Preliminary Copy Dated February 9, 1995
SEARS, ROEBUCK AND CO.
SEARS TOWER
CHICAGO, ILLINOIS 60684
February , 1995
EDWARD A. BRENNAN
Chairman of the Board
Dear Shareholder:
The Company will hold a special meeting of shareholders on , March
, 1995 to consider and vote on a proposal to separate its Sears Merchandise
and Allstate Insurance businesses. I have recommended this ``spin-off''
proposal to the Board of Directors, and it has unanimously approved it. The
Board and I recommend that you vote FOR the proposal.
Under the proposal, each Sears common shareholder would receive, as a
special tax-free dividend, just under one share of Allstate stock for each
Sears common share. In other words, you would own two separate stocks-Sears
and Allstate-that together would represent the combined investment
currently represented by only your Sears stock. The value of the Allstate
stock you would receive will, of course, depend on market prices at the
time of the spin-off. However, based on a February 8, 1995 Sears stock
price of $48 and an Allstate stock price of $26-1/4, the estimated value of
the special dividend would be approximately $24 per Sears common share and
the Sears stock price would be expected to decrease by a similar amount
after the spin-off. After the spin-off, your combined dividends on the two
stocks are expected to be approximately $1.64 (as compared to the current
annual dividend of $1.60 on your Sears stock).
We believe the timing is right for Sears and Allstate to operate
independently. Each business has strong management, good operating
performance and financial strength. We believe that, as focused companies,
Sears and Allstate can perform even better. Sears would continue to operate
its domestic and international merchandise and credit operations, and
Allstate would continue to operate its property, life and other insurance
operations.
Sears and Allstate have their own financial, investment and operating
characteristics. Separating the two companies would enable management of
each of them to concentrate attention and financial resources on its own
business without regard to the objectives and policies of the other
business. As completely separate companies, Sears and Allstate each would
be able to offer employees stock plans tied directly to the results of
their efforts, unaffected by the performance of the other business.
Finally, we believe that this proposal would allow investors to evaluate
better each business, enhancing the likelihood that each would achieve
appropriate market recognition for its performance.
This proposal is another of the actions we have initiated in recent years
designed to enhance shareholder value. As you know, the corporate
repositioning program of 1993 involving our financial services businesses
made the Company stronger by significantly reducing debt and strengthening
its financial condition.
The meeting will begin promptly at 10 a.m. in the Arthur Rubloff Auditorium
of the Chicago Historical Society, Clark Street at North Avenue, Chicago,
Illinois. The official Notice of Meeting, proxy statement and form of proxy
are included with this letter.
The vote of every shareholder is particularly important for this special
meeting. Mailing your completed proxy will not prevent you from voting in
person at the meeting if you wish to do so.
Please sign, date and promptly mail your proxy. Your cooperation will be
greatly appreciated.
Sincerely,
(signed)
Edward A. Brennan
SEARS, ROEBUCK AND CO.
SEARS TOWER
CHICAGO, ILLINOIS 60684
February , 1995
DAVID SHUTE
Senior Vice President
General Counsel
and Secretary
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
A special meeting of shareholders (the ``Special Meeting'') of Sears,
Roebuck and Co. (the ``Company'') will be held in the Arthur Rubloff
Auditorium of the Chicago Historical Society, Clark Street at North Avenue,
Chicago, Illinois, on , March , 1995, at 10:00 a.m., to consider
and vote on a proposal (the ``Distribution Proposal'') that, as described
more fully in the attached Proxy Statement, provides for the distribution
(the ``Distribution'') to the holders of the Company's common shares, par
value $.75 per share (``Sears Common Shares''), of all 360,500,000 shares
of the common stock, par value $.01 per share (``Allstate Common Stock''),
of The Allstate Corporation (``Allstate'') that are owned by the Company.
The Distribution will result in approximately 80.2% of the outstanding
shares of Allstate Common Stock being distributed to holders of Sears
Common Shares. The remaining Allstate Common Stock was sold to the public
in June 1993.
Holders of record at the close of business on February , 1995 of Sears
Common Shares or of the Company's Series A Mandatorily Exchangeable
Preferred Shares are entitled to notice of and to vote at the Special
Meeting or any adjournment or postponement thereof. Holders of record of
the Company's 8.88% Preferred Shares, First Series are not entitled to vote
at the Special Meeting and accordingly no form of proxy is enclosed with
the accompanying Proxy Statement mailed to such holders. No business other
than the Distribution Proposal will be considered at the Special Meeting or
at any adjournment or postponement thereof.
As described more fully in the accompanying Proxy Statement, action taken
at the Special Meeting may entitle shareholders who are entitled to vote
and who fulfill the requirements of Section 623 of the New York Business
Corporation Law (a copy of which is included in Appendix D to the Proxy
Statement) to receive payment for their shares.
By Order of the Board of Directors,
(signed)
David Shute
Secretary
YOUR VOTE IS IMPORTANT
Whether or not you plan to attend the special meeting, please sign and date
the enclosed proxy and mail it promptly in the envelope provided, which
requires no postage if mailed in the United States.
SEARS, ROEBUCK AND CO.
PROXY STATEMENT FOR SPECIAL MEETING
PROXY STATEMENT SUMMARY
This summary is qualified by the more detailed information set forth
elsewhere in this Proxy Statement, which should be read in its entirety.
The Special Meeting
Date, Time and Place of the Special Meeting. The Special Meeting of
Shareholders (the ``Special Meeting'') of Sears, Roebuck and Co. (the
``Company'') will be held in the Arthur Rubloff Auditorium of the Chicago
Historical Society, Clark Street at North Avenue, Chicago, Illinois, on
March , 1995, at 10:00 a.m.
Purpose of the Special Meeting. The Special Meeting is being held to
consider and vote on a proposal (the ``Distribution Proposal'') to approve
the distribution (the ``Distribution''), subject to the conditions
described elsewhere in this Proxy Statement, to the holders (``Sears Common
Shareholders'') of the Company's common shares, par value $.75 per share
(``Sears Common Shares''), of all 360,500,000 shares of the common stock,
par value $.01 per share (``Allstate Common Stock''), of The Allstate
Corporation (``Allstate'') that are owned by the Company.
Recommendation of the Company's Board. The Board of Directors of the
Company, including the five directors who are also directors of Allstate,
has unanimously approved the Distribution Proposal and recommends that
shareholders vote FOR the Distribution Proposal. For a description of the
reasons for the Distribution, see ``The Distribution Proposal-Background
and Reasons for the Distribution''.
Special Meeting Record Date. February , 1995 (the ``Special Meeting
Record Date'').
Voting. At the Special Meeting, each holder of record as of the Special
Meeting Record Date of Sears Common Shares or of Series A Mandatorily
Exchangeable Preferred Shares (``PERCS'') will be entitled to one vote for
each share held as of such date. Holders of record of the Company's 8.88%
Preferred Shares, First Series (the ``8.88% Preferred Shares'') are not
entitled to vote at the Special Meeting.
The Company is seeking approval of the Distribution Proposal by the holders
of at least two-thirds of the outstanding shares entitled to vote at the
Special Meeting. However, if the Distribution Proposal is approved by the
holders of less than two-thirds of the outstanding shares, but is approved
by the holders of a majority of the shares voted at the Special Meeting,
the Company may request a court to rule that shareholder approval is not
required and consummate the Distribution if a favorable ruling is obtained.
Appraisal Rights. Shareholders of the Company (including holders of PERCS)
who are entitled to vote at the Special Meeting and who do not vote for the
Distribution Proposal and who dissent by complying with the procedures
required by the New York Business Corporation Law (the ``NYBCL'') may have
the right to receive, instead of the Distribution, payment for the fair
value of their shares. However, the Company expects to request a court to
rule that no such right exists by reason of the Distribution. See ``The
Special Meeting-Appraisal Rights.''
Certain Considerations. Shareholders should consider the factors discussed
under ``Certain Considerations'' in this Proxy Statement and those
discussed under ``Certain Factors Affecting The Allstate Corporation'' in
the Allstate Appendix, as well as other information set forth herein,
before acting on the Distribution Proposal.
The Distribution
Shares to be Distributed. The Distribution will be made to Sears Common
Shareholders of record as of the Distribution Record Date (as defined
below), which has not yet been established. Each such shareholder will
receive an estimated 0.93 share of Allstate Common Stock for each Sears
Common Share held. The actual fraction will depend on the number of Sears
Common Shares outstanding on the Distribution Record Date and cannot be
exactly determined until such date. Factors that will affect the fraction
include (i) the number of Sears Common Shares to be exchanged for PERCS and
(ii) the number of employee stock options that are exercised through the
Distribution Record Date. See ``The Distribution Proposal-Determination of
the Distribution Ratio.''
Prior to the Distribution Record Date, the Company intends to exchange
Sears Common Shares for the PERCS, which are outstanding in the form of
28.75 million depositary shares. Holders of the PERCS who continue to hold
such Sears Common Shares through the Distribution Record Date will be
entitled to receive the Distribution.
Distribution Record Date. The ``Distribution Record Date'' will be
established by the Board shortly before the Distribution.
Distribution Date. The ``Distribution Date'' will be established by the
Board following the Special Meeting and is presently expected to be in
mid-1995. On the Distribution Date, the Company will deliver shares of
Allstate Common Stock to a distribution agent to be selected by the Company
(the ``Distribution Agent''). The Distribution Agent will mail stock
certificates as soon as practicable thereafter. See ``The Distribution
Proposal-Manner of Effecting the Distribution.''
Fractional Share Interests. No certificates representing fractional shares
will be issued. Fractional share interests will be sold by the Distribution
Agent and the net proceeds (after deduction of brokerage fees) will be
remitted to shareholders who would otherwise be entitled to the fractional
shares.
Conditions to the Distribution. There are several conditions to the
Distribution. In general, these conditions may be waived by the Board. Even
if all conditions are satisfied, the Board has reserved the right to
abandon or defer the Distribution. See ``The Distribution
Proposal-Conditions; Termination'' and ``-Federal Income Tax Aspects of the
Distribution.''
Reasons for the Distribution. The Distribution is designed to separate the
Company's domestic and international merchandising and credit operations
from Allstate's property, liability, life and other insurance operations.
The separation of these businesses, which have distinct financial,
investment and operating characteristics, will enable management of each
business group to concentrate its attention and financial resources on its
own business group without regard to the corporate objectives and policies
of the other business group. Further, as separate companies, the Company
and Allstate will each be able to offer prospective and current employees
(including management) stock plans tied directly to the results of their
efforts and unaffected by the performance of the other group. Also, the
Board believes that the Distribution will allow investors to evaluate
better the performance and investment characteristics of each business
group, enhancing the likelihood that each will achieve appropriate market
recognition of its performance. See ``The Distribution Proposal-Background
and Reasons for the Distribution.''
Tax Consequences. The Company has conditioned the Distribution on receipt
of a ruling from the Internal Revenue Service to the effect, among other
things, that receipt of Allstate Common Stock by Sears Common Shareholders
will be tax-free for federal income tax purposes. The Board has reserved
the right to waive the receipt of such a ruling, but will not do so unless,
in the Board's judgment, based on an opinion of counsel, the receipt of
Allstate Common Stock will be tax-free. See ``The Distribution
Proposal-Federal Income Tax Aspects of the Distribution.'' For a
description of the consequences to the Company, its shareholders, and
Allstate if the Distribution were not to qualify as tax-free, see ``Certain
Considerations-Certain Tax Considerations.''
Accounting Treatment. If the shareholders of the Company approve the
Distribution Proposal at the Special Meeting, the Company will thereafter
present the business of Allstate and its subsidiaries as a discontinued
operation to the extent financial information for periods prior to the
Distribution is required to be included in the Company's historical
financial statements. After the Distribution, the business of Allstate and
its subsidiaries will continue to be reflected in separate consolidated
financial statements of Allstate.
Principal Business to be Retained by the Company. Following the
Distribution, the principal business of the Company will be its
merchandising operations in the United States, Canada and Mexico. The
Company is among the largest retailers in the world, on the basis of sales
of merchandise and services. See ``Business of the Company After the
Distribution.''
Post-Distribution Dividend Policies. It is currently expected that,
following the Distribution, the sum of the annual dividends to be received
by a Sears Common Shareholder who retains the Allstate Common Stock
received in the Distribution will be approximately $1.64 (as compared to
the Company's current annual dividend rate of $1.60 per Sears Common
Share). It is also expected that the Company will pay approximately $.92 of
this amount and that Allstate will continue to pay dividends at its current
rate of $.78 per share of Allstate Common Stock (of which approximately
$.72 would be attributable to the estimated 0.93 share of Allstate Common
Stock that will be distributed for each Sears Common Share in the
Distribution). No such dividends have been declared, however, and the
actual amount of such dividends will remain subject to the discretion of
the respective Boards of Directors of the two companies and will depend on
results of operations, cash requirements, future prospects and other
factors. See ``The Distribution Proposal-Certain Considerations-Dividend
Policies.''
Trading Market. Sears Common Shares are expected to continue to be listed
on the New York Stock Exchange (``NYSE''), the Chicago Stock Exchange
(``CSE'') and the Pacific Stock Exchange (``PSE'') and on several foreign
stock exchanges. Allstate Common Stock is expected to continue to be listed
on the NYSE and the CSE.
The market price of Sears Common Shares and Allstate Common Stock after the
Distribution will be determined by the marketplace. It is expected that the
market price of a Sears Common Share after the Distribution will decline to
reflect the market value of the estimated 0.93 share of Allstate Common
Stock to be received in the Distribution for each Sears Common Share. The
market price of Allstate Common Stock after the Distribution may be
influenced by many factors, including, among others, the market impact of
the substantial increase in the number of shares of Allstate Common Stock
available to trade in the market following the Distribution. See ``Certain
Considerations-Changes in Trading Prices of Sears Common Shares and
Allstate Common Stock.''
Comparison of Rights of Shareholders of the Company and Allstate. After
the Distribution, the rights of the Company's shareholders will be governed
by New York law and the Company's charter documents. The rights of
Allstate's stockholders will be governed by Delaware law and Allstate's
charter documents. There are significant differences between New York and
Delaware law, and between the charter documents of the Company and
Allstate, which affect the rights of shareholders, including statutory
differences relating to shareholder votes for mergers or other corporate
reorganizations and the regulation of certain business combinations with
``interested shareholders''. In addition, dissenters' rights are generally
more limited under Delaware law than under New York law. See ``Comparison
of Rights of Shareholders of the Company and Allstate.''
Selected 1994 Operating Results
Sears. The Company reported 1994 fourth-quarter consolidated net income of
$685 million, or $1.74 per common share, compared with net income of $545
million, or $1.39 per common share in 1993. Fourth quarter earnings
included a $195 million extraordinary gain resulting from the early
extinguishment of debt related to Sears Tower, a $104 million provision
(after minority interest) for additional California earthquake catastrophe
losses and an $80 million charge (after minority interest) for Allstate's
early retirement program. The 1994 results reflect improved performance in
domestic operations at the Sears Merchandise Group on higher merchandise
sales, a lower provision for uncollectible accounts due to a favorable
trend in write-offs and a lower ratio of selling and administrative
expenses to revenues, and better underwriting results, excluding the
California earthquake catastrophe losses, at Allstate.
The Company's consolidated net income for the year was $1.45 billion, or
$3.66 per common share, compared with 1993 net income of $2.37 billion, or
$6.13 per common share. Results for 1994 included $846 million in insurance
catastrophe losses from the California earthquake (without giving effect to
a $65 million benefit after taxes and minority interest from the release of
excess Hurricane Andrew catastrophe reserves), the extraordinary gain from
the early extinguishment of the Sears Tower debt and the charge for
Allstate's early retirement program. Included in 1993 results were a $635
million gain for the initial public offering of Allstate, an $87 million
favorable income tax adjustment resulting from federal income tax
legislation, $176 million of income from discontinued operations and $211
million of extraordinary losses related to the early paydown of debt. The
results in 1994 reflect the significant impact of the California earthquake
catastrophe losses, which more than offset improvements in the Sears
Merchandise Group on higher merchandise sales, a lower provision for
uncollectible accounts due to a favorable trend in write-offs and a lower
ratio of selling and administrative expenses to revenues and improved
underwriting performance at Allstate, excluding the California earthquake
losses.
Allstate. Allstate reported fourth-quarter net income of $163 million, or
$0.37 per share, compared with $259 million, or $0.57 per share in the 1993
period. The decline in 1994 earnings reflects $130 million of additional
catastrophe losses for the California earthquake and a $100 million charge
related to Allstate's early retirement program. Net income for 1994 was
$484 million, or $1.08 per share, compared with 1993 net income of $1.30
billion, or pro forma earnings per share of $2.99. Results in 1994 were
significantly impacted by after-tax catastrophe losses from the California
earthquake of $1.06 billion (without giving effect to an $81 million after-
tax benefit from the release of excess Hurricane Andrew catastrophe
reserves) and the charge related to the early retirement program. For
further discussion of Allstate's 1994 results, see "Selected 1994 Operating
Results" and "1994 California Earthquake" in the Allstate Appendix.
Allstate
Allstate is engaged, principally in the United States and Canada and
primarily through agents working exclusively for Allstate, in property-
liability insurance (including personal property and casualty insurance and
business insurance) and life insurance. Allstate, with more than 20 million
customers, is the country's second largest property-liability insurer on
the basis of 1993 statutory premiums earned and is a major life insurer.
See ``Business of Allstate'' in the Allstate Appendix.
Shareholders should consider all of the factors discussed under ``Certain
Factors Affecting the Allstate Corporation'' in the Allstate Appendix,
including the inherent uncertainty in the process of establishing property-
liability loss reserves and the potentially significant impact on the
financial condition and results of operations of property-liability
insurers of claims arising out of catastrophes, before acting on the
Distribution Proposal.
Additional information regarding Allstate and the Allstate Common Stock is
set forth or incorporated by reference in the Allstate Appendix, which is
attached hereto as Appendix A and constitutes a part of the Proxy
Statement. The Allstate Appendix should be read in its entirety.
SEARS, ROEBUCK AND CO.
HISTORICAL SUMMARY FINANCIAL INFORMATION
The following table sets forth certain summary consolidated financial
information of the Company for the year-to-date periods ended October 1,
1994 and September 30, 1993 and the five years ended December 31, 1993. The
summary information has been derived from and should be read in conjunction
with the financial statements and financial statement schedules included in
the Company's Annual Report on Form 10-K for the year ended December 31,
1993 and Quarterly Report on Form 10-Q for the quarterly period ended
October 1, 1994, both of which are incorporated herein by reference.
Discontinued operations include the operating results and financial
position of Dean Witter, Discover & Co. and Coldwell Banker's residential
services businesses and commercial division.
Year-To-Date Through Year Ended December 31,
Oct. 1, Sept. 30,
1994 1993 1993 1992 1991 1990 1989
(millions, except per common share data)
Operating results
Revenues $38,480 $36,174 $50,838 $52,345 $50,983 $50,283 $48,466
Cost and expenses 36,523 33,592 47,234 52,479 48,568 48,069 45,383
Restructuring - - - 3,108 - 265 -
Interest 1,090 1,147 1,498 1,511 1,681 1,746 1,634
Funding cost on
securitized
receivables 292 432 553 667 655 440 217
Total funding
costs 1,382 1,579 2,051 2,178 2,336 2,186 1,851
Operating income
(loss) 867 1,435 2,106 (4,753) 734 203 1,449
Other income 84 685 852 54 139 153 139
Income (loss) be-
fore income taxes
(benefit) and
minority interest 951 2,120 2,958 (4,699) 873 356 1,588
Income taxes (benefit)
Current
operations 117 171 401 (2,114) (38) (228) 234
Fresh start
adjustment - - - - - (139) -
Income (loss) from
continuing
operations 769 1,865 2,409 (2,567) 916 713 1,311
Income from dis-
continued
operations - 176 176 508 363 189 198
Extraordinary loss - (211) (211) - - - -
Cumulative effect of
accounting changes - - - (1,873) - - -
Net income (loss) 769 1,830 2,374 (3,932) 1,279 902 1,509
Earnings (loss) per
common share
Income (loss)
from continuing
operations 1.92 4.82 6.22 (7.02) 2.65 2.08 3.74
Net income
(loss) 1.92 4.73 6.13 (10.72) 3.71 2.63 4.30
Cash dividends
declared per
common share 1.20 1.20 1.60 2.00 2.00 2.00 2.00
Financial position
Investments $48,904 $46,419 $49,726 $42,176 $39,824 $33,746 $28,901
Receivables 20,940 18,365 20,168 18,254 16,814 18,339 18,483
Merchandise
inventories 4,505 3,793 3,518 4,048 4,459 4,074 4,358
Property and
equipment, net 5,684 5,298 5,529 5,483 5,842 5,484 5,027
Net assets of
discontinued
operations - 357 - 3,086 2,416 2,134 1,966
Total assets 93,914 86,622 90,808 85,491 79,554 72,639 65,219
Insurance
reserves 39,558 36,854 37,444 35,889 31,612 27,184 22,331
Short-term
borrowings 6,573 4,032 4,929 4,608 2,215 7,882 7,058
Long-term debt 12,440 13,343 12,926 13,735 17,585 11,849 9,344
Total debt 19,013 17,375 17,855 18,343 19,800 19,731 16,402
Securitized
receivables 4,615 6,352 5,791 7,812 8,330 6,040 3,526
Total funding 23,628 23,727 23,646 26,155 28,130 25,771 19,928
Shareholders'
equity 10,689 10,016 11,664 10,773 14,188 12,824 13,622
Book value per
common share 26.77 25.01 29.58 27.89 40.29 37.38 39.77
Note: Series A Mandatorily Exchangeable Preferred Shares (PERCS) are
considered common shares for purposes of calculating book value per
common share and earnings (loss) per common share. For the year ended
December 31, 1992, including PERCS as common shares resulted in an
anti-dilutive impact on the loss per common share calculation. Excluding
the PERCS from the calculation, the loss per common share from
continuing operations and net loss per common share for the year ended
December 31, 1992 would have been ($7.78) and ($11.73), respectively.
The net loss applicable to common shares, including all preferred share
dividends, for the year ended December 31, 1992 was $4.05 billion.
Financial position for Oct. 1, 1994 and Dec. 31, 1993 reflects the
adoption of new accounting rules for certain investments in debt
securities. Operating results and financial position for 1994, 1993 and
1992 reflect the adoption of new accounting rules for postretirement and
postemployment benefits.
SEARS, ROEBUCK AND CO.
PRO FORMA SUMMARY FINANCIAL INFORMATION
The following table sets forth certain summary consolidated pro forma financial
information of the Company for the year-to-date period ended October 1, 1994
and the year ended December 31, 1993. The pro forma information gives effect to
the current assumptions relating to the proposed spin-off of Allstate, the
contemplated divestiture of Homart at book value and other adjustments as
described under ``Sears, Roebuck and Co. Notes to Pro Forma Condensed
Consolidated Financial Statements.'' The summary information has been derived
from and should be read in conjunction with the pro forma condensed
consolidated financial statements included herein and the financial statements
and financial statement schedules included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1993 and Quarterly Report on Form
10-Q for the quarterly period ended October 1, 1994, both of which are
incorporated herein by reference.
Year-To-Date
Through Year Ended
Oct. 1, Dec. 31,
(millions, except per common share data) 1994 1993
Operating results
Revenues $22,201 $29,593
Cost and expenses 20,432 27,456
Interest 913 1,250
Funding cost on securitized receivables 292 432
Total funding costs 1,205 1,682
Operating income 856 887
Other income 30 115
Income before income taxes and minority interest 886 1,002
Income taxes 360 345
Income from continuing operations 524 649
Earnings from continuing operations per
common share 1.29 1.62
Cash dividends declared per common share 0.69 0.92
Financial position
Retail customer receivables $16,702
Merchandise inventories 4,505
Property and equipment, net 4,522
Total assets 30,221
Short-term borrowings 5,835
Long-term debt 9,543
Total debt 15,378
Securitized receivables 4,615
Total funding 19,993
Shareholders' equity 3,840
Book value per common share 9.08
Note: Series A Mandatorily Exchangeable Preferred Shares are considered
common shares for purposes of calculating book value per common share
and earnings from continuing operations per common share.
THE SPECIAL MEETING
This Proxy Statement is being furnished to shareholders of the Company in
connection with the solicitation of proxies on behalf of its Board to be used
at the Special Meeting to be held on , March , 1995, at 10:00 a.m. in
the Arthur Rubloff Auditorium of the Chicago Historical Society, Clark Street
at North Avenue, Chicago, Illinois, and at any adjournment or postponement
thereof. This Proxy Statement is first being mailed to the Company's
shareholders on or about February , 1995. The principal executive offices of
the Company are located at Sears Tower, Chicago, Illinois 60684, and the
Company's telephone number at that address is (800) SEARS 80.
Purpose of the Special Meeting
The Special Meeting is being held to consider and vote on the Distribution
Proposal. The Distribution Proposal is to approve the Distribution, subject to
the conditions described elsewhere in this Proxy Statement, to Sears Common
Shareholders of all 360,500,000 shares of Allstate Common Stock that are owned
by the Company. The Distribution will result in approximately 80.2% of the
outstanding shares of Allstate Common Stock being distributed to Sears Common
Shareholders. The remaining Allstate Common Stock was sold to the public in
June 1993.
The Board of Directors of the Company has unanimously approved the Distribution
Proposal and recommends that shareholders vote FOR the Distribution Proposal.
For a description of the reasons for the Distribution, see ``The Distribution
Proposal-Background and Reasons for the Distribution.'' For a description of
the conditions to the Distribution, see ``The Distribution Proposal-Conditions;
Termination.''
Shareholders should consider the factors discussed under ``Certain
Considerations'' and those discussed under ``Certain Factors Affecting The
Allstate Corporation'' in the Allstate Appendix, as well as the other
information set forth herein, before acting on the Distribution Proposal.
Voting Rights and Proxy Information
Only holders of record at the close of business on the Special Meeting Record
Date of Sears Common Shares or PERCS will be entitled to notice of and to vote
at the Special Meeting or any adjournment or postponement thereof. As of the
Special Meeting Record Date, there were Sears Common Shares and
7,187,500 PERCS outstanding and entitled to vote at the Special Meeting. Such
holders of shares (including PERCS) are entitled to one vote per share on the
Distribution Proposal. Holders of record of the 8.88% Preferred Shares are not
entitled to vote at the Special Meeting. The holders of one-third of the total
number of shares (including PERCS) entitled to vote, present in person or
represented by proxy, constitute a quorum for the transaction of business at
the Special Meeting.
The Company believes that under New York law, which governs the Distribution, a
vote of shareholders is not required in connection with the Distribution. New
York law requires the approval of the holders of at least two-thirds of a
corporation's outstanding shares entitled to vote thereon for a sale, lease,
exchange or other disposition of all or substantially all of the assets of the
corporation. The Company believes that a dividend, such as the Distribution, is
not an ``other disposition'' and, even if the Distribution were viewed as such,
the Allstate Common Stock proposed to be distributed does not constitute ``all
or substantially all'' the assets of the Company. Although the Company believes
that shareholder approval is not required, the Company is seeking such approval
because this issue has not been definitively settled under New York law. The
Company is seeking approval of the Distribution Proposal by the holders of at
least two-thirds of the outstanding shares entitled to vote at the Special
Meeting. If the Distribution Proposal is approved by the holders of less than
two-thirds of such outstanding shares, but is approved by the holders of a
majority of the shares voted at the Special Meeting, the Company may request a
court to rule that shareholder approval of the Distribution Proposal is not
required and consummate the Distribution if a favorable ruling is obtained.
