SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
Commission file number 1-416
SEARS, ROEBUCK AND CO.
(Exact name of registrant as specified in its charter)
New York 36-1750680
(State of Incorporation) (I.R.S. Employer Identification
No.)
Sears Tower, Chicago, Illinois 60684
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 875-2500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
----------------------------------------- ------------------------
Common Shares, par value $0.75 per share New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Depositary Shares, each representing a New York Stock Exchange
one-fourth interest in an 8.88% Preferred
Share, par value $1.00 per share
Depositary Shares, each representing a New York Stock Exchange
one-fourth interest in a Series A Mandatorily
Exchangeable Preferred Share, par value
$1.00 per share
Extendable Notes due April 15, 1999 New York Stock Exchange
9-1/2% Notes due June 1, 1999 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
On January 31, 1995 Registrant had 351,855,045 common shares and
7,187,500 Series A Mandatorily Exchangeable Preferred Shares,
represented by 28,750,000 Depositary Shares, outstanding. Of these,
302,502,665 common shares and 28,750,000 Depositary Shares, having an
aggregate market value (based on the closing price of these shares as
reported in a summary of composite transactions in The Wall Street
Journal for stocks listed on the New York Stock Exchange on January 31,
1995) of approximately $15.0 billion, were owned by shareholders other
than directors and executive officers of the Registrant, The Savings and
Profit Sharing Fund of Sears Employees and any other person known by the
Registrant as of the date hereof to beneficially own five percent or
more of Registrant's common shares.
<PAGE 2>
Registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
Documents Incorporated By Reference
Parts I and II of this Form 10-K incorporate by reference certain
information from the registrant's 1994 Annual Report to Shareholders
(the "1994 Annual Report"). Part III of this Form 10-K incorporates by
reference certain information from the registrant's definitive Proxy
Statement dated March 22, 1995, for its Annual Meeting of Shareholders
to be held on May 11, 1995 (the "1995 Proxy Statement").
<PAGE 3>
PART I
Item 1. Business
Sears, Roebuck and Co. ("Sears") originated from an enterprise
established in 1886. It was incorporated under the laws of New York in
1906. Its corporate headquarters are located at Sears Tower, Chicago,
Illinois. Sears and its consolidated subsidiaries (the "Company")
conduct Domestic and International merchandising operations. The
Company, through Sears Merchandise Group, a multi-line retailer, is
among the largest retailers in the world on the basis of sales of
merchandise and services.
Domestic operations include Domestic merchandising and Domestic
credit. Domestic merchandising consists of the Company's core
merchandising and product services businesses in the United States and
Puerto Rico. In recent years, Domestic merchandising has been
streamlining and focusing its operations in order to reduce operating
costs and improve the Company's competitive position and earnings
potential. Domestic credit operations primarily relate to the
SearsCharge card, the largest proprietary credit card in the United
States, which is used to pay for purchases of goods and services from
Domestic merchandising.
International operations consist of merchandising and credit
operations conducted through majority-owned subsidiaries in Canada and
Mexico.
For further information, see "Sears Merchandise Group" below and
"Analysis of Consolidated Operations," Sears Merchandise Group "Analysis
of Operations" and Sears Merchandise Group "Analysis of Financial
Condition" beginning on pages 20, 48 and 53, respectively, of the 1994
Annual Report, incorporated herein by reference in response to Item 7
hereof.
Spin-off of Allstate Insurance Group; Divestiture of Homart Development
Co.
On November 10, 1994, the Company announced a decision to
distribute to Sears common shareholders the Company's interest in its
Allstate Insurance Group ("Allstate") in a tax-free spin-off (the
"Allstate spin-off"). Allstate engages in property-liability insurance
and life insurance in the United States and Canada. The business of
Allstate is conducted through The Allstate Corporation ("Allcorp"), an
80.2%-owned subsidiary of the Company. Sears anticipates that the
Allstate spin-off will be effected in mid-1995 by means of a special
dividend to Sears common shareholders of all of the Allcorp common stock
owned by the Company.
In addition, the Company is pursuing the divestiture of Homart
Development Co. ("Homart") and an affiliated company. Homart and the
affiliated company are wholly-owned subsidiaries of the Company that
develop, own and manage shopping centers and retail community centers
and own and manage office properties. Homart has been treated as a
discontinued operation in the Company's consolidated financial
statements.
These transactions are subject to market conditions, final
approvals by Sears Board of Directors and, with respect to the Allstate
spin-off, any required regulatory approvals and a favorable tax ruling
or opinion on the tax-free nature of the spin-off. The Allstate spin-
off is scheduled to be considered at a special meeting of Sears
shareholders on March 31, 1995.
