credit Loans and Incremental Loans. See Notes 3 and 12 for further information.
(4) Repayments in 2018 include $67 million to related parties in connection with the Term Loan Facility, 2017 Secured Loan Facility, Incremental Loans and 2016 Secured Loan Facility. Repayments in 2017 include $299 million to related parties in connection with the 2017 Secured Loan Facility, 2016 Secured Loan Facility, Incremental Loans, 2016 Term Loan and Line of Credit Loans. See Notes 3 and 12 for further information.
(5) Includes fees related to our borrowings of $13 million paid to related parties during the 39 weeks ended November 3, 2018. Includes a one-time extension fee equal to $4 million to JPP, LLC and JPP II, LLC, entities affiliated with ESL (as defined in Note 1) during the 39 weeks ended October 28, 2017. See Note 3 for further information.
(6) Cash interest paid includes $140 million and $114 million interest paid to related parties related to our borrowings during the 39 weeks ended November 3, 2018 and October 28, 2017, respectively. See Notes 3 and 12 for further information.


7


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Condensed Consolidated Statements of Deficit
(Unaudited)
 
Deficit Attributable to Holdings' Shareholders
 
dollars and shares in millions
Number
of
Shares
Common
Stock
Treasury
Stock
Capital in
Excess of
Par Value
Retained Earnings (Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance at January 28, 2017
107

$
1

$
(5,891
)
$
9,130

$
(5,519
)
$
(1,552
)
$
(3,831
)
Comprehensive income
 
 
 
 
 
 
 
Net income




245


245

Pension and postretirement adjustments, net of tax





50

50

Currency translation adjustments, net of tax





1

1

Total Comprehensive Income
 
 
 
 
 
 
296

Stock awards


15

(14
)


1

Associate stock purchase


1




1

Balance at April 29, 2017
107

1

(5,875
)
9,116

(5,274
)
(1,501
)
(3,533
)
Comprehensive loss
 
 
 
 
 
 
 
Net loss




(250
)

(250
)
Pension and postretirement adjustments, net of tax





127

127

Total Comprehensive Loss
 
 
 
 
 
 
(123
)
Stock awards


12

(14
)


(2
)
Associate stock purchase


2




2

Balance at July 29, 2017
107

1

(5,861
)
9,102

(5,524
)
(1,374
)
(3,656
)
Comprehensive loss
 
 
 
 
 
 
 
Net loss




(556
)

(556
)
Pension and postretirement adjustments, net of tax





200

200

Currency translation adjustments, net of tax





1

1

Total Comprehensive Loss
 
 
 
 
 
 
(355
)
Stock awards
1


15

(16
)


(1
)
Associate stock purchase


2




2

Balance at October 28, 2017
108

$
1

$
(5,844
)
$
9,086

$
(6,080
)
$
(1,173
)
$
(4,010
)
Balance at February 3, 2018
108

$
1

$
(5,820
)
$
9,063

$
(5,898
)
$
(1,072
)
$
(3,726
)
Comprehensive loss
 
 
 
 
 
 
 
Net loss




(424
)

(424
)
Pension and postretirement adjustments, net of tax





36

36

Currency translation adjustments, net of tax





1

1

Total Comprehensive Loss
 
 
 
 
 
 
(387
)
Stock awards


48

(52
)


(4
)
Associate stock purchase


4




4

Balance at May 5, 2018
108

1

(5,768
)
9,011

(6,322
)
(1,035
)
(4,113
)
Comprehensive loss
 
 
 
 
 
 
 
Net loss




(508
)

(508
)
Pension and postretirement adjustments, net of tax





218

218

Currency translation adjustments, net of tax





(1
)
(1
)
Total Comprehensive Loss
 
 
 
 
 
 
(291
)
Stock awards
1


49

(51
)


(2
)
Associate stock purchase


4




4

Balance at August 4, 2018
109

1

(5,715
)
8,960

(6,830
)
(818
)
(4,402
)
Comprehensive loss
 
 
 
 
 
 
 
Net loss




(950
)

(950
)
Pension and postretirement adjustments, net of tax





45

45

Currency translation adjustments, net of tax





(3
)
(3
)
Total Comprehensive Loss
 
 
 
 
 
 
(908
)
Stock awards


32

(41
)


(9
)
Associate stock purchase


8




8

Balance at November 3, 2018
109

$
1

$
(5,675
)
$
8,919

$
(7,780
)
$
(776
)
$
(5,311
)
See accompanying notes.

8


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements
(Unaudited)


NOTE 1—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 766 full-line and specialty retail stores as of November 3, 2018 in the United States, operating through Kmart and Sears. As previously announced, an additional 241 stores will close during the fourth quarter of 2018. We operate under two reportable segments: Kmart and Sears Domestic.
These interim unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full fiscal year. The retail business is seasonal in nature, and we generate a high proportion of our revenues and operating cash flows during the fourth quarter of our fiscal year, which includes the holiday season. These interim financial statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2018.
On October 15, 2018 (the "Petition Date"), Holdings and certain of its subsidiaries (collectively, the "Debtors") filed voluntary petitions (the "Chapter 11 Cases") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") seeking relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"). The Chapter 11 Cases are being jointly administered under the caption "In re Sears Holdings Corporation, et al., Case No. 18-23538." Documents filed on the docket of and other information related to the Chapter 11 Cases are available free of charge online at https://restructuring.primeclerk.com/sears. Documents and other information available on such website are not part of this document and shall not be deemed incorporated by reference in this document.
The accompanying interim Unaudited Condensed Consolidated Financial Statements have been prepared assuming that Holdings will continue as a going concern and contemplates continuity of operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. Our ability to continue as a going concern is contingent upon our ability to comply with the financial and other covenants contained in the Senior and Junior debtor-in-possession ("DIP") financing described in Note 3, and our ability to successfully develop and, subject to the Bankruptcy Court's approval, implement, a restructuring plan, among other factors. We have significant indebtedness. Our level of indebtedness has adversely impacted and continues to adversely impact our financial condition. In addition, the filing of the Chapter 11 Cases constituted an event of default with respect to certain of our existing debt obligations. As a result, our financial condition and the risks and uncertainties surrounding our Chapter 11 proceedings raise substantial doubt as to our ability to continue as a going concern.
Furthermore, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in-possession under Chapter 11, the Debtors may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business and subject to restrictions of our DIP financing (see Note 3) and applicable orders of the Bankruptcy Court, for amounts other than those reflected in the accompanying Unaudited Condensed Consolidated Financial Statements. Any such actions occurring during the Chapter 11 proceedings confirmed by the Bankruptcy Court could materially impact the amounts and classifications of assets and liabilities reported in Holdings' interim Unaudited Condensed Consolidated Financial Statements. The Debtors are currently pursuing a going-concern sale process for the stores after closures (for further information on such closures see Note 4). The Debtors must obtain or find acceptable a non-contingent and fully-financed (with committed financing containing customary limited conditionality consistent with acquisition financing commitments) stalking horse bid for the sale of the go forward stores (which may be either on a going-concern or liquidation basis) that is reasonably acceptable to the administrative agent and co-collateral agents party to the Senior DIP Credit Agreement, as defined in Note 3, (a "Qualified Stalking Horse Bid") on or prior to December 15, 2018. Failure to obtain and find acceptable a Qualified

9


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

Stalking Horse bid by December 15, 2018, shall not constitute an event of default or default under the Senior DIP Credit Agreement or the Junior DIP Credit Agreement so long as the Debtors are diligently pursuing a process reasonably acceptable to the applicable administrative agents and collateral agents designed for bidding procedures and the selection of a stalking horse bid for the sale of the go forward stores by December 27, 2018.
Under the absolute priority scheme established by the Bankruptcy Code, unless our creditors agree otherwise, all of our pre-petition liabilities and post-petition liabilities must be satisfied in full before the holders of our existing common stock may receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or shareholders, if any, will not be determined until confirmation and implementation of a plan or plans of reorganization. We can give no assurance that any recovery or distribution of any amount will be made to any of our creditors or shareholders. Our plan of reorganization could result in any of the holders of our liabilities and/or securities, including our common stock, receiving no distribution on account of their interests and cancellation of their holdings. Moreover, a plan of reorganization can be confirmed, under the Bankruptcy Code, even if the holders of our common stock vote against the plan of reorganization and even if the plan of reorganization provides that the holders of our common stock receive no distribution on account of their equity interests. The accompanying Unaudited Condensed Consolidated Financial Statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern or as a consequence of the filing of the Chapter 11 Cases. Refer to Note 2 for additional information.
Citibank Amendment
In May 2018, the Company entered into an amendment to the program agreement with Citibank, N.A. (the "Citibank Amendment"), pursuant to which Citibank offers Sears proprietary and co-branded credit cards and administers the associated credit card program (the "Program"). The Citibank Amendment provides for a five-year extension (through November 2, 2025) of our 15-year co-brand and private label credit card relationship along with long-term marketing arrangements that include ongoing enhancements to the Shop Your Way MasterCard rewards program.
The Citibank Amendment removes Sears' credit cards, other than Sears' proprietary cards, not enrolled in a rewards program or enrolled in the "Thank You" rewards program (the "TY/NR Portfolio") from the Program. Under a separate marketing agreement entered in conjunction with the Citibank Amendment, the Company will continue to receive payments from Citibank in respect of the TY/NR Portfolio, which payments will be determined substantially consistent with how such payments were determined under the Program prior to the Citibank Amendment through December 31, 2020 and will thereafter be based on total sales for the TY/NR Portfolio. Credit cards in the TY/NR Portfolio will continue to be accepted in Sears' sales channels. The Citibank Amendment provides for the Company to continue to receive payments from Citibank in respect of the remaining card portfolio under the Program, which payments will be determined substantially consistent with how such payments were determined under the Program prior to the Citibank Amendment through December 31, 2020 and will thereafter be based on new account spend and total sales for the credit card portfolio.
The Citibank Amendment removes the Company's right to purchase, or arrange for a third-party to purchase, Program-related assets in certain circumstances, including upon termination or expiry of the Program, except that the Company will have such right if it elects to extend the Program through November 2, 2027, subject to the satisfaction of the performance conditions, and the Program continues through such date, or in certain circumstances if Sears terminates the Program Agreement because of an uncured material breach of Citibank's obligations thereunder. Sears will have no right to purchase the TY/NR Portfolio being removed from the Program.
Pursuant to the Citibank Amendment, Citibank paid Sears $425 million, and Sears funded a reserve for the benefit of Citibank in the amount of $25 million through an irrevocable standby letter of credit from a third-party financial institution. The Company accounted for the Citibank Amendment in accordance with accounting standards applicable to revenue from contracts with customers. The Company initially deferred the $425 million received for the Citibank Amendment and will recognize the revenue over the term of the Program as we satisfy the related performance obligation over time. During the 13- and 39- weeks ended November 3, 2018, the Company recognized revenues of $14 million and $28 million, respectively, and expects to recognize revenue of $57 million within the next 12 months and $340 million of revenue thereafter. The Company has accordingly included these amounts within current and long-term unearned revenues, respectively.

10


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

Adoption of Accounting Standards Updates: Revenue from Contracts with Customers and Compensation - Retirement Benefits
In May 2014, the Financial Accounting Standards Board ("FASB") issued accounting standards updates which replace the current revenue recognition standards. Subsequently, the FASB has also issued accounting standards updates which clarify the guidance. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The updates may be applied retrospectively for each period presented or as a cumulative-effect adjustment at the date of adoption.
The Company adopted the update in the first quarter of 2018 using the full retrospective method, and, therefore, comparative financial statements of prior years have been adjusted to apply the new standard retrospectively. The adoption impacted the accounting for our Shop Your Way® program, revenues from gift cards and merchandise returns. The expense for Shop Your Way points was previously recognized as customers earned points and recorded within cost of sales. The new guidance requires the Company to allocate the transaction price to products and points on a relative standalone selling price basis, deferring the portion of revenue allocated to the points and recognizing a contract liability for unredeemed points. The change in the accounting for the Shop Your Way program reduced revenue, but had no impact to gross margin. The new guidance also changed the timing of recognition of the unredeemed portion of our gift cards, which was previously recognized using the remote method. The new guidance requires application of the proportional method. The Company reports revenues from merchandise sales net of estimated returns. The new guidance requires the Company to record both an asset and a liability for anticipated customer returns.
The Company elected the following practical expedients with respect to accounting standards for revenue from contracts with customers:
The Company elected not to disclose the aggregate amount of the transaction price allocated to remaining performance obligations for its contracts that are one year or less, as the revenue is expected to be recognized within the next year;
The Company has applied the accounting guidance using the portfolio approach as we believe that the effects of applying the guidance to the portfolio would not differ materially from applying the guidance to the individual contracts within that portfolio;
For completed contracts, the Company has elected to not restate contracts that begin and end within the same annual reporting period;
For completed contracts that have variable consideration, the Company has elected to use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods;
The Company applied the update retrospectively for each period presented, but for all reporting periods presented before the date of initial application, the Company elected not to disclose the amount of the transaction price allocated to the remaining performance obligations or an explanation of when the entity expects to recognize that amount as revenue;
For contracts that were modified before the beginning of the earliest reporting period, the Company has elected to not retrospectively restate the contract for those contract modifications and there was no aggregate effect of modifications that occurred before the beginning of the earliest period.
The Company has made an accounting policy election to exclude from the measurement of transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer (sales tax, value added tax, etc.).
The Company has made an accounting policy election to account for shipping and handling activities performed after a customer obtains control of the good as activities to fulfill the promise to transfer the good.
In addition, in March 2017, the FASB issued an accounting standards update which requires an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered

11


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

by the pertinent employees during the period. It also requires the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendments in the update must be applied retrospectively. The Company adopted the update in the first quarter of 2018. The adoption of the new standard reduced selling and administrative and operating loss and increased other loss in the Condensed Consolidated Statements of Operations by $248 million and $540 million for the 13- and 39- weeks ended October 28, 2017, respectively.
The following financial statement line items for the periods presented were affected by the adoption of these new standards. Also, retained deficit as of January 31, 2016 increased from $3,291 million, as originally reported, to $3,310 million as a result of the adoption of the new revenue standard.
Condensed Consolidated Statement of Operations
 
 
 
 
 
 
13 Weeks Ended
 
October 28, 2017
millions, except per share data
As Originally Reported
 
As Adjusted
 
Effect of Adoption of New Standard
Merchandise sales
$
2,893

 
$
2,810

 
$
(83
)
Services and other
767

 
765

 
(2
)
Cost of sales, buying and occupancy - merchandise sales
2,535

 
2,448

 
(87
)
Operating loss
(419
)
 
(169
)
 
250

Net loss attributable to Holdings' Shareholders
(558
)
 
(556
)
 
2

Basic loss per share
(5.19
)
 
(5.17
)
 
0.02

 
 
 
 
 
 
 
39 Weeks Ended
 
October 28, 2017
millions, except per share data
As Originally Reported
 
As Adjusted
 
Effect of Adoption of New Standard
Merchandise sales
$
9,820

 
$
9,553

 
$
(267
)
Services and other
2,506

 
2,499

 
(7
)
Cost of sales, buying and occupancy - merchandise sales
8,320

 
8,042

 
(278
)
Operating loss
(223
)
 