Abstentions and broker non-votes are counted as shares present for
determination of a quorum. For purposes of determining whether the Distribution
Proposal is approved by the holders of at least two-thirds of the outstanding
shares entitled to vote at the Special Meeting, abstentions and broker
non-votes will have the same effect as votes against the Distribution Proposal.
For purposes of determining whether the Distribution Proposal has been approved
by the holders of a majority of the shares voted at the Special Meeting,
abstentions and broker non-votes will be treated as unvoted and will not be
counted as votes for or against the proposal.
All Sears Common Shares that are represented at the Special Meeting by properly
executed proxies received before or at the Special Meeting and not revoked will
be voted at the Special Meeting in accordance with the instructions indicated
on such executed proxies. If no instructions are indicated on the executed
proxies, shares represented by such proxies (including whole shares held for
the account of shareholders in the Sears Dividend Reinvestment and Share
Purchase Plan) will be voted FOR approval of the Distribution Proposal. No
business other than the Distribution Proposal will be considered at the Special
Meeting or any adjournment or postponement thereof.
The holders of record on the Special Meeting Record Date of depositary shares
related to PERCS may instruct First Chicago Trust Company of New York, the
Depositary for the PERCS (the ``Depositary''), as to the exercise of voting
rights pertaining to the PERCS underlying their depositary shares by completing
and returning to the Depositary the enclosed proxy no later than March , 1995.
Because of the advance time needed by the Depositary to tabulate voting
instructions and return a proxy to the Company, proxies received from
depositary shares holders after March , 1995 may not be given effect. Any
grant of discretionary authority on the proxy will be taken as a direction to
the Depositary to give a discretionary proxy to the Company's proxy holders.
Upon receipt of proxies from the holders of record on February , 1995 of
depositary shares, the Depositary will attempt to the extent possible to vote
or cause to be voted in accordance with the holder's instructions the maximum
number of whole PERCS relating to all depositary shares as to which any
particular voting instructions are received. In the absence of voting
instructions from the holder of a depositary share, the Depositary will abstain
from voting (in effect, a vote against the Distribution Proposal).
Participants in The Savings and Profit Sharing Fund of Sears Employees who
receive this Proxy Statement in their capacity as such participants will be
receiving a voting instruction form in lieu of a proxy.
The persons named in the enclosed form of proxy will not use their
discretionary authority to vote on adjournment of the Special Meeting in order
to solicit further proxies. However, the chairman of the Special Meeting or the
Board may adjourn the Special Meeting without a vote on such adjournment and
without notice other than by announcement at the meeting.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with Corporate Election Services, Inc. at or before the Special Meeting, a
written notice of revocation bearing a later date than the proxy, (ii) duly
executing a subsequent proxy relating to the same Sears Common Shares and
delivering it to Corporate Election Services, Inc. at or before the Special
Meeting, or (iii) attending the Special Meeting and voting in person (although
attendance at the Special Meeting will not in and of itself constitute a
revocation of a proxy). Any written notice revoking a proxy, and any subsequent
proxy, should be sent to Corporate Election Services, Inc., First & Market
Building, 100 First Avenue, Suite 400, Pittsburgh, PA 15222-1507.
In connection with all meetings of shareholders, all proxies, ballots and vote
tabulations that identify the particular vote of a shareholder are kept
confidential, except that disclosure may be made (i) to allow the independent
election inspectors to certify the results of the vote; or (ii) as necessary to
meet applicable legal requirements, including the pursuit or defense of
judicial actions. The tabulator and the inspectors are independent of the
Company, its directors, officers and employees. Comments written on proxies,
consents or ballots, may be transcribed and provided to the Secretary of the
Company with the name and address of the shareholder without reference to the
vote of the shareholder, except where such vote is included in the comment or
disclosure is necessary to understand the comment. Information concerning which
shareholders have not voted and periodic status reports on the aggregate vote,
including break-downs of vote totals by different types of shareholders,
provided that the Company is not able to determine how a particular shareholder
voted, may be made available to the Company if the Company so requests.
The Company will pay the cost of all proxy solicitation. Officers and other
employees of the Company and its subsidiaries may solicit proxies by personal
interview, telephone and telegram, in addition to the use of the mails. None of
these individuals will receive special compensation for these services, which
will be performed in addition to their regular duties, and some of them may not
necessarily solicit proxies. The Company has also made arrangements with
brokerage firms, banks, nominees and other fiduciaries to forward proxy
solicitation materials for shares held of record by them to the beneficial
owners of such shares. The Company will reimburse them for reasonable
out-of-pocket expenses. D.F. King & Co., Inc. will assist in the distribution
of proxy solicitation materials, collection of proxies and the solicitation of
proxies by personal interview, telephone and telegram for a fee estimated at
$200,000, plus out-of-pocket expenses. The Company has also agreed to indemnify
D.F. King & Co., Inc. against certain liabilities.
Appraisal Rights
If, under New York law, the Distribution constitutes a sale, lease, exchange or
other disposition of all or substantially all of the assets of the Company,
shareholders of the Company who are entitled to vote and who fulfill the
requirements of Section 623 of the NYBCL will be entitled to dissent from the
Distribution Proposal and receive, instead of the Distribution, payment for the
fair value of their Company shares on the terms and conditions described below.
The Company does not believe that the Distribution would be a sale, lease,
exchange or other disposition of all or substantially all of the assets of the
Company under New York law and, accordingly, does not believe that dissenters'
rights to payment would arise by reason of the Distribution. The Company
expects to request a court to rule that the Distribution does not entitle
shareholders of the Company to receive payment for their shares. Moreover, if
the holders of more than 1% of the outstanding shares entitled to vote at the
Special Meeting purport to exercise such dissenters' rights to payment and the
Company cannot obtain a ruling by a court to the effect that no such rights
exist, the Company may elect not to proceed with the Distribution.
If, contrary to the Company's belief, such rights of dissent and payment are
available, Section 910 of the NYBCL sets forth the rights of shareholders of
the Company who object to the Distribution Proposal. Any shareholder of the
Company (including holders of PERCS) who is entitled to vote and who does not
vote in favor of the Distribution Proposal may be able to obtain payment in
cash of the fair value of his or her shares by complying with the requirements
of Section 623 of the NYBCL. The dissenting shareholder must file with the
Company, before shareholders vote on the Distribution Proposal, a written
objection including a notice of election to dissent, the dissenting
shareholder's name and residence address, the number of Company shares as to
which the objection applies and a demand for payment of the fair value of such
shares if the Distribution is effected. Such objection is not required from any
shareholder to whom the Company did not give proper notice of the meeting
pursuant to which such vote was taken. Within 10 days after the vote of
shareholders approving the Distribution Proposal, the Company must give written
notice of such authorization to each such dissenting shareholder who filed
written objection or from whom written objection was not required and who did
not vote in favor of the Distribution Proposal. Within 20 days after the giving
of such notice, any shareholder from whom written objection was not required
and who elects to dissent from the proposed Distribution must file with the
Company a written notice of such election, stating the dissenting shareholder's
name and residence address, the number of shares of the Company as to which the
notice applies and a demand for payment of the fair value of such shares.
Shareholders may not dissent as to less than all of their shares and a nominee
or fiduciary may not dissent on behalf of any beneficial owner as to less than
all of the shares of such owner, as to which such nominee or fiduciary has a
right to dissent, held of record by such nominee or fiduciary. At the time of
filing the notice of election to dissent or within one month thereafter, the
shareholder must submit the certificates representing the shares to the Company
or its transfer agent for notation thereon of the election to dissent after
which such certificates will be returned to the shareholder. Failure to submit
the certificates for such notation may result in the loss of dissenters'
rights. Within 15 days after the expiration of the period within which
shareholders may file their election to dissent, or within 15 days after
consummation of Distribution, whichever is later (but not later than 90 days
after the shareholders' vote authorizing the Distribution Proposal), the
Company must make a written offer (which, if the Distribution has not been
consummated, may be conditioned upon such consummation) to each shareholder who
has filed such notice of election to pay for the Company shares at a specified
price which the Company considers to be their fair value. The dissenting
shareholder has a period of 30 days within which to accept such written offer.
A shareholder may withdraw the notice of election to dissent at any time before
accepting in writing the Company's offer, but in no case more than 60 days
after the later of (x) the date of the consummation of the Distribution or (y)
the date the Company makes its written offer (as described above). Thereafter,
such withdrawal shall require the written consent of the Company. The Company
may request a court to determine the rights of dissenting shareholders and to
fix the fair value of their Company shares. If the Company does not institute
such a proceeding, the dissenting shareholders may do so.
The foregoing summary does not purport to be a complete statement of the
provisions of Sections 910 and 623 of the NYBCL and is qualified in its
entirety by reference to those Sections, copies of which are attached as
Appendix D hereto.
CERTAIN CONSIDERATIONS
Shareholders should consider the following factors, and those discussed under
``Certain Factors Affecting The Allstate Corporation'' in the Allstate
Appendix, as well as the other information in this Proxy Statement.
General Effects of the Distribution
After the Distribution, the Company will no longer own any shares of Allstate
Common Stock and the Company's consolidated financial statements will no longer
reflect the Company's 80.2% interest in Allstate's shareholders' equity and
results of operations. At October 1, 1994, the Company had total assets of
$93.9 billion. After giving effect to the current assumptions relating to the
Distribution, the contemplated divestiture of Homart at book value and certain
other adjustments, all as if they had occurred on October 1, 1994, the Company
would have had total assets of $30.2 billion on such date. See ``Sears, Roebuck
and Co. Pro Forma Condensed Consolidated Financial Statements.'' In addition,
the dividends paid by Allstate to the Company as an 80.2% shareholder of
Allstate will no longer be available to the Company after the Distribution.
Dividends paid by Allstate to the Company with respect to 1993 and 1994
totalled $329.8 million and $259.6 million, respectively. See ``Relationships
Between the Company and Allstate-Business Relationships-Dividends.''
Conversely, Allstate will no longer have the Company available as a potential
source of capital contributions or financial support. The Company made no cash
contributions to Allstate in 1993, 1994 or 1995 (year to date).
Diversification
The Distribution will reduce the diversification of the Company's current
consolidated operations as the Company will no longer own its 80.2% interest in
Allstate. Although the Distribution will eliminate the Company's exposure to
the trends and risks of the insurance industry, the Company will remain subject
to the trends and risks of the retail and consumer credit industries (including
seasonality). Allstate's businesses will continue to be subject to the trends
and risks of the insurance industry (including catastrophe losses). See ``The
Allstate Corporation-Certain Factors Affecting The Allstate Corporation'' in
the Allstate Appendix. In addition, after the Distribution, Allstate's losses,
including those resulting from catastrophes, will not be mitigated by earnings
from the Company. On January 17, 1995, Allstate increased its gross provision
for the January, 1994 California earthquake to $1.625 billion from $1.325
billion. See ``Recent Developments'' and ``1994 California Earthquake'' in the
Allstate Appendix.
Changes in Trading Prices of Sears Common Shares and Allstate Common Stock
The market price of Sears Common Shares and Allstate Common Stock after the
Distribution will be determined by the marketplace. It is expected that the
market price of a Sears Common Share after the Distribution will decline to
reflect the market value of the estimated 0.93 share of Allstate Common Stock
to be received in the Distribution for each Sears Common Share. Based on
February 8, 1995 closing prices of $48 for Sears Common Shares and $26-1/4 for
Allstate Common Stock, the amount of such decline is estimated to be
approximately $24 per Sears Common Share. The market price of Allstate Common
Stock after the Distribution may be influenced by many factors, including,
among others, the market impact of the substantial increase in the number of
shares of Allstate Common Stock available to trade in the market following the
Distribution. See ``The Distribution Proposal-Listing and Trading of Sears
Common Shares'' and ``-Listing and Trading of Allstate Common Stock.''
The trustees or other fiduciaries of the respective trusts under the
tax-qualified profit sharing plans (including employee stock ownership plan
components) of the Company and Allstate will, on behalf of participating
employees, dispose of (i) Allstate Common Stock held in such plan of the
Company and (ii) Sears Common Shares held in such Allstate plan, except to the
extent that employees elect to retain such shares that have been allocated to
their plan accounts. The timing of such dispositions will be determined by the
independent institutional trustees of the plan Company plan and the independent
institutional investment manager appointed to direct the independent
institutional trustees of the Allstate plan. The Company cannot predict the
timing of such dispositions, but expects that they will occur during the first
several months following the Distribution. Such dispositions are expected to be
effected by exchanges of Sears Common Shares and Allstate Common Stock between
plans, by open-market sales, or some combination of exchanges and sales.
Immediately following the split of the existing plan of the Company, but prior
to the Distribution, the Company plan and the Allstate plan that results from
such split are presently estimated to hold approximately 8.4% and 5.7% of the
Sears Common Shares outstanding, respectively. See ``Relationships Between the
Company and Allstate-Agreements Relating to the Distribution-Stock Transfers
Between Qualified Plans.''
Certain Tax Considerations
The Company has conditioned the Distribution on the receipt of a favorable
ruling from the Internal Revenue Service to the effect that, among other
things, the Distribution will qualify as a tax-free spin-off under Section 355
of the Internal Revenue Code of 1986, as amended (the ``Code''). The Board has
reserved the right to waive receipt of the ruling as a condition to
consummation of the Distribution. The Board will not waive such condition
unless, in the Board's judgment, based on an opinion of counsel, the receipt of
shares of Allstate Common Stock will be tax-free. See ``The Distribution
Proposal-Federal Income Tax Aspects of the Distribution.'' Such a ruling, while
generally binding upon the Internal Revenue Service, is subject to certain
factual representations and assumptions. If such factual representations and
assumptions were incorrect in a material respect, such ruling would be
jeopardized. The Company is not aware of any facts or circumstances which would
cause such representations and assumptions to be untrue. The Company and
Allstate have agreed to certain restrictions on their future actions to provide
further assurances that the Distribution will qualify as tax-free. See
``Relationships Between the Company and Allstate-Agreements Relating to the
Distribution-Tax Sharing Agreement.''
If the Distribution were not to qualify under Section 355 of the Code, then in
general a corporate tax would be payable by the consolidated group, of which
the Company is the common parent, based upon the difference between (x) the
fair market value of the 80.2% of the outstanding Allstate Common Stock owned
by the Company and (y) the adjusted basis of such Allstate Common Stock. Under
certain limited circumstances, Allstate has agreed to indemnify the Company for
such tax liability. See ``Relationships Between the Company and
Allstate-Agreements Relating to the Distribution-Tax Sharing Agreement.'' In
addition, under the consolidated return rules, each member of the consolidated
group (including Allstate) is jointly and severally liable for such tax
liability. Furthermore, if the Distribution were not to qualify as a tax-free
spinoff, each Sears Common Shareholder receiving shares of Allstate Common
Stock in the Distribution would be treated as if such shareholder had received
a taxable distribution in an amount equal to the fair market value of Allstate
Common Stock received, which would result in (x) a dividend to the extent of
such shareholder's pro rata share of the Company's current and accumulated
earnings and profits, (y) a reduction in such shareholder's basis in Sears
Common Shares to the extent the amount received exceeds such shareholder's
share of earnings and profits and (z) a gain from the exchange of Sears Common
Shares to the extent the amount received exceeds both such shareholder's share
of earnings and profits and such shareholder's basis in Sears Common Shares.
Loss of Tax Consolidation Benefits
After the Distribution, Allstate and its subsidiaries will no longer be
included in the Company's consolidated tax return. Loss of the tax
consolidation will have a negative impact on Allstate's 1995 net income that is
presently estimated at less than $15,000,000. See ``Relationships Between the
Company and Allstate-Agreements Relating to the Distribution-Tax Sharing
Agreement.''
Dividend Policies
It is currently expected that, following the Distribution, the sum of the
annual dividends to be received by a Sears Common Shareholder who retains the
Allstate Common Stock received in the Distribution will be approximately $1.64
(as compared to the Company's current annual dividend rate of $1.60 per Sears
Common Share). It is also expected that the Company will pay approximately $.92
of this amount and that Allstate will continue to pay dividends at its current
rate of $.78 per share of Allstate Common Stock (of which approximately $.72
would be attributable to the estimated 0.93 share of Allstate Common Stock that
will be distributed for each Sears Common Share in the Distribution). No such
dividends have been declared, however, and the actual amount of such dividends
will remain subject to the discretion of the respective Boards of Directors of
the two companies and will depend on results of operations, cash requirements,
future prospects and other factors.
Relationships Between the Company and Allstate After the Distribution
For purposes of governing certain ongoing relationships between the Company and
Allstate after the Distribution, the Company and Allstate have entered into or
will enter into certain agreements. Such agreements include: (i) a Separation
Agreement, providing for the Distribution; (ii) a Human Resources Allocation
Agreement, providing for certain allocations between the Company and Allstate
of responsibilities with respect to employee compensation, benefit and human
resources matters; and (iii) a Tax Sharing Agreement. In addition, the Company
currently has, and after the Distribution will continue to have, various
contractual and other relationships with Allstate and its affiliates.
Immediately after the Distribution, it is expected that the Company and
Allstate will continue to share five common directors: Warren L. Batts, Edward
A. Brennan, William E. LaMothe, Nancy C. Reynolds and Donald H. Rumsfeld. In
addition, Mr. James M. Denny, Vice Chairman and Acting Chief Financial Officer
of the Company, presently serves as a director of Allstate, but expects to
resign as a director following the completion of a transition period after the
Distribution. Such common directors and Mr. Denny may have conflicting duties
due to the ongoing relationships between the companies. The common directors
and Mr. Denny have abstained, and will continue to abstain, from voting with
respect to matters that present a significant conflict of interest between the
companies. Further, the intercompany agreements described under the caption
``Relationships Between the Company and Allstate-Agreements Relating to the
Distribution'' have been approved by committees of each company's board of
directors consisting exclusively of persons who are not directors or employees
of the other company. See ``Relationships Between the Company and Allstate.''
THE DISTRIBUTION PROPOSAL
Background and Reasons for the Distribution
The Board regularly reviews the structure of the Company to determine if it
continues to be in the best interest of the Company's shareholders. The
proposal to effect the Distribution was discussed by the Board at a meeting on
October 17, 1994. The Distribution Proposal was unanimously approved by the
Board, including the five directors who are also directors of Allstate, at a
meeting on November 9, 1994. At that meeting, the Board, with the advice of the
Company's financial advisors, determined that the Distribution would be in the
best interest of the Company and its shareholders. The Distribution is intended
to increase the long-term value of the shareholders' investment for the reasons
set forth below.
The Distribution is designed to separate two businesses with distinct
financial, investment and operating characteristics. The Board believes that
the Distribution will enable management of each business group to concentrate
its attention and financial resources on its own business group without regard
to the corporate objectives and policies of the other business group.
The Distribution also will permit the Company and Allstate to offer incentives
that are more appropriate for the recruitment and retention of their respective
employees (including management). By separating Allstate from the Company, the
Company and Allstate will each be able to offer prospective and current
employees stock plans that are tied more directly to the results of their
efforts and unaffected by the performance of the other company. The Board has
concluded that the Company's profit-sharing plan, employee stock ownership plan
(ESOP) and broad-based stock option program should be more directly dependent
upon specific business group performance to provide incentives consistent with
the Company's strategic goals.
The Board believes that the Distribution will allow investors (including
participants in the Company's employee benefit plans) to evaluate better the
performance and investment characteristics of each business group, enhancing
the likelihood that each will achieve appropriate market recognition of its
performance.
The Board unanimously recommends that shareholders vote FOR the Distribution
Proposal.
Factors Considered by the Board
In reaching a decision to recommend the Distribution Proposal to the Company's
shareholders, the Board considered: (i) the financial condition, results of
operations, business and prospects of the Company and Allstate; (ii) the
economic and competitive environment in which the Company and Allstate operate
and the conditions in the merchandising industry and the insurance industry,
respectively; (iii) the fact that the Distribution will enable the Company and
Allstate to operate as focused, independent companies; (iv) the fact that the
Distribution will improve the ability of each company to offer stock plans to
its employees; (v) the beneficial effect of the Distribution on investors'
ability to evaluate the performance and investment characteristics of each
business group, enhancing the likelihood that each will achieve appropriate
market recognition of its performance; (vi) the benefits of creating an
opportunity for shareholders (including participants in the Company's employee
benefit plans) to make an investment in the Company's merchandising business
that would be unaffected by the insurance business and the catastrophic risk
and potential earnings volatility related to the insurance business; (vii) the
fact that the Distribution will enable investors to purchase or sell shares in
either of the companies without affecting their holdings in the other; (viii)
the oral and written presentations of Goldman, Sachs & Co. (``Goldman Sachs'')
and Morgan Stanley & Co. Incorporated (``Morgan Stanley''); (ix) the possible
impact of the Distribution on the credit ratings of the Company and Allstate;
(x) the possible effect of the Distribution on Allstate and its stockholders,
including the benefits of the removal of a control block overhang (the market
uncertainty resulting from ownership of a substantial majority of a
corporation's stock by a single shareholder) and a substantial increase in
market liquidity, as well as the detriments of loss of tax consolidation with
the Company and the loss of Allstate's potential access to the Company's
capital; (xi) the potential risks to completion of the Distribution; (xii) the
terms of the Distribution Proposal; and (xiii) the intended tax-free nature of
the Distribution. In view of the variety of the factors considered, the Board
did not find it practical to, and did not, quantify or otherwise attempt to
attach relative weights to the specific factors considered.
The Distribution Proposal is being proposed at the present time because the
Board believes that the recent operating performances of the Company and
Allstate, as well as the economic environment, make the timing right. The Board
believes that each of the companies has strong management, good operating
performance and financial strength. In addition, the relationships that once
existed between the two companies have been significantly reduced as a result
of a significant decrease in the number of Allstate agents located in Company
stores and remaining relationships can continue through intercompany
arrangements.
Opinions of Financial Advisors
In reaching a decision to recommend the Distribution Proposal, the Board
considered the advice of the Company's financial advisors, Goldman Sachs and
Morgan Stanley. Goldman Sachs and Morgan Stanley were selected to act as
financial advisors to the Company based on their qualifications, expertise and
reputation, as well as their investment banking relationships and familiarity
with the Company and Allstate. The Board obtained opinions from both financial
advisors because of the importance of the Board's decision to the Company and
its shareholders. As noted in ``The Distribution Proposal-Background and
Reasons for the Distribution'' and ``-Factors Considered by the Board'', the
opinions of Goldman Sachs and Morgan Stanley were among many factors considered
by the Board in determining to approve the Distribution.
A summary of the opinions rendered by Goldman Sachs and Morgan Stanley with
respect to the Distribution is set forth below. The full text of such opinions,
each dated as of the date hereof, which set forth certain assumptions made,
matters considered and limitations on the review undertaken, are attached as
Appendices B and C hereto and are incorporated herein by reference. Sears
shareholders are urged to read such opinions carefully and in their entirety.
The summary of each of the opinions of Goldman Sachs and Morgan Stanley set
forth herein is qualified by reference to the full texts of such respective
opinions. It is a condition to the consummation of the Distribution that each
of Goldman Sachs and Morgan Stanley deliver opinions to the Board, to be dated
as of the date of the Board's declaration of the special dividend (the
``Declaration Date''), in substantially the same form as the opinions set forth
in Appendices B and C, respectively (see ``The Distribution
Proposal-Conditions; Termination'').
Each of Goldman Sachs and Morgan Stanley believes that its analysis must be
considered as a whole and that selecting portions of such analyses or any of
the factors considered, without considering all such analyses and factors,
could create an incomplete view of the process underlying its analyses and
opinion. The preparation of a fairness opinion is a complex process and is not
susceptible to partial analysis or summary description. In performing its
analyses, each of Goldman Sachs and Morgan Stanley made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the Company's and Allstate's
control. The analyses performed by Goldman Sachs and Morgan Stanley are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses.
Opinion of Goldman Sachs. Goldman Sachs rendered to the Board its oral opinion
on November 9, 1994, which oral opinion was subsequently confirmed in writing
as of the date of this Proxy Statement, that as of the date thereof and based
upon the matters set forth in such opinion and in light of the fact that the
Distribution will be on a pro rata basis to each Sears Common Shareholder, it
is of the opinion that the Distribution is fair to Sears Common Shareholders.
In arriving at its opinion, Goldman Sachs conducted discussions with members of
management of the Company and Allstate with respect to the historical and
current businesses and the future prospects of the Company and Allstate, the
anticipated effects of the Distribution on the Company's and Allstate's initial
and projected capital structures, cash flow and results of operations, and the
plans and programs for the financing of current and projected capital and
operating requirements of the Company and Allstate; analyzed certain historical
business and financial information for the Company and Allstate; reviewed
certain projections provided by the Company and Allstate for the Company and
Allstate for 1994 through 1998; reviewed public information relating to the
Company and Allstate including public financial statements; reviewed certain
rating agency presentations; reviewed public information with respect to
certain other companies in lines of business it believed to be generally
comparable to certain of the businesses conducted by the Company and Allstate;
considered the terms of other recent spin-off transactions; and conducted such
other studies, analyses and investigations as it deemed appropriate.
Goldman Sachs relied upon the accuracy and completeness of the historical and
forecasted financial and other information regarding the Company and Allstate
and their business segments and subsidiaries provided by the Company and its
subsidiaries and did not undertake any independent verification of any such
information. Goldman Sachs assumed and did not independently verify the
reasonableness of the projections provided by management in connection with its
analysis of the Company and Allstate. Goldman Sachs did not make any appraisals
nor was it furnished with independent appraisals of any of the assets of the
Company or Allstate. Goldman Sachs assumed projections will be realized in
amounts shown at times stated.
No limitations were imposed by the Company, Allstate or the Board upon Goldman
Sachs with respect to the investigations made or the procedures followed by
Goldman Sachs, except that Goldman Sachs was not requested or authorized to
solicit, and did not solicit, any proposals for the acquisition of stock or
assets of Allstate or the Company, nor did Goldman Sachs make any determination
as to whether any such proposals could be obtained, if solicited.
In connection with the delivery of its opinion, Goldman Sachs discussed with
the Board Goldman Sachs' views of (a) in the case of the Company, the benefits
of creating an opportunity to make an investment in the Company's merchandising
business that would be unaffected by the insurance business and the
catastrophic risk and potential earnings volatility related to the insurance
business; (b) in the case of Allstate, the benefits of removing a control block
overhang, creating a substantial increase in market liquidity, and the benefits
of independent access to equity capital, as well as the detriments of the loss
of tax consolidation with the Company (with respect to which loss of tax
consolidation Goldman Sachs assumed the accuracy of the Company's expectation
that there would be no significant detriment associated therewith) and loss of
access to the Company's capital; and (c) in the case of both the Company and
Allstate, the benefits to performance of heightened focus, accountability and
independence of management and employees that should result from the
Distribution. Goldman Sachs also noted that the Distribution would result in
the reduction in net assets of the Company by over $8 billion, with a possible
risk to the Company's credit ratings, but that if the Company's credit ratings
were affected they should recover assuming the Company meets its projections.