For further information, see "Allstate Insurance Group" and
"Homart" below and notes 3 and 5 of the Notes to the Consolidated
Financial Statements on pages 32 and 34, respectively, of the 1994
Annual Report, incorporated herein by reference to Item 7 hereof.
<PAGE 4>
Restructuring of Sears Tower Financing
On November 7, 1994, the Company announced an agreement to
restructure the financing of Sears Tower. Under the agreement, Sears
transferred ownership of Sears Tower and its related mortgages (which
were entered into in a nonrecourse mortgage financing in 1990) to a
trust. The transaction removed approximately $850 million in debt from
the Company's balance sheet and resulted in a $195-million after-tax
extraordinary gain related to the early extinguishment of debt in the
fourth quarter of fiscal 1994. The transaction will also reduce the
Company's after-tax interest expense by about $75 million annually.
Under the trust, a third party will become owner of Sears Tower in 2003.
For further information, see "Analysis of Consolidated Operations"
and note 12 of the Notes to the Consolidated Financial Statements
beginning on pages 20 and 40, respectively, of the 1994 Annual Report,
incorporated herein in response to Items 7 and 8 hereof.
Corporate Joint Ventures
The Company also has (i) a 50% interest in Prodigy Services
Company, a partnership with International Business Machines Corporation
("IBM"), and (ii) a minority interest in Advantis, a joint venture with
a subsidiary of IBM. Prodigy Services Company features the PRODIGY
service, an online network that permits customers to use their personal
computers to access a broad array of information and interactive
services, including news, weather, sports and financial information;
consumer databases; travel information and ticketing; online banking and
discount brokerage; education and entertainment; shopping; and
communication and messaging. The PRODIGY service was first offered
nationally in September 1990. Prodigy Services Company is also
developing other services for personal computer users. Advantis, which
began operations in December 1992, provides data and voice networking
services for the Company, IBM and other customers. Advantis also
provides information processing services to the Company.
Information regarding revenues, income before income taxes and
minority interest, net income and assets of the Company's Domestic and
International merchandising operations, Allstate insurance operations
and the Corporate group for each of the three years ended December 31,
1994 is in note 18 of the Notes to the Consolidated Financial Statements
beginning on page 47 of the 1994 Annual Report, incorporated herein by
reference to Item 8 hereof. Information on the components of revenues
is included in the analysis of operations of each of the Company's
business groups beginning on pages 48 and 56, and in the summarized
Group financial statements beginning on page 48, of the 1994 Annual
Report, incorporated herein by reference in response to Items 7 and 8
hereof.
The Company's continuing operations employ approximately 360,000
people worldwide, including its Corporate staff.
<PAGE 5>
SEARS MERCHANDISE GROUP
DOMESTIC OPERATIONS
The Merchandise Group's Domestic operations consists of Domestic
merchandising and Domestic credit.
Domestic merchandising
Domestic merchandising sells a broad line of general merchandise
and services through department stores and various types of free-
standing retail facilities and direct response marketing in the United
States and Puerto Rico. At December 31, 1994, the core merchandising
operations included:
- 800 Sears department stores, which include 412 large-size stores
located principally in shopping malls in major metropolitan areas, 379
medium-size stores that also carry an extensive assortment of
merchandise, and nine small-size hard-line stores that serve either
neighborhoods of metropolitan areas or smaller communities and stock a
limited selection of appliances, hardware, sporting goods and automotive
supplies.
- Free-standing stores, which include:
- Western Auto Supply Company and its subsidiaries, including
Tire America and NTW ("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 633 company-
owned retail stores (including 118 Tire America and 125 NTW stores) in
35 states and in Puerto Rico and in the United States Virgin Islands and
sells at wholesale to 1,020 independently owned and operated dealer
stores nationwide.
- 72 Sears Homelife furniture stores.
- 80 Sears Hardware stores.
- 285 dealer stores operated under the Sears name. The dealer
stores are primarily independently owned and operated, and carry home
appliances, electronics, CRAFTSMAN tools, DIEHARD batteries and lawn and
garden equipment.
- Seven small-size appliance stores, two free-standing Tire and
Auto Centers and 61 retail outlet stores.