321

 
544

Net loss attributable to Holdings' Shareholders
(565
)
 
(561
)
 
4

Basic loss per share
(5.27
)
 
(5.23
)
 
0.04


12


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

Condensed Consolidated Balance Sheets
 
 
 
 
 
 
January 28, 2017
millions
As Originally Reported
 
As Adjusted
 
Effect of Adoption of New Standard
Prepaid expenses and other current assets
$
285

 
$
300

 
$
15

Other current liabilities
1,956

 
1,971

 
15

Other long-term liabilities
1,002

 
1,009

 
7

Total Deficit
(3,824
)
 
(3,831
)
 
(7
)
 
 
 
 
 
 
 
October 28, 2017
millions
As Originally Reported
 
As Adjusted
 
Effect of Adoption of New Standard
Prepaid expenses and other current assets
$
347

 
$
364

 
$
17

Other current liabilities
1,534

 
1,547

 
13

Other long-term liabilities
994

 
1,001

 
7

Total Deficit
(4,007
)
 
(4,010
)
 
(3
)
 
 
 
 
 
 
 
February 3, 2018
millions
As Originally Reported
 
As Adjusted
 
Effect of Adoption of New Standard
Prepaid expenses and other current assets
$
335

 
$
346

 
$
11

Other current liabilities
1,568

 
1,575

 
7

Other long-term liabilities
928

 
935

 
7

Total Deficit
(3,723
)
 
(3,726
)
 
(3
)
Condensed Consolidated Statements of Cash Flows
 
 
 
 
 
 
39 Weeks Ended
 
October 28, 2017
millions
As Originally Reported
 
As Adjusted
 
Effect of Adoption of New Standard
Net loss
$
(565
)
 
$
(561
)
 
$
4

Change in other operating liabilities
(409
)
 
(413
)
 
(4
)
The Company's accounting policies, as updated from our Annual Report on Form 10-K for the year ended February 3, 2018, pursuant to the adoption of the new revenue standard, are as follows.
Revenue Recognition
Revenues from contracts with customers include sales of merchandise, services and extended service contracts, delivery and handling revenues related to merchandise sold, and fees earned from co-branded credit card programs. Revenue is measured based on the amount of fixed consideration that we expect to receive, reduced by estimates for variable consideration such as returns and promotional discounts. Revenue also excludes any amounts collected on behalf of third parties, including sales taxes. In arrangements where we have multiple performance obligations, the transaction price is allocated to each performance obligation using the relative stand-alone selling price. We

13


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

generally determine stand-alone selling prices based on the prices charged to customers or using expected cost plus a margin. We generally receive payments from customers for sales of merchandise, extended service contracts, product installation, and delivery and handling at the point of sale and payments from customers for services, fees from co-branded credit card programs and agreements with SHO and Lands' End when the performance obligations are satisfied.
We recognize revenues from retail operations upon the transfer of control of the goods to the customer. The Company satisfies its performance obligation at the point of sale for retail store transactions and upon delivery for online transactions. We defer the recognition of layaway sales and profit until the period in which the customer takes possession of the merchandise, which is when our related performance obligation has been satisfied. For retail store and online transactions where the Company has not transferred control of the goods to the customer at the end of the period, the performance obligation is generally satisfied in the following reporting period.
Revenues from the sale of service contracts and the related direct acquisition costs are deferred and amortized over the lives of the associated contracts, while the associated service costs are expensed as incurred. The Company satisfies its performance obligations for service contracts over time as the Company is obligated to perform the related services over the contract period, while payment from the customer is generally received at the inception of the service contract. Revenues from product installation and repair services are recognized at the time the services are provided, which is also when the Company has satisfied its performance obligations.
Revenues earned in connection with our agreements with SHO and Lands' End are earned upon the transfer of control of merchandise or the satisfaction of the service performance obligation.
The Company has a Shop Your Way program in which customers earn points on purchases which may be redeemed to pay for future purchases. Points earned pursuant to the Shop Your Way program represent performance obligations and the Company allocates revenue between the merchandise or service and Shop Your Way points based on the relative stand-alone selling price of each performance obligation. The Company uses a portfolio approach and the expected cost plus margin approach to determine the stand-alone selling price of Shop Your Way points. The Company's assessment also incorporates our estimate of Shop Your Way points that we expect will not be redeemed (breakage) based on historical redemption patterns. Revenue related to Shop Your Way points is initially deferred and recognized when the points are redeemed or expire. The Company expects to recognize revenue related to the Shop Your Way points performance obligation within one year from when the points are earned by the customer.
We sell gift cards to customers at our retail stores and through our direct to customer operations. The gift cards generally do not have expiration dates. Revenues from gift cards are recognized when the gift card is redeemed by the customer. The Company also recognizes the estimated value of gift cards we expect will not be redeemed (gift card breakage) as revenue in proportion to the redemption of gift cards based on historical redemption patterns when we determine that we do not have a legal obligation to remit the value of the unredeemed gift cards to the relevant jurisdictions.
We also earn revenues through arrangements with third-party financial institutions that manage and directly extend credit relative to our co-branded credit card programs. The third-party financial institutions pay us for generating new accounts and sales activity on co-branded cards, as well as for selling other financial products to cardholders. We recognize these revenues over time as our related performance obligations have been satisfied.
Revenues from merchandise sales are reported net of estimated returns and exclude sales taxes. The typical return period is 30 days and the refund liability for returns is calculated as a percentage of sales based on historical return percentages. Estimated returns are recorded as a reduction of sales and cost of sales. We offer assurance-type warranties on certain Kenmore®, Craftsman®, and DieHard® branded products, as well as on certain services, that we do not consider performance obligations.
Cost of Sales, Buying and Occupancy
Cost of sales, buying and occupancy are comprised principally of the costs of merchandise, buying, warehousing and distribution (including receiving and store delivery costs), retail store occupancy costs, product repair, and home service and installation costs, customer shipping and handling costs, vendor allowances, markdowns and physical inventory losses.

14


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

Pension Benefit Guaranty Corporation Agreement
On March 18, 2016, we entered into a five-year pension plan protection and forbearance agreement (the "PPPFA") with the Pension Benefit Guaranty Corporation ("PBGC"), pursuant to which the Company has agreed to continue to protect, or "ring-fence," pursuant to customary covenants, the assets of certain special purpose subsidiaries (the "Relevant Subsidiaries") holding real estate and/or intellectual property assets related to the Kenmore and DieHard trade names. At October 28, 2017 and February 3, 2018, respectively, the net book value of the securitized real estate assets held by the Relevant Subsidiaries was approximately $0.6 billion and $0.5 billion. The net book value of the securitized trademark rights held by the Relevant Subsidiaries was approximately $0.5 billion at November 3, 2018 and was approximately $0.7 billion at both October 28, 2017 and February 3, 2018. Also under the agreement, the Relevant Subsidiaries granted the PBGC a springing lien on the ring-fenced assets, which lien will be triggered only by (a) failure to make required contributions to the Company's pension plans (the "Plans"), (b) prohibited transfers of ownership interests in the Relevant Subsidiaries, (c) termination events with respect to the Plans, or (d) bankruptcy events with respect to the Company or certain of its material subsidiaries, in each case subject to certain additional conditions that have not been satisfied to date. Under the PPPFA, the PBGC has agreed to forbear from initiating an involuntary termination of the Plans, except upon the occurrence of certain specified conditions, which includes among other things, a voluntary bankruptcy event such as the Chapter 11 Cases.
In November 2017, we entered into an amendment to the PPPFA which provided for the release of 138 of our properties from a ring-fence arrangement, which is further described below and in Note 6.
In August 2018, we entered into an amendment to the PPPFA which provided for the release of 12 of our properties from a ring fence arrangement, which had originally been granted in connection with the Craftsman Sale, as defined below, in exchange for a contribution of $32 million into an escrow for the benefit of our pension plans (the "Required Deposit"). The Required Deposit was made on August 30, 2018, using funds generated from the sale and leaseback of one of the 12 properties.
On November 27, 2018, amounts deposited in escrow for the benefit of our pension plans equal to $281 million were transferred to our pension plans. The amounts had been included within restricted cash in the Condensed Consolidated Balance Sheets at November 3, 2018.
Craftsman Brand Sale
On March 8, 2017, the Company closed its sale of the Craftsman brand to Stanley Black & Decker (the "Craftsman Sale"). The transaction provides Stanley Black & Decker with the right to develop, manufacture and sell Craftsman-branded products outside of Holdings and Sears Hometown & Outlet Stores, Inc. distribution channels. As part of the transaction, Holdings is permitted to continue to offer Craftsman-branded products, sourced from existing suppliers, through its current retail channels via a perpetual license from Stanley Black & Decker, which will be royalty-free for the first 15 years after closing and royalty-bearing thereafter.
The Company received an initial upfront payment of $525 million, subject to closing costs and an adjustment for working capital changes, at closing. In addition, Stanley Black & Decker will pay a further $250 million in cash in three years (the "Craftsman Receivable") and Holdings will receive payments of between 2.5% and 3.5% on new Stanley Black & Decker sales of Craftsman products made during the 15-year period following the closing. In connection with the Craftsman Sale, we recognized a gain in our Kmart segment of $492 million within gain on sales of assets in the Condensed Consolidated Statements of Operations for the 26 weeks ended July 29, 2017, and initially established a receivable of $234 million for the net present value of the Craftsman Receivable. During the 13 weeks ended July 29, 2017, we sold the Craftsman Receivable to a third-party purchaser.
In connection with the closing of the Craftsman Sale, Holdings reached an agreement with the PBGC pursuant to which the PBGC consented to the sale of the Craftsman-related assets that had been "ring-fenced" under the PPPFA and certain related transactions. As a condition to obtaining this consent, the Company agreed to grant the PBGC a lien on, and subsequently contributed to the Company's pension plans, the value of the Craftsman Receivable.
The Company also granted a lien to the PBGC on the 15-year income stream relating to new Stanley Black & Decker sales of Craftsman products, and agreed to contribute the payments from Stanley Black & Decker under such income stream to the Company's pension plans, with such payments to be credited against the Company's minimum pension funding obligations starting no later than five years from the closing date. The Company also

15


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

agreed to grant the PBGC a lien on $100 million of real estate assets to secure the Company's minimum pension funding obligations through the end of 2019 and agreed to certain other amendments to the PPPFA. The real estate assets were released from the ring-fence arrangement in August 2018 as described above and in Note 6.
Cash and Cash Equivalents and Restricted Cash
Our cash and cash equivalents include all highly liquid investments with original maturities of three months or less at the date of purchase. The Company classifies cash balances that are legally restricted pursuant to contractual arrangements as restricted cash. The restricted cash balance relates to amounts deposited in escrow for the benefit of our pension plans at each of November 3, 2018, October 28, 2017 and February 3, 2018. The amounts deposited in escrow for the benefit of our pension plans equal to $281 million were transferred to our pension plans on November 27, 2018.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows as of November 3, 2018, October 28, 2017 and February 3, 2018.
millions
November 3,
2018
 
October 28,
2017
 
February 3,
2018
Cash and cash equivalents
$
436

 
$
122

 
$
113

Cash posted as collateral
5

 
4

 
4

Credit card deposits in transit
85

 
74

 
65

Total cash and cash equivalents
526

 
200

 
182

Restricted cash
281

 
154

 
154

Total cash balances
$
807

 
$
354

 
$
336

Depreciation Expense
Depreciation expense included within depreciation and amortization reported in the Condensed Consolidated Statements of Operations was $65 million and $88 million for the 13 week periods ended November 3, 2018 and October 28, 2017, respectively, and $196 million and $256 million for the 39 week periods ended November 3, 2018 and October 28, 2017, respectively.
Sears Canada
At each of November 3, 2018, October 28, 2017 and February 3, 2018, the Company was the beneficial holder of approximately 12 million, or 12%, of the common shares of Sears Canada. In July 2017, Sears Canada filed for court protection and trading of its common shares was suspended. Accordingly, we recognized other-than-temporary impairment of $12 million, thereby reducing the carrying value to zero, within interest and investment loss in our Condensed Consolidated Statements of Operations during the 39 weeks ended October 28, 2017.

16


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

NOTE 2—BANKRUPTCY FILING
Chapter 11 Proceedings
On the Petition Date, the Debtors filed voluntary petitions in the Bankruptcy Court seeking relief under the Bankruptcy Code. The Chapter 11 Cases are being jointly administered under the caption "In re Sears Holdings Corporation, et al., Case No. 18-23538." Documents filed on the docket of and other information related to the Chapter 11 Cases are available free of charge online at https://restructuring.primeclerk.com/sears. Documents and other information available on such website are not part of this document and shall not be deemed incorporated by reference in this document. The Debtors are authorized to continue to operate their businesses and manage their properties as "debtors in possession" under the jurisdiction of the Bankruptcy Code and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Certain subsidiaries of Holdings (collectively, the "Non-Filing Entities") were not part of the Chapter 11 Cases. The Non-Filing Entities include, among others, SRC O.P. LLC, SRC Facilities LLC, SRC Real Estate (TX), LLC, KCD IP, LLC and Sears Reinsurance Company Ltd. The Non-Filing Entities will continue to operate their businesses in the normal course and their results are included in our interim Unaudited Condensed Consolidated Financial Statements.
Significant Bankruptcy Court Actions
Following the Petition Date, the Bankruptcy Court entered certain interim and final orders facilitating the Debtors' operational transition into Chapter 11. These orders authorized the Debtors to, among other things, pay employee wages and benefits, honor member programs, and pay vendors and suppliers in the ordinary course for all goods and services provided after the Petition Date. On November 30, 2018, the Bankruptcy Court entered an order approving the Senior DIP Facility (as defined in Note 3) on a final basis and the Junior DIP Facility (as defined in Note 3) on an interim basis. The Junior DIP Facility will be heard by the Bankruptcy Court on a final basis on December 20, 2018 (see Note 3).
Debtor-In-Possession Financing
See Note 3 for further discussion of the DIP credit facilities, which provide up to $300 million in senior priming financing and $350 million in junior financing.
Sale Process
In connection with the Chapter 11 Cases, we are seeking to sell the Company or certain of our assets pursuant to a sale under Section 363 of the Bankruptcy Code or a Chapter 11 plan of reorganization (each, a "Transaction"). These assets include, but are not limited to, the Company as a going concern (whether as the go-forward retail footprint alone or together with substantially all of the Company's assets and component businesses), certain of the Company's businesses, or any combination of assets comprising one or more of the Company's businesses, including the underlying real estate. We are concurrently seeking bids from buyers potentially interested in a Transaction on a going concern or liquidation basis. The deadline with respect to designating a stalking horse bidder for the go-forward retail footprint is December 15, 2018. See Notes 1 and 3 for more information on the bid deadline with respect to the DIP financing. The sale process is being directed by the Restructuring Committee of the Board of Directors of the Company.
Dispositions
We have pursued certain transactions in accordance with the procedures approved by the Bankruptcy Court, including with respect to the use of the proceeds generated from such dispositions.
Sears Home Improvement Business
On November 2, 2018, the Company entered into an Asset Purchase Agreement ("SHIP APA") with Service.com pursuant to which Service.com agreed to purchase from the Company and its subsidiaries the Home Improvement business of the Sears Home Services division of the Company for approximately $60 million subject to adjustment under the SHIP APA. A hearing before the Bankruptcy Court is scheduled for December 18, 2018 to approve the