Goldman Sachs also discussed with the Board (i) Goldman Sachs' view that the
earnings multiple at which the Common Stock of each of the Company and Allstate
was trading and was expected to trade in the future was below the median of
multiples at which comparable retailers and comparable insurance companies on a
stand-alone basis traded (although Goldman Sachs noted that there are no
directly comparable insurance companies) and (ii) Goldman Sachs' estimation
that the earnings multiples at which the Common Stock of each of the Company
and Allstate would trade (after being fully and widely distributed among
investors) over time following the Distribution should expand assuming that the
Company and Allstate accomplish their respective strategic plans and meet their
respective projections. In addition, Goldman Sachs discussed with the Board the
reduction in the scope of distribution relationships between the Company and
Allstate as a result of a significant decrease in the number of Allstate agents
located in Company stores. Goldman Sachs also generally discussed with the
Board the results of certain studies performed by researchers at two
universities and an independent institutional research firm indicating positive
share price reaction for companies effecting spin-offs versus general market
performance.
Goldman Sachs' opinion addresses only the fairness of the Distribution from a
financial point of view to the holders of Sears Common Shares and constitutes
neither a recommendation to any current or prospective shareholder of the
Company or Allstate as to any voting or investment decision or other action
such person or party make take, nor an opinion or estimate as to the value or
trading price of the Sears Common Shares or the Allstate Common Stock prior to
or following the Distribution.
Goldman Sachs is an internationally recognized investment banking firm that
specializes in providing financial advisory services in connection with mergers
and acquisitions and corporate restructurings.
The Company has paid Goldman Sachs fees in connection with the Distribution
totaling $500,000 and has agreed to pay Goldman Sachs an additional $750,000 on
March 31, 1995 and $3,000,000 upon consummation of the Distribution. In
addition, the Company has agreed, among other things, to reimburse Goldman
Sachs for all reasonable fees and disbursements of counsel and other reasonable
out-of-pocket expenses incurred in connection with its services. The Company
has also agreed to indemnify and hold harmless Goldman Sachs and certain of its
related parties to the fullest extent lawfully permitted from and against all
liabilities, including certain liabilities under the federal securities laws,
in connection with Goldman Sachs' engagement.
Goldman Sachs acts as a regular outside financial advisor to the Company.
During the past two years, Goldman Sachs has provided a wide range of financial
advisory services and financing services to the Company and Allstate, including
acting as co-manager of the initial public offerings of Allstate and Dean
Witter, Discover & Co. (``DWDC''), and has received fees of approximately $59
million in connection with such services, excluding the fees described above in
connection with the Distribution. In addition Goldman Sachs has been retained
to represent the Company in connection with the proposed sale of Homart, in
connection with which the Company has agreed to pay Goldman Sachs a fee of 1/2
of 1% of the aggregate consideration paid to the Company, including the
principal amount of Homart's debt assumed.
Opinion of Morgan Stanley. Morgan Stanley rendered to the Board its oral
opinion on November 9, 1994, which oral opinion was subsequently confirmed in
writing as of the date of this Proxy Statement, that based upon and subject to
the various considerations set forth in such opinion and as of the date
thereof, the Distribution is fair, from a financial point of view, to the
holders of Sears Common Shares.
In rendering its opinion, Morgan Stanley (i) analyzed certain publicly
available financial statements and other information relating to the Company
and Allstate; (ii) analyzed certain internal financial statements and other
financial operating data concerning the Company and Allstate prepared by their
respective managements; (iii) analyzed certain financial budgets and forecasts
prepared by the respective managements of the Company and Allstate; (iv)
compared the financial performance of Allstate with that of certain other
companies with publicly traded securities which Morgan Stanley deemed to be
comparable to Allstate; (v) compared the financial performance of the Company
(excluding Allstate) with that of certain other companies with publicly traded
securities which Morgan Stanley deemed to be comparable to the Company
(excluding Allstate); (vi) discussed past and current operations and financial
condition and the prospects of the Company with senior executives of the
Company and of Allstate with senior executives of Allstate; (vii) participated
in discussions among representatives of the Company, Allstate and their legal
advisors; (viii) performed such other analyses as Morgan Stanley deemed
appropriate; and (ix) reviewed this Proxy Statement.
Morgan Stanley assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by it for the purpose of
its opinion. With respect to the financial budgets and forecasts, Morgan
Stanley assumed that such budgets and forecasts were reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
future financial performance of the Company and Allstate. Morgan Stanley did
not make any independent valuation or appraisal of the assets or liabilities,
contingent or otherwise, of the Company or Allstate, and Morgan Stanley was not
furnished with any such appraisals.
No limitations were imposed by the Company, Allstate or the Board upon Morgan
Stanley with respect to the investigations made or the procedures followed by
Morgan Stanley, except that Morgan Stanley was not requested or authorized to
solicit, and did not solicit, any proposals for the acquisition of stock or
assets of Allstate, nor did Morgan Stanley make any determination as to whether
any such proposals could be obtained, if solicited.
In connection with the delivery of its opinion, Morgan Stanley discussed with
the Board, among other things, Morgan Stanley's analysis of the possible
post-Distribution market values of the Sears Common Shares and the Allstate
Common Stock, in each case assuming, among other things, that such securities
are fully and widely distributed among investors and subject only to normal
trading activity (which distribution Morgan Stanley noted could take a period
of time). The analysis was based on a range of price/earnings multiples and
1994, 1995 and 1996 earnings estimates for the Company and Allstate. The
price/earnings multiples used in the analysis were compared to the
price/earnings multiples of certain publicly-traded companies which Morgan
Stanley deemed comparable to the Company and Allstate, respectively. The
earnings estimates used in the analysis were compared to certain published
analysts' estimates. In connection with the analysis with respect to Allstate,
Morgan Stanley assumed the accuracy of the Company's expectation that there
would be no significant detriment associated with the loss of Allstate's tax
consolidation with the Company. The analysis generally indicated that, on a
post-Distribution basis, based on the earnings estimates and price/earnings
multiples that were considered most appropriate, the combined implied market
value of one Sears Common Share and the fractional share of Allstate Common
Stock reflecting the Distribution ratio would exceed the closing market price
per Sears Common Share on the day prior to the Board's approval of the
Distribution.
Morgan Stanley also discussed with the Board Morgan Stanley's analysis of
selected ``spin-off'' transactions completed since 1988, none of which were
deemed directly comparable to the Distribution. This analysis generally
indicated, among other things, that during the six month periods following the
selected spin-offs, the stock prices of the ``spun-off'' companies slightly
outperformed the S&P 500 average.
In addition, Morgan Stanley discussed with the Board Morgan Stanley's view of
certain potential benefits of the Distribution, including (i) enhanced focus of
the Company's and Allstate's respective management teams; (ii) reduced
volatility of the Company's earnings; and (iii) incentive compensation
structures correlated to the Company and Allstate individually rather than on a
combined basis. Morgan Stanley also discussed with the Board Morgan Stanley's
view of certain potential detriments of the Distribution, including (i)
potential negative reaction of credit rating agencies; and (ii) potential
redistribution of Allstate Common Stock for a period of time.
Morgan Stanley's opinion addresses only the fairness of the Distribution from a
financial point of view to the holders of Sears Common Shares and constitutes
neither a recommendation to any current or prospective shareholder of the
Company or Allstate as to any voting or investment decision or other action
such person or party may take, nor an opinion or estimate as to the value or
trading price of the Sears Common Shares or the Allstate Common Stock prior to
or following the Distribution.
Morgan Stanley is an internationally recognized investment banking and advisory
firm. Morgan Stanley, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. In the course of its trading
activities, Morgan Stanley may, from time to time, have a long or short
position in, and buy and sell securities of, the Company and Allstate. Morgan
Stanley and its affiliates have provided financial advisory and financing
services to the Company and Allstate during the past two years, including
acting as co-manager of Allstate's and DWDC's initial public offerings, and
have received fees of approximately $19.5 million in connection with such
services.
Pursuant to a letter agreement dated October 21, 1994 between the Company and
Morgan Stanley, the Company has also paid Morgan Stanley $1,000,000 for its
advisory services in connection with the Distribution and has agreed to pay
Morgan Stanley additional fees of $1,000,000 and $2,000,000 upon the mailing of
this Proxy Statement and the consummation of the Distribution, respectively.
The Company has also agreed to reimburse Morgan Stanley for its reasonable
out-of-pocket expenses and to indemnify Morgan Stanley and its affiliates,
their respective directors, officers, agents and employees and each person, if
any, controlling Morgan Stanley or any of its affiliates, against certain
liabilities, including liabilities under federal securities law, related to
Morgan Stanley's engagement.
Manner of Effecting the Distribution
If all conditions to the Distribution Proposal are satisfied (or waived by the
Board), the Distribution will be made on a date (presently expected to be in
mid-1995) to be established by the Board following the Special Meeting (the
``Distribution Date'') to Sears Common Shareholders of record as of the
``Distribution Record Date.'' See ``The Distribution Proposal-Conditions;
Termination.'' The Distribution Record Date will be established by the Board
shortly before the Distribution. On the Distribution Date, the Company will
deliver all 360,500,000 shares of Allstate Common Stock that it owns to the
Distribution Agent. As soon as practicable thereafter, certificates for such
shares will be mailed by the Distribution Agent to Sears Common Shareholders of
record as of the Distribution Record Date.
No certificates or scrip representing fractional shares of Allstate Common
Stock will be issued to Sears Common Shareholders as part of the Distribution.
The Distribution Agent will, as soon as practicable, aggregate and sell all
fractional interests of Allstate Common Stock on the NYSE or otherwise at
then-prevailing market prices and remit the net proceeds (after deduction of
brokerage fees) to shareholders entitled to fractional shares. See ``The
Distribution Proposal-Federal Income Tax Aspects of the Distribution''.
Shares of Allstate Common Stock as well as cash from the sale of fractional
share interests will be remitted directly to each participant in the Company's
dividend reinvestment plan based upon the aggregate number of Sears Common
Shares credited to such participant's account under such plan and any Sears
Common Shares registered in such participant's name.
No Sears Common Shareholder will be required to pay any cash or other
consideration for the shares of Allstate Common Stock received in the
Distribution or to surrender or exchange Sears Common Shares in order to
receive shares of Allstate Common Stock. All shares of Allstate Common Stock
received in the Distribution will be fully paid and nonassessable and the
holders thereof will not be entitled to preemptive rights. The Distribution
will not affect the number of outstanding Sears Common Shares.
Determination of the Distribution Ratio
The Distribution will be made to Sears Common Shareholders on the basis of an
estimated 0.93 share of Allstate Common Stock for every Sears Common Share. The
exact fraction of a share of Allstate Common Stock to be received in the
Distribution for each Sears Common Share will equal 360,500,000 (the number of
shares of Allstate Common Stock owned by the Company) divided by the number of
Sears Common Shares outstanding on the Distribution Record Date. Because the
number of Sears Common Shares outstanding is subject to change between the date
of this Proxy Statement and the Distribution Record Date, the 0.93 fraction is
only an estimate. The exact Distribution ratio will be determined by the
Company (without the participation of Goldman Sachs or Morgan Stanley) shortly
after the Distribution Record Date and may be higher or lower than the 0.93
estimate. The 0.93 estimate is based on the Sears Common Shares
outstanding on the Special Meeting Record Date, as increased to reflect the
aggregate number of Sears Common Shares that would be issued upon (i) an
optional exchange of the PERCS based on the market price of Sears Common Shares
on the date of this Proxy Statement (see ``Effect of the Distribution on
PERCS'') and (ii) the exercise of employee stock options, assuming that option
exercises continue at their 1994 rate through the mid-1995 anticipated
Distribution Date.
Federal Income Tax Aspects of the Distribution
The Company has conditioned the Distribution on the receipt of a ruling from
the Internal Revenue Service to the effect, among other things, that the
Distribution will qualify as a tax-free spin-off under Section 355 of the Code
for federal income tax purposes and that, for federal income tax purposes:
(1) No gain or loss will be recognized by (and no amount will be included in
the income of) a Sears Common Shareholder upon the receipt of Allstate
Common Stock in the Distribution, except in connection with cash received
in lieu of fractional shares. A Sears Common Shareholder who receives cash
in lieu of fractional shares as a result of the sale of such shares by the
Distribution Agent will be treated as if such fractional shares had been
received by such shareholder as part of the Distribution and then sold by
such shareholder. Accordingly, such shareholder will recognize gain or
loss equal to the difference between the cash received and the amount of
tax basis allocable (as described below) to such fractional share. Such
gain or loss would be capital gain or loss if such fractional share would
have been held by such shareholder as a capital asset.
(2) The aggregate basis of Sears Common Shares and Allstate Common Stock
(including fractional shares) in the hands of a Sears Common Shareholder
immediately after the Distribution will be the same as the aggregate basis
of Sears Common Shares held immediately before the Distribution, allocated
in proportion to the fair market value of each.
(3) The holding period applicable to the Allstate Common Stock received by a
Sears Common Shareholder will include such shareholder's holding period
for the Sears Common Shares with respect to which the Distribution will be
made, provided that such shareholder held the Sears Common Shares as a
capital asset on the Distribution Date.
(4) No gain or loss will be recognized by the Company upon the Distribution.
Application has been made to the Internal Revenue Service for a ruling to the
foregoing effect. As of the date hereof, the Internal Revenue Service has not
yet issued the ruling requested. The Company believes and has been advised by
its outside tax advisors, Sonnenschein Nath & Rosenthal, that the positions
asserted by the Company in requesting the ruling are consistent with the Code
and the rules and regulations promulgated thereunder. However, there can be no
assurance that the Internal Revenue Service will issue a favorable ruling. The
Board has reserved the right to waive the receipt of such a ruling as a
condition to consummation of the Distribution. The Board will not waive such
condition unless, in the Board's judgment, based on an opinion of counsel, the
receipt of shares of Allstate Common Stock will be tax-free. See ``The
Distribution Proposal-Conditions; Termination.'' For a description of the
consequences to the Company, its shareholders, and Allstate if the Distribution
were not to qualify as tax-free, see ``Certain Considerations-Certain Tax
Considerations.''
The summary of federal income tax consequences set forth above is for general
reference only and does not purport to cover all federal income tax
consequences that may apply to all categories of shareholders. All shareholders
should consult their own tax advisors regarding the particular federal,
foreign, state and local tax consequences of the Distribution to such
shareholders.
For a description of the Tax Sharing Agreement pursuant to which the Company
and Allstate have provided for various tax matters, see ``Relationships Between
the Company and Allstate-Agreements Relating to the Distribution-Tax Sharing
Agreement.''
Listing and Trading of Allstate Common Stock
It is expected that Allstate Common Stock will continue to be listed on the
NYSE and the CSE. The prices at which Allstate Common Stock trades after the
Distribution will be determined by the marketplace and may be influenced by
many factors, including, among others, the market impact of the substantial
increase in the number of shares of Allstate Common Stock available to trade in
the market following the Distribution, investor perception of the effects on
Allstate's future results of operations and financial condition of the
separation of Allstate from the Company, Allstate's future dividend policy, and
general economic and market conditions. The substantial increase in the number
of shares of Allstate Common Stock which will be available to trade in the
public market following the Distribution could adversely affect the prevailing
market price.
The Company has requested a no-action letter from the staff of the Securities
and Exchange Commission (``SEC'') to the effect that the staff would not
recommend enforcement action if the Distribution is effected without
registration of the Allstate Common Stock under the Securities Act of 1933 (the
``Securities Act''). Shares of Allstate Common Stock distributed to Sears
Common Shareholders in the Distribution will be freely transferable, except for
securities received by persons who may be deemed to be ``affiliates'' of
Allstate within the meaning of Rule 144 promulgated under the Securities Act.
Persons who are affiliates of the Company within the meaning of Rule 144 may
not publicly offer or sell the Allstate Common Stock received in the
Distribution except pursuant to an effective registration statement under the
Securities Act, or pursuant to an exemption, if any, under the Securities Act.
Listing and Trading of Sears Common Shares
It is expected that Sears Common Shares will continue to be listed and traded
on the NYSE, the CSE and the PSE in the United States and on the following
foreign exchanges: London, England; Basel, Geneva, Lausanne and Zurich,
Switzerland; Amsterdam, The Netherlands; Tokyo, Japan; Paris, France; and
Frankfurt, Germany. It is expected that the market price of a Sears Common
Share after the Distribution will decline to reflect the market value of the
estimated 0.93 share of Allstate Common Stock to be received in the
Distribution for each Sears Common Share. The prices at which Sears Common
Shares trade after the Distribution will be determined by the marketplace and
may be influenced by many factors, including, among others, investor perception
of the effects on the Company's future results of operations and financial
condition of the separation of the Company from Allstate, the Company's future
dividend policy and general economic and market conditions.
Conditions; Termination
The Board has conditioned the Distribution upon, among other things, (i) the
Internal Revenue Service having issued a ruling in response to the Company's
request, in form and substance satisfactory to the Board (see ``The
Distribution Proposal-Federal Income Tax Aspects of the Distribution''); (ii)
the Distribution Proposal having been approved by the holders of at least
two-thirds of the outstanding shares entitled to vote at the Special Meeting;
(iii) any required third-party consents to the Distribution having been
obtained, except for those that, if not obtained, would not have a material
adverse effect on the Company or Allstate; (iv) each of Goldman Sachs and
Morgan Stanley having delivered an opinion to the Board, dated as of the
Declaration Date, in substantially the same form as the opinions set forth in
Appendices B and C, respectively (see ``The Distribution Proposal-Opinions of
Financial Advisors''); (v) compliance with applicable law; and (vi) holders of
not more than 1% of the outstanding shares entitled to vote at the Special
Meeting having purported to exercise dissenters' rights to appraisal or the
Company having obtained a ruling by a court to the effect that no such rights
exist. The Company is not presently aware of any required third-party consents
to the Distribution. In general, any of these conditions may be waived in the
discretion of the Board. The Company is seeking approval of the Distribution
Proposal by the holders of at least two-thirds of the outstanding shares
entitled to vote at the Special Meeting. However, if the Distribution Proposal
is approved by the holders of less than two-thirds of the outstanding shares,
but is approved by the holders of a majority of the shares voted at the Special
Meeting, the Company may request a court to rule that shareholder approval of
the Distribution Proposal is not required and consummate the Distribution if a
favorable ruling is obtained. Even if all the above conditions are satisfied,
the Board has reserved the right to abandon or defer the Distribution. See
``Relationships Between the Company and Allstate-Agreements Relating to the
Distribution-Separation Agreement.''
Effect of the Distribution on PERCS
Prior to the Distribution Record Date, the Company intends to exchange Sears
Common Shares for the outstanding PERCS (which were issued and are outstanding
in the form of 28.75 million PERCS depositary shares). Holders of the PERCS who
continue to hold such Sears Common Shares through the Distribution Record Date
will be entitled to receive the Distribution. Unless the Company elects to make
the optional exchange described in the next sentence, each depositary share is
required to be exchanged on April 1, 1995 for 1.3525 Sears Common Shares (as
adjusted for the spin-off of DWDC in June 1993). Prior to April 1, 1995, the
Company may elect to exchange Sears Common Shares for the outstanding
depositary shares, in whole or in part, at a price of $59.00 per share, plus
accrued and unpaid dividends.
Effect of the Distribution on Employee Stock Options and Restricted Shares
The Distribution will not be made to holders of stock options or restricted
shares under Sears Employees Stock Plans. Pursuant to applicable antidilution
provisions, it is expected that outstanding awards (other than those held by
employees of Allstate) under such plans, and the number of shares remaining
available for future grant (in the form of stock options, restricted shares,
stock appreciation rights, performance units or other rights to the extent
permitted under the provisions of the respective plans) under such plans, will
be adjusted to reflect the dilutive effects of the Distribution. In addition,
it is anticipated that outstanding awards held by employees of Allstate under
such plans will be replaced by comparable awards relating to Allstate Common
Stock under an Allstate replacement stock plan.
Awards held by Sears Employees. In general, it is expected that the number of
shares subject to each employee stock option (other than those held by current
and former employees of Allstate and its subsidiaries) will be increased, and
the option price decreased, in order to preserve (i) the aggregate exercise
price and (ii) the aggregate difference, or ``spread,'' between the fair market
value of the shares subject to the option and the option exercise price.
Restricted shares (other than those held by employees of Allstate and its
subsidiaries) will be cancelled before the Distribution Record Date and the
former holders will be granted restricted Sears Common Shares having an
aggregate fair market value after the Distribution equal to the fair market
value of the cancelled shares before the Distribution.
Awards Held by Allstate Employees. In general, it is expected that all Sears
options and restricted Sears Common Shares held by current and former employees
of Allstate and its subsidiaries will be cancelled prior to the Distribution
and, to the extent authority to make grants under the applicable Employees
Stock Plan has not expired, the related Sears Common Shares will be available
(on a basis adjusted to reflect the dilutive effects of the Distribution) for
future grant under the plans. It is also expected that before the Distribution
Allstate will adopt, subject to approval of Allstate stockholders, a
replacement stock plan under which the holders of such cancelled awards will be
granted substantially similar awards relating to Allstate Common Stock. Sears
intends to vote its 80.2% interest in the outstanding Allstate Common Stock for
approval of such replacement employees stock plan, thereby assuring such
approval.
As of December 31, 1994, there were outstanding employee stock options to
purchase 11,523,440 Sears Common Shares (of which options to purchase 1,129,424
shares were held by employees of Allstate and its subsidiaries) and 362,980
restricted shares (of which 103,199 shares were held by employees of Allstate
and its subsidiaries), and 8,854,454 shares were available for future grant
under the Sears Employees Stock Plans.
Agreements with Executive Officers
In anticipation of the elimination of the Sears Corporate Group, the Company
has adopted a retention policy that provides varying levels of severance
benefits for all employees of the Sears Corporate Group following the
Distribution. In the cases of Messrs. James A. Blanda (Vice President and
Controller) and Gerald E. Buldak (Vice President, Public Affairs) and Ms. Alice
M. Peterson (Vice President and Treasurer), such policy provides for severance
payments in the event of a termination of employment without cause or a
significant reduction during the period ending on the first anniversary of the
Distribution in the compensation or responsibilities of such officer on
November 10, 1994 (a ``deemed termination''). The amount payable to such
officers under such circumstances would equal one year's salary and target
annual bonus. In addition, each such officer would receive up to one year's
additional salary and target annual bonus, payable on a monthly basis during
the second year following the date of the actual or deemed termination, but
only so long as such officer has not obtained new employment. Mr. Shute (Senior
Vice President, General Counsel and Secretary) is expected to retire from the
Company on his normal retirement date in February, 1996. The retention policy
does not apply to Messrs. Edward A. Brennan (Chairman of the Board of
Directors, President and Chief Executive Officer) and James M. Denny (Vice
Chairman and Acting Chief Financial Officer).
The Compensation Committee of the Board has deferred a determination as to any
special compensation for Messrs. Brennan and Denny until shortly before the
Distribution. This will enable the Compensation Committee to take into account
their contributions to the management of the Company, including the process
leading to the Distribution. The Distribution will result in the elimination of
the positions of Messrs. Brennan and Denny following a transition period after
the Distribution.
Regulatory Approvals
The Company does not believe that any material federal or state regulatory
approvals will be necessary in connection with the Distribution.
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
``HSR Act''), and the rules promulgated thereunder, the distribution of
Allstate Common Stock to certain persons pursuant to the Distribution may
require the Company and any such persons to file a Premerger Notification and
Report Form (a ``Report Form'') with the Department of Justice and the Federal
Trade Commission and be subject to the expiration or early termination of a
specified waiting period. The waiting period under the HSR Act will expire 30
days after such filings are made, subject to extension if additional
information is required by the government agencies.
In general, if (i) a person receiving shares of Allstate Common Stock pursuant
to the Distribution would own, upon consummation of the Distribution, Allstate
Common Stock that exceeds $15 million in value, (ii) certain jurisdictional
requirements are met and (iii) no exemption applies, then the HSR Act would
require that the Company and such person file a Report Form and observe the
applicable waiting period. If such waiting period has not expired or been
terminated by the Distribution Date with respect to any such recipient, the
Company may be required to deliver such recipient's shares of Allstate Common
Stock into an escrow facility pending the expiration or termination of such
waiting period.
Exemptions from the requirements of the HSR Act that may be available to
persons who receive shares of Allstate Common Stock that exceed $15 million in
value include: (i) an exemption for acquisition of voting securities made
solely for the purpose of investment if, after the acquisition, the acquiring
person would hold 10% or less of the outstanding voting securities of the
issuer, regardless of the dollar value of voting securities so acquired or
held; and (ii) an exemption for the acquisition of voting securities if (a) the
securities are acquired by a trust that meets the qualifications of section 401
of the Code, (b) the trust is controlled by a person that employs the
beneficiaries, and (c) the voting securities acquired are those of that person
or an entity within that person. Shareholders are urged to consult their legal
counsel to determine whether the requirements of the HSR Act will apply to
their receipt of Allstate Common Stock pursuant to the Distribution.
Accounting Treatment
If the shareholders of the Company approve the Distribution Proposal at the
Special Meeting, the Company will thereafter present the business of Allstate
and its subsidiaries as a discontinued operation to the extent financial
information for periods prior to the Distribution is required to be included in
the Company's historical financial statements. After the Distribution, the
business of Allstate and its subsidiaries will continue to be reflected in the
separate consolidated financial statements of Allstate.
RELATIONSHIPS BETWEEN THE COMPANY AND ALLSTATE
The Company currently has, and after the Distribution will continue to have, a
variety of contractual and other relationships with Allstate and its
affiliates. In addition, the Company and Allstate have entered into, or will
enter into, other arrangements to facilitate the Distribution. A description of
these existing relationships and contemplated arrangements follows below.
Business Relationships
Assumption of Debt. On March 8, 1993, pursuant to an agreement between Allstate
Holdings, Inc., a wholly-owned subsidiary of the Company (``Allstate
Holdings''), and Allstate, Allstate Holdings contributed to Allstate all of the
outstanding stock of Allstate Insurance Company (``AIC''), and Allstate assumed
payment liabilities with respect to $1.8 billion aggregate principal amount of
indebtedness of the Company, which Allstate Holdings had assumed by agreement
with the Company. All of such indebtedness has been paid by Allstate.
Intercompany Agreement. Before June 2, 1993, Allstate was an indirect
wholly-owned subsidiary of the Company. Allstate sold approximately 19.9% of
its common stock to the public in an initial public offering (the ``Allstate
IPO'') on June 2, 1993. In connection with the Allstate IPO, the Company and
Allstate entered into an agreement dated as of May 29, 1993 (the ``Intercompany
Agreement'') setting forth certain agreements and undertakings between them
concerning the Allstate IPO and their relationship following the Allstate IPO.
The Intercompany Agreement contains, among other provisions, cross-indemnities
relating to the Allstate IPO, and provisions relating to certain relationships
between the Company and Allstate following the Allstate IPO, such as the
responsibility of each party for the conduct of its business. The Intercompany
Agreement also contains provisions for the protection of confidential
information, access to information and retention of records. The Intercompany
Agreement will survive the consummation of the Distribution.
Dividends. Dividends paid by Allstate to the Company with respect to 1992, 1993
and 1994 totaled $201.8, $329.8 million and $259.6 million, respectively. The
Company will continue to receive any dividends declared by Allstate with
respect to Allstate Common Stock as to which the record date is prior to the
Distribution Date.