Domestic merchandising's operations are organized into three core
businesses: Apparel, Home and Automotive. The Apparel business
consists of the women's, children's and men's apparel and home fashion
departments. The Home business consists of the home appliances and
electronics, furniture and home improvement departments, dealer stores
and Product Services. Furniture includes free-standing Homelife stores
as well as in-store furniture departments. Product Services operations
provide repair parts, consumer service and repair work on national brand
name
<PAGE 6>
items in addition to Sears brand name products. Product Services also
offers installation, repair, monitoring and other services for consumer
and commercial programs. The Automotive business consists of the Sears
Tire and Auto Centers and Western Auto.
The Home and Automotive business departments are positioned against
the strongest competitors (which are usually specialty stores focusing
on one type of business) in the merchandising category. The Apparel
business is positioned as a moderate department store.
Domestic merchandising's pricing strategy is to offer customers
great values every day, and also includes special sales events offering
even better values. Domestic merchandising sells a mixture of national
brands and high quality private label merchandise at competitive prices.
In-store and off-premise licensees deliver goods and services that
complement Domestic merchandising's core strategies. In-store licensed
businesses include portrait studios, optical and income tax preparation.
Off-premise licensed businesses include pest control, car rental and
carpet cleaning. See note 1 of the Notes to the Consolidated Financial
Statements on page 29 of the 1994 Annual Report, incorporated herein by
reference to Item 8 hereof.
Direct response marketing includes: specialty catalogs, credit
protection insurance, clubs and services, and impulse and continuity
merchandise. Sears Shop at Home Services, Inc., a wholly-owned
subsidiary of the Company, licenses third-party distributors of
specialty catalogs and merchandisers of shop-at home services to use the
Sears name and customer list.
Strategic Initiatives
In recent years, Domestic merchandising has been streamlining and
focusing operations in order to reduce operating costs and improve the
Company's competitive position and earnings potential. Initiatives
completed prior to 1994 included the termination, divestiture or closing
of various operations and elimination of approximately 50,000 full-time
and part-time positions. Five strategic initiatives, formulated in
1993, have served as a guide to improving profitability: focusing on
core businesses; making Sears a more compelling place to shop; cost and
productivity improvements; market focus; and fostering a winning
culture.
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 Domestic merchandising's existing strengths of strong
private label brands, a loyal customer base, a strong position in
durable goods, highly-focused product lines, a network of mall-based
department stores, a nationwide service organization and attractive
credit programs.
Making Sears a More Compelling Place to Shop. To support the focus
on the core merchandising businesses, the Company has a $4 billion
capital expenditure program for the period 1993 through 1997. The
primary focus of the program is upgrading Domestic merchandising's
department stores and making the Sears store a more compelling place to
shop. Approximately 240 stores have been renovated and updated, and
approximately 260 additional stores will be renovated and updated
through 1997. The renovated and updated stores have increased selling
area, more extensive apparel offerings, wider aisles and better
lighting. Much of the additional selling area is being created from
underutilized stockroom and back office areas and the closing of in-
store furniture departments. By 1997, Domestic merchandising plans to
add approximately 12 million square feet of apparel selling area in the
renovated and updated stores, of which
<PAGE 7>
approximately 3.7 million square feet had been added by year-end 1994.
Apparel offerings are designed to meet shoppers' needs with a
mixture of national brands and high-quality, private label merchandise.
Expanded fragrance and cosmetics departments had been introduced in 120
stores by year-end 1994, with further expansion planned.
Capital is also being made available for selected new store
openings and the roll-out of promising new free-standing concepts, such
as Homelife and Sears Hardware stores and the expansion of Western Auto.
For further information, see "Properties" below and Sears
Merchandise Group "Analysis of Financial Condition" beginning on page 53
of the Company's Annual Report incorporated herein by reference in
response to Item 8 hereof.
Cost and Productivity Improvements. Customer service, expense and
logistics areas have been benchmarked against the competition, and
expense reduction and process improvement programs are ongoing. The
programs are intended 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. In 1994,
Domestic merchandising began a Strategic Sourcing initiative designed to
reduce the costs of externally purchased goods and services. The goal
of the Strategic Sourcing initiative is to analyze purchases and
negotiate reduced expenditures while increasing quality and forging
closer and more efficient links with important suppliers and vendors. A
"Pure Selling Environment" program is building a strong customer service
orientation by relieving sales associates of administrative
responsibilities and enabling them to spend more time and effort serving
customers.
Market Focus. Domestic merchandising is renewing its emphasis on
market-by-market assortment, marketing and pricing to strengthen the
local competitive position of each store. As part of the capital
expenditure program referred to above, significant emphasis is being
placed on allocating capital to select geographic markets in order to
focus Domestic merchandising's positioning and marketing efforts on a
market-by-market basis. In addition, merchandising offerings are being
implemented to target small and rural markets, and Hispanic-American,
African-American and Asian-American customers.