17


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

transaction, which is expected to close upon the satisfaction of any remaining conditions to closing under the SHIP APA.
SRAC Medium Term Notes Series B Debt Obligations
On November 28, 2018, the Debtors completed the sale of certain Medium Term Notes Series B debt obligations in the principal amount of $880.7 million (the "MTNs") issued by Sears Roebuck Acceptance Corp. pursuant that certain Indenture, dated as of October 1, 2002, by and among Sears Roebuck Acceptance Corp., and the Bank of New York Mellon Trust Company, N.A., as successor trustee to BNY Midwest Trust Company, as trustee, to Cyrus Capital Partners L.P. ("Cyrus") for a cash payment of $82.5 million. Subject to, and only to the extent provided by, the Bankruptcy Court in accordance with the Bankruptcy Code, Cyrus is entitled to receive payments of principal, interest, fees, or other amounts on $251.2 million aggregate principal amount of the MTNs. Cyrus has agreed to waive all rights to receive such payments as to the remaining $629.5 million aggregate principal amount of the MTNs. The Debtors have agreed, on behalf of themselves and their subsidiaries, not to sell, transfer or assign any MTNs not included as part of this transaction to any non-Debtor entity other than a transfer or assignment pursuant to a non-consensual order of a court of competent jurisdiction with respect thereto. The Bankruptcy Court authorized the sale of the MTNs and the deposit of the net proceeds of the sale into the Debtors' wind-down account pursuant to an order dated November 19, 2018.
Executive Compensation Plans
As previously disclosed, the Compensation Committee of the Board of Directors of the Company approved the Debtors' Key Employee Incentive Plan (the "KEIP") and the Debtors' Key Employee Retention Plan ("KERP"), each subject to the approval of the Bankruptcy Court following a hearing on December 14, 2018. The KEIP is designed to incentivize 19 of the Debtors' senior executives (including the members of the Office of the Chief Executive and other named executive officers) by providing a total potential award opportunity of approximately $8.5 million upon the achievement of certain milestone metrics. The KERP is designed to enhance retention of a maximum of 322 other non-insider employees and provides a total award pool of approximately $16.9 million.
Financial Reporting in Reorganization
Effective on the Petition Date, the Company began to apply accounting standards applicable to reorganizations, which are applicable to companies under Chapter 11 bankruptcy protection. They require the financial statements for periods subsequent to the Petition Date to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Expenses, realized gains and losses, and provisions for losses that are directly associated with reorganization proceedings must be reported separately as reorganization items, net in the Unaudited Condensed Consolidated Statements of Operations. In addition, the balance sheet must distinguish pre-petition liabilities subject to compromise ("LSTC") of the Debtors from pre-petition liabilities that are not subject to compromise, post-petition liabilities, and liabilities of non-Debtor entities in the accompanying Unaudited Condensed Consolidated Balance Sheets. LSTC are pre-petition obligations that are not fully secured and have at least a possibility of not being repaid at the full claim amount. Where there is uncertainty about whether a secured claim will be paid or impaired pursuant to the Chapter 11 Cases, the Company has classified the entire amount of the claim as a LSTC.
Furthermore, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in-possession, certain claims against the Debtors in existence before the filing of the petitions for relief under the federal bankruptcy laws are stayed while the Debtors continue business operations as debtors in possession. These claims are reflected in the Condensed Consolidated Balance Sheets at November 3, 2018 as liabilities subject to compromise. Additional claims (liabilities subject to compromise) may arise after the filing date resulting from rejection of executory contracts, including leases, and from the determination by the Bankruptcy Court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed amounts. Claims secured against the Debtors' assets (secured claims) also are stayed, although the holders of such claims have the right to move the Bankruptcy Court for relief from the stay. Secured claims are secured primarily by liens on the Debtors' certain receivables, inventory, intellectual property and certain real estate assets.

18


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

Liabilities Subject to Compromise
As a result of the commencement of the Chapter 11 Cases, the payment of pre-petition liabilities is generally subject to compromise pursuant to a plan of reorganization. Generally, actions to enforce or otherwise effect payment of pre-petition liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the Debtors authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtors' business and assets. Among other things, the Bankruptcy Court authorized, but did not require, the Debtors to pay certain pre-petition claims relating to employee wages and benefits, taxes, and certain vendors.
Pre-petition liabilities that are subject to compromise are required to be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts classified as LSTC may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, the determination of secured status of certain claims, the determination as to the value of any collateral securing claims, proof of claims, or other events.
Liabilities Subject to Compromise as of November 3, 2018 included the following components:
millions
November 3,
2018
Debt(1)
$
2,078

Accrued interest on debt subject to compromise
35

Pension
1,018

Accounts payable, accrued expense and other liabilities(2)
1,464

Total liabilities subject to compromise
$
4,595

(1) See Note 3 for details of pre-petition debt reported as liabilities subject to compromise.
(2) On October 15, 2018, the Debtors' filed a motion to reject certain leases. On November 16, 2018, the Bankruptcy Court entered an order approving the Debtors' motion to reject these leases. The amount of liabilities subject to compromise related to these leases was $183 million at November 3, 2018, and does not include any adjustment to reduce the amount to the expected allowed claims as the motion had not been approved as of that date. The potential damages from the rejection of such leases cannot currently be estimated.
Reorganization Items, Net
Reorganization items, net represent amounts incurred after the Petition Date as a direct result of the Chapter 11 Cases and are comprised of the following for the 13- and 39- weeks ended November 3, 2018. Cash paid for reorganization items, net was $14 million for the 13- and 39- weeks ended November 3, 2018.
millions
13 Weeks Ended November 3, 2018
 
39 Weeks Ended November 3, 2018
Professional fees
$
18

 
$
18

Debtor-in-possession financing costs
10

 
10

Write-off of pre-petition debt issuance costs and debt discount
103

 
103

Reorganization items, net
$
131

 
$
131



19


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

NOTE 3—BORROWINGS
Total borrowings were as follows:
millions
November 3,
2018
 
October 28,
2017
 
February 3,
2018
Short-term borrowings:
 
 
 
 
 
Debtor-in-possession credit facility
$
112

 
$

 
$

Unsecured commercial paper

 
40

 

Secured borrowings
836

 
424

 
271

Line of Credit Loans

 
413

 
500

Incremental Loans

 
184

 
144

Secured Loans
98

 

 

Total short-term borrowings
$
1,046

 
$
1,061

 
$
915

Debt subject to compromise:
 
 
 
 
 
Second Lien Term Loan
$
317

 
$

 
$

Line of Credit Loans
570

 

 

Old Senior Secured Notes
89

 

 

New Senior Secured Notes
175

 

 

Old Senior Unsecured Notes
411

 

 

New Senior Unsecured Notes
223

 

 

Subsidiary Notes
293

 

 

Total debt subject to compromise
$
2,078

 
$

 
$

Long-term debt, including current portion:
 
 
 
 
 
Term Loan

 
722

 
391

2016 Term Loan
562

 
557

 
559

FILO Loan
122

 

 

Mezzanine Loan & Additional Mezzanine Loans
501

 

 

Term Loan Facility
230

 

 
206

Consolidated Secured Loan Facility
824

 

 

2017 Secured Loan Facility

 
373

 
374

2016 Secured Loan Facility

 
261

 
251

Second Lien Term Loan

 
293

 
294

Old Senior Secured Notes

 
303

 
303

Old Senior Unsecured Notes

 
468

 
483

Subsidiary Notes

 
284

 
284

Total long-term debt, including current portion:
$
2,239

 
$
3,261

 
$
3,145

Capitalized lease obligations
53

 
81

 
72

Total borrowings
$
5,416

 
$
4,403

 
$
4,132

LSTC must be reported at the amounts expected to be allowed by the Bankruptcy Court. The carrying value of the debt subject to compromise will be adjusted as claims are approved. As of November 3, 2018, the Company wrote off $103 million of debt issuance costs and debt discount to present the debt subject to compromise at the outstanding face value. The write-offs are included within reorganization items, net in the Condensed Consolidated Statements of Operations. See Note 2 for further details.

20


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

The fair value of long-term debt, excluding capitalized lease obligations, was $2.3 billion at November 3, 2018, $3.0 billion at October 28, 2017 and $2.8 billion at February 3, 2018. The fair value of our debt was estimated based on quoted market prices for the same or similar issues or on current rates offered to us for debt of the same remaining maturities. Our long-term debt instruments are valued using Level 2 measurements as defined in Note 5 of our Annual Report on Form 10-K for the fiscal year ended February 3, 2018.
Effect of Chapter 11 Cases & Automatic Stay on Pre-Petition Debt Obligations
The filing of the Chapter 11 Cases constituted an event of default with respect to certain of our existing debt obligations. Except with respect to certain loans that have been converted to post-petition obligations or payments required to be made as adequate protection under the Bankruptcy Code and the applicable Bankruptcy Court orders, any efforts to enforce payment obligations under such debt instruments are automatically stayed as a result of the filing of the Chapter 11 Cases and are subject to the applicable provisions of the Bankruptcy Code.
Contractual Interest on Debt Subject to Compromise
Effective as of the Petition Date, the Company ceased recording interest expense on outstanding pre-petition debt subject to compromise. Contractual interest expense represents amounts due under the contractual terms of outstanding pre-petition debt classified as LSTC. From the Petition Date through November 3, 2018, contractual interest expense of $10 million related to LSTC has not been recorded in the financial statements.
Senior Debtor-In-Possession Credit Facility
On November 29, 2018, the Company entered into a Super-priority Senior Secured Debtor-in-Possession Asset-Based Credit Agreement (the "Senior DIP Credit Agreement"), effective as of November 30, 2018, upon the entry of the order of the Bankruptcy Court approving the Senior DIP Credit Agreement (the "Senior DIP Order") and the satisfaction of certain other conditions to effectiveness (the "Senior DIP Closing Date"), with Sears Roebuck Acceptance Corp., a Delaware corporation, ("SRAC") and Kmart Corporation, a Michigan corporation, (together with SRAC, the "Borrowers") as borrowers, the Company as a guarantor, Bank of America, N.A. as administrative agent (the "Senior DIP Administrative Agent"), co-collateral agent and swingline lender, Wells Fargo Bank, National Association as co-collateral agent, and the agents and lenders from time to time party thereto.
The Senior DIP Credit Agreement provides for an asset-based credit facility in the aggregate principal amount of up to $300 million (the "Senior DIP Facility"), with amounts available from time to time (including in respect of letters of credit) equal to the lesser of (a) the borrowing base, which equals 87.5% of the eligible accounts receivable and certain inventory of the Company and the Borrowers, subject to customary reserves and eligibility criteria, and (b) the aggregate revolving credit commitments plus the principal amount of the term loan outstanding at such time. As of the Senior DIP Closing Date, the aggregate revolving credit commitments (including sub-facilities in respect of letters of credit and swingline loans) were $1.148 billion and the aggregate term loan outstanding, including the new money term loan facility, was $682.7 million. The Senior DIP Facility consists of (i) new money commitments in the aggregate principal amount of $300 million, including a new money term loan facility under which an aggregate principal amount of $111.9 million was made available to SRAC as of October 17, 2018 and (ii) new money revolving commitments in an aggregate principal amount of $188.1 million, and a "roll-up" of existing pre-petition ABL term loans, revolving advances, existing letters of credit and cash management and bank products obligations. As of the Senior DIP Closing Date, the aggregate revolving credit commitments were $1.148 billion. The new money revolving credit facility also includes a letter of credit sub-facility and a swingline loan sub-facility.
The proceeds from the Senior DIP Facility will be used for working capital and general corporate purposes and to refinance the debtor-in-possession term loans outstanding on the Senior DIP Closing Date, to fund the carve-out reserve, which will be used to pay certain trustee and professional fees as directed by the Bankruptcy Court, and to pay other fees, costs and expenses incurred in connection with the Chapter 11 Cases.
Base rate advances under the Senior DIP Term Loan Facility bear interest at a rate per annum equal to the Base Rate (as defined in the Senior DIP Credit Agreement) plus 7.00%; Eurodollar rate advances under the Senior DIP Term Loan Facility bear interest at a rate per annum equal to the Eurodollar Rate (as defined in the Senior DIP Credit Agreement) plus 8.00%. Base rate advances under the Senior DIP Revolving Credit Facility bear interest at a rate

21


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

per annum equal to the Base Rate plus 3.50%; Eurodollar rate advances under the Senior DIP Revolving Credit Facility bear interest at a rate per annum equal to the Eurodollar Rate plus 4.50%. In addition to paying interest on outstanding principal under the Senior DIP Credit Agreement, the Borrowers are required to pay a commitment fee of 0.75% per annum to the revolving lenders under the Senior DIP Credit Agreement in respect of the un-utilized revolving commitments thereunder. The Borrowers must also pay a letter of credit fronting fee equal to 0.125% per annum of the undrawn and unexpired amount of each letter of credit.
Borrowings under the Senior DIP Credit Agreement will mature, and lending commitments thereunder will terminate, upon the earliest to occur of: (A) October 16, 2019 (the "Senior DIP Scheduled Termination Date"), (B) the substantial consummation of a plan of reorganization filed in the Chapter 11 Cases that is confirmed pursuant to an order entered by the Bankruptcy Court, (C) the consummation of a sale of all or substantially all of the collateral of a type that is included in the borrowing base, (D) the date of termination in whole of the aggregate revolving commitments and the acceleration of the total extensions of credit pursuant to an optional termination or reduction of the revolving commitments or an event of default and (E) the occurrence of the "termination date" or "maturity date" (or any similar term having the same meaning) under the Junior DIP Credit Agreement.
If on the date of delivery of any borrowing base certificate, the total extensions of credit exceed the line cap, the Borrowers shall prepay advances in an amount equal to such excess, provided that if the aggregate principal amount of advances then outstanding is less than the amount of such excess, the Borrowers shall cash collateralize outstanding letter of credit obligations to the extent of such excess. Any Senior DIP Borrower may voluntarily repay, without premium or penalty, outstanding amounts under the Senior DIP Facility at any time, on three business days advance notice for any Eurodollar rate borrowings, and on one business day advance notice for any base rate borrowings.
The facility is guaranteed by, subject to certain exceptions, the Debtors other than the Borrowers (the "Guarantors"). All obligations under the Senior DIP Credit Agreement, and the guarantees of those obligations, are secured by a perfected first priority senior priming lien on substantially all of the assets of the Company, the Borrowers and the Guarantors, including collateral under the Pre-Petition Domestic Credit Agreement, and other previously unencumbered assets and a perfected lien on certain specified assets pari passu with liens securing the Junior DIP Facility. The Senior DIP Credit Agreement includes negative covenants that, subject to significant exceptions, limit the Company's, the Borrowers' and the Guarantors' ability and the ability of its restricted subsidiaries to, among other things:
incur additional indebtedness;
create liens on assets;
engage in mergers, consolidations, liquidations and dissolutions;
sell assets;
pay dividends and distributions or repurchase capital stock;
make investments, loans, or advances;
prepay certain junior indebtedness;
engage in certain transactions with affiliates; or
change lines of business.
The Senior DIP Credit Agreement includes certain customary representations and warranties, affirmative covenants and events of default, including but not limited to, payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain bankruptcy-related events, certain events under ERISA, material judgments and a change of control. If an event of default occurs, the lenders under the Senior DIP Credit Agreement will be entitled to take various actions, including the acceleration of all amounts due under the Senior DIP Credit Agreement and all actions permitted to be taken under the loan documents or applicable law, subject to the terms of the Senior DIP Order.