Demand Collateral Note. Pursuant to a Demand Collateral Note dated as of
December 20, 1990, the Company agreed to pay on demand, on or before December
29, 1995, to AIC the principal sum of $450 million, together with accrued but
unpaid interest thereon. The interest on the principal sum is at the rate of 9%
per annum payable semi-annually commencing as of June 15, 1991. To secure
payment of such note, the Company has granted a security interest to AIC in all
of the outstanding shares of common stock of Homart. The Company intends to
repay the Demand Collateral Note in full before the Distribution Date.
Advantis Agreements. As of November 30, 1992, AIC entered into a Master
Agreement for Systems Operations Service and a related Services Agreement
(collectively, the ``Advantis Agreement'') with Advantis, a New York general
partnership (the general partners of which are an affiliate of International
Business Machines Corporation (``IBM'') and an affiliate of the Company),
covering the provision to AIC of the data networking, voice and related
services (collectively, the ``Services'') formerly provided to AIC by Sears
Technology Services, Inc. (``STS''), a subsidiary of the Company. The Advantis
Agreement sets forth the terms and conditions for the Services that are to be
performed by Advantis for AIC. As of January 1, 1995, AIC's aggregate minimum
annual revenue commitment under the Advantis Agreement is approximately $109.1
million, subject to a cost-of-living adjustment mechanism.
The term of the Advantis Agreement commenced on December 1, 1992, and
terminates, unless earlier terminated or extended, on December 31, 1996. Such
term may be renewed by mutual agreement of AIC and Advantis for an additional
four-year period and then an additional two-year period beyond the original
term and the renewal term, respectively. Under certain circumstances, early
termination requires the payment to Advantis of an early termination charge.
Under separate agreements with the affiliate of the Company that is a partner
in Advantis, AIC has an interest, currently approximately 3.2%, in the
operating results and distributions of Advantis, which portion varies on the
basis of the fees paid to Advantis by AIC, the Company and certain other
customers of Advantis (the ``Profits Interest''). In addition, the Company has
agreed to pay to AIC an amount, based upon the proceeds received by the Company
affiliate, upon the sale or liquidation of its interest in Advantis or as a
result of the sale of certain capital assets by Advantis or from certain other
distributions by Advantis (the ``Capital Events Interest''). Such amount would
equal 15.8% (subject to reduction under certain circumstances) of any cash
proceeds realized by the Company affiliate on account of its interest in
Advantis. Allstate's rights to receive payments under the Profits Interest and
the Capital Events Interest expire upon certain circumstances, including the
expiration or termination of the Advantis Agreement (except that the Capital
Events Interest continues if the termination occurs on or after December 31,
2002) or if the Company affiliate ceases to be a partner of Advantis.
As of the date of this Proxy Statement, AIC, Sears and Advantis are engaged in
negotiations relating to certain terms of the Advantis Agreement.
Household Marketing File. To coordinate their cross-business marketing efforts,
in 1988, Allstate, the Company and its other affiliates established the
Corporate Household Marketing File (the ``Household File''). Allstate and the
Company send certain customer files to Allstate's Menlo Park, California-based
Research Center on a regular basis for input into the Household File. On a
request basis, the Allstate Research Center provides certain research services
to the Company at cost and provides data extracts to the Company, Allstate and
other affiliates to support marketing programs. These arrangements are being
modified by the Marketing File Separation Agreement and the Research Services
Agreement described below.
Other Relationships. Other less significant relationships include: (i)
Allstate's leasing of space in certain Sears stores, (ii) Allstate's provision
of credit life and other insurance coverage to holders of the SearsCharge Card;
(iii) various marketing assistance programs, including customer referrals and
product promotions; (iv) claimant referral programs under which Allstate
affiliates refer customers to the Company and certain of its affiliates for
replacement or repair of damaged property; and (v) various general
administrative service agreements. Allstate affiliates also sell certain
products, such as structured settlement annuities, to the Company and its
affiliates. Modifications of certain of these relationships are described under
``Agreements Relating to the Distribution'' below.
Agreements Relating to the Distribution
In contemplation of the proposed Distribution, the Company and Allstate have
entered into certain new and amended arrangements. The agreements summarized in
this section are included as exhibits to Allstate's Current Report on Form 8-K
dated February , 1995 relating to the Distribution, and the following
summaries are qualified in their entirety by reference to the agreements as
filed.
Separation Agreement. The Company and Allstate have entered into the Separation
Agreement, which provides for, among other things: (i) the Distribution; and
(ii) certain other agreements governing the relationship between the Company
and Allstate following the Distribution as described below.
The Separation Agreement restricts competition between the Company and Allstate
during the five years following the Distribution, providing that during that
period (i) the Company cannot engage in insurance or related businesses in
which it was not engaged on January 1, 1995, if Allstate was then so engaged;
and (ii) Allstate cannot [engage in the business of repair, improvement or
maintenance of personal property or residential real estate (except
satisfaction of insurance claims and existing Allstate Motor Club business),
and cannot], if the Company was so engaged on January 1, 1995, (x) engage in a
consumer finance business if Allstate was not so engaged on January 1, 1995,
(y) issue credit cards (except as described in the next sentence), and (z) sell
consumer products (except insurance and financial products) at retail. Allstate
may, however, elect to issue credit cards at any time commencing 42 months
after the Distribution Date, provided that Allstate so notifies the Company and
deletes from the Household File all credit account information relating to the
Company's customers. In the event of such an election by Allstate, all
restrictions on competition between the Company and Allstate will terminate.
The provisions of the Separation Agreement also include the following: (w) each
party will indemnify the other in the event of certain liabilities relating to
the Distribution arising under the Securities Exchange Act of 1934 (the
``Exchange Act'') or otherwise, (x) the discount privileges of Allstate
employees and retirees in Sears stores will be terminated as of the
Distribution Date, (y) Allstate's leased space in Sears stores will be
gradually reduced until its elimination by the second anniversary of the
Distribution Date, and (z) expenses related to the Distribution will generally
be borne by the Company, except that such expenses not specifically addressed
will be charged to the party for whose benefit the expenses are incurred.
Marketing File Separation Agreement. The Marketing File Separation Agreement
(the ``MFSA'') provides that, until December 31, 1995, the Company will
continue to provide Allstate's Household File with the Company's customer
information. Allstate will retain the Household File, but credit account and
other customer information furnished by the Company before that time will be
retained by Allstate only until the fifth anniversary of the Distribution Date
or, if Allstate exercises its election to enter the credit card business (see
``Separation Agreement'' above), until the time of such election. See
``Business Relationships-Household Marketing File.'' The MFSA limits the
frequency with which Allstate can contact customers of the Company during the
five years following the Distribution Date and provides that Allstate cannot
conduct certain direct response insurance or auto club marketing using the
Company's customer information, except pursuant to existing or future
agreements with the Company. The Agreement also provides for an Allstate
payment to the Company of $1,000,000, and cross-indemnities for losses suffered
by one party caused by the other party's breach of the Agreement.
Research Services Agreement. Under the Research Services Agreement between the
Company and Allstate, the Allstate Research Center will provide credit related
research services to the Company, at the Company's request, beginning on the
Distribution Date, for fees based on the current agreement until December 31,
1995 and at commercially reasonable rates thereafter. The Agreement provides
that the Company indemnifies Allstate for (i) any liability arising out of
implementation of models and programs under the Agreement and (ii) any
liability related to the Company's use of research produced under the
Agreement.
Tax Sharing Agreement. After the Distribution, Allstate will no longer be a
member of the Company's affiliated group (the ``Sears Group''), which files a
consolidated federal income tax return. The Company and Allstate have entered
into an agreement (the ``Tax Sharing Agreement'') which (i) defines their
respective rights and obligations with respect to federal, state, local and all
other taxes for all periods prior to or including the Distribution
(``Consolidated Taxable Years'') and (ii) governs the conduct of all audits and
other tax controversies relating to the Consolidated Taxable Years. As a member
of Sears Group during Consolidated Taxable Years, Allstate is jointly and
severally liable for the consolidated income tax liability of the Sears Group.
The Tax Sharing Agreement provides that all Consolidated Taxable Years will
continue to be governed by the existing tax agreement of the Sears Group (the
``Existing Agreement''). Pursuant to the Existing Agreement and practices
thereunder, each Sears Group member (including Allstate, with the Allstate Life
Group treated as a separate member) is responsible for its share of Sears Group
federal income taxes for Consolidated Taxable Years. Each Sears Group member
(including Allstate, with the Allstate Life Group treated as a separate member)
is allocated a share of such taxes as determined under an elective method
permitted under the Treasury Department's consolidated return regulations. In
general, this method provides for an allocation of taxes to each member as if
it filed a separate return, except that items such as net operating losses,
capital losses, foreign tax credits, general business credits or similar items
which might not be immediately recognizable in a separate return are allocated
to the extent such items reduce the Sears Group consolidated tax liability.
Similarly, alternative minimum tax (``AMT'') incurred by the Sears Group is
allocated to members of the Sears Group whose tax position caused the AMT. If
new Treasury Regulations are issued which provide for an allocation of the
Sears Group's federal tax liability or loss or credit carryforwards (including
the allocation of AMT and minimum tax credit) to a member of the Sears Group
(including Allstate, with the Allstate Life Group treated as a separate member)
which differs from the methods of allocation provided under the Existing
Agreement, the new Regulations shall apply. To the extent that the Company or
Allstate is allocated any minimum tax credit which does not correspond to an
allocation of AMT provided under the Existing Agreement, the party receiving
the benefit of such allocation is required to pay to the other an amount equal
to the amount of such credit on or before certain prescribed dates set out in
the Tax Sharing Agreement which are based on the utilization of such credit. If
new Regulations are issued which provide for alternative allocation methods,
the Company will continue to allocate AMT and minimum tax credits under the
Existing Agreement or adopt an allowable allocation method advantageous to the
Consolidated Group.
The Tax Sharing Agreement confirms that Allstate has fully paid its reported
tax liability under the Existing Agreement for all years ending on or before
December 31, 1993. Nevertheless, (i) Allstate will be required to pay (to the
extent not already paid) to the Company its share of federal income taxes
attributable to all Consolidated Taxable Years ending before or including the
Distribution Date, (ii) Allstate may be required to pay additional taxes to the
Company to the extent federal income tax liability allocable to Allstate for
any Consolidated Taxable Year is increased after audit, and (iii) Allstate will
be entitled to receive tax refunds (if any) or may be entitled to receive
additional payments (if any) to the extent a refund or an audit adjustment to a
Consolidated Taxable Year is allocable to Allstate. Similar provisions apply
under the Tax Sharing Agreement to other taxes, such as state and local income
taxes (which are not covered by the Existing Agreement), with respect to
jurisdictions in which a member of Allstate's affiliated group is required to
be included in a combined return with a member of the Sears Group, for periods
ending prior to or including the Distribution Date.
Under the Existing Agreement, each Sears Group member (including Allstate, with
the Allstate Life Group treated as a separate member) may be (i) required to
pay a member if such member's losses, tax credits or certain other items could
potentially create a tax benefit for the Sears Group, and (ii) entitled to
receive an amount from other members if its own losses, tax credits or certain
other items could potentially create a tax benefit for the Sears Group.
Effectively, under these provisions Allstate generally is allocated an amount
of federal income tax no greater than the amount for which it would have been
liable had it filed its return separately from the Sears Group.
The Company and Allstate will be responsible for their respective federal
income tax liabilities and those of their subsidiaries for all periods after
the Distribution Date. The Company and Allstate will remain responsible for
their separate state and local income tax liabilities and for those of their
subsidiaries.
Allstate has indemnified the Company in the Tax Sharing Agreement with respect
to tax liabilities resulting from (i) Allstate's failure to comply in all
material respects with certain written representations and statements made
regarding it in the IRS ruling request (and related submissions) relating to
the tax-free nature of the Distribution, or (ii) certain errors or omissions
contained in the ruling request, insofar as any such error or omission was made
based on written statements that Allstate has furnished to the Company in
connection with the ruling request. In addition, Allstate has agreed to refrain
from certain actions for the two-year period beginning on the Distribution
Date, unless it obtains an opinion of counsel or a supplemental ruling from the
IRS (which, in either case, shall be reasonably satisfactory to the Company)
that such actions will not affect the qualification of the Distribution as a
tax-free distribution under Section 355 of the Code. These actions include (i)
a material disposition outside of Allstate's affiliated group, by means of sale
or exchange of assets or capital stock (other than an offering of Allstate's
own stock in an amount which does not exceed 50 percent of Allstate's issued
and outstanding stock), (ii) a distribution to stockholders or otherwise of any
of its assets (other than ordinary dividends), (iii) a repurchase of any
Allstate stock (excluding certain repurchases in connection with employee
benefit plans) and (iv) voluntarily ceasing the active conduct of a material
portion of its business.
The Tax Sharing Agreement provides that Allstate shall have the right, subject
to the Company's approval (which may not be unreasonably withheld) to have full
responsibility and discretion in the handling of any tax controversy including
an audit, protest to the Appeals Division of the IRS, and litigation in Tax
Court or any other court of competent jurisdiction, with respect to any item
reported on an Allstate tax return that would give rise to a payment of tax for
which Allstate would be liable (or a refund of tax to which Allstate would be
entitled) under the Tax Sharing Agreement.
Human Resources Allocation Agreement. At the time of the Allstate IPO,
Allstate, AIC and the Company entered into a Human Resources Allocation
Agreement regarding the parties' employees, agents, employee benefits and
related matters. The agreement generally preserved the parties' existing
relationships with respect to these matters, while reserving the right to
change them. In contemplation of the proposed Distribution, the Company and
Allstate have amended the Human Resources Allocation Agreement to provide that
(i) after the Distribution, the Company, Allstate and their respective
affiliates will operate and maintain separate employee benefit programs and
procedures; (ii) subject to certain exceptions, Sears and Allstate retain or
assume any and all liabilities under various employee benefit plans and
arrangements with respect to any person who, as of the time such liability was
incurred, was an employee of Sears or Allstate, respectively; (iii) Allstate
will adopt, and the Company as majority shareholder prior to the Distribution
agrees to approve The Allstate Corporation Employees Replacement Stock Plan,
under which Allstate will have the authority to grant awards, including
nonqualified stock options and various forms of stock appreciation rights
(including limited stock appreciation rights) relating to Allstate Common
Stock, and shares of restricted Allstate Common Stock, solely in order to
replace substantially similar awards relating to Sears Common Shares
terminated, cancelled or forfeited in connection with the Distribution; (iv)
The Savings and Profit Sharing Fund of Sears Employees (the ``Sears Profit
Sharing Fund'') will be split up and procedures established in accordance with
applicable fiduciary standards and securities laws, for the transfer of Company
and Allstate stock between the resulting plans of the Company and Allstate, as
described under ``Stock Transfers Between Qualified Plans'' below; and (v)
Allstate will assume the obligation to provide the benefits under certain other
plans to Allstate employees.
Stock Transfers Between Qualified Plans. The Sears Profit Sharing Fund has been
in effect since 1916 and is a tax-qualified profit sharing, stock bonus and
401(k) plan covering all eligible employees of the Company and its affiliates
(including Allstate). The Sears Profit Sharing Fund also contains a leveraged
employee stock ownership plan (``ESOP'') feature. The Sears Profit Sharing Fund
as of December 31, 1994, held 49,483,401 Sears Common Shares (approximately
14.1% of the Sears Common Shares then outstanding).
The leveraged ESOP is liable on a 15-year note bearing interest at an annual
rate of 9.2% to the Company made in 1989 in the original principal amount of
$800 million, of which approximately $655 million remains unpaid as of the date
of this Proxy Statement. The proceeds of the loan were used to purchase 21.9
million Sears Common Shares (increased to 27.2 million shares as a result of
the sale of the stock of DWDC received in the Company's spinoff of DWDC in
1993, and the subsequent reinvestment of the proceeds in Sears Common Shares).
Payment of the loan is made with employer contributions and cash dividends paid
on shares acquired by the leveraged ESOP (including, at the election of the
Company, dividends paid on shares allocated to participants' accounts). The
shares acquired with the loan proceeds are released to plan participants'
accounts as principal and interest on the loan is repaid. As of December 31,
1994, 19,624,336 Sears Common Shares (approximately 5.6% of the Sears Common
Shares then outstanding) remained unallocated.
Effective as of the first day of the month following the approval by the Board
of the plan split described below, the Sears Profit Sharing Fund will be split
into two separate plans: (a) a plan with profit sharing, stock bonus, 401(k)
and leveraged ESOP components for employees of the Company and its affiliates
other than Allstate and its affiliates (``Company employees''), and (b) a
substantially identical plan for employees of Allstate and its affiliates
(``Allstate employees'').
Existing account balances of current and former Allstate employees, including
all the Sears Common Shares acquired by the leveraged ESOP that have been
allocated to the accounts of current and former Allstate employees, will be
transferred to the Allstate plan, together with 50% of the principal amount of
the debt obligation and 50% of the unallocated Sears Common Shares in the
leveraged ESOP. The remainder of the debt obligation and the unallocated Sears
Common Shares, together with existing account balances of current and former
Company employees and the Sears Common Shares acquired by the leveraged ESOP
that have been allocated to the accounts of current and former Company
employees will remain in the Sears Profit Sharing Fund. Immediately following
the plan split, the Sears Profit Sharing Fund and the Allstate plan will hold
approximately 8.4% and 5.7%, respectively, of the Sears Common Shares
outstanding.
Effective as of the date of the plan split, Allstate will assume the obligation
to make contributions to the ESOP portion of the Allstate plan annually in the
amount that, together with dividends on employer securities held in the ESOP
available for such purpose, is necessary to allow the Allstate plan to make
payments on the portion of the ESOP loan transferred to the Allstate plan. In
addition, Allstate has agreed to assume the obligations of the Company under
the ESOP portion of the plan. Allstate has also agreed to indemnify the Company
for any liability of the Company, from and after the date of such plan split,
with respect to the portion of the ESOP and the ESOP loan assumed by the
Allstate plan, to the extent that such liability relates to the obligation of
the Company under the settlement agreement in Larkin v. The Savings and Profit
Sharing Fund of Sears Employees et al. to refrain from seeking payment by the
ESOP under the ESOP loan except to the extent that employer contributions,
together with dividends on employer securities held in the ESOP available for
such purpose, are sufficient to allow the ESOP to make timely payments of
amounts due under the ESOP loan. The Company has agreed to cross-indemnify
Allstate and its affiliates with respect to the portion of the ESOP and the
ESOP loan retained by the Company. In connection with the split of the
leveraged ESOP, Allstate has agreed to purchase from the Company the portion of
the ESOP note representing 50% of the ESOP loan outstanding as of the date of
the plan split and which will be assumed by the Allstate plan (the ``Allstate
ESOP Note'') (presently expected to be approximately $327 million). The
purchase price will be equal to the principal amount of, and accrued interest
on, the Allstate ESOP Note. Payment will be made in the form of a promissory
note, with quarterly interest payments at the same rate as under the Allstate
ESOP Note, and payable in full on the earlier of the Distribution Date or one
year after the date of the plan split.
At the Distribution, each of the plans will receive a distribution of Allstate
Common Stock on the same basis as other Sears Common Shareholders. For ERISA
regulatory reasons, the unallocated collateral stock in each of the leveraged
ESOPs must be reinvested exclusively in the stock of the respective
post-spinoff employer. Accordingly, it is contemplated that the non-employer
shares held in the post-spinoff unallocated leveraged ESOP collateral accounts
will be exchanged or sold in the open market or in private transactions and the
proceeds invested in employer stock with respect to each respective plan. In
view of the desire of the Company and Allstate to focus the attention of their
respective employees on the performance of their employer, it is also
contemplated that shares of non-employer stock allocated to participants'
accounts (including the allocated leveraged ESOP shares) will be exchanged or
sold in the open market or in private transactions and the proceeds invested in
employer stock, except to the extent that a participant elects to retain
nonemployer stock in his or her own accounts. Thus, within a reasonable time
following the Distribution, it is expected that (1) the Sears Profit Sharing
Fund (including the ESOP) will dispose of Allstate Common Stock and (2) the new
Allstate profit sharing plan (including the Allstate ESOP) will dispose of
Sears Common Shares (except in each case to the extent that participants elect
otherwise with respect to their own accounts) and use the proceeds to acquire
employer stock.
Common Directors
Five of the 10 current directors of the Company are also serving, and may
continue to serve for an indefinite period of time after the Distribution, as
directors of Allstate. In addition, Mr. James M. Denny, Vice Chairman and
Acting Chief Financial Officer of the Company, presently serves as a director
of Allstate, but expects to resign as a director following the completion of a
transition period after the Distribution. After the Distribution, the Company
and Allstate also will have certain contractual and other ongoing
relationships, as described above. Such ongoing relationships may present
certain conflict situations for such persons. Certain officers and directors of
the Company and Allstate will also own (or have options to acquire) a
significant number of shares of common stock in both companies. See ``Stock
Ownership Information.'' The common directors and Mr. Denny have abstained, and
will continue to abstain, from voting with respect to matters that present a
significant conflict of interest between the companies. Further, the
intercompany agreements described under the caption ``Relationships Between the
Company and Allstate-Agreements Relating to the Distribution'' have been
approved by committees of each company's board of directors consisting
exclusively of persons who are not directors or employees of the other company.
SEARS, ROEBUCK AND CO.
HISTORICAL SUMMARY FINANCIAL INFORMATION
The following table sets forth certain summary consolidated financial
information of the Company for the year-to-date periods ended October 1, 1994
and September 30, 1993 and the five years ended December 31, 1993. The summary
information has been derived from and should be read in conjunction with the
financial statements and financial statement schedules included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1993 and
Quarterly Report on Form 10-Q for the quarterly period ended October 1, 1994,
both of which are incorporated herein by reference. Discontinued operations
include the operating results and financial position of Dean Witter, Discover &
Co. and Coldwell Banker's residential services businesses and commercial
division.
Year-To-Date Through Year Ended December 31,
Oct. 1, Sept. 30,
1994 1993 1993 1992 1991 1990 1989
(millions, except per common share data)
Operating results
Revenues $38,480 $36,174 $50,838 $52,345 $50,983 $50,283 $48,466
Cost and expenses 36,523 33,592 47,234 52,479 48,568 48,069 45,383
Restructuring - - - 3,108 - 265 -
Interest 1,090 1,147 1,498 1,511 1,681 1,746 1,634
Funding cost on
securitized
receivables 292 432 553 667 655 440 217
Total funding
costs 1,382 1,579 2,051 2,178 2,336 2,186 1,851
Operating income
(loss) 867 1,435 2,106 (4,753) 734 203 1,449
Other income 84 685 852 54 139 153 139
Income (loss) be-
fore income taxes
(benefit) and
minority interest 951 2,120 2,958 (4,699) 873 356 1,588
Income taxes (benefit)
Current
operations 117 171 401 (2,114) (38) (228) 234
Fresh start
adjustment - - - - - (139) -
Income (loss) from
continuing
operations 769 1,865 2,409 (2,567) 916 713 1,311
Income from dis-
continued
operations - 176 176 508 363 189 198
Extraordinary loss - (211) (211) - - - -
Cumulative effect of
accounting changes - - - (1,873) - - -
Net income (loss) 769 1,830 2,374 (3,932) 1,279 902 1,509
Earnings (loss) per
common share
Income (loss)
from continuing
operations 1.92 4.82 6.22 (7.02) 2.65 2.08 3.74
Net income
(loss) 1.92 4.73 6.13 (10.72) 3.71 2.63 4.30
Cash dividends
declared per
common share 1.20 1.20 1.60 2.00 2.00 2.00 2.00
Financial position
Investments $48,904 $46,419 $49,726 $42,176 $39,824 $33,746 $28,901
Receivables 20,940 18,365 20,168 18,254 16,814 18,339 18,483
Merchandise
inventories 4,505 3,793 3,518 4,048 4,459 4,074 4,358
Property and
equipment, net 5,684 5,298 5,529 5,483 5,842 5,484 5,027
Net assets of
discontinued
operations - 357 - 3,086 2,416 2,134 1,966
Total assets 93,914 86,622 90,808 85,491 79,554 72,639 65,219
Insurance
reserves 39,558 36,854 37,444 35,889 31,612 27,184 22,331
Short-term
borrowings 6,573 4,032 4,929 4,608 2,215 7,882 7,058
Long-term debt 12,440 13,343 12,926 13,735 17,585 11,849 9,344
Total debt 19,013 17,375 17,855 18,343 19,800 19,731 16,402
Securitized
receivables 4,615 6,352 5,791 7,812 8,330 6,040 3,526
Total funding 23,628 23,727 23,646 26,155 28,130 25,771 19,928
Shareholders'
equity 10,689 10,016 11,664 10,773 14,188 12,824 13,622
Book value per
common share 26.77 25.01 29.58 27.89 40.29 37.38 39.77
Note: Series A Mandatorily Exchangeable Preferred Shares (PERCS) are
considered common shares for purposes of calculating book value per
common share and earnings (loss) per common share. For the year ended
December 31, 1992, including PERCS as common shares resulted in an
anti-dilutive impact on the loss per common share calculation. Excluding
the PERCS from the calculation, the loss per common share from
continuing operations and net loss per common share for the year ended
December 31, 1992 would have been ($7.78) and ($11.73), respectively.
The net loss applicable to common shares, including all preferred share
dividends, for the year ended December 31, 1992 was $4.05 billion.
Financial position for Oct. 1, 1994 and Dec. 31, 1993 reflects the
adoption of new accounting rules for certain investments in debt
securities. Operating results and financial position for 1994, 1993 and
1992 reflect the adoption of new accounting rules for postretirement and
postemployment benefits.
SEARS, ROEBUCK AND CO.
PRO FORMA SUMMARY FINANCIAL INFORMATION
The following table sets forth certain summary consolidated pro forma financial
information of the Company for the year-to-date period ended October 1, 1994
and the year ended December 31, 1993. The pro forma information gives effect to
the current assumptions relating to the proposed spin-off of Allstate, the
contemplated divestiture of Homart at book value and other adjustments as
described under ``Sears, Roebuck and Co. Notes to Pro Forma Condensed
Consolidated Financial Statements.'' The summary information has been derived
from and should be read in conjunction with the pro forma condensed
consolidated financial statements included herein and the financial statements
and financial statement schedules included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1993 and Quarterly Report on Form
10-Q for the quarterly period ended October 1, 1994, both of which are
incorporated herein by reference.
Year-To-Date
Through Year Ended
Oct. 1, Dec. 31,
(millions, except per common share data) 1994 1993
Operating results
Revenues $22,201 $29,593
Cost and expenses 20,432 27,456
Interest 913 1,250
Funding cost on securitized receivables 292 432
Total funding costs 1,205 1,682
Operating income 856 887
Other income 30 115
Income before income taxes and minority interest 886 1,002
Income taxes 360 345
Income from continuing operations 524 649
Earnings from continuing operations per
common share 1.29 1.62
Cash dividends declared per common share 0.69 0.92
Financial position
Retail customer receivables $16,702
Merchandise inventories 4,505
Property and equipment, net 4,522
Total assets 30,221
Short-term borrowings 5,835
Long-term debt 9,543
Total debt 15,378
Securitized receivables 4,615
Total funding 19,993
Shareholders' equity 3,840
Book value per common share 9.08
Note: Series A Mandatorily Exchangeable Preferred Shares are considered
common shares for purposes of calculating book value per common share
and earnings from continuing operations per common share.