Winning Culture. Programs are in place to foster teamwork,
customer focus, and speed and simplicity in the organizational culture,
and to develop depth in management. The programs for all salaried
associates include an expansion of the Company's stock option program
during 1994 and an incentive pay program based on the Merchandise
Group's growth, as measured by increases in profits. New culture is a
critical element in the success of the Company's strategic objectives.
Sources of Merchandise
Domestic merchandising purchases goods primarily from approximately
10,500 domestic suppliers, most of whom have been suppliers for many
years. Buying offices are located in Domestic merchandising's home
office complex, as well as the headquarters of Western Auto and several
foreign countries.
<PAGE 8>
Seasonality
Domestic merchandising sales in the fourth quarter are
traditionally higher than in other quarterly periods because of holiday
buying patterns. This results in a lower ratio of fixed costs to sales
and produces a higher ratio of operating income to sales in the fourth
quarter. Traditional business patterns also generally result in the
lowest sales in the first quarter, producing a relatively high ratio of
fixed costs to sales and a lower ratio of operating income to sales, as
compared with other periods.
Trademarks
The name "SEARS" is used extensively in the Company's Domestic
merchandising and other businesses in the United States and throughout
the world. The Company's right to the name "SEARS" continues so long as
it uses the name. The name is also the subject of numerous renewable
United States and foreign trademark and service mark registrations.
This trade and service mark is material to the Company's Merchandising
and other related businesses in the United States and throughout the
world.
The Company sells private label merchandise under a number of brand
names which are important to Domestic merchandising. Sears KENMORE,
CRAFTSMAN and DIEHARD brands are among the strongest private label
brands in retailing. The Company's right to these names continues so
long as it uses the names. The names are also the subject of numerous
renewable United States and foreign trademark and service mark
registrations. Other important and well-recognized Company trademarks
and service marks include BRAND CENTRAL and HOMELIFE.
Competition
The domestic retail merchandise business is highly competitive.
Convenience of shopping facilities, quality of merchandise, competitive
prices, brand names and availability of services such as credit, product
delivery, repair and installation, are the principal factors which
differentiate competitors. The Company believes it is able to compete
in every respect despite strong competitive pressures in recent years.
On average, the Company's ratio of operating costs to revenues is not as
low as benchmark targets in the industry but is improving due to efforts
to increase revenues and cut costs. See "Strategic Initiatives" above
and Sears Merchandise Group "Analysis of Operations" beginning on page
48 of the 1994 Annual Report, incorporated herein by reference to Item 7
hereof.
Domestic credit
Domestic credit initiates and maintains, in the United States,
customer credit accounts generated by Domestic merchandising.
In the department and Homelife stores, SearsCharge sales as a
percent of total sales was approximately 58.3%, 58.0% and 54.5% for
1994, 1993 and 1992, respectively. Based on current experience,
approximately 7.6% of the amount of total credit balances is liquidated
each month.
As of December 31, 1994, Domestic credit had approximately 25
million active customer credit accounts. These accounts had an average
balance of $842, for a total of $21.3 billion of retail customer
receivables before sales of account balances. SearsCharge (the
traditional charge card) accounted for approximately 90% of such
receivables.
<PAGE 9>
Sears has an ongoing securitization program pursuant to which a
portion of such accounts receivable has been sold through Sears
Receivables Financing Group, Inc., a wholly-owned subsidiary, to trusts
(the "securitization trusts") that issue credit account pass-through
certificates to public and private investors. In general, the
outstanding interests of investors in the securitization trusts are not
treated as assets, and the obligations of the securitization trusts to
investors are not treated as liabilities, in the Company's financial
statements. In addition, Sears has an ongoing program pursuant to which
a securitization trust issues credit account pass-through certificates
to wholly-owned subsidiaries of Sears which, in turn, issue commercial
paper ("asset-backed commercial paper") backed by such certificates and
liquidity facilities provided by third parties. The receivables
relating to asset-backed commercial paper are treated as assets, and the
asset-backed commercial paper is treated as a liability, in the
Company's financial statements. Pursuant to contractual agreements,
Sears remains the servicer on the accounts creating the receivables and
receives a fee for the services performed. See "Analysis of
Consolidated Financial Condition," note 12 of the Notes to Consolidated
Financial Statements, and Sears Merchandise Group "Analysis of
Operations" and Sears Merchandise Group "Analysis of Financial
Condition," beginning on pages 23, 40, 48 and 53, respectively of the
1994 Annual Report, incorporated herein by reference in response to
Items 7 and 8 hereof.