22


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

Junior Debtor-in-Possession Credit Facility
On November 29, 2018, the Company entered into a Super-priority Junior Lien Secured Debtor-in-Possession Credit Agreement (the "Junior DIP Credit Agreement"), with SRAC and Kmart Corporation as borrowers, Cantor Fitzgerald Securities, as agent (the "Junior DIP Administrative Agent") and collateral agent, and the other lenders from time to time party thereto. The entry into the Junior DIP Credit Agreement was approved on an interim basis by an order of the Bankruptcy Court (the "Junior DIP Order"). The Junior DIP Credit Agreement became effective on November 30, 2018 (the "Junior DIP Effective Date").
The Junior DIP Credit Agreement provides for a term loan credit facility in the aggregate principal amount of up to $350 million (the “Junior DIP Facility”), consisting of (i) term loans in an aggregate principal amount not to exceed $250 million, which shall be funded by the lenders in three draws (each, an "Interim DIP Loan") on or after the Junior DIP Effective Date and prior to the date when conditions precedent to Subsequent DIP Loans (as defined below) are satisfied or waived by the Junior DIP Administrative Agent (the "Junior DIP Final Closing Date") in the following amounts and in the following order: (x) first, an Interim DIP Loan in an aggregate principal amount of up to $75 million, (y) second, an Interim DIP Loan in an aggregate principal amount of up to $75 million, and (z) third, an Interim DIP Loan in an aggregate principal amount of up to $100 million, provided that with respect to clauses (y) and (z) above, such Interim DIP Loans shall only be made available on the dates when Excess Availability (as defined in the Junior DIP Credit Agreement) is less than $50 million, and (ii) term loans in an aggregate principal amount not to exceed $100 million, which shall be funded by the lenders in multiple draws (each, a "Subsequent DIP Loan") on or after the Junior DIP Final Closing Date in an aggregate principal amount of the lesser of (x) $50 million and (y) the remaining Term Commitments (as defined in the Junior DIP Credit Agreement), provided that each Subsequent DIP Loan shall only be made available on the dates when the sum of Excess Availability and the aggregate amount of cash available to the loan parties is less than $50 million.
The proceeds of an Interim DIP Loan in an aggregate principal amount of $75 million from the Junior DIP Facility were made available on the Junior DIP Effective Date, and were used for operating, working capital and general corporate purposes, including to fund the carve-out reserve and to pay other fees, costs and expenses incurred in connection with the transactions contemplated by the Junior DIP Credit Agreement and the Chapter 11 Cases.
Base rate advances under the Junior DIP Facility bear interest at a rate per annum equal to the Base Rate (as defined in the Junior DIP Credit Agreement) plus 9.00%; Eurodollar rate advances under the Junior DIP Facility bear interest at a rate per annum equal to the greater of (a) 1.00% or (b) the Eurodollar Rate (as defined in the Junior DIP Credit Agreement), plus 10.00%. In addition to paying interest on outstanding principal under the Junior DIP Credit Agreement, the Borrowers are required to pay (1) a closing fee equal to (A) 3.00% with respect to the $250 million aggregate principal amount of the Interim DIP Loan amount, due and payable on the Junior DIP Effective Date and (B) 3.00% with respect to the $100 million aggregate principal amount of Subsequent DIP Loans, each due and payable on the date of the borrowing thereof, provided that such fee shall be paid in respect of the aggregate principal amount of unused term commitments upon the earlier of (x) December 31, 2018 and (y) the Junior DIP Final Closing Date, (2) a commitment fee equal to 0.75% per annum to the lenders under the Junior DIP Credit Agreement on the average daily amount of the available term commitment of each such lender, (3) subject to the Borrowers’ valid election of the Extension Option (as defined below), an extension fee equal to 1.25% of the aggregate principal amount of each lender’s then outstanding term loans, due and payable on the first day after the Termination Date (as defined in the Junior DIP Credit Agreement), and (4) a monitoring fee equal to $175,000, due and payable on the Junior DIP Effective Date.
Borrowings under the Junior DIP Credit Agreement will mature, and lending commitments thereunder will terminate, upon the earliest to occur of: (i) July 29, 2019 (the "Junior DIP Scheduled Termination Date"), (ii) November 29, 2019, if the Borrowers exercise the Extension Option, and (iii) the Termination Date (as defined in the Senior DIP Credit Agreement) under the Senior DIP Credit Agreement. The Borrowers may, upon three business days notice to the Junior DIP Administrative Agent, exercise the option to extend the maturity of the Junior DIP Credit Agreement for an additional four months following the Junior DIP Scheduled Termination Date (the "Extension Option").
Any Junior DIP Borrower may voluntarily repay, without premium or penalty, outstanding amounts under the Junior DIP Facility at any time, upon two business days advance notice for any Eurodollar rate borrowings, and on one business day advance notice for any base rate borrowings. No prepayment shall be required from any net proceeds in connection with the sale of pre-petition unencumbered assets, until (i) the Wind-down Account Funding Condition (as defined in the Junior DIP Credit Agreement) has been satisfied, (ii) the Pre-petition Unencumbered Assets Proceeds Account (as

23


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

defined in the Junior DIP Credit Agreement) is funded and (iii) the Discharge of Senior DIP Obligations (as defined in the Junior DIP Credit Agreement) has occurred.
The facility is guaranteed by the Guarantors. All obligations under the Junior DIP Credit Agreement, and the guarantees of those obligations, are secured by a perfected first priority junior lien on all of the Company's and all of the Borrowers' and the Guarantors' assets, subject to certain exceptions. The Junior DIP Credit Agreement includes certain customary representations and warranties, affirmative and negative covenants and events of default substantially consistent with the Senior DIP Credit Agreement described above.
Going-Concern Sale
The Debtors are currently pursuing a going-concern sale process for the stores after closures (for further information on such closures see Note 4). The Debtors must obtain or find acceptable a Qualified Stalking Horse Bid on or prior to December 15, 2018. Failure to obtain and find acceptable a Qualified Stalking Horse bid by December 15, 2018, shall not constitute an event of default or default under the Senior DIP Credit Agreement or the Junior DIP Credit Agreement so long as the Debtors are diligently pursuing a process reasonably acceptable to the applicable administrative agents and collateral agents designed for bidding procedures and the selection of a sale of the go forward stores by December 27, 2018.
Unsecured Commercial Paper
Prior to the Petition Date, the Company had borrowed through the commercial paper markets. At October 28, 2017, we had outstanding commercial paper borrowings of $40 million, while at November 3, 2018 and February 3, 2018, we had no commercial paper borrowings outstanding. The carrying value of commercial paper, net of remaining discount, was $40 million at October 28, 2017.
Letter of Credit Facility
On December 28, 2016, the Company, through the Borrowers, entities wholly-owned and controlled, directly or indirectly by the Company, entered into the Letter of Credit and Reimbursement Agreement (the "LC Facility") providing for a $500 million secured standby letter of credit facility (of which $271 million was committed at November 3, 2018) from JPP, LLC and JPP II, LLC, entities affiliated with ESL (collectively, the "Lenders"), with Citibank, N.A., serving as administrative agent and issuing bank.
In August 2017, the Company executed amendments to the LC Facility. The amendments, among other things, extended the maturity to December 28, 2018, eliminated the unused portion of the facility and released the real estate collateral that secured the original LC Facility. The amended LC Facility also permits the Lenders to syndicate all or a portion of their commitments under the facility to other lenders, of which $165 million has been syndicated to unaffiliated third-party lenders as of November 3, 2018. In April 2018, the Company executed amendments to the LC Facility, which extended the maturity to December 28, 2019.
The amended LC Facility is guaranteed by the same subsidiaries of the Company that guaranteed the obligations under the Pre-petition Domestic Credit Agreement, as defined below. The amended LC Facility is secured by substantially the same collateral as the Pre-petition Domestic Credit Agreement. The amended LC Facility contains a borrowing base calculation, pursuant to which the borrowers are required to cash collateralize the LC Facility if the aggregate obligations under the Pre-petition Domestic Credit Agreement, amended LC Facility and certain other cash management and similar obligations exceed the Modified Borrowing Base, as defined in the amended LC Facility, as of the end of any calendar month.
To secure their obligation to participate in letters of credit issued under the LC Facility, the lenders under the LC Facility are required to maintain cash collateral on deposit with the Issuing Bank in an amount equal to 102% of the commitments under the LC Facility (the "Lender Deposit"). The Borrowers paid the Lenders an upfront fee equal to 1.00% of the aggregate amount of the Lender Deposit, and in connection with the extension of the maturity of the LC Facility in April 2018, the Borrowers paid the Lenders an upfront fee equal to 0.50% of the aggregate amount of the Lender Deposit. In addition, the Borrowers are required to pay a commitment fee on the average daily amount of the Lender Deposit (as such amount may be increased or decreased from time to time) equal to the Eurodollar Rate (as defined under the Pre-petition Domestic Credit Facility) plus 11.0%, as well as certain other fees. The Borrowers

24


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

are also required to pay a fee equal to 0.50% of the aggregate amount of the Lender Deposit in connection with the termination of the LC Facility, whether at maturity or otherwise, or of any reduction in the amount of the Lenders' commitments under the LC Facility.
The LC Facility includes certain representations and warranties, affirmative and negative covenants and other undertakings, which are subject to important qualifications and limitations set forth in the LC Facility. The LC Facility also contains certain events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, and bankruptcy or insolvency proceedings. The filing of the Chapter 11 Cases constituted an event of default under the LC Facility. Although under the LC Facility the Lenders may terminate all or any portion of the commitments under the LC Facility, require the Borrowers to cash collateralize the LC Facility and/or exercise any rights they might have under any of the related facility documents (including against the collateral), such actions are stayed as a result of the Chapter 11 Cases, subject to certain exceptions under the Bankruptcy Code. See "Effect of Chapter 11 Cases & Automatic Stay on Pre-petition Debt Obligations" above. At each of November 3, 2018, October 28, 2017 and February 3, 2018, we had $271 million of letters of credit outstanding under the LC Facility.
Secured Loan and Mezzanine Loan
On March 14, 2018, the Company, through SRC O.P. LLC, SRC Facilities LLC and SRC Real Estate (TX), LLC (collectively, the "Secured Loan Borrowers"), entities wholly-owned and controlled indirectly by the Company, entered into a Credit Agreement (the "Credit Agreement") with the lenders party thereto (collectively, the "Secured Lenders"). The Credit Agreement provides for a $200 million term loan (the "Secured Loan") that was initially secured by the Secured Loan Borrowers' interests in 138 real properties that were released from a ring-fence arrangement with the PBGC. The Secured Loan had an original maturity date of December 14, 2018. The Company used the proceeds of the Secured Loan to make a contribution to the Company's pension plans and for general corporate purposes.
Also on March 14, 2018, the Company, through SRC Sparrow 2 LLC (the "Mezzanine Loan Borrower"), an entity wholly-owned and controlled indirectly by the Company, entered into a Mezzanine Loan Agreement (the "Mezzanine Loan Agreement") with the Lenders, entities affiliated with ESL. The Mezzanine Loan Agreement provides for a $240 million term loan (the "Mezzanine Loan") that is secured by a pledge of the equity interests in SRC O.P. LLC, the direct parent company of the entities that own the 138 real properties that initially secured the obligations of the Secured Loan Borrowers under the Credit Agreement. The Mezzanine Loan matures on July 20, 2020. The Company used the proceeds of the Mezzanine Loan to make a contribution to the Company's pension plans.
The Mezzanine Loan Agreement contains an uncommitted accordion feature pursuant to which the Mezzanine Loan Borrower may incur additional loans ("Additional Mezzanine Loans") subject to certain conditions set forth in the Mezzanine Loan Agreement and the Credit Agreement. During the first nine months of 2018, the Company obtained Additional Mezzanine Loans of $273 million.
On June 29, 2018, the Secured Loan Borrowers entered into a Second Amendment to the Credit Agreement with the Secured Lenders that increased the loan-to-value cap applicable to the aggregate principal amount of the Secured Loan, the Mezzanine Loan and the Additional Mezzanine Loans that may be incurred under the Credit Agreement and the Mezzanine Loan Agreement from 55% to 69%. The Mezzanine Loan Agreement was also amended to make a conforming change to the loan-to-value cap to increase such cap from 55% to 69%. No upfront or other fees were paid by the Secured Loan Borrowers in connection with these amendments.
On August 31, 2018, the Secured Loan Borrowers entered into a Third Amendment to the Credit Agreement with the Secured Lenders pursuant to which the Secured Loan Borrowers borrowed an additional $113 million from the Secured Lenders (together with the original $200 million term loan, the "Secured Loans"), which was used for general corporate purposes. The Secured Loans are secured by the Secured Loan Borrowers' interests in 119 real properties. The Secured Loans mature on August 30, 2019. The Company paid an upfront commitment fee of 2.75% of the additional borrowings.
On November 13, 2018, the Lenders, entities affiliated with ESL, purchased the Secured Loans from the Secured Lenders in the aggregate principal amount of $101.7 million. In connection with the purchase of the Secured Loans,