SEARS, ROEBUCK AND CO.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The pro forma condensed consolidated statements of income for the year-to-date
period ended October 1, 1994 and the year ended December 31, 1993, give effect
to the current assumptions relating to the proposed spin-off of Allstate, the
contemplated divestiture of Homart at book value and other adjustments as
described under ``Sears, Roebuck and Co. Notes to Pro Forma Condensed
Consolidated Financial Statements,'' assuming the transactions had occurred as
of the beginning of the respective periods. The pro forma condensed
consolidated statement of financial position gives effect to the current
assumptions relating to the transactions as if they had occurred on October 1,
1994.
The pro forma condensed consolidated financial statements have been derived
from and should be read in conjunction with the financial statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 1993 and
Quarterly Report on Form 10-Q for the quarterly period ended October 1, 1994,
both of which are incorporated herein by reference. The pro forma information
is presented for illustrative purposes only and is not necessarily indicative
of the results of operations or financial position that would have occurred had
such transactions been consummated on the dates assumed; nor is the pro forma
information intended to be indicative of the Company's future results of
operations or financial position.
Pro Forma Condensed Consolidated Statement of Income Year-To-Date Through
October 1, 1994
(millions, except per common share data)
Pro Forma Adjustments
Historical Allstate Other Pro Forma
(Note 1) (Note 2)
Revenues
Merchandise sales and
services $19,525.1 $ $ $19,525.1
Credit revenues 2,676.1 2,676.1
Insurance operations and
other revenues 16,278.8 (16,030.5)(A) (189.7)(A) -
(58.6)(B)
Total revenues 38,480.0 (16,030.5) (248.3) 22,201.2
Costs and expenses
Cost of sales, buying
and occupancy 13,967.5 13,967.5
Claims, benefits and
related expense 15,895.0 (15,895.0)(A) -
Provision for un-
collectible accounts 501.7 501.7
Selling and
administrative expense 6,158.5 9.1 (C) (151.4)(A) 5,962.4
(53.8)(B)
Interest expense (Note 3) 1,089.9 (44.6)(A) (95.0)(A) 913.3
14.0 (B) (56.3)(B)
5.3 (C)
Total costs and
expenses 37,612.6 (15,911.2) (356.5) 21,344.9
Operating income 867.4 (119.3) 108.2 856.3
Other income 83.6 8.4 (A) (62.5)(A) 29.5
Income before income
taxes and minority
interest 951.0 (110.9) 45.7 885.8
Income taxes 117.1 228.4 (D) 14.7 (C) 360.2
Minority interest (64.9) 63.7 (A) (1.2)
Income from continuing
operations $769.0 $(275.6) $31.0 $524.4
Earnings from
continuing operations
per common share $1.92 $1.29
Average common and
common equivalent
shares outstanding 388.7 388.7
See Notes to Pro Forma Condensed Consolidated Financial Statements.
Pro Forma Condensed Consolidated Statement of Income Year Ended December 31,
1993
(millions, except per common share data)
Pro Forma Adjustments
Historical Allstate Other Pro Forma
(Note 1) (Note 2)
Revenues
Merchandise sales and
services $26,291.2 $ $ $26,291.2
Credit revenues 3,301.7 3,301.7
Insurance operations and
other revenues 21,244.6 (20,936.5)(A) (230.9)(A) -
(77.2)(B)
Total revenues 50,837.5 (20,936.5) (308.1) 29,592.9
Costs and expenses
Cost of sales, buying
and occupancy 18,759.1 18,759.1
Claims, benefits and
related expense 19,513.6 (19,513.6)(A) -
Provision for un-
collectible accounts 820.9 820.9
Selling and
administrative expense 8,140.1 26.9 (C) (215.2)(A) 7,876.0
(75.8)(B)
Interest expense (Note 3) 1,498.1 (81.6)(A) (115.0)(A) 1,249.9
16.4 (B) (74.0)(B)
6.0 (C)
Total costs and
expenses 48,731.8 (19,545.9) (480.0) 28,705.9
Operating income 2,105.7 (1,390.6) 171.9 887.0
Other income 217.6 (34.7)(A) (68.3)(A) 114.6
Gain on sale of
subsidiary's stock 635.1 (635.1)(A) -
Income before income
taxes and minority
interest 2,958.4 (2,060.4) 103.6 1,001.6
Income taxes 400.9 (90.9)(D) 35.3 (C) 345.3
Minority interest (148.4) 141.2 (A) (7.2)
Income from continuing
operations $2,409.1 $(1,828.3) $68.3 $649.1
Earnings from
continuing operations
per common share $6.22 $1.62
Average common and
common equivalent
shares outstanding 382.9 382.9
See Notes to Pro Forma Condensed Consolidated Financial Statements.
Pro Forma Condensed Consolidated Statement of Financial Position October 1,
1994
(millions) Pro Forma Adjustments
Historical Allstate Other Pro Forma
(Note 1) (Note 2)
Assets
Investments $48,904.1 $(46,986.4)(A)$(1,917.7)(A) $ -
Retail customer
receivables 16,701.5 16,701.5
Cash and invested
cash 1,614.4 (740.5)(A) (95.0)(A) 761.4
(17.5)(B)
Insurance premium
installments and other
receivables 4,238.7 (3,342.1)(A) (145.1)(A) 704.6
(46.9)(B)
Merchandise inventories 4,504.5 4,504.5
Property and equipment,
net 5,684.3 (795.1)(A) (4.1)(A) 4,522.1
(363.0)(B)
Deferred income taxes 3,381.9 (1,482.4)(A) 8.5 (A) 1,784.8
(123.2)(B)
Other assets 6,101.5 (4,783.3)(A) (2.1)(A) 1,242.0
(74.1)(B)
Separate Accounts 2,783.2 (2,783.2)(A) -
Total assets $93,914.1 $(60,913.0) $(2,780.2) $30,220.9
Liabilities and Shareholders' Equity
Insurance reserves $39,557.6 $(39,557.6)(A) $ $ -
Long-term debt 12,439.9 (862.0)(A) (1,189.9)(A) 9,542.8
(845.2)(B)
Short-term borrowings 6,572.6 450.0 (B) (837.6)(A) 5,835.2
(349.8)(C)
Unearned revenues 7,289.4 (5,973.2)(A) 14.0 (B) 1,330.2
Accounts payable and
other liabilities 12,573.0 (2,972.8)(A) (128.0)(A) 9,393.7
(90.0)(B) 11.5 (B)
Separate Accounts 2,773.3 (2,773.3)(A) -
Total liabilities 81,205.8 (52,128.7) (2,975.2) 26,101.9
Minority interest 2,019.8 (1,741.0)(A) 278.8
Shareholders' equity 10,688.5 (7,332.8)(A) 195.0 (B) 3,840.2
289.5 (C)
Total liabilities
and shareholders'
equity $93,914.1 $(60,913.0) $(2,780.2) $30,220.9
See Notes to Pro Forma Condensed Consolidated Financial Statements.
Pro Forma Condensed Consolidated Balance Sheet October 1, 1994
Based on the Company's significant insurance operations, the Company has
historically not classified its statement of financial position. Assuming the
completion of the proposed spin-off of Allstate, the Company will present a
classified balance sheet. The pro forma condensed consolidated balance sheet
below has been derived from the pro forma condensed consolidated statement of
financial position and gives effect to the current assumed transactions as if
they had occurred on October 1, 1994.
(millions)
Assets
Current assets
Cash and invested cash $761.4
Retail customer receivables 16,701.5
Other receivables 671.8
Inventories 4,504.5
Deferred income taxes 1,253.5
Other current assets 376.2
Total current assets 24,268.9
Property and equipment, net 4,522.1
Deferred income taxes 531.3
Other assets 898.6
Total assets $30,220.9
Liabilities
Current liabilities
Short-term borrowings $5,835.2
Current portion of long-term debt
and capitalized lease obligations 1,303.2
Accounts payable and other current
liabilities 7,270.7
Total current liabilities 14,409.1
Long-term debt and capitalized
lease obligations 8,239.6
Postretirement benefits, minority
interest and other liabilities 3,732.0
Total liabilities 26,380.7
Shareholders' equity 3,840.2
Total liabilities and shareholders'
equity $30,220.9
See Notes to Pro Forma Condensed Consolidated Financial Statements.
Notes to Pro Forma Condensed Consolidated Financial Statements
Note 1 - To reflect the impact of the proposed distribution of the Company's
80.2 percent ownership of The Allstate Corporation in a tax-free
dividend to Sears common shareholders including the following:
(A) Elimination of the Company's 80.2 percent ownership of The
Allstate Corporation from the Company's historical consolidated
financial statements.
(B) Payment by the Company of the $450 million demand collateral
note payable to Allstate. See ``Relationships Between the
Company and Allstate-Business Relationships-Demand Collateral
Note.''
(C) Equal division of the leveraged employee stock ownership plan
(ESOP) between the Company and Allstate. See ``Relationships
Between the Company and Allstate-Agreements Relating to the
Distribution-Stock Transfers Between Qualified Plans.''
(D) Impact on income taxes of the pro forma adjustments. Neither the
Company nor Allstate had established a valuation reserve
relating to its deferred tax assets because each such
corporation considers it more likely than not that it will earn
sufficient taxable income in the future to realize such deferred
tax assets.
While the Company's effective tax rate is expected to increase
after the Distribution, it is not expected to vary materially
from the pro forma effective tax rate.
The Distribution may necessitate a change in the investment
strategy of Allstate for tax planning purposes. Specifically,
Allstate may vary its mix of holdings of taxable and tax-exempt
securities. The extent of any shift in the portfolio will depend
on underwriting performance and investment yields. While such a
shift will tend to increase the effective tax rate, it will also
increase investment income, as taxable securities generally have
higher pre-tax yields than tax-exempt securities. The net impact
of any change in strategy may reduce the after-tax yield on the
portfolio. However, any change in strategy is not expected to
have a material effect on results of operations, liquidity or
capital resources.
Note 2 - To reflect the impact of the following proposed or completed
transactions:
(A) Elimination of Homart Development Co. from the Company's
historical consolidated financial statements assuming a
divestiture with proceeds equal to Homart's book value. The
Company believes the divestiture of Homart is probable and that
book value represents a reasonable estimate of the probable
Homart sales price. There can be no assurance, however, that the
actual sales price will not vary from this amount.
(B) Elimination of Sears Tower and its related mortgages from the
Company's historical consolidated financial statements. On
November 7, 1994, the Company transferred ownership of Sears
Tower and its related mortgages to a trust. As a result of the
transfer, an extraordinary after-tax gain of $195.0 million, or
approximately 50 cents per Sears common share, has been recorded
in the fourth quarter of 1994.
(C) Impact on income taxes of the pro forma adjustments.
Note 3 - Impact on interest expense assumes the transactions in Notes 1 and 2
occurred at the beginning of the period. The assumed annual average
commercial paper interest rates were 4.15% and 3.64% for the
year-to-date period ended October 1, 1994 and the year ended December
31, 1993, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF THE CONTINUING BUSINESSES OF THE COMPANY
The following discussion relates to the continuing businesses of the Company.
Information related to liquidity and capital resources at October 1, 1994 is
set forth below. Information related to the results of operations for the years
ended December 31, 1991, 1992 and 1993 and for the year-to-date periods ended
September 30, 1993 and October 1, 1994 and liquidity and capital resources at
December 31, 1993 is incorporated by reference to the information presented
under the captions ``Sears Merchandise Group-Analysis of Operations'' and ``-
Analysis of Financial Condition'' on pages 39 through 43 of the Company's 1993
Annual Report which is incorporated by reference in the Company's Annual Report
on Form 10-K for the year ended December 31, 1993, and to the information
presented under the caption ``Management's Discussion and Analysis of Financial
Condition and Results of Operations-Sears Merchandise Group'' on pages 13
through 15 of the Company's Quarterly Report on Form 10-Q for the quarterly
period ended October 1, 1994, which Form 10-K and Form 10-Q are incorporated
herein by reference.
After the proposed Distribution, the Company will continue to be highly liquid.
On a pro forma basis, cash and invested cash, retail customer receivables after
securitization and inventory totaled $22.0 billion at October 1, 1994.
The Company maintains access to a variety of capital markets to preserve
flexibility and diversify its funding sources on a competitive and cost
effective basis. The Company issues senior unsecured debt via underwritten
offerings and its medium term note program, securitizes customer accounts
receivables through Sears Receivables Financing Group, Inc., a wholly-owned
subsidiary, and transacts private placements through wholly-owned affiliates.
Sears Roebuck Acceptance Corp. (``SRAC''), a wholly-owned subsidiary of the
Company, issues unsecured commercial paper. SRAC is a first tier issuer of
commercial paper under SEC Regulation 2a-7, which broadens access within the
commercial paper market. The following sets forth the ratings of the Company
and certain financing subsidiaries from four nationally-recognized rating
agencies:
Duff &
Moody's Phelps Fitch
Investors Standard Credit Investors
Service & Poor's Rating Co. Service, Inc.
Unsecured long-term debt A2 BBB A- A
Unsecured commercial paper P-1 A-2 D-1 F-1
Term securitization Aaa AAA AAA AAA
Asset-backed commercial
paper P-1 A-1+/A-1 - -
On November 10, 1994, following the announcement of the proposed Distribution,
Moody's Investors Service stated that it was continuing its review for a
possible upgrade of the Company's senior debt rating of Baa1. Fitch Investors
Services, Inc. and Duff & Phelps Credit Rating Co. each reaffirmed their rating
of the Company's senior debt of A and A-, respectively. Standard & Poor's
lowered its rating of the Company's senior debt from BBB+ to BBB. On January
19, 1995, Moody's Investors Service raised the rating of the Company's
long-term senior debt to A2 from Baa1 and upgraded SRAC's commercial paper
rating to P-1 from P-2. The Company believes that it will continue to obtain
funds on a competitive and cost-effective basis.
On a pro forma basis, on October 1, 1994, the net funding for the Company's
domestic merchandising and credit operations was $17.8 billion, including
retail customer receivables securitized of $4.1 billion. This funding primarily
supported the Company's $20.1 billion in gross domestic retail customer
receivables. International operations' net funding portfolio was $1.8 billion
and was used primarily to support retail customer receivables.
BUSINESS OF THE COMPANY AFTER THE DISTRIBUTION
After the Distribution, the Company's principal business will be conducting
merchandising operations in the United States, Canada, Puerto Rico and Mexico.
The Company is among the largest retailers in the world, on the basis of sales
and services, and is composed of two segments: domestic operations and
international operations. Components of domestic operations are domestic
merchandising and domestic credit operations. Domestic merchandising includes
the core merchandising and product services businesses in the United States and
Puerto Rico. The Company operates 799 multi-line Sears department stores and
1,074 specialty stores in the United States and Puerto Rico. The specialty
stores include Sears Hardware, Sears Homelife, dealer stores (see description
below) and Western Auto Supply Company and its subsidiaries, Tire America and
NTW (``Western Auto''). Domestic credit operations primarily consist of
activities related to the SearsCharge card, the largest proprietary credit card
in the nation with approximately 25 million active customer accounts.
International operations consist of similar retail and credit operations in
Canada through Sears Canada Inc., a consolidated, 61.1% owned subsidiary
(``Sears Canada''), and in Mexico through Sears, Roebuck de Mexico, S.A. de
C.V., a consolidated, 75% owned subsidiary (``Sears Mexico'').
Homart Development Co., which develops, owns and manages regional shopping
centers and retail community centers and owns and manages office properties, is
also a wholly-owned subsidiary of the Company. The Company is pursuing a
divestiture of Homart.
Strategic Initiatives
In early 1993, the Company announced a major restructuring program to build on
its existing initiatives to streamline and focus the Sears Merchandise Group
operations. This program included discontinuing domestic catalog operations, a
voluntary early retirement incentive program, closing 113 unprofitable retail
department stores, streamlining or discontinuing various unprofitable
merchandise lines and the write-down of underutilized assets to market value.
The Company also reorganized its domestic merchandising operations into the
Apparel Group, Home Group and Automotive Group (as described below). The
restructuring program was intended to reduce operating costs and improve the
Company's competitive position and earnings potential. The restructuring
program eliminated approximately 50,000 full-time and part-time positions. The
following five strategic objectives were formulated in 1993 and have served as
a guide to improve the profitability of Sears Merchandise Group.
Focus on Core Businesses. Domestic merchandising is focusing on middle income
women as its primary core customer, and expanding the product offering in
apparel. This strategy is designed to take advantage of the Company's existing
strengths of a loyal customer base, strong position in durable goods, a network
of mall-based multi-line stores, a nationwide service organization and
attractive credit programs. A ``Pure Selling Environment'' program that
relieves sales associates of administrative responsibilities to enable them to
spend more time serving customers was initiated in 1992.
Make Sears a Compelling Place to Shop. In 1993, the Company began a $4 billion
capital expenditure program for the period 1993 through 1997 to make the Sears
store a more compelling place for customers to shop, with a primary focus on
remodelling Sears stores. The remodeled stores have increased selling area,
more extensive apparel offerings, wider aisles and better lighting. By 1997,
the Company plans to increase significantly the apparel selling area through
the addition of 12 million square feet. Apparel offerings are designed to meet
shoppers' needs with a mixture of national brands and high-quality, private
label merchandise and will include expanded accessory and cosmetics
departments. Capital is also being used for selected new Sears stores and the
roll-out of promising free-standing specialty retail concepts, such as Sears
Homelife and Sears Hardware stores.
Cost and Productivity Improvement. Customer service and expense areas have been
benchmarked against the competition and both expense reduction and process
improvement programs are being developed and implemented on an ongoing basis.
The programs' goals are to improve the value of merchandise to the customer,
reduce selling and administrative expenses as a percent of revenues and improve
productivity and customer service levels.
Market Focus. Programs have been initiated to renew emphasis on
market-by-market assortment, marketing and pricing to strengthen the local
competitive position of each store. In addition, merchandising offerings are
being implemented to target small and rural markets and Hispanic and Asian
customers.
Foster New Culture. A more aggressive organization has been created through the
implementation of the voluntary early retirement program in 1993 and by
attracting high-level executives from outside Sears Merchandise Group. Programs
are in place to foster teamwork, customer focus, speed and simplicity in the
organizational culture and develop depth in management. Such programs included
an expansion of the Company's stock option program during 1994 to include all
salaried employees. Development of a new culture is a critical element in the
success of the preceding strategic objectives.
Domestic Operations
Domestic merchandising operations sell a broad line of general merchandise and
services through various types and sizes of retail facilities and direct
response marketing in the United States and Puerto Rico. At October 1, 1994,
domestic merchandising operations included:
(bullet) 799 Sears multi-line department stores, which include 412 large-size
stores located principally in shopping malls in major metropolitan
areas, 378 medium-size stores that also carry an extensive assortment
of merchandise and nine small-size, hard-line stores that serve
either the neighborhoods of metropolitan areas or smaller communities
and stock a limited selection of appliances, hardware, sporting goods
and automotive supplies.
(bullet) Western Auto. Western Auto is a leading retail and wholesale marketer
of automotive supplies, tires, appliances and lawn and garden
equipment. Western Auto operates through 623 company-owned retail
stores (including 117 Tire America and 127 NTW stores) in 34 states,
Puerto Rico and the United States Virgin Islands. Western Auto sells
also at wholesale to 1,046 independently owned and operated dealer
stores nationwide.
(bullet) 58 free-standing Sears Homelife furniture stores.
(bullet) 78 Sears Hardware stores.
(bullet) 250 dealer stores operated under the Sears name. The dealer stores
are primarily independently owned and operated, and carry home
appliances, home electronics and lawn and garden equipment.
Domestic merchandising's Apparel Group consists of the women's, men's and
children's apparel and home fashion departments. The Home Group consists of
home appliances and electronics, furniture (including Sears Homelife furniture
stores), and home improvement businesses (including the mall-based departments,
Sears Hardware stores and home installation services), dealer stores and
product services. The Home Group's product services operations provide repair
parts, customer service and repair work on national brand items in addition to
Sears brand name products. The Automotive Group consists of the Sears Tire and
Auto Centers and Western Auto.
Domestic credit operations initiate and maintain, in the United States and
Puerto Rico, customer credit accounts generated by the domestic merchandising
operations. As of October 1, 1994, domestic credit had approximately 25 million
active customer accounts. These accounts had an average balance of $841, for a
total of $20.1 billion of retail customer receivables before subtracting
account balances sold.
On August 1, 1993, all domestic Sears stores began accepting VISA, MasterCard
and American Express cards for purchases, in addition to SearsCharge, Discover
Card, personal check or cash, in order to attract new customer and incremental
sales. Although customers' use of VISA, MasterCard and American Express cards
replaces to some extent their use of Sears credit plans, it is expected that
the long-term effect on domestic credit operations will be offset by the
effects of new initiatives to increase SearsCharge market penetration in all
sales and service channels. Despite the introduction of third-party cards,
domestic sales charged to the SearsCharge card as a percentage of total sales
has remained stable.
Domestic operations employ approximately 260,000 full and part-time employees.
International Operations
Sears Canada is the largest single retailer of general merchandise in Canada.
At October 1, 1994, Sears Canada operated 110 department stores, 11 outlet
stores and 1,382 catalog selling units. Approximately 39,500 full and part-time
employees were employed by Sears Canada at December 31, 1993.
MANAGEMENT OF THE COMPANY AFTER THE DISTRIBUTION
The following table sets forth the names of the persons who are presently
expected to be the executive officers of the Company immediately after the
Distribution, the positions and offices with the Company presently held by
them, the date on which they first became officers of the Company or the Sears
Merchandise Group and their current ages:
Edward A. Brennan(1) Chairman of the Board of Directors,
President and chief Executive Officer 1978 61
James M. Denny(1) Vice Chairman and Acting Chief
Financial Officer 1986 62
David Shute Senior Vice President, General Counsel
and Secretary 1981 63
James A. Blanda Vice President and Controller 1992 51
Gerald E. Buldak Vice President, Public Affairs 1993 50
Alice M. Peterson Vice President and Treasurer 1993 42
Sears Merchandise Group(2)
Arthur C. Martinez(1) Chairman and Chief Executive Officer,
Sears Merchandise Group 1992 55
Russell S. Davis Executive Vice President and Chief
Financial Officer, Sears Merchandise
Group 1990 59
Anthony J. Rucci Executive Vice President,
Administration, Sears Merchandise Group 1993 44
John H. Costello Senior Executive Vice President,
General Manager, Marketing Division,
Sears Merchandise Group 1993 47
Robert Mettler President, Apparel and Home Fashions
Group, Sears Merchandise Group 1993 54
Paul A. Baffico President, Automotive Group,
Sears Merchandise Group 1992 48
Marvin M. Stern President, Home Group, Sears
Merchandise Group 1988 59
Allan B. Stewart President, Retail Stores, Sears
Merchandise Group 1984 52
Jane J. Thompson Executive Vice President, Credit,
Sears Merchandise Group 1988 43
William G. Pagonis Executive Vice President, Logistics,
Sears Merchandise Group 1993 53
Alan J. Lacy Senior Vice President, Finance,
Sears Merchandise Group 1995 41
(1) Mr. Brennan has stated that he expects to remain in the position of
Chairman of the Board, President and Chief Executive Officer of the
Company until the successful completion of the Distribution and during a
transition period thereafter. After such period, Mr. Brennan also does not
expect to remain a director of the Company. Mr. Denny expects to remain as
Vice Chairman and Acting Chief Financial Officer of the Company until the
successful completion of the Distribution and during a transition period
thereafter. Upon Mr. Brennan's retirement, the Board expects that Mr.
Martinez will succeed him and be elected as Chairman of the Board of
Directors, President and Chief Executive Officer. Mr. Martinez became a
director of the Company in February 1995.
(2) It is expected that the Merchandise Group will cease to be a separate
business group sometime following the Distribution. When this occurs, the
executive officers presently in the Merchandise Group are expected to
become officers of the Company, with similar titles and functions (other
than the reference to the Merchandise Group in their titles).
No family relationships exist among the above-named individuals.
Each of the officers named above was elected or appointed to serve in the
office indicated until the first meeting of the Board following the annual
meeting of shareholders in 1995 and until his or her successor is elected and
qualified or until such officer reaches retirement age or resigns.
With the exception of Messrs. Blanda, Buldak, Costello, Davis, Lacy, Martinez,
Mettler, Pagonis and Rucci, these officers have held their positions set forth
in the table above for at least the last five years or have served the Company
or its subsidiaries in various executive or administrative capacities for at
least that length of time.
Mr. Blanda joined the Company as Vice President and Controller in December
1992. Before joining the Company, he had been a partner in the accounting and
auditing firm of KPMG Peat Marwick since 1983.
Mr. Buldak joined the Company as National Manager, External Communications, in
July, 1990. Before joining the Company he had been the Manager of Public
Affairs for The Detroit Edison Company since 1984.
Mr. Costello joined the Company as Senior Executive Vice President, General
Manager, Marketing Division, of the Merchandise Group of the Company, in April
1993. Before joining the Company he had been President of Nielsen Marketing
Research USA.
Mr. Davis joined the Company as Senior Vice President and Chief Financial
Officer of the Merchandise Group for the Company, in June 1990. Before joining
the Company, he had been Executive Vice President and Chief Financial Officer,
and previously Senior Vice President, Planning, of Federated Department
Stores/Allied Department Stores.
Mr. Lacy joined the Company effective January 1, 1995. Before joining the
Company, he had been Vice President, Financial Services and Systems of Philip
Morris Companies Inc. and President of Philip Morris Capital Corporation since
September, 1993 and, from September, 1989 to September, 1993, was Senior Vice
President of Kraft General Foods in charge of finance, strategy and development
matters.
Mr. Martinez joined the Company as Chairman and Chief Executive Officer of the
Sears Merchandise Group in September 1992. Before joining the Company, he had
been a Vice Chairman of Saks Fifth Avenue and responsible for all of its
administrative functions since August 1990 and, from January 1987 until August
1990, was Senior Vice President of Batus, Inc. and responsible for its Saks
Fifth Avenue, Marshall Field's, J.B. Ivey and Breuner's stores.
Mr. Mettler joined the Company as President, Apparel Group, of the Merchandise
Group of the Company, in February 1993. Before joining the Company, he had been
President and Chief Executive Officer of Robinson's Inc.
Mr. Pagonis joined the Company as Senior Vice President of Logistics, in
November 1993. Before joining the Company, he had been a Lieutenant General in
the U.S. Army, serving as Director for Transportation, Energy and Troop Support
in the Office of the Deputy Army Chief of Staff for Logistics.
Mr. Rucci joined the Company as Executive Vice President, Administration in
October 1993. Before joining the Company, he had been Senior Vice President,
Strategy, Business Development and External Affairs and previously Senior Vice
President, Human Resources, of Baxter International, Inc.
STOCK OWNERSHIP INFORMATION
The following tables set forth certain information as of December 31, 1994 with
respect to beneficial share ownership by directors and executive officers of
the Company and, to the best of the Company's knowledge, beneficial owners of
5% or more of any class of voting security of the Company. Except as set forth
below, share ownership of directors, certain executive officers and all
executive officers and directors as a group includes (i) shares in which they
may be deemed to have a beneficial interest, (ii) Sears Common Shares held as
nontransferable restricted shares awarded under the Company's 1979 Incentive
Compensation Plan and 1990 and 1994 Employees Stock Plans which are subject to
forfeiture under certain circumstances, and (iii) shares credited to individual
accounts in the Profit Sharing Fund. Share ownership of directors and executive
officers does not include shares of Allstate Common Stock which they would
receive as Sears Common Shareholders in connection with the Distribution.