On August 1, 1993, all 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 customers 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 without lowering credit standards. Despite the
introduction of third party credit cards in the stores in 1993, the
percentage of domestic sales transacted with the SearsCharge card as a
percentage of total sales has remained stable. See Sears Merchandise
Group "Analysis of Operations" beginning on page 48 of the 1994 Annual
Report, incorporated herein by reference in response to Item 7 hereof.
Domestic credit's operations are subject to federal and state
legislation, including the consumer credit laws of each state in which
its customers reside. From time to time, such legislation, as well as
competitive conditions, may affect, among other things, credit card
finance charges. While the Company cannot predict the effect of future
competitive conditions and legislation or the measures which the Company
might take in response thereto, a significant reduction in the finance
charges imposed by Domestic credit could have an adverse effect on the
Company.
Sears National Bank (the "Bank"), a wholly-owned subsidiary of the
Company acquired in 1994, is a credit card bank limited to engaging
solely in credit card operations and is subject to certain other
restrictions applicable to credit card banks under federal law. In
1994, the Bank became the issuer of SearsCharge accounts in Arizona.
Beginning in March 1995, the Bank will be the issuer of new SearsCharge
accounts opened in an additional 25 states and current SearsCharge
holders in such states will be notified in March 1995 that the Bank will
become the issuer of their accounts beginning in May 1995.
In March 1995, the Bank will modify the SearsCharge account
agreement to create a uniform finance charge rate of 21% for all of its
accounts. The finance charge rate in most states has been 21% for a
number of years. Also in March 1995, Sears changed the methodology
specified in its SearsCharge plan on which the minimum monthly payment
is based. The effect generally is a lower monthly payment being
required.
<PAGE 10>
Employees
Domestic operations employs approximately 265,000 people, including
part-time employees.
Properties
The Domestic operations home office complex is located on a 200-
acre site at Prairie Stone, in Hoffman Estates, Illinois and is owned by
Sears. The complex consists of five interconnected office buildings
totaling approximately two million gross square feet of office space,
and serves as headquarters for the Company's retail operations. Prairie
Stone is a planned 786-acre zoned business community owned by Sears,
consisting of a 586-acre business park and the Merchandise Group's
headquarters. Sears Prairie Stone business park is being marketed for
sale, lease or build-to-suit by Homart.
The following table sets forth information concerning stores
operated by Domestic merchandising. The information excludes catalog
and specialty merchandising. Information for 1992 includes 113 stores
closed as a part of the restructuring announced in January 1993.
EDGAR Tables
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C><C><C>
Department Free-standing
stores Western Auto(a) Homelife(a) Hardware(a) Other(a)(b) Total
Stores at December 31, 1994:
Owned 432(c) 195 14 - 22 663
Leased(d)
Operating Leases
Gross and Net Leases(e) 321 438 54 77 45 935
Short-term and
Percentage Leases(f) 4 - - - - 4
Capital Leases(g) 43 - 4 3 3 53
Independently Owned Retail
Dealer Stores - - - - 285 285
Total Stores at December 31
1991 868 548 22 97 1091,644
Stores opened during 1992 13 62 13 11 17 116
Stores closed during 1992 (22) (15) (1) (5) (16) (59)
1992 859 595 34 103 110 1,701
Stores opened during 1993 6 56 17 15 216 310
Stores closed during 1993 (66) (32) - (32) (64) (194)
1993 799 619 51 86 262 1,817
Stores opened during 1994 9 35 22 11 108 185
Stores closed during 1994 (8) (21) (1) (17) (15) (62)
1994 800 633 72 80 355 1,940
Gross Retail Area
at December 31
(square feet in millions)
1994 112.5 7.5 2.5 1.1 4.1 127.7
1993 112.2 7.4 1.8 1.0 2.9 125.3
1992 115.9 7.0 1.2 .8 1.7 126.6
<PAGE 11>
Retail Selling Area
at December 31
(square feet in millions)
1994 62.7 3.5 2.1 .9 2.8 72.0
1993 61.1 3.5 1.5 .8 1.8 68.7
1992 62.7 3.5 1.0 .6 1.3 69.1
<S>
Net Sales per Square Foot (Selling Area)
1994 $360
1993 $344
1992 $340
<FN>
(a) Five of the Western Auto stores were located at Sears department
stores. Information concerning Homelife, Sears Hardware and Other
stores excludes facilities located at department stores.