25


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

the Secured Loan Borrowers entered into a Fourth Amendment to the Credit Agreement, dated November 13, 2018, with the Lenders (the "Fourth Amendment"). Pursuant to the Fourth Amendment, the Lenders reallocated an aggregate of $513.2 million of the outstanding principal under the Mezzanine Loan Agreement over to the Secured Loans and, immediately following the reallocation under the Fourth Amendment, the outstanding principal amount under the Secured Loans was $614.9 million. Pursuant to the Fourth Amendment, the Lenders also replaced UBS AG, Stamford Branch as administrative agent under the Credit Agreement.
The Secured Loans, the Mezzanine Loan and the Additional Mezzanine Loans are guaranteed by the Company and certain of its subsidiaries. The Secured Loan originally had interest at an annual interest rate of LIBOR plus 6.5% for the first three months the Secured Loan is outstanding, LIBOR plus 7.5% for the fourth through the sixth month the Secured Loan is outstanding and LIBOR plus 8.5% for the seventh through the ninth month the Secured Loan is outstanding. The Secured Loans bear interest at an annual interest rate of LIBOR plus 6.5% for the first four months following the Third Amendment to the Credit Agreement, LIBOR plus 7.5% for the fifth through eighth month, and LIBOR plus 8.5% for the ninth through twelve months. Accrued interest is payable monthly during the term of the Secured Loans. The Mezzanine Loan and the Additional Mezzanine Loans bear interest at an annual interest rate of LIBOR plus 11.0%, with accrued interest payable monthly during the term of the Mezzanine Loan and the Additional Mezzanine Loans. The Company paid an upfront commitment fee of 1.5% of the principal amount of the Secured Loan, and paid an arrangement fee. The Mezzanine Borrowers paid upfront commitment fees equal to 1.8% of the principal amount of the Mezzanine Loan and the Additional Mezzanine Loans.
To the extent permitted under other debt of the Company or its affiliates, the Secured Loans, the Mezzanine Loan and the Additional Mezzanine Loans may be prepaid at any time in whole or in part, without penalty or premium, subject to approval by the Bankruptcy Court. The Secured Loan Borrowers are required to apply the net proceeds of the sale of any real property collateral for the Secured Loans to repay the Secured Loans. Following repayment in full of the Secured Loans, the Mezzanine Loan Borrower is required to apply the net proceeds of the sale of any real property that served as collateral for the Secured Loans to repay the Mezzanine Loan and the Additional Mezzanine Loans. The Company used proceeds of $211 million to pay a portion of the Secured Loans during the 39 weeks ended November 3, 2018.
The Credit Agreement and the Mezzanine Loan Agreement include certain representations and warranties, indemnities and covenants, including with respect to the condition and maintenance of the real property collateral. The Credit Agreement and the Mezzanine Loan Agreement have certain events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, and bankruptcy or insolvency proceedings. The Secured Loan Lenders and the Mezzanine Lenders may declare all or any portion of the outstanding indebtedness to be immediately due and payable, exercise any rights they might have (including against the collateral), and require the Secured Loan Borrowers or Mezzanine Loan Borrower to pay a default interest rate of 2.0% in excess of the base interest rate as a result of the event of default.
At November 3, 2018, the carrying value of the Secured Loans, net of the remaining debt issuance costs, was $98 million. At November 3, 2018, the carrying value of the Mezzanine Loan, net of the remaining debt issuance costs, was $232 million and the carrying value of the Additional Mezzanine Loans, net of the remaining debt issuance costs, was $269 million. The filing of the Chapter 11 Cases constituted an event of default with respect to the Secured Loans, Mezzanine Loan and Additional Mezzanine Loans. As a result, the Mezzanine Loan and Additional Mezzanine Loans are included within current portion of long-term debt and capitalized lease obligations in the Condensed Consolidated Balance Sheets at November 3, 2018. The Secured Loans are included within short-term borrowings in the Condensed Consolidated Balance Sheets.
Term Loan Facility
On January 4, 2018, the Borrowers entered into a Term Loan Credit Agreement (the "Term Loan Credit Agreement") providing for a secured term loan facility (the "Term Loan Facility") from the Lenders, entities affiliated with ESL. The Term Loan Facility is guaranteed by the Company and certain of its subsidiaries that guarantee the Company's other material debt or own material intellectual property. The Term Loan Facility is secured by substantially all of the unencumbered intellectual property of the Company and its subsidiaries, other than intellectual property relating to the Kenmore and DieHard brands, as well as by certain real property interests, in each case subject to certain

26


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

exclusions. On January 4, 2018, $100 million was borrowed under the Term Loan Facility. The Term Loan Facility also contains an uncommitted incremental loan feature that, subject to the satisfaction of certain conditions, including the consent of the Agent, would permit up to an additional $200 million to be borrowed from other counterparties and secured by the same collateral as the initial loan under the Term Loan Facility. An additional $30 million was borrowed under the Term Loan Facility on January 19, 2018.
On January 29, 2018, the Company entered into an Amendment to the Term Loan Credit Agreement (the "Term Loan Facility Amendment"), pursuant to which an additional $20 million was borrowed from the Lenders and a further $60 million was borrowed from certain unaffiliated lenders, bringing the total amount borrowed under the Term Loan Facility to $210 million at February 3, 2018. The Term Loan Facility Amendment, among other changes, separates the loans under the Term Loan Facility into two tranches. On February 26, 2018, the Company entered into another amendment to the Term Loan Credit Agreement pursuant to which an additional $40 million was borrowed from the Lenders.
The loans under the Term Loan Facility bear interest at a weighted average annual interest rate of LIBOR plus 12.5%, which during the first year must be paid in kind by capitalizing interest. The loans under the Term Loan Facility mature on July 20, 2020. The Company used the proceeds of the Term Loan Facility for general corporate purposes. No upfront or arrangement fees were paid in connection with the Term Loan Facility. The loans under the Term Loan Facility are prepayable without premium or penalty, subject to approval by the Bankruptcy Court. The Company used proceeds of $42 million to pay interest and a portion of the Term Loan Facility during the 39 weeks ended November 3, 2018.
The Term Loan Facility includes certain representations and warranties, indemnities and covenants, including with respect to the condition and maintenance of the intellectual property and real property collateral. The Term Loan Facility has certain events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, and bankruptcy or insolvency proceedings. The filing of the Chapter 11 Cases constituted an event of default under the Term Loan Facility. Although under the Term Loan Facility the Lenders may declare all or any portion of the outstanding indebtedness to be immediately due and payable, exercise any rights they might have (including against the collateral), and require the Borrowers to pay a default interest rate, such actions are stayed as a result of the Chapter 11 Cases, subject to certain exceptions under the Bankruptcy Code. See "Effect of Chapter 11 Cases & Automatic Stay on Pre-petition Debt Obligations" above.
At November 3, 2018 and February 3, 2018, the carrying value of the Term Loan Facility, net of the remaining debt issuance costs, was $230 million and $206 million, respectively. The carrying value includes paid-in-kind interest of $23 million and $1 million at November 3, 2018 and February 3, 2018, respectively.
Consolidated Secured Loan Facility
On June 4, 2018, the Company, through the Incremental Loan Borrowers (as defined below), entered into a Third Amended and Restated Loan Agreement (the "Consolidated Loan Agreement") with the 2016 Secured Loan Lenders (as defined below), which amends and restates the Second Amended and Restated Loan Agreement, dated as of October 18, 2017. In connection with the Consolidated Loan Agreement, the 2016 Secured Loan Lenders made an additional advance in an aggregate principal amount of approximately $186 million, which was used to repay the loans outstanding under the 2016 Secured Loan Facility and terminate the agreement. In connection therewith, the mortgages on the 13 real properties securing the 2016 Secured Loan Facility were released and these properties were pledged as collateral for the loan under the Consolidated Loan Agreement (the "Consolidated Secured Loan Facility"). After giving effect to the additional advance, the aggregate principal amount of the loan outstanding under the Consolidated Loan Agreement as of June 4, 2018 was approximately $779 million. The Consolidated Secured Loan Facility matures on July 20, 2020.
On September 12, 2018, the Company, through the Incremental Loan Borrowers, entered into a First Amendment to the Consolidated Loan Agreement with the 2016 Secured Loan Lenders, pursuant to which certain of the Incremental Loan Borrowers (the "Additional Advance Borrowers") received an additional advance in aggregate principal amount of $75 million (the "Additional Advance") and granted the 2016 Secured Loan Lenders a first

27


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

priority lien on an additional 20 real properties. No Incremental Loan Borrower other than the Additional Advance Borrowers shall have any liabilities or obligations in connection with the Additional Advance.
After giving effect to the Additional Advance, the aggregate principal amount of the loan outstanding under the Consolidated Loan Agreement as of September 12, 2018 was approximately $831 million. Approximately $108 million of Consolidated Secured Loan Facility, which as of closing of the Additional Advance was held by Cascade Investment, LLC, is structured as a "first out" tranche evidenced by promissory note "A" ("Note A") and bears interest at LIBOR plus 6.50% per annum. The remainder of Consolidated Secured Loan Facility is evidenced by promissory note "B" ("Note B"), which as of closing of the Additional Advance was held by JPP, LLC and JPP II, LLC, entities affiliated with ESL, and bears interest at LIBOR plus 9.00% per annum. The Consolidated Secured Loan Facility matures on July 20, 2020.
The Incremental Loan Borrowers paid approximately $1.6 million in upfront fees to the 2016 Secured Loan Lenders in connection with the Consolidated Loan Agreement and the Additional Advance Borrowers paid approximately $0.4 million in upfront fees to the 2016 Secured Loan Lenders in connection with the Additional Advance. In addition, to the extent any portion of the loan evidenced by Note A remains outstanding on March 12, 2019, the Incremental Loan Borrowers must pay the holder of Note A an additional fee of 1.00% of the principal amount outstanding under Note A as of such date, and to the extent any portion of the loan evidenced by Note A remains outstanding on September 12, 2019, the Incremental Loan Borrowers must pay the holder of Note A an additional fee of 2.00% of the principal amount outstanding under Note A as of such date.
The Incremental Loan Borrowers had the right, at any time prior to October 15, 2018, to request an additional advance under the Consolidated Loan Agreement in an amount not to exceed $50 million. The making of any such additional advance and the amount thereof was subject to the 2016 Secured Loan Lenders' sole discretion and the payment of an origination fee equal to 0.5% of the amount so advanced. On October 3, 2018, the Incremental Loan Borrowers requested an additional advance in the amount of $50 million. The Secured Loan Lenders declined to make the additional advance, and, as required by the Consolidated Loan Agreement, released their liens on certain of the additional 20 real properties pledged in connection with the Additional Advance.
The Consolidated Secured Loan Facility is guaranteed by the Company and was originally secured by a first priority lien on 88 real properties owned or leased by the Incremental Loan Borrowers, which included real property that initially secured the 2017 Secured Loan Facility, Incremental Loans and 2016 Secured Loan Facility. To the extent permitted under other debt documents of the Company or its affiliates, the Consolidated Secured Loan Facility may be prepaid at any time in whole or in part, without penalty or premium, subject to approval by the Bankruptcy Court. The Incremental Loan Borrowers are required to apply the net proceeds of the sale of any real property collateral to repay the Consolidated Secured Loan Facility. Any such prepayments or repayments will be applied first to Note A until Note A is repaid in full, and then to Note B, provided, that the holder of Note A shall have the right to waive any such prepayment or repayment (other than in connection with a repayment of the Consolidated Secured Loan Facility in full at maturity or any other prepayment in full or repayment in full of the Consolidated Secured Loan Facility), in which case (x) such prepayment or repayment shall be applied to Note B and (y) such amount shall reduce the principal amount of indebtedness deemed outstanding under Note A solely for the purpose of calculating the delayed origination fees described above. The Company used proceeds of $23 million to pay interest and a portion of the Consolidated Secured Loan Facility during the 39 weeks ended November 3, 2018.
The Consolidated Loan Agreement includes certain representations and warranties, indemnities and covenants, including with respect to the condition and maintenance of the real property collateral. The Consolidated Loan Agreement has certain events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, and bankruptcy or insolvency proceedings. The filing of the Chapter 11 Cases constituted an event of default under the Consolidated Loan Agreement. Although under the Consolidated Secured Loan Facility the 2016 Secured Loan Lenders may declare all or any portion of the outstanding indebtedness to be immediately due and payable, exercise any rights they might have under any of the Consolidated Secured Loan Facility documents (including against the collateral), and require the Incremental Loan Borrowers to pay a default interest rate equal to the greater of (i) 2.5% in excess of the base interest rate and (ii) the prime rate plus 1%, such actions are stayed as a result of the Chapter 11 Cases, subject to certain exceptions under the Bankruptcy Code. See "Effect of Chapter 11 Cases & Automatic Stay on Pre-petition Debt Obligations" above.

28


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

The carrying value of the Consolidated Secured Loan Facility, net of the remaining debt issuance costs, was $824 million at November 3, 2018.
2017 Secured Loan Facility
On January 3, 2017, the Company, through Sears, Kmart Stores of Illinois LLC, Kmart of Washington LLC and Kmart Corporation (collectively, "2017 Secured Loan Borrowers"), entities wholly-owned and controlled, directly or indirectly by the Company, obtained a $500 million real estate loan facility (the "2017 Secured Loan Facility") from the Lenders, entities affiliated with ESL. On January 3, 2017, $321 million was funded under the 2017 Secured Loan Facility, and an additional $179 million was drawn by the Company prior to January 28, 2017. The 2017 Secured Loan Facility had an original maturity of July 20, 2020. The Company used the proceeds of the 2017 Secured Loan Facility for general corporate purposes.
During October 2017, the Company, through the 2017 Secured Loan Borrowers and SHC Desert Springs, LLC, Innovel Solutions, Inc., Sears Holdings Management Corporation, Maxserv, Inc., Troy Coolidge No. 13, LLC, Sears Development Co. and Big Beaver of Florida Development, LLC (collectively, "Incremental Loan Borrowers"), entities wholly-owned and controlled, directly or indirectly by the Company, entered into amended and restated loan agreements (the "Incremental Loans") with the Lenders, entities affiliated with ESL. The Company borrowed $200 million pursuant to the Incremental Loans, and used the proceeds for general corporate purposes. The Incremental Loans had an original maturity of July 6, 2018.
On March 8, 2018, the Company, through the 2017 Secured Loan Borrowers and SHC Desert Springs, LLC, Innovel Solutions, Inc., Sears Holdings Management Corporation, Maxserv, Inc. and Troy Coolidge No. 13, LLC (collectively, "Second Incremental Loan Borrowers"), entities wholly-owned and controlled, directly or indirectly by the Company, entered into a second amendment to the Incremental Loans (the "Second Amendment") with the Lenders, entities affiliated with ESL. Pursuant to the Second Amendment, the Second Incremental Loan Borrowers borrowed an additional $100 million from the Lenders, which had an original maturity of July 20, 2020 and had the same terms as the 2017 Secured Loan Facility, as amended. The Company used the proceeds for general corporate purposes.
On June 4, 2018, the 2017 Secured Loan Facility and Incremental Loans were amended and restated by the Consolidated Loan Agreement described above.
Initially, the 2017 Secured Loan Facility had an annual base interest rate of 8%, with accrued interest payable monthly during the term of the 2017 Secured Loan Facility. Pursuant to the Second Amendment, the interest rate increased to LIBOR plus 9%. The Borrowers paid an upfront commitment fee equal to 1.0% of the full principal amount of the 2017 Secured Loan Facility and paid a funding fee equal to 1.0% of the amounts drawn under the 2017 Secured Loan Facility at the time such amounts were drawn. The Incremental Loans had an annual interest rate of 11%, with accrued interest payable monthly. No upfront or funding fees were paid in connection with the Incremental Loans or the Second Amendment.
The 2017 Secured Loan Facility and Incremental Loans were guaranteed by the Company and certain of its subsidiaries, and were secured by a first priority lien on 69 real properties owned by the 2017 Secured Loan Borrowers and Incremental Loan Borrowers and guarantors at inception of the 2017 Secured Loan Facility, and an additional seven real properties owned by the Incremental Loan Borrowers at inception of the Incremental Loans. In certain circumstances, the Lenders and the 2017 Secured Loan Borrowers, Incremental Loan Borrowers and Second Incremental Loan Borrowers were permitted to substitute one or more properties as collateral. To the extent permitted under other debt of the Company or its affiliates, the 2017 Secured Loan Facility was permitted to be prepaid at any time in whole or in part, without penalty or premium. The 2017 Secured Loan Borrowers were required to apply the net proceeds of the sale of any real property collateral for the 2017 Secured Loan Facility to repay the loan. The Company used proceeds of $20 million and $116 million to pay interest and a portion of the 2017 Secured Loan Facility during the 39 weeks ended November 3, 2018 and October 28, 2017, respectively, and $6 million to pay interest and a portion of the Incremental Loans during the 39 weeks ended November 3, 2018.
The 2017 Secured Loan Facility and Incremental Loans included certain representations and warranties, indemnities and covenants, including with respect to the condition and maintenance of the real property collateral. The 2017 Secured Loan Facility and Incremental Loans had certain events of default, including (subject to certain materiality