Shares shown as ``subject to option'' are subject to employee stock options
exercisable on or before March 1, 1995.
Security Ownership of Directors and Executive Officers
Amount and Nature of Beneficial Ownership(a)
Sears Allstate*
Name Common Shares Common Stock
Hall Adams, Jr. 1,000 -
Warren L. Batts 1,600 5,200
Edward A. Brennan 721,694(b) 3,000
James W. Cozad 1,000 -
William E. LaMothe 2,100 1,400
Michael A. Miles 1,171 4,500
Sybil C. Mobley 1,255 -
Nancy C. Reynolds 1,400 1,200
Clarence B. Rogers, Jr. 4,696 1,000
Donald H. Rumsfeld 4,600 7,200
Jerry D. Choate 44,217(c) 14,450(g)
James M. Denny 243,890(d) 2,000
Arthur C. Martinez 174,722(e) -
All directors and executive
officers as a group 1,283,996(f) 40,450(g)
* A majority-owned, indirect subsidiary of the Company.
(a) Direct ownership unless indicated otherwise.
(b) Includes 19,900 shares held in trust for Mrs. Brennan.
Also includes 585,586 shares subject to option.
(c) Includes 37,703 shares subject to option.
(d) Includes 191,612 shares subject to option.
(e) Includes 67,348 shares subject to option.
(f) Includes 942,242 shares subject to option.
(g) Includes 12,450 shares subject to option.
Security Ownership of Certain Beneficial Owners
Amount and Nature of Percent
Name and Address Beneficial Ownership(a) of Class
The Northern Trust Company
of New York 29,859,065 shares 8.5%
19th Floor, 80 Broad Street Trustee of the trust under The
New York, NY 10004 Savings and Profit Sharing Fund
of Sears Employees(b)
United States Trust Company
of New York 19,624,336 shares 5.6%
114 West 47th Street Trustee of the Sears, Roebuck
New York, NY 10036-1532 and Co. Employee Stock
Ownership Trust
(a) Beneficial ownership may under certain circumstances include both voting
power and investment power. Information is provided for reporting purposes
only and should not be construed as an admission of actual beneficial
ownership.
(b) The Northern Trust Company became trustee effective January 1, 1995.
To the knowledge of the Company, as of December 31, 1994, no shareholder
(except as set forth above) beneficially owned more than 5% of the outstanding
Sears Common Shares, no director had a beneficial interest in more than .21% of
the outstanding Sears Common Shares, and all directors and executive officers
together beneficially owned an aggregate of 1,283,996 Sears Common Shares (.37%
of the outstanding shares), which included 942,242 shares subject to option. No
director or executive officer had a beneficial interest in more than .004% of
the outstanding Allstate Common Stock, and all directors and executive officers
together beneficially owned an aggregate of 40,450 shares of Allstate Common
Stock (.01% of the outstanding shares).
MARKET INFORMATION CONCERNING SEARS
COMMON SHARES AND ALLSTATE COMMON STOCK
Sears Common Shares are traded on the NYSE under the symbol ``S'' and on
several regional and foreign exchanges. As of the Special Meeting Record Date,
the number of Sears Common Shareholders of record was . Allstate Common
Stock is traded on the NYSE and the CSE under the symbol ``ALL''. As of
February , 1995, there were record holders of Allstate Common Stock.
The following table sets forth, for the fiscal periods indicated, the high and
low sales price per share of Sears Common Shares and Allstate Common Stock as
reported on the NYSE Composite Tape, and the cash dividends paid per Sears
Common Share and per share of Allstate Common Stock.
Sears Common Shares Allstate Common Stock
Cash Cash
Dividends Dividends
Year High Low Paid High Low Paid
1993:
First Quarter 55-3/4 43-7/8 .40 N/A N/A N/A
Second Quarter 56-1/4 50-3/8 .40 30* 27-1/8* N/A
Third Quarter 57-3/4 39-7/8 .40 33-3/8 27-7/8 .18
Fourth Quarter 60-1/8 51-3/8 .40 34-1/4 27-5/8 .18
1994:
First Quarter 55-1/8 42-7/8 .40 29-7/8 23 .18
Second Quarter 51-7/8 42-1/8 .40 26-1/2 22-5/8 .18
Third Quarter 51-1/8 45-5/8 .40 26-7/8 23 .18
Fourth Quarter 52-3/8 43-1/2 .40 25-1/2 22-5/8 .18
1995:
First Quarter** 48-3/8 44-1/8 - 26-1/4 23-1/2 -
* From June 2, 1993.
** Through February , 1995.
On November 9, 1994, the last trading day before the announcement of the
proposed Distribution, the high and low sales prices of a Sears Common Share
and a PERCS depositary share were $49-3/8 and $48-1/2 and $56-3/4 and $56-1/2,
respectively. On November 9, 1994, the high and low sales prices of Allstate
Common Stock were $25 and $24-3/4, respectively. On February , 1995, the
closing price of a Sears Common Share and a PERCS depositary share was $ .
and $ . , respectively, and the closing price of Allstate Common Stock was $
per share.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS OF THE COMPANY AND ALLSTATE
The Restated Certificate of Incorporation of the Company provides that a
director shall not be personally liable to the Company or its shareholders for
damages for any breach of duty in such capacity, unless a judgment or other
final adjudication adverse to him or her establishes that his or her acts or
omissions were in bad faith or involved intentional misconduct or a knowing
violation of law, or that he or she personally gained in fact a financial
profit or other advantage to which he or she was not legally entitled, or that
his or her acts violated Section 719 of the NYBCL, which concerns unlawful
payments of dividends, stock purchases or redemptions, distribution of assets
to shareholders after dissolution of a corporation and loans to directors.
The Restated Certificate of Incorporation of Allstate waives the personal
liability of a director for monetary damages for breach of fiduciary duty to
the fullest extent permitted by the General Corporation Law of the State of
Delaware as the same exists or may in the future be amended. Section 102(b)(7)
of the General Corporation Law currently provides that the liability of a
director may not be limited or eliminated for (i) breach of duty of loyalty to
the corporation or its stockholders, (ii) acts or omissions not in good faith
or which include intentional misconduct or knowing violation of law, (iii) any
transaction from which the director derived an improper personal benefit or
(iv) a violation of Section 174 of the General Corporation Law, which concerns
unlawful payments of dividends, stock purchases or redemptions.
While the Restated Certificate of Incorporation of each of the Company and
Allstate provides directors with protection from awards for monetary damages
for breaches of their duty of care, they do not eliminate such duty.
Accordingly, the Restated Certificate of Incorporation of each of the Company
and Allstate will have no effect on the availability of equitable remedies such
as an injunction or rescission based on a director's breach of his or her duty
of care.
The By-Laws of both the Company and Allstate provide for indemnification of the
directors and officers of the Company and Allstate, respectively, to the full
extent permitted by applicable state law, as the same exists or may hereafter
be amended. The indemnification rights conferred by the charter documents of
both the Company and Allstate are not exclusive of any other right to which a
person seeking indemnification may be entitled under any law, by-law,
agreement, vote of shareholders or disinterested directors or otherwise. Each
of the Company and Allstate also has provided liability insurance for their
respective directors and officers for certain losses arising from claims or
charges made against them while acting in their capacities as directors or
officers.
COMPARISON OF RIGHTS OF SHAREHOLDERS
OF THE COMPANY AND ALLSTATE
Differences in Corporation Laws
As a result of the Distribution, shareholders of the Company, whose rights are
governed by New York law, will also become shareholders of Allstate, with their
rights governed by Delaware law. The statutes and court decisions with respect
to rights of shareholders of corporations incorporated under the laws of those
two jurisdictions reflect several differences.
The following discussion is intended only to highlight certain statutory
differences between the rights of Sears Common Shareholders and the rights of
holders of Allstate Common Stock. The discussion does not purport to constitute
a detailed comparison of the provisions of New York and Delaware law.
Shareholders are referred to those laws for further information.
Certain significant differences which affect the rights of shareholders are as
follows:
1. Shareholder Vote for Mergers. Corporations incorporated under Delaware law
must obtain the affirmative vote (except as indicated below) of the holders of
a majority of the outstanding shares of the corporation entitled to vote
thereon to approve a merger of the corporation into another corporation, the
sale of substantially all of the corporation's assets or the voluntary
dissolution of the corporation. In the same situations, New York law requires
the approval of two-thirds of the outstanding shares entitled to vote thereon.
Delaware law does not require a shareholder vote of the surviving corporation
in a merger if (i) the merger agreement does not amend the existing certificate
of incorporation, (ii) each outstanding share of the surviving corporation
before the merger is unchanged, and (iii) the number of shares to be issued in
the merger does not exceed 20% of the shares outstanding immediately prior to
such issuance. New York law has no such exception.
2. Appraisal Rights. Generally, New York law gives appraisal rights in more
situations than does Delaware law. Both Delaware law and New York law provide
such rights to shareholders entitled to vote in merger transactions (except as
indicated below). New York law also provides for such rights in a sale of
assets requiring shareholder approval, whereas Delaware law does not.
Subject to certain exceptions, Delaware law does not recognize dissenters'
rights of appraisal in a merger or consolidation if the shares of the
corporation are either listed on a national securities exchange (the Allstate
Common Stock is currently listed on the NYSE and the CSE, which are national
securities exchanges) or held of record by more than 2,000 shareholders unless
stockholders are required to accept for their shares in the merger or
consolidation anything other than common stock of the surviving or resulting
corporation or common stock of another corporation that is so listed or held
(and cash in lieu of fractional shares), or if the corporation is the surviving
corporation and no vote of its shareholders is required.
3. Inspection of Shareholders' List. New York law provides for a right of
inspection of the shareholders' list and books of the corporation by any person
who has been either a record holder for more than six months or who is
authorized by the owners of at least five percent of any class of a
corporation's stock. Delaware law allows any shareholder to inspect the
shareholders' list and books of the corporation for a purpose reasonably
related to such person's interest as a shareholder.
4. Payment of Dividends. Under New York law, dividends can only be paid out of
surplus while under Delaware law, generally a corporation may pay dividends out
of the corporation's net profits for the fiscal year in which the dividend is
declared or from the preceding fiscal year, even if the corporation has no
available surplus.
5. Loans to Directors. New York law prohibits loans to directors unless
authorized by shareholder vote. Delaware law permits the Board of Directors,
without stockholder approval, to authorize loans to corporate directors who are
also officers or employees.
6. Corporate Action Without a Shareholders' Meeting. A shareholders' meeting to
authorize corporate action may be dispensed with by a New York corporation only
upon the written consent of all shareholders. Delaware law permits corporate
action without a meeting of stockholders upon the written consent of the
holders of that number of shares necessary to authorize the proposed corporate
action being taken, unless the certificate of incorporation expressly provides
otherwise.
7. Rights and Options. New York law requires shareholder approval of any plan
pursuant to which rights or options are to be granted to directors, officers or
employees. Delaware law does not require stockholder approval of such plans
although various other applicable legal requirements may make stockholder
approval of rights or option plans necessary or desirable.
8. Consideration for Shares. New York law provides that neither obligations of
the subscriber for future payments nor future services shall constitute payment
or part payment for shares of a corporation. Furthermore, certificates for
shares may not be issued until the full amount of the consideration therefor
has been paid. Delaware law provides that shares of stock may be issued, and
shall be deemed to be fully paid and nonassessable, if the corporation receives
consideration having a value not less than the par value of such shares and the
corporation receives a binding obligation of the subscriber to pay the balance
of the subscription price.
9. Regulation of Business Combinations. Both New York and Delaware have
provisions regulating business combinations such as mergers. In New York under
Section 912 of the NYBCL, a shareholder becomes subject to the statute's
restrictions when it acquires 20% of a corporation's voting stock. During the
first five years after the date the interested shareholder acquired the stock
making him an interested shareholder, such interested shareholder may only
merge with the corporation if the corporation's board of directors had, before
the shareholder acquired 20% of the corporation's voting stock, given its
approval to either the stock acquisition by the shareholder or the business
combination. After such five-year period, a business combination between the
interested shareholder and the corporation may only occur if (i) the standard
described in the preceding sentence has been satisfied, (ii) a majority of the
corporation's disinterested shareholders approve the business combination, or
(iii) certain price and other terms specified in Section 912 of the NYBCL are
obtained by shareholders in the business combination.
In Delaware under Section 203 of the Delaware General Corporation Law (the
``DGCL''), generally a stockholder who acquires 15% or more of a corporation's
stock (an ``interested stockholder'') cannot engage in a business combination
(as defined) with that corporation for a period of three years unless: (i) the
board of directors of the corporation approves the combination or acquisition
of stock resulting in the stockholder becoming interested before the
stockholder acquires 15% or more of the corporation's stock, (ii) the
stockholder's stockholdings in the corporation increase from less than 15% to
more than 85% in one transaction, or (iii) the board of directors of the
corporation and at least two-thirds of the corporation's disinterested
stockholders approve the business combination. Although Allstate is presently
not governed by Section 203 of the DGCL, Sears and Allstate presently expect
that Allstate's Restated Certificate of Incorporation will be amended prior to
the Distribution to cause Allstate to be governed by Section 203.
10. Regulation of a Corporation's Stock Repurchases. In New York under the
NYBCL, a corporation is restricted from paying more than market value to any
shareholder for the purchase by the corporation of more than 10% of the
corporation's stock without board and shareholder approval. Delaware has no
similar statutory restriction. However, Delaware courts have imposed certain
restrictions on such stock repurchases.
Significant Differences in Corporate Charters and By-Laws
The Restated Certificate of Incorporation and By-Laws of the Company and
Allstate also differ in several respects. The following discussion is intended
only to highlight material differences between the Restated Certificate of
Incorporation and By-laws of the Company and Allstate. The discussion does not
purport to constitute a detailed comparison of the provisions of those charter
documents, which are included or incorporated by reference in documents
incorporated by reference in this Proxy Statement. See ``Incorporation of
Certain Documents by Reference.''
1. Authorized Capital Stock. The Restated Certificates of Incorporation of each
of the Company and Allstate authorize the Board of Directors of the Company and
Allstate, respectively, to establish series of preference and preferred stock
and to determine, with respect to any such series, among other things: the
dividend rates; liquidation and dividend preferences; provisions respecting
redemptions; terms, if any, upon which the shares are convertible; voting
rights; and other rights thereof. The Restated Certificate of Incorporation of
the Company authorizes the issuance of 1,000,000,000 Sears Common Shares and
50,000,000 preferred shares (of which, as of the date of this Proxy Statement,
3,250,000 shares are designated 8.88% Preferred Shares, First Series and
7,187,500 shares are designated PERCS). The Restated Certificate of
Incorporation of Allstate presently authorizes the issuance of 450,000,000
shares of Allstate Common Stock and 25,000,000 shares of preferred stock. Sears
and Allstate presently expect that Allstate's Restated Certificate of
Incorporation will be amended prior to the Distribution to increase the number
of authorized shares of Allstate Common Stock to 1,000,000,000.
2. Election of Directors. The Company's Restated Certificate of Incorporation
divides the Board of Directors into three classes, with staggered terms of
office. The Company's Restated Certificate of Incorporation also provides for
cumulative voting. As a result of cumulative voting, shareholders holding a
significant minority percentage of the outstanding shares entitled to vote in
the election of directors may be able to ensure the election of one or more
directors. However, because the Board is classified, shareholders wishing to
exercise cumulative voting rights to assure the election of one or more
directors must own approximately three times as many shares as would be
required if the Board were not classified.
The Restated Certificate of Incorporation of Allstate does not provide for a
classified board or cumulative voting. As a result, the holder or holders of a
majority of the shares entitled to vote in an election of directors will be
able to elect all directors then being elected, and holders of a substantial
minority of the outstanding shares of Allstate Common Stock may not have enough
voting power to elect any directors.
3. Removal of Directors. The Company's Restated Certificate of Incorporation
provides that any director may be removed from office only for cause and only
by the affirmative vote of at least 75% of the shares entitled to vote.
Allstate's By-Laws presently provide that any director may be removed, with or
without cause, by the holders of a majority of the shares then entitled to vote
at an election of directors. Sears and Allstate presently expect that
Allstate's Restated Certificate of Incorporation and By-Laws will be amended
prior to the Distribution to provide that any director may be removed from
office, with or without cause, only by the affirmative vote of at least 66-2/3%
of the shares entitled to vote except as otherwise provided with respect to
directors elected by any series of Preferred Stock.
4. Special Meetings of Shareholders. The By-Laws of the Company provide that a
special meeting of shareholders may be called at any time by the Chairman of
the Board, the President or a majority of the members of the Board of Directors
or of the Executive Committee then in office.
The By-laws of Allstate presently provide that a special meeting of
stockholders may be called at any time by the Chairman of the Board and Chief
Executive Officer and shall be called at the request in writing of a majority
of the Board of Directors, or at the request in writing of stockholders owning
a majority in amount of the entire capital stock of Allstate issued and
outstanding and entitled to vote. Sears and Allstate presently expect that
Allstate's By-laws will be amended prior to the Distribution to provide that a
special meeting of stockholders may be called only by the Chairman of the Board
and Chief Executive Officer or at the request of a majority of the Board of
Directors.
5. Shareholder Consent to Action Without Meeting. Any action required or
permitted to be taken at a meeting of shareholders of the Company may be taken
without a meeting, but only with the written consent of all shareholders
entitled to vote with respect to the subject matter thereof.
Allstate's Restated Certificate of Incorporation presently does not prohibit
stockholder consent to action without a meeting. As a result, any action
required to be taken at any annual or special meeting of stockholders, or any
action which may be taken at any annual or special meeting of stockholders, may
be taken without a meeting with the written consent of the holders of
outstanding stock having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present. Sears and Allstate presently expect that
Allstate's Restated Certificate of Incorporation will be amended prior to the
Distribution to prohibit stockholder consent to action without a meeting by
stockholders entitled to vote generally in the election of directors.
6. Advance Notice Provisions for Shareholder Proposals and Shareholder
Nominations of Directors. The Company's By-Laws provide, in general, that if a
shareholder intends to propose business or make a nomination for the election
of directors at an annual meeting, the Company must receive written notice of
such intention not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting. If the date of the meeting
is advanced by more than 30 days or delayed by more than 60 days from the prior
anniversary date, notice must be delivered not earlier than the 90th day prior
to the annual meeting and not later than the later of the 60th day prior to
such meeting or the 10th day following the public announcement of the date of
such meeting. The notice must include all information relating to the proposed
nominee required by law to be disclosed in solicitations of proxies for
election of directors or, in the case of a proposal, a brief description of the
proposal and why it should be raised at the meeting, and any material interest
of the shareholder or beneficial owner, if any, in the proposal. The notice
also must include (i) the name and address of both the shareholder giving the
notice and the beneficial owner, if any, on whose behalf the nomination is made
and (ii) the class and number of shares of the Company that are owned
beneficially and of record by such shareholder and beneficial owner. In certain
cases, the notice may be delivered later if the number of directors to be
elected to the Board of Directors is increased. The By-Laws also provide, in
general, that if a shareholder intends to make a nomination for the election of
directors at a special meeting, written notice including all the information
set forth above must be received by the Secretary of the Company not earlier
than the 90th day prior to the special meeting and not later than the later of
the 60th day prior to the special meeting or the 10th day following public
announcement of the special meeting and of the nominees proposed by the Board
of Directors to be elected at such meeting.
Allstate's By-Laws provide, in general, that if a stockholder intends to
propose business or make a nomination for the election of directors at an
annual meeting, Allstate must receive written notice of such intention not less
than 90 days nor more than 120 days prior to the first anniversary of the
preceding year's annual meeting. The notice must include all information
relating to the proposed nominee required by law to be disclosed in
solicitations of proxies, for election of directors, or, in the case of a
proposal, a brief description of the proposal, and why it should be raised at
the meeting, and any material interest of the stockholder or beneficial owner,
if any, in the proposal. The notice also must include (i) the name and address
of both the stockholder giving the notice and the beneficial owner, if any, on
whose behalf the nomination is made and (ii) the class and number of shares of
Allstate that are owned beneficially and of record by such stockholder and
beneficial owner.
7. Amendment by Stockholders of Certain Provisions of the Restated Certificate
of Incorporation and By-Laws. The Restated Certificate of Incorporation of the
Company provides that the affirmative vote of at least 75% of the shares
entitled to vote is required to alter, amend or repeal or adopt provisions of
the Company's Restated Certificate of Incorporation relating to the number,
election and term of the Company's directors; the filling of director
vacancies; the removal of directors; and the election, terms of office, filling
of vacancies and other features of any directors elected separately by the
holders of preferred shares.
Under Delaware law, the Restated Certificate of Incorporation of Allstate may
be amended by the affirmative vote of a majority of the shares entitled to vote
thereon. Allstate's By-Laws may be amended by the Allstate Board of Directors
or by the affirmative vote of a majority of the outstanding shares entitled to
vote thereon, present in person or by proxy, at a stockholders meeting at which
a quorum is present. Sears and Allstate presently expect that Allstate's
Restated Certificate of Incorporation and By-Laws will be amended prior to the
Distribution to provide that the affirmative vote of at least 66-2/3% of the
shares entitled to vote is required to alter, amend or repeal or adopt
provisions of Allstate's Restated Certificate of Incorporation relating to the
removal of directors or, unless amended by the Allstate Board of Directors, of
Allstate's By-Laws.
Insurance Regulations Concerning Change or Acquisition of Control
Each of the Company and Allstate is currently an insurance holding company
subject to regulation throughout jurisdictions in which Allstate's insurance
subsidiaries do business. Certain of Allstate's subsidiaries are
property-liability and life insurance companies organized under the respective
insurance codes of Arizona, California, Florida, Illinois, Nebraska, New York,
Texas and Utah. The insurance codes in such states contain similar provisions
(subject to certain variations) to the effect that the acquisition or change of
``control'' of a domestic insurer or of any person that controls a domestic
insurer cannot be consummated without the prior approval of the relevant
insurance regulator. In general, a presumption of ``control'' arises from the
ownership, control, possession with the power to vote or possession of proxies
with respect to 10% or more of the voting securities of a domestic insurer or
of a person that controls a domestic insurer. In Florida, regulatory approval
must be obtained prior to the acquisition of 5% or more of the voting
securities of a domestic stock insurer or of a controlling company. In
addition, certain state insurance laws contain provisions that require
pre-acquisition notification to state agencies of a change in control of a
non-domestic insurance company admitted in that state. While such
pre-acquisition notification statutes do not authorize the state agency to
disapprove the change of control, such statutes do authorize certain remedies,
including the issuance of a cease and desist order with respect to the
non-domestic admitted insurer if certain conditions exist, such as undue market
concentration. Thus, any transaction involving the acquisition of 10% or more
(5% in Florida) of either Sears Common Shares or Allstate Common Stock would
generally require prior approval by the state insurance departments of Arizona,
California, Florida, Illinois, Nebraska, New York, Texas and Utah and would
require the pre-acquisition notification in those states which have adopted
pre-acquisition notification provisions and wherein Allstate's insurance
subsidiaries are admitted to transact business. Such approval requirements may
deter, delay or prevent certain transactions affecting the ownership of Sears
Common Shares or Allstate Common Stock.
After the Distribution, the Company will no longer be an insurance holding
company subject to insurance regulations concerning change or acquisition of
control. Allstate and its insurance subsidiaries will continue to be subject to
these and other regulations pertaining to insurance holding companies and
insurance companies.
INDEPENDENT AUDITORS
The consolidated financial statements and financial statement schedules of the
Company and subsidiaries included or incorporated by reference in the Company's
Annual Report on Form 10-K for the year ended December 31, 1993 have been
audited by Deloitte & Touche LLP, independent auditors, for the periods
indicated in their reports thereon. Representatives of Deloitte & Touche LLP
will be present at the Special Meeting, will be available to respond to
questions and may make a statement if they so desire.
SHAREHOLDER PROPOSALS
As described in the Company's proxy statement for the 1994 annual meeting of
shareholders, proposals which shareholders intend to present at the 1995 annual
meeting of shareholders (other than those submitted for inclusion in the proxy
material pursuant to Rule 14a-8 of the Proxy Rules of the SEC) must be received
by the Company no earlier than February 12, 1995 and no later than March 14,
1995 to be presented at the 1995 annual meeting. Proposals must have been
received by November 23, 1994 to be eligible for inclusion in the proxy
material for the 1995 annual meeting.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the SEC are incorporated by
reference herein:
1. Annual Report on Form 10-K for the fiscal year ended December 31, 1993.
2. Quarterly Reports on Form 10-Q for the quarterly periods ended April 2,
July 2 and October 1, 1994.
3. Current Reports on Form 8-K dated January 11, February 1, March 9, March
21, April 20, September 29 and November 10, 1994, and January 17 and
February 7, 1995.
The Company will provide without charge to each person to whom a copy of this
Proxy Statement is delivered, on the written or oral request of any such
person, by first class mail or other equally prompt means within one business
day of receipt of such request, a copy of any or all of the foregoing documents
incorporated herein by reference (other than any exhibits to such documents
which are not specifically incorporated herein or into such documents by
reference). Requests should be directed to:
Sears, Roebuck and Co.
Sears Tower
Chicago, Illinois 60684
Attention: Shareholder Services
or
(800) SEARS 80
All documents filed by the Company with the SEC pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to the
date of the Special Meeting or any adjournment thereof shall be deemed to be
incorporated by reference herein.
Any statements contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for purposes hereof to the extent that a
statement contained herein (or in any other subsequently filed document that
also is incorporated by reference herein) modifies or supersedes such
statement. Any statement so modified or superseded shall be deemed to
constitute a part hereof except as so modified or superseded.
AVAILABLE INFORMATION
The Company and Allstate are subject to the informational requirements of the
Exchange Act and the rules and regulations promulgated thereunder and in
accordance therewith file reports, proxy statements and other information with
the SEC. Reports, proxy statements and other information filed by the Company
and Allstate may be inspected and copied at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the Regional Offices of the SEC at 7 World Trade Center, Suite
1300, New York, New York and at Northwestern Atrium Center, Suite 1400, 500
West Madison Street, Chicago, Illinois. Copies of such information can be
obtained by mail from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Reports and other
information concerning the Company can also be inspected at the offices of the
New York Stock Exchange, 20 Broad Street, New York, New York 10005, the Chicago
Stock Exchange, 440 South LaSalle Street, Chicago, Illinois 60605, and the
Pacific Stock Exchange, 301 Pine Street, San Francisco, California 94104.
Reports and other information concerning Allstate can also be inspected at the
offices of the NYSE and the CSE.
APPENDIX A: Allstate Appendix
THE ALLSTATE CORPORATION
Business of Allstate
Allstate is engaged, principally in the United States and Canada and primarily
through agents working exclusively for Allstate, in property-liability
insurance (including personal property and casualty insurance and business
insurance) and life insurance. Allstate, with more than 20 million customers,
is the country's second largest property-liability insurer on the basis of 1993
statutory premiums earned and is a major life insurer. Building on a strong
market share of approximately 12 percent in private passenger automobile and
homeowners insurance and benefitting from favorable demographic trends,
Allstate is well-positioned to expand its presence in both insurance lines.
Allstate's strategy is to enhance the profitability of its leading position in
its markets and to build on its core competencies by broadening its role as a
provider of life insurance, selected commercial coverages and other risk
management products. This strategy is designed to capitalize on: (1) the
strength of the Allstate name, (2) Allstate's network of full-time agents, (3)
Allstate's auto insurance capabilities, and (4) additional distribution
channels available to Allstate.