(b) Other stores consist of small-size appliance stores, free-standing
Tire and Auto Centers, retail outlet stores and dealer stores.
(c) Includes 338 of the 412 large-size department stores.
(d) Many of the leases contain renewal options. With respect to 12
stores, leased prior to 1960 with lease terms ranging up to 45 years,
Sears has the option to purchase the premises, terminate the lease or
continue the terms at substantially reduced rentals.
(e) Leased for terms ranging from one to 99 years. Rentals are either
fixed or fixed at minimum rentals coupled with a percentage of sales,
including some sale and leaseback arrangements.
(f) Leased for a term, or with a remaining term, of less than one year
or under leases providing for payments based only on a percentage of
sales.
(g) Leased for terms ranging from five to 99 years. The leases have
been capitalized as assets of Domestic merchandising.
</TABLE>
In addition, at December 31, 1994, there were 748 other sales
offices and service facilities, most of which are occupied under short-
term leases or are a part of other Sears facilities included in the
above table.
To effectively implement Domestic merchandising's logistics
strategy, Sears Logistics Services, Inc., a wholly-owned subsidiary of
the Company ("SLS"), provides specialized distribution, transportation
and home delivery services, primarily for Domestic merchandising and
also for other customers. SLS' strategy includes expanded marketing to
diversify and increase its current customer base through the range of
new logistics services as well as more efficient customer-oriented
performance of existing services.
As of December 31, 1994, SLS owned and operated four retail
replenishment centers, two direct delivery centers and 21 cross dock
centers; two other cross dock centers were operated and substantially
owned by SLS. An additional six retail replenishment centers, five
direct delivery
<PAGE 12>
centers (operated by third parties), four furniture consolidation
centers (operated by third parties) and 22 cross dock centers (five of
which are operated by third parties), were leased for terms ranging from
one to 99 years. In addition, as of December 31, 1994, Domestic
merchandising owned and operated five fashion merchandising distribution
centers.
SLS operates two retail replenishment centers pursuant to sale and
lease-back arrangements for a primary term of 25 years with renewal
options for an additional 30 or 40 years and a fair market value
purchase option at the end of the primary term, and at certain other
times. These facilities have been constructed on land owned by the
Company which has been leased to the lessor of the facility for an
initial term of 25 years, with renewal options which extend 10 to 20
years beyond that in the lease to the Company.
For Domestic merchandising and Domestic credit, the capital
expenditures for expansion and remodeling and other improvements
(including capitalized financing leases but excluding amounts expended
for administrative offices) amounted to $855 million for the year ended
December 31, 1994. In 1995, planned capital expenditures for Domestic
merchandising and Domestic credit of approximately $1.2 billion include
the remodeling and upgrade of merchandise presentations in approximately
109 existing department stores and 17 new or relocated department
stores. Domestic merchandising plans to open approximately 30
additional Homelife stores, 50 additional Hardware stores, 140
additional dealer stores and 62 Western Auto stores in 1995.
For additional information, see "Strategic Initiatives" above and
Sears Merchandise Group "Analysis of Financial Condition" beginning on
page 53 of the 1994 Annual Report, incorporated herein by reference in
response to Item 7 hereof.
INTERNATIONAL OPERATIONS
The Merchandise Group conducts retail merchandise and credit
operations in Canada through Sears Canada Inc., a consolidated, 61.1%
owned subsidiary of Sears ("Sears Canada") and in Mexico through Sears,
Roebuck de Mexico, S.A. de C.V., a consolidated, 75.2% owned subsidiary
of Sears ("Sears Mexico").
Sears Canada is the largest single retailer of general merchandise
in Canada. Sears Canada operates 110 department stores and 11 outlet
stores, and has 1,438 independently-owned catalog selling units and 37
warehouses. During 1994, Sears Canada relocated two department stores
and closed one outlet store. A conversion of company-operated catalog
selling units to independent local ownership was completed in 1994.
Sears Canada does not plan to open additional department stores during
1995, although it plans to renovate approximately ten stores and may
relocate one store during this period.
Sears Canada has an ongoing securitization program pursuant to
which undivided co-ownership interests in its pool of charge account
receivables are sold to trusts established to issue debt and trust units
(representing the residual equity interest in the trust) to third
parties. Sears Canada acts as servicer of the charge account
receivables. See Sears Merchandise Group "Analysis of Financial
Condition" and note 12 of the Notes to the Consolidated Financial
Statements on pages 53 and 40, respectively, of the 1994 Annual Report,
incorporated herein by reference in response to Items 7 and 8 hereof.
Approximately 38,800 full and part-time employees were employed by
Sears Canada.