29


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, and bankruptcy or insolvency proceedings. If there was an event of default, the Lenders may have declared all or any portion of the outstanding indebtedness to be immediately due and payable, exercise any rights they might have under any of the 2017 Secured Loan Facility or Incremental Loan documents (including against the collateral), and required the 2017 Secured Loan Borrowers, Incremental Loan Borrowers or Second Incremental Loan Borrowers to pay a default interest rate equal to the greater of (i) 2.5% in excess of the base interest rate and (ii) the prime rate plus 1%.
The carrying value of the 2017 Secured Loan Facility, net of the remaining debt issuance costs, was $373 million and $374 million at October 28, 2017 and February 3, 2018, respectively. The carrying value of the Incremental Loans, net of the remaining debt issuance costs, was $144 million at February 3, 2018. The Incremental Loans were included within short-term borrowings in the Condensed Consolidated Balance Sheets at February 3, 2018.
2016 Secured Loan Facility
On April 8, 2016, the Company, through Sears, Sears Development Co., Innovel, Big Beaver of Florida Development, LLC and Kmart Corporation (collectively, "2016 Secured Loan Borrowers"), entities wholly-owned and controlled, directly or indirectly by the Company, obtained a $500 million real estate loan facility (the "2016 Secured Loan Facility") from JPP, LLC, JPP II, LLC, and Cascade Investment, LLC (collectively, the "2016 Secured Loan Lenders"). JPP, LLC and JPP II, LLC are entities affiliated with ESL. The first $250 million of the 2016 Secured Loan Facility was funded on April 8, 2016 and the remaining $250 million was funded on April 22, 2016. The funds were used to reduce outstanding borrowings under the Company's asset-based revolving credit facility and for general corporate purposes. The 2016 Secured Loan Facility had an original maturity date of July 7, 2017. In May 2017, the Company reached an agreement to extend the maturity of $400 million of the 2016 Secured Loan Facility to January 2018, with options to further extend the maturity of the loan for up to an additional six months, to July 6, 2018, subject to the satisfaction of certain conditions and the payment of certain fees. On November 21, 2017, the Company notified the 2016 Secured Loan Lenders of its exercise of the first such option to extend the maturity to April 6, 2018, subject to the payment of an extension fee on January 8, 2018, which fee was paid on January 8, 2018. On February 5, 2018, the Company notified the 2016 Secured Loan Lenders of its exercise of the second such option to extend the maturity to July 6, 2018, subject to the payment of an extension fee on April 6, 2018, which fee was paid on April 6, 2018. The 2016 Secured Loan Facility was included within current portion of long-term debt in the Condensed Consolidated Balance Sheets at October 28, 2017 and February 3, 2018. The carrying value of the 2016 Secured Loan Facility, net of the remaining debt issuance costs, was $261 million and $251 million at October 28, 2017 and February 3, 2018, respectively. As noted above, on June 4, 2018, the Company repaid all loans outstanding under the 2016 Secured Loan Facility, and terminated the agreement.
The 2016 Secured Loan Facility had an annual base interest rate of 8%, with accrued interest payable monthly during the term of the 2016 Secured Loan Facility. The 2016 Secured Loan Borrowers paid an upfront commitment fee equal to 1.0% of the full principal amount of the 2016 Secured Loan Facility and paid a funding fee equal to 1.0% at the time such amounts were drawn. In connection with the May 2017 maturity extension, the Company paid a one-time extension fee equal to $8 million to the extending lenders.
The 2016 Secured Loan Facility was guaranteed by the Company and was originally secured by a first priority lien on 21 real properties owned by the 2016 Secured Loan Borrowers. The 2016 Secured Loan Facility included customary representations and warranties, indemnities and covenants, including with respect to the condition and maintenance of the real property collateral.
The 2016 Secured Loan Facility had customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, and bankruptcy or insolvency proceedings. If there was an event of default, the 2016 Secured Loan Lenders may have declared all or any portion of the outstanding indebtedness to be immediately due and payable, exercise any rights they might have under any of the 2016 Secured Loan Facility documents (including against the collateral), and required the 2016 Secured Loan Borrowers to pay a default interest rate equal to the greater of (i) 2.5% in excess of the base interest rate and (ii) the prime rate plus 1%. The 2016 Secured Loan Facility was permitted to be prepaid at any time in whole or in part, without penalty or premium. The 2016 Secured Loan Borrowers were required to apply the net proceeds of the sale of any real property collateral for the 2016 Secured

30


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

Loan Facility to repay the loan. The Company used proceeds of $67 million and $238 million to pay interest and a portion of the 2016 Secured Loan Facility during the 39 weeks ended November 3, 2018 and October 28, 2017, respectively.
Pre-Petition Domestic Credit Agreement
Prior to entry into the Senior DIP Credit Agreement, the Borrowers and Holdings were party to an amended and restated credit agreement (the "Pre-Petition Domestic Credit Agreement") with a syndicate of lenders. As discussed above, outstanding obligations under the Pre-Petition Domestic Credit Agreement were "rolled up" into the Senior DIP Credit Agreement. Pursuant to the Pre-Petition Domestic Credit Agreement, the Borrowers borrowed two senior secured term loan facilities having original principal amounts of $1.0 billion and $750 million (the "Term Loan" and "2016 Term Loan," respectively). The Pre-Petition Domestic Credit Agreement provided for a $1.5 billion asset-based revolving credit facility (the "Pre-Petition Revolving Facility") with a $1.0 billion letter of credit sub-facility, which matures on July 20, 2020. The Term Loan had an original maturity of June 30, 2018 and the 2016 Term Loan matures on July 20, 2020. In December 2017, the Company entered into an agreement to extend the maturity of the Term Loan to January 20, 2019, with the option to further extend the maturity to July 20, 2019, subject to certain conditions, including payment of an extension fee equal to 2.0% of the principal amount of the Term Loan outstanding at the time of such extension. The Pre-Petition Domestic Credit Agreement included an accordion feature that allows the Borrowers to use, subject to borrowing base requirements, existing collateral for the facility to obtain up to $1.0 billion of additional borrowing capacity, of which $750 million was utilized for the 2016 Term Loan (described below). The Pre-Petition Domestic Credit Agreement also included a FILO tranche feature that allowed up to an additional $500 million of borrowing capacity and allowed Holdings and its subsidiaries to undertake short-term borrowings outside the facility up to $1.0 billion. In February 2018, the Borrowers entered into an amendment that increased the size of the general debt basket to $1.25 billion.
On March 21, 2018, the Company, through the Borrowers, entered into a fifth amendment (the "Fifth Amendment") and a sixth amendment (the "Sixth Amendment") to the Pre-Petition Domestic Credit Agreement pursuant to which the Borrowers borrowed a $125 million FILO term loan (the "FILO Loan") and made certain other changes to the Pre-petition Domestic Credit Agreement. The FILO Loan matures on July 20, 2020. The FILO Loan bears interest at a rate per annum equal to the Eurodollar Rate plus a margin of 8.50% (subject to a floor of 1.50%) (or a base rate plus a margin of 7.50%). The Borrowers are required to pay an early repayment premium of the greater of a make-whole through eight months and 3.00% in the event the FILO Loan is repaid within the first year, and 2.00% in the event the FILO Loan is repaid within the second year. The FILO Loan is guaranteed by the same guarantors and secured by the same assets as the loans under the Pre-Petition Domestic Credit Agreement, but ranks junior in right of recovery from the collateral relative to such loans. The Company paid a fee of 2.25% of the FILO Loan to the initial lenders of the FILO Loan. The initial lenders of the FILO Loan include JPP, LLC and JPP II, LLC, entities affiliated with ESL, and Benefit Street 2018 LLC, an entity affiliated with Thomas J. Tisch. The Company received approximately $122 million in net proceeds from the FILO Loan, which proceeds were using to reduce outstanding borrowings under our revolving credit facility. The carrying value of the FILO Loan, net of the remaining discount and debt issuance costs, was $122 million at November 3, 2018.
Revolving advances under the Pre-Petition Domestic Credit Agreement bore interest at a rate equal to, at the election of the Borrowers, either the London Interbank Offered Rate ("LIBOR") or a base rate, in either case plus an applicable margin dependent on Holdings' consolidated leverage ratio (as measured under the Pre-Petition Domestic Credit Agreement). The margin with respect to borrowings ranged from 3.50% to 4.00% for LIBOR loans and from 2.50% to 3.00% for base rate loans. The Pre-Petition Domestic Credit Agreement also provided for the payment of fees with respect to issued and undrawn letters of credit at a rate equal to the margin applicable to LIBOR loans and a commitment fee with respect to unused amounts of the Pre-Petition Revolving Facility at a rate equal to 0.625% per annum.
At October 28, 2017 and February 3, 2018, respectively, we had borrowings of $724 million and $400 million under the Term Loan, and carrying value, net of the remaining discount and debt issuance costs, of $722 million and $391 million. The Company repaid the Term Loan during August 2018, resulting in no borrowings outstanding as of the date of this report. A portion of the proceeds received from the Craftsman Sale were used to reduce outstanding borrowings under the Term Loan during 2017.

31


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

The carrying value of the 2016 Term Loan, net of the remaining discount and debt issuance costs, was $562 million, $557 million and $559 million at November 3, 2018, October 28, 2017 and February 3, 2018, respectively. A portion of the proceeds received from the Craftsman Sale were also used to reduce outstanding borrowings under the 2016 Term Loan during 2017.
At November 3, 2018, October 28, 2017 and February 3, 2018, we had $836 million, $424 million and $271 million, respectively, of Pre-Petition Revolving Facility borrowings and $121 million, $381 million and $377 million at November 3, 2018, October 28, 2017 and February 3, 2018, respectively, of letters of credit outstanding under the Pre-Petition Revolving Facility. At October 28, 2017 and February 3, 2018, the amount available to borrow under the Pre-Petition Revolving Facility was $39 million and $69 million, respectively, which reflected the effect of the springing fixed charge coverage ratio covenant and the borrowing base limitation. The majority of the letters of credit outstanding are used to provide collateral for our insurance programs.
Second Lien Credit Agreement
On September 1, 2016, the Company, SRAC, and Kmart Corporation (together with SRAC, the "ABL Borrowers") entered into a Second Lien Credit Agreement with the Lenders thereunder, entities affiliated with ESL, pursuant to which the ABL Borrowers borrowed $300 million under a term loan (the "Second Lien Term Loan"). The Company received net proceeds of $291 million, which were used for general corporate purposes.
The maturity date for the Second Lien Term Loan is July 20, 2020 and the Second Lien Term Loan will not amortize. The Second Lien Term Loan bears interest at a rate equal to, at the election of the ABL Borrowers, either LIBOR (subject to a 1.00% floor) or a specified prime rate ("Base Rate"), in either case plus an applicable margin. The margin with respect to the Second Lien Term Loan is 7.50% for LIBOR loans and 6.50% for Base Rate loans.
The Second Lien Credit Agreement was amended on July 7, 2017, providing an uncommitted line of credit facility under which subsidiaries of the Company may from time to time borrow line of credit loans ("Line of Credit Loans") with maturities less than 180 days, subject to applicable borrowing base limitations, in an aggregate principal amount not to exceed $500 million at any time outstanding. In February 2018, the Second Lien Credit Agreement was further amended to, among other things, increase the maximum aggregate principal amount of the Line of Credit Loans to $600 million, extend the maximum duration of the Line of Credit Loans to 270 days and increase the size of the general debt basket to $1.25 billion. During 2017, the Company received aggregate proceeds of $610 million from the issuance of Line of Credit Loans from various lenders, some of which are entities affiliated with ESL, Bruce R. Berkowitz, and Thomas J. Tisch. The Company made repayments of $110 million during 2017, some of which were to related parties. During 2018, the Company received an additional $70 million from the issuance of Line of Credit Loans from ESL. See Note 12 for further information. The proceeds were used for the repayment of indebtedness and general corporate purposes.
The Second Lien Credit Agreement was further amended on January 9, 2018. This amendment amended the borrowing base definition in the Second Lien Credit Agreement to increase the advance rate for inventory to 75% from 65% and also deferred the collateral coverage test for purposes of the mandatory repayment covenant in the Second Lien Credit Agreement such that no such mandatory repayment can be required until the end of the third quarter of 2018. In connection with the closing of the Exchange Offers, the Company also entered into an amendment to its Second Lien Credit Agreement. The amendment provides the Company with the option to pay interest on its outstanding $300 million principal amount Second Lien Term Loan in kind, and also provides that the Company's obligation under the term loan is convertible into common stock of the Company, on the same conversion terms as the New Senior Secured Notes (as defined below).
Following consummation of the Exchange Offers, the Company's obligations under the Second Lien Credit Agreement are secured on a pari passu basis with the Company's obligations under that certain Indenture, dated as of March 20, 2018, pursuant to which the Company issued its New Senior Secured Notes. The collateral includes inventory, receivables and other related assets of the Company and its subsidiaries which are obligated on the Second Lien Term Loan and the New Senior Secured Notes. The Second Lien Credit Agreement is guaranteed by all domestic subsidiaries of the Company that guaranteed the Company's obligations under the Pre-Petition Revolving Facility.