Through the use of proprietary data bases, which consist of marketing
characteristics and of characteristics of various types of risks in the
personal lines automobile and homeowners markets, Allstate is pursuing a
strategy of growth in the types of markets management believes will be
profitable while limiting growth in other markets. Allstate is pursuing the
same segmented growth strategy with respect to geographic areas, attempting to
grow its business more rapidly in areas where weather and seismic conditions
are relatively benign and in areas where the regulatory climate is conducive to
attractive returns, and constraining growth in other areas. Allstate has also
made extensive use of computer technology in progressing toward its stated goal
of reducing the ratio of operating expenses to earned premiums over the 1993
through 1997 period. Allstate's use of this technology has also reduced the
time and paperwork associated with processing policies and claims in the field.
Allstate has aligned and focused resources-including technology, improved
processes, and agent training-in order to meet the needs and expectations of
its customers and potential customers. The customer retention rates for
Allstate's standard/preferred auto policies have risen to 91.08% for the nine
months ended September 30, 1994 from 90.48% for fiscal year 1993 and 89.52% for
fiscal year 1992.
Allstate has achieved the leading market share in non-standard auto insurance
(insureds with a prior history of accidents or violations, or owning high
performance cars or having other special needs). This has been a market segment
in which Allstate has competed successfully by capitalizing on an established
distribution system, technology and claims capability and by tailoring pricing
and products to reach a broader market. Allstate plans to continue to develop
opportunities in this market.
Although Allstate's full-time agency force of approximately 14,500 full-time
agents is at the core of its distribution system, Allstate is expanding its
market reach by distributing products in non-competing, non-overlapping markets
using independent agents, financial institutions, specialized brokers and
direct marketing. Allstate uses approximately 1,900 independent agents to
market personal lines insurance to individuals in rural markets not served by
Allstate agents, and its subsidiary, Northbrook Property and Casualty Insurance
Company, uses 1,650 independent agents to deliver commercial insurance to small
and medium sized businesses. Allstate's life insurance and annuity products
also are marketed through independent brokers and agents, and annuity products
are marketed through Dean Witter Reynolds and through banks. Specialized
brokers are used to distribute group pension and structured settlement
products.
Recent Developments
On January 17, 1995, Allstate and its indirect wholly-owned subsidiary The PMI
Group, Inc. (``PMI''), filed registration statements with the SEC regarding (1)
the proposed sale by AIC to the public (the ``Stock Offering'') of 61.4% of the
shares of common stock of PMI (70% if the underwriters' over-allotment option
is exercised in full) and (2) a new issue of Allstate Exchangeable Notes,
exchangeable at maturity for all or a significant portion of the remaining
shares of PMI common stock (depending upon exercise of the underwriters'
over-allotment option with respect to the notes offering, and the market price
of PMI common stock at the maturity of the notes, and subject to Allstate's
election to pay cash in lieu of delivering PMI common stock to repay the notes
upon maturity). PMI is engaged, through its wholly-owned subsidiary, PMI
Mortgage Insurance Co., in the business of private mortgage insurance. Allstate
is proposing to sell PMI in keeping with its strategic direction to focus on
its core property/casualty and life insurance businesses, and to realize the
return on its long-term investment in PMI Mortgage Insurance Co. Depending upon
the date of consummation of the Stock Offering, PMI will be deconsolidated from
the Allstate Group as early as January 1, 1995. The foregoing offerings are
subject to market and other conditions, and there can be no assurance that they
will be consummated.
During the autumn of 1994, Allstate offered a voluntary early retirement
incentive package to approximately 700 employees. The package offered one year
of salary continuation and related pension and welfare plan benefits during the
salary continuation period, and an enhanced retirement benefit. See "Selected
1994 Operating Results" below.
Certain Factors Affecting The Allstate Corporation
Sears Common Shareholders should consider, among other things, the following
factors affecting Allstate and the insurance industry discussed in Allstate's
Annual Report on Form 10-K for the year ended December 31, 1993 incorporated by
reference herein: (i) the inherent uncertainty in the process of establishing
property-liability loss reserves and the fact that, consistent with industry
practice, no reserves are established until a loss, including a loss from a
catastrophe, occurs; (ii) that ultimate losses could materially exceed
established loss reserves and have a material adverse effect on results of
operations and financial condition; (iii) the potentially significant impact on
the financial condition and results of operations of property-liability
insurers of claims arising out of catastrophes; (iv) the need for Allstate's
insurance company subsidiaries to maintain appropriate levels of statutory
capital and surplus, particularly in light of continuing scrutiny by rating
organizations and state insurance regulatory authorities, and to maintain
financial strength or claims-paying ability ratings; (v) the extensive
regulation and supervision to which Allstate's direct and indirect subsidiaries
are subject, various regulatory initiatives that may affect Allstate, and
regulatory and other legal actions involving Allstate; and (vi) Allstate's
primary reliance, as a holding company, on dividends from AIC to meet debt
payment obligations, and regulatory restrictions on AIC's ability to pay such
dividends. Allstate has experienced, and can be expected in the future to
experience, catastrophe losses which may have a material adverse impact on
Allstate's results of operations and financial condition. Following
consummation of the Distribution, the Company will not have a direct investment
in Allstate and will no longer be a potential source of capital to Allstate in
the event losses, including those resulting from catastrophes, require a
capital infusion.
1994 California Earthquake
On January 17, 1994, a major earthquake centered in Northridge California
occurred, registering 6.8 on the Richter scale, which has resulted in the
second highest total losses from a single catastrophe incurred by Allstate in
its history. Following the earthquake, Allstate rapidly deployed a significant
number of claim adjusters to the affected areas, and on February 1, 1994,
Allstate announced that its preliminary provision for losses was $350 million
($227.5 million after-tax). Since February 1, 1994, based on its ongoing
evaluation of ever increasing claim data and changing circumstances, Allstate
has revised its provision for Northridge losses a number of times. On March 21,
1994, Allstate increased its provision to $600 million ($390 million after-tax,
an increase of $162.5 million after-tax), principally due to the increase in
reported claims, more expansive claims data owing to field inspections, the
input of specialists in the claims estimation process and the significant
effect of various aftershocks. On April 20, 1994, in preparation of the March
31, 1994 financial statements and earnings release for the first quarter,
Allstate increased its provision to $950 million ($617.5 million after-tax, an
increase of $227.5 million after-tax), principally due to hidden damage which
was revealed as repairs began, the escalation of repair costs due to a shortage
of contractors and rising material costs, the unanticipated severity of
personal contents claims, numerous aftershocks and the continuation of greater
than expected numbers of new claims. In the second quarter, Allstate released
$125 million of no longer necessary catastrophe reserves that had previously
been recorded with respect to Hurricane Andrew and added a $150 million
provision for Northridge losses, resulting in a gross provision for Northridge
of $1.1 billion ($715 million after tax, an increase of $97.5 million after
tax). Second quarter-end and subsequent disclosures of the Northridge losses
were determined after giving effect to the catastrophe reserve release and
reported (and discussed herein) in terms of the net effect on the income
statement. The resolution of Hurricane Andrew claims has taken several years
owing to, among other things, the substantial damage inflicted, the uncertainty
of whether insureds would rebuild, questions about applicable building codes
and litigation. Management released the $125 million in the 1994 second quarter
following a court decision favorable to insurers, including Allstate, regarding
the applicable building codes. On September 29, 1994, Allstate revised its
gross provision for Northridge losses to $1.425 billion ($926.3 million after-
tax, an increase of $211.3 million after-tax from its previous provision),
principally due to the uncovering of additional hidden damage, continuing
multiple aftershocks, continuing rising repair costs and continuing new claims
filed. On January 17, 1995, Allstate increased its Northridge gross provision
to $1.625 billion ($1.06 billion after-tax, an increase of $130 million after-
tax), principally due to additional damage caused by continuing shifting and
compacting of the soil as a result of ongoing seismic activity. Shortly after
the earthquake and throughout the year, industry estimates of the insured loss
increased significantly from an initial estimate of $1-2 billion in January
1994 to $9.5 billion in December 1994 (A.M. Best). The establishment of
reserves is an inherently uncertain process, and there can be no assurance that
ultimate losses with respect to the Northridge earthquake will not exceed
recorded reserves in light of the substantial number of unsettled claims
(approximately 6,300 at January 31, 1995, out of approximately 45,000 reported
claims), the possibility of additional seismic activity, the effect (if any) of
recent California flooding and the possibility of additional hidden damage. See
"Selected 1994 Operating Results" below.
Allstate and Subsidiary Selected Financial Data
The following table summarizes certain selected consolidated financial data.
The information set forth below should be read in conjunction with The Allstate
Corporation and Subsidiary Consolidated Financial Statements and Notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in Allstate's Annual Report on Form 10-K for the year
ended December 31, 1993, and in Allstate's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1994, which are incorporated herein by
reference.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
1994 1993 1993 1992 1991 1990 1989
(millions, except per
common share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating results
Insurance premiums and
contract charges earned $13,315.9 $12,975.1 $17,402.3 $16,865.5 $16,343.9 $15,446.6 $14,344.5
Investment income, less
investment expense 2,531.3 2,482.7 3,323.7 3,200.5 3,001.4 2,571.3 2,235.2
Realized capital gains 186.9 205.2 220.3 162.1 4.9 181.2 223.4
Total revenues 16,034.1 15,663.0 20,946.3 20,228.1 19,350.2 18,199.1 16,803.1
Property-liability
insurance claims and
claims expense 11,142.5 9,585.1 12,922.5 15,205.1 12,518.8 12,198.8 10,873.6
Life insurance policy
benefits 1,526.2 1,567.1 2,102.5 2,153.8 2,121.6 1,827.2 1,653.7
Policy acquisition
costs 2,395.9 2,449.3 3,279.2 3,154.1 3,072.1 2,870.3 2,678.8
Other operating costs
and expense 842.4 875.6 1,184.5 1,140.4 1,098.6 1,001.8 913.3
Interest expense 44.6 64.0 81.6 - - - -
Total costs and
expenses 15,951.6 14,541.1 19,570.3 21,653.4 18,811.1 17,898.1 16,119.4
Income (loss) from
continuing operations
before income taxes
(benefit) 82.5 1,121.9 1,376.0 (1,425.3) 539.1 301.0 683.7
Income tax expense
(benefit)
Current operations (238.2) 79.4 74.5 (925.7) (183.4) (250.8) (131.5)
Fresh start adjustment - - - - - (139.0) -
Total income tax
expense (benefit) (238.2) 79.4 74.5 (925.7) (183.4) (389.8) (131.5)
Income (loss) from
continuing operations 320.7 1,042.5 1,301.5 (499.6) 722.5 690.8 815.2
Gain from discontinued
operations, net of tax - - - - - 10.5 -
Cumulative effect of
accounting changes - - - (325.6) - - -
Net income (loss) (1) $320.7 $1,042.5 $1,301.5 $(825.2) $722.5 $701.3 $815.2
Earnings (loss) per
share (2)
Income (loss) from
continuing operations $0.71 $2.42 $2.99 $(1.16)
Cumulative effect of
accounting changes - - - (0.75)
Net income (loss) $0.71 $2.42 $2.99 $(1.91)
Dividends declared per
share $0.54 $0.18 $0.36
Pretax catastrophe
losses(3) $1,680.2 $389.9 $545.9 $3,300.3 $505.7 $449.8 $468.7
Realized capital gains,
net of tax 121.5 133.4 143.2 107.0 3.2 119.6 147.5
Financial position (1)
Investments(4) $48,039.4 $45,914.8 $48,791.2 $41,730.8 $38,861.1 $33,509.9 $28,617.5
Total assets(4) 60,949.5 57,060.2 59,358.0 52,098.4 47,377.9 41,477.8 35,582.8
Claims reserves and
contractholder funds 39,551.0 36,846.7 37,436.4 35,881.6 31,661.0 27,177.6 22,325.9
Debt(5) 862.0 1,170.1 850.0 1,800.0 - - -
Total liabilities(5) 52,168.3 48,441.7 49,058.3 46,715.7 39,226.9 34,351.1 28,789.5
Shareholders' equity
(4)(5) 8,781.2 8,618.5 10,299.7 5,382.7 8,151.0 7,126.7 6,793.3
Book value per share(6) 19.53 19.15 22.89 17.04
Statutory surplus
Property-liability
companies 6,613.9 6,908.9 7,145.1 4,766.7 5,421.7 4,710.3 4,524.5
Life companies 1,233.2 1,144.7 1,185.4 1,002.1 900.3 800.4 594.8
Other operating data
Property-liability
claims and claims
expense ratio 89.1 78.7 79.2 96.6 82.7 85.4 82.8
Property-liability
combined ratio 112.1 102.3 103.0 120.8 107.5 109.9 107.5
Effect of catastrophe
losses on property-
liability combined
ratio(7) 13.4 3.2 3.3 21.0 3.3 3.1 3.6
Annual statutory
premiums written to
surplus ratio (U.S.
property-liability
operations) - - 2.3x 3.2x 2.7x 3.0x 2.9x
Ratio of earnings to
fixed charges(8) 1.7x 9.3x 8.8x - 7.0x 4.5x 9.8x
Total employees 47,871 49,404 48,889 51,515 54,144 57,232 55,789
Total Allstate agents 14,736 14,766 14,602 15,082 15,680 16,547 16,029
</TABLE>
(1) Financial position for September 30, 1994 and December 31, 1993
reflects the adoption of new accounting for certain investments in
debt securities. Operating results and financial position for 1994,
1993 and 1992 reflect the adoption of new accounting rules for
postretirement and postemployment benefits.
(2) Pro forma for nine month period ended September 30, 1993 and for the
years ended December 31, 1993 and 1992.
(3) Catastrophe losses are reported net of reinsurance. A catastrophe is
defined by Allstate as an event that causes pretax losses, before
reinsurance, in excess of $250,000 and involves multiple first party
policyholders. Pretax catastrophe losses before reinsurance were $1.7
billion and $389.9 million for the nine-month periods ended September
30, 1994 and 1993, respectively, and $545.9 million, $3.5 billion
(including $2.7 billion relating to Hurricane Andrew), $574.9 million,
$492.0 million and $607.2 million for the years ended December 31,
1993, 1992, 1991, 1990 and 1989, respectively.
(4) As a result of a change in accounting for investments in debt
securities, total investments at September 30, 1994 decreased $64.3
million; total assets and shareholders' equity at September 30, 1994
each increased $33.4 million. Total investments, total assets and
shareholders' equity at December 31, 1993 increased $2,405.3 million,
$1,472.0 million and $1,472.0 million as a result of the accounting
change.
(5) Debt, total liabilities and shareholders' equity at December 31, 1992
reflect, on a pro forma basis, the results of capitalization of
Allstate with the contribution of all the common stock of AIC and the
assumption of $1.8 billion of debt as if the capitalization had
occurred as of December 31, 1992. Allstate was capitalized on March 8,
1993.
(6) Book value per share for 1992 is calculated as 1992 pro forma
shareholders' equity plus net proceeds of the stock offering of
$2,287.1 million divided by 450 million shares. Book value per share
for 1991 and prior years is not meaningful.
(7) Calculated by dividing pretax net catastrophe losses by total
property-liability earned premiums. Losses incurred in connection with
Hurricane Andrew contributed 15.9 points to the 1992 combined ratio.
(8) For purposes of this computation, earnings consists of income (loss)
from continuing operations before income taxes plus fixed charges.
Fixed charges consist of interest expense, amortization of financing
costs and that portion of rental expense that is representative of the
interest factor. Earnings for the year ended December 31, 1992 were
not sufficient to cover fixed charges by $1,425.3 million. The loss in
1992 resulted primarily from the impact of Hurricane Andrew which
caused pretax losses after reinsurance of $2.5 billion. Excluding
losses from Hurricane Andrew, the 1992 ratio was 12.7x.
For a discussion of liquidity, capital resources, results of operations,
and other information necessary to obtain an understanding of the
historical amounts presented in The Allstate Corporation and Subsidiary
Consolidated Statements of Income for the year ended December 31, 1993 and
for the nine months ended September 30, 1994, please refer to the
``Management's Discussion and Analysis'' in Allstate's Annual Report on
Form 10-K for the year ended December 31, 1993, and in Allstate's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1994,
respectively, incorporated herein by reference.
Selected 1994 Operating Results
On February 7, 1995, Allstate reported 1994 consolidated net income of $484
million, or $1.08 per share, compared with 1993 net income of $1.30
billion, or pro forma earnings per share of $2.99. For the fourth quarter
of 1994, Allstate reported consolidated net income of $163 million, or 37
cents per share, compared with $259 million, or 57 cents per share for the
same quarter in 1993. The 1994 annual and fourth-quarter periods include
estimated after-tax losses from the January, 1994 California earthquake of
$1.06 billion (without giving effect to an $81 million after-tax benefit
from the release of excess Hurricane Andrew catastrophe reserves) and $130
million, respectively. See "1994 California Earthquake." Results for both
1994 periods were also impacted by a $99.9 million after-tax charge
resulting from an early retirement program that was accepted by about 600
employees and which will save Allstate approximately $35 million annually,
commencing in 1996.
For 1994, property-liability income was $312 million compared to $1.19
billion for 1993. Favorable trends in automobile claims, higher investment
income and a lower expense ratio were more than offset by losses from the
California earthquake. Life income for 1994 was $211 million compared to
$163 million for 1993. This improvement resulted from higher profit on
individual annuity products and lower operating expenses.
For the fourth quarter of 1994, property-liability income was $144 million
compared to $227 million for the same period in 1993. Favorable trends in
automobile claims, operating expense reductions and higher investment
income were more than offset by catastrophe losses and the charge for the
early retirement program. Life income for the fourth quarter of 1994 was
$29 million compared with $42 million for the same period in 1993 as a
higher volume of contract charges and lower operating expenses were offset
by the charge for the early retirement program.
Pro Forma Condensed Consolidated Financial Statements
The pro forma condensed consolidated statements of income for the nine
month period ended September 30, 1994 and the year ended December 31, 1993,
give effect to current assumptions relating to 1) the planned sale of 61.4%
of the outstanding common stock of PMI through the Stock Offering; and 2)
the proposed Distribution, including equal division of the leveraged
employee stock ownership plan of the Savings and Profit Sharing Fund of
Sears Employees between Allstate and the Company and payment by the Company
of the $450 million demand collateral note payable to AIC assuming the
transactions had occurred as of the beginning of the respective periods.
The pro forma condensed consolidated statements of operations do not
reflect investment income resulting from the proceeds of the Stock Offering
or payment by the Company of the demand collateral note. The pro forma
condensed consolidated statement of financial position gives effect to the
current assumptions relating to the above transactions assuming they
occurred on September 30, 1994.
The pro forma condensed consolidated financial statements have been derived
from, and should be read in conjunction with, the financial statements in
Allstate's Annual Report on Form 10-K for the year ended December 31, 1993
and Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1994. The pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the results of operations or
financial position that would have occurred had the transactions described
above been consummated on the dates assumed; nor is the pro forma
information intended to be indicative of Allstate's future results of
operations or financial position.
The Allstate Corporation Pro Forma Condensed Consolidated Statement of
Operations (Nine Month Period Ended September 30, 1994)
(in millions, except per share data)
Pro Forma Adjustments
Historical PMI Distribution Pro Forma
(Note 1) (Note 2)
Revenues
Property-liability
insurance premiums $12,508.2 $(220.7) $ $12,287.5
Life insurance premium
income and contract
charges 807.7 807.7
Investment income, less
investment expense 2,531.3 (42.1) 24.1 (A) 2,513.3
Realized capital gains
and losses 186.9 (2.0) 184.9
Total revenues 16,034.1 (264.8) 24.1 15,793.4
Costs and expenses
Property-liability
insurance claims and
claims expense 11,142.5 (107.1) 11,035.4
Life insurance policy
benefits 1,526.2 1,526.2
Policy acquisition
costs 2,395.9 (50.4) (5.1)(A) 2,340.4
Other operating costs
and expenses 842.4 (35.0) (4.0)(A) 803.4
Interest expense (Note 3) 44.6 7.9 (A) 52.5
Total costs and
expenses 15,951.6 (192.5) (1.2) 15,757.9
Income from operations
before income taxes and
equity in net income of
unconsolidated companies 82.5 (72.3) 25.3 35.5
Income tax expense
(benefit) (Note 4) (238.2) (13.1) 8.9 (A) (242.4)
Equity in net income of
unconsolidated companies
(Note 5) - 22.8 22.8
Net income $320.7 $(36.4) $16.4 $300.7
Net income per share
(Note 6) $0.71 $(.08) $.04 $0.67
Weighted average shares
outstanding 449.9 449.9 449.9 449.9
See Notes to Pro Forma Condensed Consolidated Financial Statements.
The Allstate Corporation Pro Forma Condensed Consolidated Statement of
Operations (Year Ended December 31, 1993)
(in millions, except per share data)
Pro Forma Adjustments
Historical PMI Distribution Pro Forma
(Note 1) (Note 2)
Revenues
Property-liability
insurance premiums $16,323.4 $(284.9) $ $16,038.5
Life insurance premium
income and contract
charges 1,078.9 1,078.9
Investment income, less
investment expense 3,323.7 (54.1) 35.4 (A) 3,305.0
Realized capital gains
and losses 220.3 (7.2) 213.1
Total revenues 20,946.3 (346.2) 35.4 20,635.5
Costs and expenses
Property-liability
insurance claims and
claims expense 12,922.5 (146.0) 12,776.5
Life insurance policy
benefits 2,102.5 2,102.5
Policy acquisition costs 3,279.2 (61.8) (14.9)(A) 3,202.5
Other operating costs
and expenses 1,184.5 (42.2) (12.0)(A) 1,130.3
Interest expense (Note 3) 81.6 15.4 (A) 97.0
Total costs and
expenses 19,570.3 (250.0) (11.5) 19,308.8
Income from operations
before income taxes
and equity in net
income of unconsolidated
companies 1,376.0 (96.2) 46.9 1,326.7
Income tax expense
(Note 4) 74.5 (15.9) 16.4 (A) 75.0
Equity in net income of
unconsolidated companies
(Note 5) - 31.0 31.0
Net income $1,301.5 $(49.3) $30.5 $1,282.7
Net income per share
(Note 6) $2.99 $(.11) $.07 $2.95
Weighted average shares
outstanding 441.7 441.7 441.7 441.7
See Notes to Pro Forma Condensed Consolidated Financial Statements.
The Allstate Corporation Pro Forma Condensed Consolidated Statement of
Financial Position (September 30, 1994)
(in millions)
Pro Forma Adjustments
Historical PMI Distribution Pro Forma
(Note 1) (Note 2)
Assets
Investments $48,039.4 $(506.5) $(349.8)(A) $47,633.1
450.0 (B)
Premium installment
receivables 2,223.5 (37.5) 2,186.0
Deferred policy
acquisition costs 1,926.9 (26.3) 1,900.6
Reinsurance recoverables 1,883.9 (11.9) 1,872.0
Cash 112.3 (3.7) 108.6
Other 3,980.3 217.6 4,197.9
Separate Accounts 2,783.2 2,783.2
Total assets $60,949.5 $(368.3) $100.2 $60,681.4
Liabilities
Insurance reserves $28,014.8 $(315.9) $ $27,698.9
Contractholder funds 17,509.4 17,509.4
Other liabilities and
accrued expenses 3,008.8 (52.4) 2,956.4
Debt 862.0 862.0
Separate Accounts 2,773.3 2,773.3
Total liabilities 52,168.3 (368.3) 51,800.0
Shareholders' Equity 8,781.2 (349.8)(A) 8,881.4
450.0 (B)
Total liabilities
and shareholders'
equity $60,949.5 $(368.3) $100.2 $60,681.4
See Notes to Pro Forma Condensed Consolidated Financial Statements.
Notes to Pro Forma Condensed Consolidated Financial Statements
Note 1 To reflect the impact of the planned sale by Allstate of 61.4% of
the ownership of PMI in the Stock Offering at a share price
assumed to result in net proceeds equal to book value at
September 30, 1994. Any variation in the ultimate share price
from that assumed will result in a one-time gain or loss on the
transaction.
The pro forma adjustments to net income reflected in the pro
forma condensed consolidated statements of operations differ from
the amounts reflected in PMI's financial statements for the
respective periods primarily because of timing differences in the
recognition of future losses related to PMI's discontinued
mortgage pool insurance segment. PMI recorded the future losses
as a premium deficiency in 1993 when it determined that the
losses on its pool insurance business segment were likely to
exceed the future premiums from this segment. Allstate's mortgage
insurance segment included PMI's primary mortgage insurance
business for purposes of measuring a premium deficiency, and,
when such business was included there was no resulting premium
deficiency. Accordingly, Allstate did not record a premium
deficiency, but rather recorded such losses as they were incurred
in 1994.
Note 2 To give effect to the current assumptions relating to the
proposed Distribution.
(A) To reflect equal division of the leveraged employee stock
ownership plan of the Savings and Profit Sharing Fund of
Sears Employees between Allstate and the Company. The pro
forma adjustments include investment income at 9.2% on the
note from the Allstate Plan, reduction of Allstate's profit
sharing expense due to appreciation on the unallocated
shares held by the ESOP, and a decrease in investments for
the amount paid to the Company for the unallocated shares.
(B) To reflect payment by the Company of the $450 million demand
collateral note payable to AIC.
Note 3 Concurrently with the proposed Stock Offering, Allstate will
offer a new issue of Exchangeable Notes due 1998. No pro forma
adjustment has been reflected for the issuance of the
Exchangeable Notes because the price range and interest rate for
such notes have not been established. The anticipated annual
impact of increased after-tax interest costs is not expected to
exceed $.04 per share.
Note 4 Allstate has not established a valuation reserve relating to its
deferred tax asset because it considers it more likely than not
that it will earn sufficient taxable income in the future to
realize such deferred tax assets, including sources of taxable
income derived from the use of tax planning strategies.
While Allstate's effective tax rate is expected to increase after
the Distribution, it is not expected to vary materially from the
pro forma effective rate.
The Distribution may necessitate a change in the investment
strategy of Allstate for tax planning purposes. Specifically,
Allstate may vary its mix of holdings of taxable and tax-exempt
securities. The extent of any shift in the portfolio will be
dependent on underwriting performance and investment yields.
While such a shift will tend to increase the effective tax rate,
it will also increase investment income, as taxable securities
generally have higher pre tax yields than tax-exempt securities.
The net impact of any change in strategy may reduce the after-tax
yield on the portfolio. However, any change in strategy is not
expected to have a material effect on results of operations,
liquidity or capital resources.
Note 5 When the exchange of the exchangeable notes takes place in 1998,
Allstate will no longer record equity in net income of PMI.
Note 6 Assuming full exercise of the underwriters' overallotment options
in the Stock Offering, the potential impact on net income per
share would be a further decrease of $.01 for the nine month
period ended September 30, 1994 and $.02 for the year ended
December 31, 1993.
Additional Information
Allstate is subject to the informational requirements of the Exchange Act
and in accordance therewith files reports, proxy statements and other
information with the SEC (collectively, the ``SEC Reports''). For further
information pertaining to Allstate (including financial statements and
other financial information), the Allstate Common Stock and related
matters, the Company shareholders are urged to read Allstate's SEC Reports.
The SEC Reports can be inspected and copied at the locations specified
under the caption ``Available Information''.