<PAGE 13>
Sears Mexico operates 40 department stores and seven satellite
stores and has 21 warehouses. During 1994, two new stores were opened
and no stores were closed. Sears Mexico plans to open three new stores
in 1995.
Approximately 9,600 full and part-time employees were employed by
Sears Mexico.
<PAGE 14>
ALLSTATE INSURANCE GROUP
Allstate is engaged, principally in the United States and Canada
and primarily through agents working exclusively for Allstate Insurance
Company ("AIC"), a wholly-owned subsidiary of Allcorp, in property-
liability insurance (including personal property and casualty insurance,
business insurance and mortgage guaranty insurance) and life insurance.
Allstate is the country's second largest property-liability insurer on
the basis of 1993 statutory premiums earned and a major life insurer.
Allstate's life insurance operations are conducted through Allstate Life
Insurance Company ("ALIC"), a wholly-owned subsidiary of AIC, and
through various ALIC subsidiaries (collectively, "Allstate Life").
Allstate has more than 20 million customers, and its name and the
"You're in Good Hands" mark are widely recognized. AIC's primary
business is the sale of private passenger automobile and homeowners
insurance through its personal property and casualty unit ("PP&C"), and
it maintains estimated national market shares in these lines of
approximately 12.1% and 11.8%, respectively. Allstate Life sells life
insurance, annuity and group pension products. AIC's business insurance
unit ("Business Insurance") sells selected commercial property and
casualty coverages, and AIC's mortgage guaranty insurance operations
("PMI") sells residential mortgage guaranty insurance to residential
mortgage lenders. Allstate is proposing to sell PMI as discussed under
"Other Recent Developments" below. Allstate markets its products
through a variety of distribution channels, with the core of its
distribution system being a broad-based network of approximately 14,500
full-time Allstate agents in the United States and Canada.
On November 10, 1994, the Company announced the proposed Allstate
spin-off. Sears anticipates that the Allstate spin-off will be effected
in mid-1995 by means of a special dividend to Sears common shareholders
of all of the Allcorp common stock owned by the Company. The spin-off
is subject to market conditions, final approval by Sears Board of
Directors, any required regulatory approvals and a favorable tax ruling
or opinion on the tax-free nature of the spin-off. The Allstate spin-
off is scheduled to be considered at a special meeting of Sears
shareholders on March 31, 1995.
Allstate has, and following the Allstate spin-off will continue to
have, a variety of contractual and other relationships with the Company.
In contemplation of the Allstate spin-off, Allstate and Sears have
modified certain of these agreements and have entered into new
agreements. Allstate has described these new and modified agreements in
a Current Report on Form 8-K dated February 22, 1995 filed with the
Securities and Exchange Commission (the "SEC"), and has included the
text of such agreements as exhibits to such Form 8-K. These agreements
and arrangements are also incorporated by reference as exhibits to this
Report.
Other Recent Developments
On January 17, 1995, Allcorp and PMI filed registration statements
with the SEC regarding the proposed sale by Allcorp to the public of (i)
61.4% (70% if the underwriters' overallotment options are exercised in
full) of the shares of common stock of PMI Group ("PMI common stock"),
and (ii) a new issue of notes of Allcorp exchangeable at maturity for
all or a significant portion of the remaining shares of PMI common stock
(depending upon exercise of the underwriters' overallotment options 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). Allstate is proposing to sell PMI in keeping with its
strategic direction to focus on its core PP&C and life insurance
businesses, and to realize the return on its long-term investment in
PMI. PMI will be deconsolidated from the Allstate group as early as
January 1, 1995, depending upon the date of consummation of the
offerings. The foregoing
<PAGE 15>
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. Approximately 600 eligible employees
accepted the offer. See Allstate Insurance Group "Analysis of
Operations" and note 6 of the Notes to the Consolidated Financial
Statements beginning on pages 56 and 34, respectively, of the 1994
Annual Report, incorporated herein by reference to Items 7 and 8 hereof.
Strategy
Allstate's strategy is to enhance the profitability of its leading
position in the private passenger automobile and homeowners insurance
markets 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: (i) the strength of the Allstate name,
(ii) Allstate's network of full-time agents, (iii) Allstate's auto
insurance capabilities, and (iv) 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 homeowner markets, Allstate
is pursuing a strategy of growth in the types of markets it believes
will be profitable while limiting growth in other markets. Allstate is
also 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 by two
percentage points 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 91.11% for fiscal year
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 high growth 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.