32


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

On July 5, 2018, the Company and the other parties thereto entered into a Fifth Amendment (the "Second Lien Credit Agreement Amendment") to the Second Lien Credit Agreement. The Second Lien Credit Agreement Amendment provides for the incurrence by the Company of approximately $45 million of alternative tranche line of credit loans (the "New Loans") in exchange for a like principal amount of the Company's outstanding 6 5/8% Senior Secured Notes due 2018, which notes were canceled.
The New Loans had a maturity date of October 15, 2018, which was the same maturity date of the Old Senior Secured Notes (as defined below). Amounts outstanding under the New Loans may be prepaid at any time, subject to a make-whole prepayment premium. The New Loans bear interest at a rate equal to 6 5/8% per annum, which was the same rate as the Old Senior Secured Notes. Interest on the New Loans is payable from April 15, 2018 on the maturity date of the New Loans. The New Loans otherwise generally have similar terms to the existing loans under the Second Lien Credit Agreement; provided that the lenders under the New Loans benefit from certain additional covenants. The New Loans are guaranteed by SRAC, Kmart and the other subsidiaries of the Company that guarantee the existing loans under the Second Lien Credit Agreement and are secured by the same assets of the Company and its subsidiaries that secure the existing loans under the Second Lien Credit Agreement.
The Second Lien Credit Agreement includes representations and warranties, covenants and other undertakings, and events of default that are substantially similar to those contained in the Pre-Petition Domestic Credit Agreement. The Second Lien Credit Agreement requires the ABL Borrowers to prepay amounts outstanding under the Pre-petition Domestic Credit Agreement and/or the Second Lien Credit Agreement in order to avoid a Collateral Coverage Event (as defined below).
The filing of the Chapter 11 Cases constituted an event of default under the Second Lien Credit Agreement. Although under the Second Lien Credit Agreement the Lenders may declare all or any portion of the outstanding indebtedness to be immediately due and payable, exercise any rights they might have under any of the Second Lien Credit Agreement documents (including against the collateral), and require the ABL Borrowers to pay a default interest rate on the Second Lien Term Loan equal to 2.0% in excess of the Base Rate, such actions are stayed as a result of the Chapter 11 Cases, subject to certain exceptions under the Bankruptcy Code. See "Effect of Chapter 11 Cases & Automatic Stay on Pre-petition Debt Obligations" above.
The carrying value of the Second Lien Term Loan, was $317 million, $293 million and $294 million at November 3, 2018, October 28, 2017 and February 3, 2018, respectively. The carrying value includes paid-in-kind interest of $17 million at November 3, 2018. The carrying value at both October 28, 2017 and February 3, 2018 is net of the remaining discount and debt issuance costs. The carrying value of the Line of Credit Loans, including the New Loans, was $570 million, $413 million and $500 million at November 3, 2018, October 28, 2017 and February 3, 2018, respectively.
Old Senior Secured Notes and New Senior Secured Notes
In October 2010, we sold $1.0 billion aggregate principal amount of senior secured notes (the "Old Senior Secured Notes"), which bear interest at 6 5/8% per annum and had a maturity date of October 15, 2018. Concurrent with the closing of the sale of the Old Senior Secured Notes, the Company sold $250 million aggregate principal amount of Old Senior Secured Notes to the Company's domestic pension plan in a private placement, none of which remain in the domestic pension plan as a result of the Tender Offer discussed below. The Old Senior Secured Notes are guaranteed by certain subsidiaries of the Company and are secured by a security interest in certain assets consisting primarily of domestic inventory and receivables (the "Collateral"). The lien that secures the Old Senior Secured Notes is junior in priority to the liens on such assets that secured obligations under the Pre-Petition Domestic Credit Agreement, as well as certain other first priority lien obligations, and, following consummation of the Exchange Offers, obligations under the indenture relating to the New Senior Secured Notes. The Company used the net proceeds of this offering to repay borrowings outstanding under a previous domestic credit agreement on the settlement date and to fund the working capital requirements of our retail businesses, capital expenditures and for general corporate purposes. Prior to consummation of the Exchange Offers, the indenture under which the Old Senior Secured Notes (the "Old Senior Secured Notes Indenture") were issued contained restrictive covenants that, among other things, (1) limited the ability of the Company and certain of its domestic subsidiaries to create liens and enter into sale and leaseback transactions and (2) limited the ability of the Company to consolidate with or merge into, or sell other than for cash or lease all or substantially all of its assets to, another person. The indenture also

33


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

provided for certain events of default, which, if any were to occur, would permit or require the principal and accrued and unpaid interest on all the then outstanding Old Senior Secured Notes to be due and payable immediately. In connection with the consummation of the Exchange Offers, we entered into a supplemental indenture to the Old Senior Secured Notes Indenture that eliminated substantially all of the restrictive covenants and certain events of default in the Old Senior Secured Notes Indenture. The supplemental indenture, among other things, eliminated the obligation of the Company to offer to repurchase all outstanding Old Senior Secured Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if the borrowing base (as calculated pursuant to the indenture) falls below the principal value of the Old Senior Secured Notes plus any other indebtedness for borrowed money that is secured by liens on the Collateral for two consecutive quarters or upon the occurrence of certain change of control triggering events. The Company may call the Old Senior Secured Notes at a premium based on the "Treasury Rate" as defined in the indenture, plus 50 basis points.
On January 9, 2018, the Company and certain of its subsidiaries entered into a Fourth Supplemental Indenture (the "Supplemental Indenture") with Wilmington Trust, National Association, as successor trustee and collateral agent, amending the Old Senior Secured Notes Indenture. The Supplemental Indenture amended the borrowing base definition in the Old Senior Secured Notes Indenture to increase the advance rate for inventory to 75% from 65%. The Supplemental Indenture also deferred the collateral coverage test for purposes of the repurchase offer covenant in the Indenture and restarts it with the second quarter of 2018 (such that no collateral coverage event could have occurred until the end of the third quarter of 2018).
The carrying value of Old Senior Secured Notes was $89 million, $303 million and $303 million at November 3, 2018, October 28, 2017 and February 3, 2018, respectively. The carrying value at both October 28, 2017 and February 3, 2018 is net of the remaining discount and debt issuance costs. The carrying value of Old Senior Secured Notes is included within current portion of long-term debt in the Condensed Consolidated Balance Sheets at October 28, 2017 and February 3, 2018.
In February 2018, the Company commenced the Exchange Offers pursuant to which it offered to issue in exchange for its outstanding Senior Secured Notes new 6 5/8% Senior Secured Notes Due 2019, of a like principal amount, convertible into common stock of the Company, with interest on such notes to be payable in kind at the Company's option. The Exchange Offers expired on March 15, 2018. Approximately $169.8 million principal amount of the Senior Secured Notes were validly tendered, accepted and canceled, including $20 million principal amount of Old Senior Secured Notes held by ESL, and the Company issued a like principal amount of New Senior Secured Notes. The New Senior Secured Notes are optionally convertible by the holders thereof into shares of the Company's common stock at a conversion price of $5.00 per share of common stock, and are mandatorily convertible at the Company's option if the volume weighted average trading price of the common stock on the NASDAQ exceeds $10.00 for a prescribed period. The New Senior Secured Notes bear interest at a rate of 6.625% per annum and the Company will pay interest semi-annually on April 15 and October 15 of each year, which interest may, at the option of the Company, be paid in kind. The New Senior Secured Notes mature in October 2019.
The New Senior Secured Notes are guaranteed by certain subsidiaries of the Company and are secured by a security interest in the Collateral. The lien that secures the New Senior Secured Notes is junior in priority to the liens on such assets that secured obligations under the Pre-Petition Domestic Credit Agreement, as well as certain other first priority lien obligations, and senior to the lien on such assets that secure obligations under the Old Senior Secured Notes Indenture. The indenture under which the New Senior Secured Notes (the "New Senior Secured Notes Indenture") were issued contains restrictive covenants that, among other things, (1) limit the ability of the Company and certain of its domestic subsidiaries to create liens and enter into sale and leaseback transactions and (2) limit the ability of the Company to consolidate with or merge into, or sell other than for cash or lease all or substantially all of its assets to, another person.
The filing of the Chapter 11 Cases constituted an event of default under each of the New Senior Secured Notes Indenture and the Old Senior Secured Notes Indenture. Although under each of the New Senior Secured Notes Indenture and the Old Senior Secured Notes Indenture the trustee or the holders of at least 25% in aggregate principal amount of the outstanding New Senior Secured Notes or the Old Senior Secured Notes, as applicable, may declare all or any portion of such New Senior Secured Notes or Old Senior Secured Notes to be immediately due and payable, exercise any rights they might have under either the New Senior Secured Notes Indenture or Old Senior Secured Notes Indenture, such actions are stayed as a result of the Chapter 11 Cases, subject to certain

34


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

exceptions under the Bankruptcy Code. See "Effect of Chapter 11 Cases & Automatic Stay on Pre-petition Debt Obligations" above.
The carrying value of New Senior Secured Notes was $175 million at November 3, 2018. The carrying value includes paid-in-kind interest of $6 million at November 3, 2018.
Old Senior Unsecured Notes and New Senior Unsecured Notes
On October 20, 2014, the Company announced its Board of Directors had approved a rights offering allowing its stockholders to purchase up to $625 million in aggregate principal amount of 8% senior unsecured notes due 2019 and warrants to purchase shares of its common stock. The subscription rights were distributed to all stockholders of the Company as of October 30, 2014, the record date for this rights offering, and every stockholder had the right to participate on the same terms in accordance with its pro rata ownership of the Company's common stock, except that holders of the Company's restricted stock that was unvested as of the record date received cash awards in lieu of subscription rights. This rights offering closed on November 18, 2014 and was oversubscribed.
Accordingly, on November 21, 2014, the Company issued $625 million aggregate original principal amount of 8% senior unsecured notes due 2019 (the "Old Senior Unsecured Notes") and received proceeds of $625 million which were used for general corporate purposes. The Old Senior Unsecured Notes are the unsecured and unsubordinated obligations of the Company and rank equal in right of payment with the existing and future unsecured and unsubordinated indebtedness of the Company. The Old Senior Unsecured Notes bear interest at a rate of 8% per annum and the Company will pay interest semi-annually on June 15 and December 15 of each year. The Old Senior Unsecured Notes are not guaranteed.
We accounted for the Old Senior Unsecured Notes in accordance with accounting standards applicable to distinguishing liabilities from equity and debt with conversion and other options. Accordingly, we allocated the proceeds received for the Old Senior Unsecured Notes based on the relative fair values of the Old Senior Unsecured Notes and warrants, which resulted in a discount to the notes of approximately $278 million. The fair value of the Old Senior Unsecured Notes and warrants was estimated based on quoted market prices for the same issues using Level 1 measurements as defined in Note 5 of our Annual Report on Form 10-K for the fiscal year ended February 3, 2018. The discount is being amortized over the life of the Old Senior Unsecured Notes using the effective interest method with an effective interest rate of 11.55%. Approximately $95 million, including $63 million within reorganization items, net, and $40 million of the discount was amortized during the 39 week periods ended November 3, 2018 and October 28, 2017, respectively. The remaining discount was approximately $155 million and $140 million at October 28, 2017 and February 3, 2018, respectively. The carrying value of the Old Senior Unsecured Notes was approximately $411 million, $468 million and $483 million at November 3, 2018, October 28, 2017 and February 3, 2018, respectively. The carrying value at both October 28, 2017 and February 3, 2018 is net of the remaining discount and debt issuance costs.
In February 2018, the Company commenced the Exchange Offers, pursuant to which it offered to issue in exchange for its outstanding Senior Unsecured Notes new 8% Senior Unsecured Notes Due 2019, of a like principal amount, convertible into common stock of the Company, with interest on such notes to be payable in kind at the Company's option. The Exchange Offers expired on March 15, 2018. Approximately $214 million principal amount of the Old Senior Unsecured Notes were validly tendered, accepted and canceled, including $187.6 million principal amount of Old Senior Unsecured Notes by ESL, and the Company issued a like principal amount of New Senior Unsecured Notes. The New Senior Unsecured Notes are optionally convertible by the holders thereof into shares of the Company's common stock at a conversion price of $8.33 per share of common stock, and are mandatorily convertible at the Company's option if the volume weighted average trading price of the common stock on the NASDAQ exceeds $10.00 for a prescribed period.
The New Senior Unsecured Notes are the unsecured and unsubordinated obligations of the Company and rank equal in right of payment with the existing and future unsecured and unsubordinated indebtedness of the Company. The New Senior Unsecured Notes bear interest at a rate of 8% per annum and the Company will pay interest semi-annually on June 15 and December 15 of each year, which interest may, at the option of the Company, be paid in kind. The New Senior Unsecured Notes are not guaranteed.

35


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

The filing of the Chapter 11 Cases constituted an event of default under the indenture governing the New Senior Unsecured Notes and the Old Senior Secured Unsecured Notes. Although under such indenture the trustee or the holders of at least 25% in aggregate principal amount of the outstanding New Senior Unsecured Notes or the Old Senior Unsecured Notes, as applicable, may declare all or any portion of such New Senior Unsecured Notes or Old Senior Unsecured Notes to be immediately due and payable, exercise any rights they might have under either the indenture governing the New Senior Unsecured Notes and Old Senior Unsecured Notes, such actions are stayed as a result of the Chapter 11 Cases, subject to certain exceptions under the Bankruptcy Code. See "Effect of Chapter 11 Cases & Automatic Stay on Pre-petition Debt Obligations" above.
The Company allocated $45 million of the remaining discount from the Old Senior Unsecured Notes to the New Senior Unsecured Notes. Approximately $45 million, including $33 million within reorganization items, net, of the discount was amortized during the 39 week period ended November 3, 2018. The carrying value of the New Senior Unsecured Notes was approximately $223 million at November 3, 2018. The carrying value includes paid-in-kind interest of $9 million at November 3, 2018.
Wholly-owned Insurance Subsidiary and Intercompany Securities
We have numerous types of insurable risks, including workers' compensation, product and general liability, automobile, warranty, asbestos and environmental claims and the extended service contracts we sell to our customers. Certain of the associated risks are managed through Holdings' wholly-owned insurance subsidiary, Sears Reinsurance Company Ltd. ("Sears Re"), a Bermuda Class 3 insurer.
In accordance with applicable insurance regulations, Sears Re holds marketable securities to support the insurance coverage it provides. Sears has utilized two securitization structures to issue specific securities in which Sears Re has invested its capital to fund its insurance obligations. In November 2003, Sears formed a Real Estate Mortgage Investment Conduit, or REMIC. The real estate associated with 138 properties was contributed to indirect wholly-owned subsidiaries of Sears, and then leased back to Sears. The contributed properties were mortgaged and the REMIC issued to wholly-owned subsidiaries of Sears (including Sears Re) $1.3 billion (par value) of securities (the "REMIC Securities") that were secured by the mortgages and collateral assignments of the store leases. Payments to the holders on the REMIC Securities were funded by the lease payments. In March 2018, in connection with the Credit Agreement and Mezzanine Loan Agreement described above, the REMIC was unwound and the REMIC Securities were extinguished.
In May 2006, a subsidiary of Holdings contributed the rights to use the Kenmore, Craftsman and DieHard trademarks in the U.S. and its possessions and territories to KCD IP, LLC, an indirect wholly-owned subsidiary of Holdings. KCD IP, LLC has licensed the use of the trademarks to subsidiaries of Holdings, including Sears and Kmart. Asset-backed securities with a par value of $1.8 billion (the "KCD Securities") were issued by KCD IP, LLC and subsequently purchased by Sears Re, the collateral for which includes the trademark rights and royalty income. Payments to the holders on the KCD Securities are funded by the royalty payments. In connection with the Craftsman Sale, KCD Securities with par value of $900 million were redeemed in March 2017.
The issuers of the REMIC Securities and KCD Securities and the owners of these real estate and trademark assets are bankruptcy remote, special purpose entities that are indirect wholly-owned subsidiaries of Holdings. Cash flows received from rental streams and licensing fee streams paid by Sears, Kmart, other affiliates and third parties, are used for the payment of fees and interest on these securities, through the extinguishment of the REMIC Securities in March 2018. Since the inception of the REMIC and KCD IP, LLC, the REMIC Securities and the KCD Securities have been entirely held by our wholly-owned consolidated subsidiaries, through the extinguishment of the REMIC Securities in March 2018. At November 3, 2018, the net book value of the securitized trademark rights relating to Kenmore and DieHard was approximately $0.5 billion. At both October 28, 2017 and February 3, 2018, the net book value of the securitized trademark rights relating to Kenmore and DieHard was approximately $0.7 billion. The net book value of the securitized real estate assets was approximately $0.6 billion and $0.5 billion at October 28, 2017 and February 3, 2018, respectively.