Incorporation by Reference
The following documents or portions thereof filed by Allstate with the SEC
are incorporated by reference herein:
1. Annual Report on Form 10-K for the fiscal year ended December 31,
1993.
2. Quarterly Reports on Form 10-Q for the quarters ended March 31, June
30 and September 30, 1994.
3. Current Reports on Form 8-K dated February 1, March 21, April 20,
September 29, 1994 and January 17, January 18, and February 7, 1995.
4. The description of Allstate Common Stock contained in the final
prospectus dated June 2, 1993 as filed pursuant to Rule 424(b) under
the Securities Act of 1933, included in Allstate's Registration
Statement on Form S-1 (File No. 33-59676) under the caption
``Description of Capital Stock.''
Allstate will provide without charge to each person to whom a copy of this
Proxy Statement is delivered, on the written or oral request of any such
person, by first class mail or other equally prompt means within one
business day of receipt of such request, a copy of any or all of the
foregoing documents incorporated herein by reference (other than any
exhibits to such documents which are not specifically incorporated herein
or into such documents by reference). Requests should be directed to:
The Allstate Corporation
Investor Relations
Allstate Plaza South
3075 Sanders Road
Northbrook, IL 60062-7127
or (708) 402-2800
All documents filed by Allstate with the SEC pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to
the date of the Special Meeting and any adjournment thereof shall be deemed
to be incorporated by reference herein.
Any statements contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes hereof to the
extent that a statement contained herein (or in any other subsequently
filed document that also is incorporated by reference herein) modifies or
supersedes such statement. Any statement so modified or superseded shall be
deemed to constitute a part hereof except as so modified or superseded.
APPENDIX B: Opinion of Goldman, Sachs & Co.
February , 1995
Sears, Roebuck and Co.
Sears Tower
233 South Wacker Drive
Chicago, IL 60684
Gentlemen and Mesdames:
We are acting as financial advisors to Sears, Roebuck and Co. (``Sears'')
in connection with the proposed distribution of all of The Allstate
Corporation (``Allstate'') common stock currently held by Sears (``Allstate
Common Stock'') to the holders of Sears' common stock (``Sears Common
Stock''), on a pro rata basis, as more fully described in the Sears Proxy
Statement dated February , 1995 (the ``Spin-Off''). You have requested
our opinion as to certain financial aspects of the Spin-Off.
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings,
secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with Sears and Allstate, having performed ongoing investment
banking services for Sears, Allstate and their subsidiaries for many years,
including acting as financial advisor to Sears in connection with the
corporate repositioning announced September 29, 1992 which contemplated the
initial public offering of approximately 20% of the common stock of
Allstate. We served as lead manager of Allstate's initial public offering
of common stock and debt securities in June 1993.
In arriving at our opinion, we have, among other things: (i) conducted
discussions with members of the current senior management of Sears and
Allstate with respect to the historical and current businesses of Sears and
Allstate and the future prospects of Sears and Allstate, the anticipated
effects of the Spin-Off on Sears' and Allstate's initial and projected
capital structures, cash flow and results of operations, and the plans and
programs for the financing of current and projected capital and operating
requirements of Sears and Allstate, (ii) analyzed certain historical
business and financial information for Sears and Allstate, (iii) reviewed
certain projections provided by Sears and Allstate for Sears and Allstate
for the years 1994 through 1998, (iv) reviewed public information relating
to Sears and Allstate including public financial statements, and reviewed
certain rating agency presentations, (v) reviewed public information with
respect to certain other companies in lines of businesses we believe to be
generally comparable to certain of the businesses conducted by Sears and
Allstate, (vi) considered the terms of other recent spin-off transactions,
and (vii) conducted such other studies, analyses and investigations as we
deemed appropriate.
We have relied upon the accuracy and completeness of the historical and
forecasted financial and other information regarding Sears and Allstate and
their business segments and subsidiaries provided to us by Sears and its
subsidiaries and have not undertaken any independent verification of any
such information. We have assumed and have not independently verified the
reasonableness of the projections provided by management in connection with
our analysis of Sears and Allstate. We have not made any appraisals nor
have we been furnished with independent appraisals of any of the assets of
Sears or Allstate. At your instruction we have assumed projections will be
realized in amounts shown at times stated. Further, our opinion is based on
economic, monetary and market conditions existing on the date of this
opinion, and we have not undertaken to reaffirm or revise or supplement
this opinion based upon any events occurring after the date hereof.
In June 1993, Allstate offered 89,500,000 shares of its common stock to the
public in concurrent U.S. and international public offerings (the
``Offerings''). Goldman, Sachs & Co. and Goldman Sachs International
Limited acted as lead manager in the Offerings. Prior to the Offerings,
Allstate was a wholly-owned subsidiary of Sears. After the completion of
the proposed Spin-Off, Sears will no longer own any Allstate Common Stock.
We have assumed with your consent that receipt of the Allstate Common Stock
not currently publicly held (80.2% of outstanding Allstate Common Stock)
will be tax-free for federal income tax purposes to the stockholders of
Sears and that Sears will not recognize income, gain or loss as a result of
the Spin-Off.
Based upon and subject to the foregoing and in light of the fact that the
Spin-off will be on a pro rata basis to each of the holders of Sears Common
Stock, it is our opinion that the Spin-off is fair to such holders.
Very truly yours,
Goldman, Sachs & Co.
APPENDIX C: Opinion of Morgan Stanley & Co. Incorporated
February , 1995
Board of Directors
Sears, Roebuck and Co.
Sears Tower
Chicago, Illinois 60684
Dear Sirs and Mesdames:
We understand that Sears, Roebuck and Co. (``Sears'') is proposing to
distribute the 80.2% of the common stock of The Allstate Corporation
(``Allstate'') that Sears owns, on a pro rata basis, to the holders of
Sears' common stock (the ``Spin-Off'').
You have asked for our opinion as of the date hereof whether the proposed
Spin-Off is fair, from a financial point of view, to the holders of Sears'
common stock.
For purposes of this opinion, we have:
(i) analyzed certain publicly available financial statements and other
information relating to Sears and Allstate;
(ii) analyzed certain internal financial statements and other financial
operating data concerning Sears and Allstate prepared by their
respective managements and given to us by you;
(iii) analyzed certain financial budgets and forecasts prepared by the
respective managements of Sears and Allstate and given to us by you;
(iv) compared the financial performance of Allstate with that of certain
other companies with publicly traded securities which we deemed to
be comparable to Allstate;
(v) compared the financial performance of Sears (excluding Allstate)
with that of certain other companies with publicly traded securities
which we deemed to be comparable to Sears (excluding Allstate);
(vi) discussed past and current operations and financial condition and
the prospects of Sears with senior executives of Sears and of
Allstate with senior executives of Allstate;
(vii) participated in discussions among representatives of Sears, Allstate
and their legal advisors;
(viii) performed such other analyses as we have deemed appropriate; and
(ix) reviewed the proxy statement for the special meeting of shareholders
of Sears relating to the Spin-Off (the ``Proxy Statement'').
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the
purposes of this opinion. With respect to the financial budgets and
forecasts, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
future financial performance of Sears and Allstate. We have not made any
independent valuation or appraisal of the assets or liabilities, contingent
or otherwise, of Sears or Allstate, nor have we been furnished with any
such appraisals.
We have further assumed that, prior to the Spin-Off, Sears will receive a
ruling from the Internal Revenue Service or an opinion of nationally
recognized counsel to the effect that the Spin-Off will not be a taxable
transaction to Sears, Allstate or their respective shareholders under
federal income tax laws (except to the extent of any cash distributed in
lieu of fractional shares of Allstate). We have further assumed the
correctness of the conclusions set forth in such opinion or ruling, as
applicable. We have further assumed that the Spin-Off will comply with (i)
Section 510 of the New York Business Corporation Law and (ii) all other
applicable laws, except for any noncompliances with such other applicable
laws that would not have a material adverse effect on Sears or Allstate. In
addition, if dissenters' rights are available under New York law in
connection with the Spin-Off, we have assumed for purposes of our opinion
that, as of the time of the Spin-Off, the holders of not more than 1% of
the outstanding shares of Sears' common stock will have taken requisite
action to preserve dissenters' rights with respect to their shares.
In rendering our opinion, we have, with your consent, not considered the
effect of any terms or arrangements relating to the Spin-Off (other than as
set forth in the first paragraph of this letter or as described in the
Proxy Statement), including the terms of any distribution, tax or other
agreement or arrangement, or any amendment or modification to any existing
such agreement or arrangement, except that you have informed us and we have
assumed that (i) the existing tax consolidation between Sears and Allstate
will be terminated as of the date of the Spin-Off and (ii) the effects of
such termination will be as represented to us by the respective managements
of Sears and Allstate. We have not solicited any proposals for the
acquisition of stock or assets of Allstate or made any determination as to
whether any such proposals could be obtained, if solicited.
Our opinion is rendered on the basis of securities markets, economic and
general business and financial conditions prevailing as of the date hereof
and the conditions and prospects, financial and otherwise, of Sears and
Allstate as they are represented to us as of the date hereof or as they
were reflected in the information and documents reviewed by us. Our opinion
assumes that the Spin-Off is completed on the basis set forth in the first
paragraph of this letter and that the shares of Sears and Allstate are
fully and widely distributed among investors and are subject only to normal
trading activity. We note that trading in the common stock of Sears and
Allstate for a period commencing with the public announcement of the
Spin-Off and continuing for a time following completion of the Spin-Off may
involve a redistribution of such securities among Sears' and Allstate's
shareholders and other investors and, accordingly, during such period, such
securities may trade at prices below both those at which they traded prior
to the public announcement of the Spin-Off and those at which they would
trade on a fully distributed basis after the Spin-Off. The estimation of
market trading prices of newly distributed securities is subject to
uncertainties and contingencies, all of which are difficult to predict and
beyond the control of the firm making such estimates. In addition, the
market prices of such securities will fluctuate with changes in market
conditions, the conditions and prospects, financial and otherwise, of Sears
and Allstate, and other factors which generally influence the prices of
securities. In rendering our opinion, we are not opining as to the price at
which the common stock of Sears or Allstate will trade after the Spin-Off
is effected.
We have acted as financial advisor to the Board of Directors of Sears in
connection with the Spin-Off and will receive a fee for our services. In
the past, Morgan Stanley Group Inc. and its affiliates have provided
investment banking and financial advisory services to both Sears and
Allstate.
Our advisory services and the opinion expressed herein are provided solely
for the benefit of Sears' Board of Directors in evaluating the Spin-Off and
are not on behalf of, and are not intended to confer any rights or remedies
upon, Sears, Allstate, any shareholder of Sears or Allstate or any person
other than Sears' Board of Directors.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that the proposed Spin-Off is fair, from a financial point of
view, to the holders of Sears' common stock.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By:
William H. Strong
Managing Director
APPENDIX D: Sections 910 and 623 of the New York Business Corporation Law
(section) 910. Right of shareholder to receive payment for shares upon
merger or consolidation, or sale, lease, exchange or other disposition of
assets, or share exchange. (a) A shareholder of a domestic corporation
shall, subject to and by complying with section 623 (Procedure to enforce
shareholder's right to receive payment for shares), have the right to
receive payment of the fair value of his shares and the other rights and
benefits provided by such section, in the following cases:
(1) Any shareholder entitled to vote who does not assent to the taking
of an action specified in subparagraphs (A), (B) and (C).
(A) Any plan of merger or consolidation to which the corporation
is a party; except that the right to receive payment of the fair value
of his shares shall not be available:
(i) To a shareholder of the parent corporation in a merger
authorized by section 905 (Merger of parent and subsidiary
corporations), or paragraph (c) of section 907 (Merger or
consolidation of domestic and foreign corporations); and
(ii) To a shareholder of the surviving corporation in a
merger authorized by this article, other than a merger specified
in a subparagraph (i), unless such merger effects one or more of
the changes specified in subparagraph (b)(6) of section 806
(Provisions as to certain proceedings) in the rights of the
shares held by such shareholder.
(B) Any sale, lease, exchange or other disposition of all or
substantially all of the assets of a corporation which requires
shareholder approval under section 909 (Sale, lease exchange or other
disposition of assets) other than a transaction wholly for cash where
the shareholders' approval thereof is conditioned upon the dissolution
of the corporation and the distribution of substantially all its net
assets to the shareholders in accordance with their respective
interests within one year after the date of such transaction.
(C) Any share exchange authorized by section 913 in which the
corporation is participating as a subject corporation; except that the
right to receive payment of the fair value of his shares shall not be
available to a shareholder whose shares have not been acquired in the
exchange.
(2) Any shareholder of the subsidiary corporation in a merger
authorized by section 905 or paragraph (c) of section 907, or in a share
exchange authorized by paragraph (g) of section 913, who files with the
corporation a written notice of election to dissent as provided in
paragraph (c) of section 623.
(section) 623. Procedure to enforce shareholder's right to receive payment
for shares. (a) A shareholder intending to enforce his right under a
section of this chapter to receive payment for his shares if the proposed
corporate action referred to therein is taken shall file with the
corporation, before the meeting of shareholders at which the action is
submitted to a vote, or at such meeting but before the vote, written
objection to the action. The objection shall include a notice of his
election to dissent, his name and residence address, the number and classes
of shares as to which he dissents and a demand for payment of the fair
value of his shares if the action is taken. Such objection is not required
from any shareholder to whom the corporation did not give notice of such
meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which term
as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent
without a meeting was obtained from the requisite shareholders, the
corporation shall give written notice of such authorization or consent by
registered mail to each shareholder who filed written objection or from
whom written objection was not required, excepting any shareholder who
voted for or consented in writing to the proposed action and who thereby is
deemed to have elected not to enforce his right to receive payment for his
shares.
(c) Within twenty days after the giving of notice to him, any shareholder
from whom written objection was not required and who elects to dissent
shall file with the corporation a written notice of such election, stating
his name and residence address, the number and classes of shares as to
which he dissents and a demand for payment of the fair value of his shares.
Any shareholder who elects to dissent from a merger under Section 905
(Merger of subsidiary corporation) or paragraph (c) of Section 907 (Merger
or consolidation of domestic and foreign corporations) or from a share
exchange under paragraph (g) of Section 913 (Share exchanges) shall file a
written notice of such election to dissent within twenty days after the
giving to him of a copy of the plan of merger or exchange or an outline of
the material features thereof under section 905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any
beneficial owner as to less than all of the shares of such owner, as to
which such nominee or fiduciary has a right to dissent, held of record by
such nominee or fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease
to have any of the rights of a shareholder except the right to be paid the
fair value of his shares and any other rights under this section. A notice
of election may be withdrawn by the shareholder at any time prior to his
acceptance in writing of an offer made by the corporation, as provided in
paragraph (g), but in no case later than sixty days from the date of
consummation of the corporate action except that if the corporation fails
to make a timely offer, as provided in paragraph (g), the time for
withdrawing a notice of election shall be extended until sixty days from
the date an offer is made. Upon expiration of such time, withdrawal of a
notice of election shall require the written consent of the corporation. In
order to be effective, withdrawal of a notice of election must be
accompanied by the return to the corporation of any advance payment made to
the shareholder as provided in paragraph (g). If a notice of election is
withdrawn, or the corporate action is rescinded, or a court shall determine
that the shareholder is not entitled to receive payment for his shares, or
the shareholder shall otherwise lose his dissenters rights, he shall not
have the right to receive payment for his shares and he shall be reinstated
to all his rights as a shareholder as of the consummation of the corporate
action, including any intervening preemptive rights and the right to
payment of any intervening dividend or other distribution or, if any such
rights have expired or any such dividend or distribution other than in cash
has been completed, in lieu thereof, at the election of the corporation,
the fair value thereof in cash as determined by the board as of the time of
such expiration or completion, but without prejudice otherwise to any
corporate proceedings that may have been taken in the interim.
(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates
shall submit the certificates representing his shares to the corporation,
or to its transfer agent, which shall forthwith note conspicuously thereon
that a notice of election has been filed and shall return the certificates
to the shareholder or other person who submitted them on his behalf. Any
shareholder of shares represented by certificates who fails to submit his
certificates for such notation as herein specified shall, at the option of
the corporation exercised by written notice to him within forty-five days
from the date of filing of such notice of election to dissent, lose his
dissenter's rights unless a court, for good cause shown, shall otherwise
direct. Upon transfer of a certificate bearing such notation, each new
certificate issued therefor shall bear a similar notation together with the
name of the original dissenting holder of the shares and a transferee shall
acquire no rights in the corporation except those which the original
dissenting shareholder had at the time of the transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within
fifteen days after the proposed corporate action is consummated, whichever
is later (but in no case later than ninety days from the shareholders'
authorization date), the corporation or, in the case of a merger or
consolidation, the surviving or new corporation, shall make a written offer
by registered mail to each shareholder who has filed such notice of
election to pay for his shares at a specified price which the corporation
considers to be their fair value. Such offer shall be accompanied by a
statement setting forth the aggregate number of shares with respect to
which notices of election to dissent have been received and the aggregate
number of holders of such shares. If the corporate action has been
consummated, such offer shall also be accompanied by (1) advance payment to
each such shareholder who has submitted the certificates representing his
shares to the corporation, as provided in paragraph (f), of an amount equal
to eighty percent of the amount of such offer, or (2) as to each
shareholder who has not yet submitted his certificates a statement that
advance payment to him of an amount equal to eighty percent of the amount
of such offer will be made by the corporation promptly upon submission of
his certificate. If the corporate action has not been consummated at the
time of the making of the offer, such advance payment or statement as to
advance payment shall be sent to each shareholder entitled thereto
forthwith upon consummation of the corporate action. Every advance payment
or statement as to advance payment shall include advice to the shareholder
to the effect that acceptance of such payment does not constitute a waiver
of any dissenters' rights. If the corporate action has not been consummated
upon the expiration of the ninety day period after the shareholders'
authorization date, the offer may be conditioned upon the consummation of
such action. Such offer shall be made at the same price per share to all
dissenting shareholders of the same class, or if divided into series, of
the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the
making of such offer, and a profit and loss statement or statements for not
less than a twelve month period ended on the date of such balance sheet or,
if the corporation was not in existence throughout such twelve month
period, for the portion thereof during which it was in existence.
Notwithstanding the foregoing, the corporation shall not be required to
furnish a balance sheet or profit and loss statement or statements to any
shareholder to whom such balance sheet or profit and loss statement or
statements were previously furnished, nor if in connection with obtaining
the shareholders' authorization for or consent to the proposed corporate
action the shareholders were furnished with a proxy or information
statement, which included financial statements, pursuant to Regulation 14A
or Regulation 14C of the United States Securities and Exchange Commission.
If within thirty days after the making of such offer, the corporation
making the offer and any shareholder agree upon the price to be paid for
his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates for any such
shares represented by certificates.
(h) The following procedure shall apply if the corporation fails to make
such offer within such period of fifteen days, or if it makes the offer and
any dissenting shareholder or shareholders fail to agree with it within the
period of thirty days thereafter upon the price to be paid for their
shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a
special proceeding in the supreme court in the judicial district in
which the office of the corporation is located to determine the rights
of dissenting shareholders and to fix the fair value of their shares.
If, in the case of merger or consolidation, the surviving or new
corporation is a foreign corporation without an office in this state,
such proceeding shall be brought in the county where the office of the
domestic corporation, whose shares are to be valued, was located.
(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty days after the
expiration of such twenty day period. If such proceeding is not
instituted within such thirty day period, all dissenter's rights shall
be lost unless the supreme court, for good cause shown, shall
otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be
paid for their shares, shall be made parties to such proceeding, which
shall have the effect of an action quasi in rem against their shares.
The corporation shall serve a copy of the petition in such proceeding
upon each dissenting shareholder who is a resident of this state in
the manner provided by law for the service of a summons, and upon each
nonresident dissenting shareholder either by registered mail and
publication, or in such other manner as is permitted by law. The
jurisdiction of the court shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as
to whom the corporation requests the court to make such determination,
is entitled to receive payment for his shares. If the corporation does
not request any such determination or if the court finds that any
dissenting shareholder is so entitled, it shall proceed to fix the
value of the shares, which, for the purposes of this section, shall be
the fair value as of the close of business on the day prior to the
shareholders' authorization date. In fixing the fair value of the
shares, the court shall consider the nature of the transaction giving
rise to the shareholders right to receive payment for shares and its
effects on the corporation and its shareholders, the concepts and
methods then customary in the relevant securities and financial
markets for determining fair value of shares of a corporation engaging
in a similar transaction under comparable circumstances and all other
relevant factors. The court shall determine the fair value of the
shares without a jury and without referral to an appraiser or referee.
Upon application by the corporation or by any shareholder who is a
party to the proceeding, the court may, in its discretion, permit
pretrial disclosure, including, but not limited to, disclosure of any
expert's reports relating to the fair value of the shares whether or
not intended for use at the trial in the proceeding and
notwithstanding subdivision (d) of section 3101 of the civil practice
laws and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to
the proceeding and is entitled thereto for the value of his shares so
determined.
(6) The final order shall include an allowance for interest at such
rate as the court finds to be equitable, from the date the corporate
action was consummated to the date of payment. In determining the rate
of interest, the court shall consider all relevant factors, including
the rate of interest which the corporation would have had to pay to
borrow money during the pendency of the proceeding. If the court finds
that the refusal of any shareholder to accept the corporate offer of
payment for his shares was arbitrary, vexatious or otherwise not in
good faith, no interest shall be allowed to him.
(7) Each party to such proceeding shall bear it own costs and
expenses, including the fees and expenses of its counsel and of any
experts employed by it. Notwithstanding the foregoing, the court may,
in its discretion, apportion and assess all or any part of the costs,
expenses and fees incurred by the corporation against any or all of
the dissenting shareholders who are parties to the proceeding,
including any who have withdrawn their notices of election as provided
in paragraph (e), if the court finds that their refusal to accept the
corporate offer was arbitrary, vexatious or otherwise not in good
faith. The court may, in its discretion, apportion and assess all or
any part of the costs, expenses and fees incurred by any or all of the
dissenting shareholders who are parties to the proceeding against the
corporation if the court finds any of the following: (A) that the fair
value of the shares as determined materially exceeds the amount which
the corporation offered to pay; (B) that no offer or required advance
payment was made by the corporation; (C) that the corporation failed
to institute the special proceeding within the period specified
therefor; or (D) that the action of the corporation in complying with
its obligations as provided in this section was arbitrary, vexatious
or otherwise not in good faith. In making any determination as
provided in clause (A), the court may consider the dollar amount or
the percentage, or both, by which the fair value of the shares as
determined exceeds the corporate offer.
(8) Within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found
to be due him, upon surrender of the certificates for any such shares
represented by certificates.
(i) Shares acquired by the corporation upon the payment of the agreed value
therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in
section 515 (Reacquired shares), except that, in the case of a merger or
consolidation, they may be held and disposed of as the plan of merger or
consolidation may otherwise provide.
(j) No payment shall be made to a dissenting shareholder under this section
at a time when the corporation is insolvent or when such payment would make
it insolvent. In such event, the dissenting shareholder shall, at his
option:
(1) Withdraw his notice of election, which shall in such event be
deemed withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it
is liquidated, be subordinated to the rights of creditors of the
corporation, but have rights superior to the non-dissenting
shareholders, and if it is not liquidated, retain his right to be paid
for his shares, which right the corporation shall be obliged to
satisfy when the restrictions of this paragraph do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation
within thirty days after the corporation has given him written notice
that payment for his shares cannot be made because of the restrictions
of this paragraph. If the dissenting shareholder fails to exercise
such option as provided, the corporation shall exercise the option by
written notice given to him within twenty days after the expiration of
such period of thirty days.
(k) The enforcement by a shareholder of his right to receive payment for
his shares in the manner provided herein shall exclude the enforcement by
such shareholder of any other right to which he might otherwise be entitled
by virtue of share ownership, except as provided in paragraph (e), and
except that this section shall not exclude the right of such shareholder to
bring or maintain an appropriate action to obtain relief on the ground that
such corporate action will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to
be given by a corporation to a shareholder under this section shall be
given in the manner provided in section 605 (Notice of meetings of
shareholders).
(m) This section shall not apply to foreign corporations except as provided
in subparagraph (e)(2) of section 907 (Merger or consolidation of domestic
and foreign corporations).
SEARS, ROEBUCK AND CO.
TABLE OF CONTENTS
Page
PROXY STATEMENT SUMMARY 1
The Special Meeting 1
The Distribution 1
Selected 1994 Operating Results 3
Allstate 4
Sears, Roebuck and Co. Historical Summary
Financial Information 5
Sears, Roebuck and Co. Pro Forma Summary
Financial Information 6
THE SPECIAL MEETING 6
Purpose of the Special Meeting 7
Voting Rights and Proxy Information 7
Appraisal Rights 8
CERTAIN CONSIDERATIONS 9
THE DISTRIBUTION PROPOSAL 11
Background and Reasons for the Distribution 11
Factors Considered by the Board 11
Opinions of Financial Advisors 12
Manner of Effecting the Distribution 15
Determination of the Distribution 15
Federal Income Tax Aspects of the Distribution 16
Listing and Trading of Allstate Common Stock 16
Listing and Trading of Sears Common Shares 17
Conditions; Termination 17
Effect of the Distribution on PERCS 17
Effect of the Distribution on Employee Stock
Options and Restricted Shares 17
Agreements with Executive Officers 18
Regulatory Approvals 18
Accounting Treatment 19
RELATIONSHIPS BETWEEN THE COMPANY AND ALLSTATE 19
Business Relationships 19
Agreements Relating to the Distribution 20
Common Directors 23
SEARS, ROEBUCK AND CO. HISTORICAL
SUMMARY FINANCIAL INFORMATION 24
SEARS, ROEBUCK AND CO. PRO FORMA
SUMMARY FINANCIAL INFORMATION 25
SEARS, ROEBUCK AND CO. PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF THE CONTINUING
BUSINESSES OF THE COMPANY 31
BUSINESS OF THE COMPANY AFTER THE DISTRIBUTION 31
MANAGEMENT OF THE COMPANY AFTER THE DISTRIBUTION 34
STOCK OWNERSHIP INFORMATION 35
Security Ownership of Directors and Executive
Officers 36
Security Ownership of Certain Beneficial Owners 36
MARKET INFORMATION CONCERNING SEARS COMMON SHARES
AND ALLSTATE COMMON STOCK 37
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS OF THE COMPANY AND ALLSTATE 37
COMPARISON OF RIGHTS OF SHAREHOLDERS OF THE
COMPANY AND ALLSTATE 38
Differences in Corporation Laws 38
Significant Differences in Corporate Charters
and By-Laws 39
Insurance Regulations Concerning Change or
Acquisition of Control 41
INDEPENDENT AUDITORS 42
SHAREHOLDER PROPOSALS 42
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 42
AVAILABLE INFORMATION 42
APPENDIX A: Allstate Appendix A-1
Business of Allstate A-1
Recent Developments A-1
Certain Factors Affecting The Allstate
Corporation A-2
1994 California Earthquake A-2
Allstate and Subsidiary Selected
Financial Data A-3
Selected 1994 Operating Results A-4
Pro Forma Condensed Consolidated
Financial Statements A-5
Additional Information A-8
Incorporation by Reference A-8
APPENDIX B: Opinion of Goldman, Sachs & Co. B-1
APPENDIX C: Opinion of Morgan Stanley & Co.
Incorporated C-1
APPENDIX D: Sections 910 and 623 of the
New York Business Corporation Law D-1