36


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

NOTE 4—STORE CLOSING CHARGES, SEVERANCE COSTS, IMPAIRMENTS AND REAL ESTATE TRANSACTIONS
Store Closings and Severance
We closed 28 stores in our Kmart segment and 73 stores in our Sears Domestic segment during the 13 week period ended November 3, 2018, and 100 stores in our Kmart segment and 138 stores in our Sears Domestic segment during the 39 week period ended November 3, 2018. As previously announced, an additional 93 stores in our Kmart segment and 148 stores in our Sears Domestic segment will close during the fourth quarter of 2018.
We closed 100 stores in our Kmart segment and 47 stores in our Sears Domestic segment during the 13 week period ended October 28, 2017, and 225 stores in our Kmart segment and 98 stores in our Sears Domestic segment during the 39 week period ended October 28, 2017.
In accordance with accounting standards governing costs associated with exit or disposal activities, expenses related to future rent payments for which we no longer intend to receive any economic benefit are accrued for when we cease to use the leased space and have been reduced for any estimated sublease income. We expect to record additional charges of approximately $390 million related to stores that we had previously made the decision to close, but have not yet closed, including leases that may be rejected pursuant to the Chapter 11 Cases. The expected amount is based on contractual future rent payments and does not include any adjustment to reduce the amount to the expected allowed claims as the damages from the possible rejection of such leases cannot currently be estimated.
Store closing costs and severance recorded for the 13- and 39- week periods ended November 3, 2018 and October 28, 2017 were as follows:
millions
Markdowns(1)
 
Severance Costs(2)
 
Lease Termination Costs(2)
 
Other Charges(2)
 
Impairment and Accelerated Depreciation(3)
 
Total Store Closing Costs
Kmart
$
56

 
$
6

 
$
28

 
$
6

 
$
3

 
$
99

Sears Domestic
75

 
11

 
26

 
10

 
8

 
130

Total for the 13 week period ended November 3, 2018
$
131

 
$
17

 
$
54

 
$
16

 
$
11

 
$
229

 
 
 
 
 
 
 
 
 
 
 
 
Kmart
$
43

 
$
6

 
$
30

 
$
8

 
$
9

 
$
96

Sears Domestic
17

 
5

 
4

 
2

 
10

 
38

Total for the 13 week period ended October 28, 2017
$
60

 
$
11

 
$
34

 
$
10

 
$
19

 
$
134

 
 
 
 
 
 
 
 
 
 
 
 
Kmart
$
70

 
$
8

 
$
50

 
$
9

 
$
4

 
$
141

Sears Domestic
113

 
24

 
66

 
18

 
21

 
242

Total for the 39 week period ended November 3, 2018
$
183

 
$
32

 
$
116

 
$
27

 
$
25

 
$
383

 
 
 
 
 
 
 
 
 
 
 
 
Kmart
$
121

 
$
19

 
$
28

 
$
21

 
$
14

 
$
203

Sears Domestic
43

 
39

 
39

 
9

 
19

 
149

Total for the 39 week period ended October 28, 2017
$
164

 
$
58

 
$
67

 
$
30

 
$
33

 
$
352

_____________
(1) 
Recorded within cost of sales, buying and occupancy in the Condensed Consolidated Statements of Operations.
(2) 
Recorded within selling and administrative in the Condensed Consolidated Statements of Operations. Lease termination costs are net of estimated sublease income, and include the reversal of closed store reserves for which the lease agreement has been terminated and the reversal of deferred rent balances related to closed stores.
(3) 
Recorded within depreciation and amortization in the Condensed Consolidated Statements of Operations.

37


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

Store closing costs and severance accruals of $290 million, $213 million and $261 million at November 3, 2018October 28, 2017 and February 3, 2018 respectively, were as shown in the table below. Store closing accruals included $68 million, $108 million and $126 million within other current liabilities and $17 million, $105 million and $135 million within other long-term liabilities in the Condensed Consolidated Balance Sheets at November 3, 2018, October 28, 2017, and February 3, 2018, respectively. Store closing accruals also included $205 million within liabilities subject to compromise at November 3, 2018 related to rejected leases and severance costs.
millions
Severance Costs
 
Lease Termination Costs
 
Other Charges
 
Total
Balance at October 28, 2017
$
35

 
$
159

 
$
19

 
$
213

Store closing costs
25

 
71

 
2

 
98

Payments/utilizations
(11
)
 
(30
)
 
(9
)
 
(50
)
Balance at February 3, 2018
49

 
200

 
12

 
261

Store closing costs
32

 
136

 
27

 
195

Store closing capital lease obligations

 
3

 

 
3

Payments/utilizations
(41
)
 
(104
)
 
(24
)
 
(169
)
Balance at November 3, 2018
$
40

 
$
235

 
$
15

 
$
290

Long-Lived Assets, Indefinite-Lived Intangible Assets and Goodwill
In accordance with accounting standards governing the impairment or disposal of long-lived assets, we performed an impairment test of certain of our long-lived assets due to events and changes in circumstances during the 13- and 39- week periods ended November 3, 2018 that indicated an impairment might have occurred. As a result of impairment testing, the Company recorded impairment charges of $9 million, all of which were recorded within the Sears Domestic segment during the 13 week period ended November 3, 2018, and $31 million, of which $25 million and $6 million were recorded within the Sears Domestic and Kmart segments, respectively, during the 39 week period ended November 3, 2018.
As a result of impairment testing, the Company recorded impairment charges of $9 million, of which $6 million and $3 million were recorded within the Sears Domestic and Kmart segments, respectively, during the 13 week period ended October 28, 2017, and $29 million, of which $18 million and $11 million were recorded within the Sears Domestic and Kmart segments, respectively, during the 39 week period ended October 28, 2017.
Additionally, as a result of continued declines in operating results, the Chapter 11 Cases and the decision to close an additional 182 stores (as announced in October 2018 and November 2018), the Company determined indications of potential impairment exist with respect to the Sears, Kenmore and DieHard trade names and accordingly performed impairment assessments.
The fair values determined as a result of our impairment assessments for the trade names were derived using the relief from royalty method, which is a specific application of the discounted-cash-flow method, which is a form of the income approach. The relief from royalty method requires inputs considered level 3 under the fair value hierarchy and assumptions related to projected revenues; assumed royalty rates that could be payable if the Company did not own the asset; and a discount rate. These estimates include assumptions that are based on historical data, management forecasts, and a variety of external sources. As a result of our impairment assessments, we recorded an impairment charge related to the Sears, Kenmore and DieHard trade names of $227 million and $296 million during the 13- and 39- week periods ended November 3, 2018, respectively. The impairment is recorded within the Sears Domestic segment and included within impairment charges on our Condensed Consolidated Statement of Operations.
Further indefinite-lived intangible and goodwill impairment charges may be recognized in future periods to the extent changes in facts or circumstances occur, including deterioration in the macroeconomic environment, retail industry, deterioration in our performance or our future projections, including as a result of the Chapter 11 Cases or otherwise, if actual results are not consistent with our estimates and assumptions used in the analysis, or changes in

38


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

our plans for one or more indefinite-lived intangible assets or our Home Services business, including the going-concern sale process and other disposition processes pursuant to the Chapter 11 Cases. Further, our business is seasonal in nature, and we generate a higher portion of our revenues and operating cash flows during the fourth quarter of our fiscal year, which includes the holiday season. The impairment analyses are particularly sensitive to changes in the projected revenue growth rate and the assumed weighted-average cost of capital. Changes to these key assumptions could result in revisions of management's estimates of the fair value of the indefinite-lived intangible assets or reporting unit and could result in impairment charges in the future, which could be material to our results of operations. We will continue to monitor for such changes in facts or circumstances, which may be indicators of potential impairment triggers, and may result in impairment charges in the future, which could be material to our results of operations.
Gain on Sales of Assets
We recognized $344 million and $1.4 billion in gains on sales of assets during the 39 weeks ended November 3, 2018 and October 28, 2017, respectively, which were primarily a result of several real estate transactions. Real estate transactions in 2018 included properties that served as collateral for our real estate facilities for which proceeds of $360 million were used to pay interest and a portion of the Secured Loan, Term Loan Facility, 2016 Secured Loan Facility, 2017 Secured Loan Facility, Incremental Loans and Consolidated Secured Loan Facility. Real estate transactions in 2017 included properties that served as collateral for our real estate facilities for which proceeds of $369 million were used to pay interest and a portion of the 2016 Secured Loan Facility, 2017 Secured Loan Facility and Incremental Loans. Gains in 2017 also included a gain of $492 million in connection with the Craftsman Sale, which is further described in Note 1.
Seritage Transaction and JV Transactions
On April 1, 2015, April 13, 2015 and April 30, 2015, Holdings and General Growth Properties, Inc. ("GGP"), Simon Property Group, Inc. ("Simon") and The Macerich Company ("Macerich"), respectively, announced that they entered into three distinct real estate joint ventures (collectively, the "JVs"). Holdings contributed 31 properties to the JVs where Holdings currently operates stores (the "JV properties"), in exchange for a 50% interest in the JVs and $429 million in cash ($426 million, net of closing costs) (the "JV transactions"). The JV transactions valued the JV properties at $858 million in the aggregate.
On July 7, 2015, Holdings completed its rights offering and sale-leaseback transaction (the "Seritage transaction") with Seritage Growth Properties ("Seritage"), an independent publicly traded real estate investment trust ("REIT"). As part of the Seritage transaction, Holdings sold 235 properties to Seritage (the "REIT properties") along with Holdings' 50% interest in the JVs. Holdings received aggregate gross proceeds from the Seritage transaction of $2.7 billion ($2.6 billion, net of closing costs). The Seritage transaction valued the REIT properties at $2.3 billion in the aggregate.
In connection with the Seritage transaction and JV transactions, Holdings entered into agreements with Seritage and the JVs under which Holdings initially leased 255 of the properties (the "Master Leases"), with the remaining properties being leased by Seritage to third parties. Holdings has closed 39 stores pursuant to recapture notices from Seritage or the JVs and 75 stores pursuant to lease terminations. An additional 77 stores will close in 2018 pursuant to lease terminations, recapture notices, and store closures. Also, in September 2018, Seritage sold five of the properties and Holdings pays rent to the new landlord; and, in July 2017, Seritage sold a 50% joint venture interest in five of the properties and Holdings pays rent to the new landlord.
We accounted for the Seritage transaction and JV transactions in accordance with accounting standards applicable to real estate sales and sale-leaseback transactions. We determined that the Seritage and JV transactions qualify for sales recognition and sale-leaseback accounting, with the exception of four properties for which we had continuing involvement as a result of an obligation to redevelop the stores for a third-party tenant and pay rent on behalf of the third-party tenant until it commenced rent payments to the JVs.
With the exception of the four properties that had continuing involvement, in accordance with accounting standards related to sale-leaseback transactions, Holdings recognized any loss on sale immediately, any gain on sale in excess of the present value of minimum lease payments immediately, and any remaining gain was deferred and will be

39


SEARS HOLDINGS CORPORATION
(DEBTOR-IN-POSSESSION)
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

recognized in proportion to the related rent expense over the lease term. Accordingly, during the second quarter of 2015, Holdings recognized an immediate net gain of $508 million within gain on sales of assets in the Consolidated Statement of Operations for 2015. The remaining gain of $894 million was deferred and will be recognized in proportion to the related rent expense, which is a component of cost of sales, buying and occupancy, in the Condensed Consolidated Statements of Operations, over the lease term.
During the 13- and 39- weeks ended November 3, 2018, respectively, Holdings recorded gains of $29 million and $97 million related to recapture and termination activity in connection with REIT properties and JV properties. During the 13- and 39- weeks ended October 28, 2017, respectively, Holdings recorded gains of $108 million and $186 million related to recapture and termination activity in connection with REIT properties and JV properties. The Master Leases provide Seritage and the JVs rights to recapture 100% of certain stores. The Master Leases also provide Seritage and the JVs a recapture right with respect to approximately 50% of the space within the stores at the REIT properties and JV properties (subject to certain exceptions), in addition to all of the automotive care centers, all outparcels or outlots, and certain portions of parking areas and common areas, except as set forth in the Master Leases, for no additional consideration. As space is recaptured pursuant to the recapture right, Holdings' obligation to pay rent is reduced proportionately. Accordingly, Holdings recognizes gains equal to the unamortized portion of the gain that had previously been deferred which exceeds the present value of minimum lease payments, as reduced due to recapture activity. The Master Leases also provide Holdings certain rights to terminate the Master Leases with respect to REIT properties or JV properties that cease to be profitable for operation. In order to terminate the Master Lease for a certain property, Holdings must make a payment to Seritage or the JV of an amount equal to one year of rent (together with taxes and other expenses) with respect to such property. The Company recognizes the corresponding expenses for termination payments to Seritage when we notify Seritage of our intention to terminate the leases and the stores are announced for closure. We recorded expense of $12 million and $32 million for termination payments to Seritage during the 13- and 39- weeks ended November 3, 2018, respectively, and $24 million during the 39 weeks ended October 28, 2017.
Holdings also recorded immediate gains of $40 million during 2017, which was recorded during the 39 weeks ended October 28, 2017, for the amount of gains on sale in excess of the present value of minimum lease payments for two of the properties that were previously accounted for as financing transactions. As the redevelopment at the stores had been completed and the third-party tenant had commenced rent payments to the JVs, the Company determined that the continuing involvement no longer existed and that the properties qualified for sales recognition and sale-leaseback accounting.
Sale-Leaseback Financing Transactions
Holdings received cash proceeds for sale-leaseback financing transactions of $206 million and $106 million during the 39 weeks ended November 3, 2018 and October 28, 2017, respectively. We accounted for the other transactions as financing transactions in accordance with accounting standards applicable to sale-leaseback transactions as a result of other forms of continuing involvement, including an earn-out provision and the requirement to prepay rent for one year. Accordingly, Holdings recorded a sale-leaseback financing obligation of $424 million, $247 million and $247 million at November 3, 2018, October 28, 2017 and February 3, 2018, respectively, which is classified as a long-term sale-leaseback financing obligation in the Condensed Consolidated Balance Sheets. The sale-leaseback financing obligation related to the four properties that had continuing involvement decreased to $70 million at February 3, 2018 as two of the properties qualified for sales recognition and sale-leaseback accounting as further described above. Additionally, Holdings recorded immediate gains of $21 million during the 39 weeks ended November 3, 2018 for three properties that were previously accounted for as financing transactions as the leaseback ended and it was determined that sales recognition was appropriate. We continued to report real property assets of $108 million, $68 million and $66 million at November 3, 2018, October 28, 2017