Property-Liability Insurance
Allstate's property-liability insurance business consists of PP&C
insurance, Business Insurance and PMI. PP&C, which represented $15.3
billion (or 70.7%) of Allstate's 1994 statutory written premiums, writes
primarily private passenger automobile and homeowners insurance policies
<PAGE 16>
in 49 states and in Canada. Operating in approximately 9,635 locations,
Allstate agents produce more than 93% of PP&C's annual statutory written
premiums, with the balance generated by independent agents largely in
locations not currently served by Allstate agents. Business Insurance,
which represented 6.9% of Allstate's 1994 statutory written premiums,
writes selected commercial lines for small and medium-sized businesses,
which it markets through Allstate agents and a network of independent
agents. PMI, which represented 1.4% of Allstate's statutory written
premiums, writes residential mortgage insurance.
Principally engaged in private passenger automobile and homeowners
insurance, PP&C is Allstate's largest business segment, writing
approximately 89.6% of Allstate's total property-liability premiums, as
determined under generally accepted accounting principles. Allstate was
the country's second largest personal property and casualty insurer for
both private passenger automobile and homeowners insurance in 1994.
Although private passenger automobile and homeowners insurance account
for the majority of its business, PP&C also writes coverages for product
lines such as motorcycles, motor homes, renters, condominium,
residential and landlord, comprehensive personal liability, fire,
personal umbrella, recreational vehicle, mobile home, and boat owners.
PP&C markets its products primarily through Allstate agents, but also
through 2,000 independent agents mostly located in rural areas not
serviced by Allstate agents. PP&C also operates the Allstate Motor
Club, an organization whose purpose is to aid its members with travel
plans and emergency road service.
Business Insurance writes a variety of selected commercial property
and casualty insurance, including automobile insurance for vehicles used
in business; property insurance for buildings, equipment, inventory and
contents; general liability insurance for risks associated with business
premises, operations or products; package policies combining property
and liability insurance; and workers' compensation for work-related
injury, illness or death. Business Insurance also reinsures insurance
companies not affiliated with Allstate.
Business Insurance sells insurance to small and medium-sized
businesses through wholly-owned AIC subsidiaries, Northbrook Property
and Casualty Insurance Co., Northbrook National Insurance Company and
Northbrook Indemnity Company, which market through over 1,650
independent agencies. Business Insurance also sells commercial
insurance through Allstate agents and through rural independent agents.
The distribution channels used by Business Insurance share certain
support resources such as field claims and loss control, but each has
its own underwriting, processing and administrative organizations.
Allstate's reinsurance underwriting focus is directed toward smaller,
regional insurers who have books of business dominated by short-tail
lines such as automobile and homeowners insurance (where potential
exposure can be more accurately predicted), and whose own underwriting
standards are considered prudent by Allstate.
PMI sells residential mortgage guaranty insurance to mortgage
lenders, including mortgage bankers, savings institutions and commercial
banks. Demand for mortgage guaranty insurance is tied directly to house
sales and refinancing activity. PMI also sells title insurance,
provides contract underwriting services and licenses its proprietary
underwriting systems. PMI sells insurance through its own approximately
110 person sales force operating out of 21 field underwriting offices
located in 17 states in the United States. PMI is the third largest
private mortgage insurer in the United States, based both on new primary
insurance written in 1994 and direct primary insurance in force at
December 31, 1994.
Catastrophes are an inherent risk of the property-liability
insurance business which have contributed, and will continue to
contribute, to material year-to-year fluctuations in Allstate's results
of operations and financial position. The level of catastrophe loss
experienced in any year cannot
<PAGE 17>
be predicted and could be material. The establishment of appropriate
reserves for catastrophes, as for all property-liability claims, is an
inherently uncertain process. Catastrophe reserve estimates are
regularly reviewed and updated, using the most current information. Any
resulting adjustments, which may be material, are reflected in current
operations.
A "catastrophe" is defined by Allstate as an event that produces
pretax losses before reinsurance in excess of $250,000 involving
multiple first party policyholders. Catastrophes are caused by various
events, including hurricanes, earthquakes, tornadoes, wind and hail
storms and fires. Although catastrophes can cause losses in a variety
of property-liability lines, homeowners insurance has in the past
generated the vast majority of catastrophe-related claims. For
Allstate, major areas of potential losses due to hurricanes include
major metropolitan centers near the eastern coast of the United States,
and the major areas of exposure to potential losses due to earthquakes
include population centers in California affected by the San Andreas
fault line and fault lines in the Los Angeles basin and areas in the
central United States affected by the New Madrid fault line. Allstate
has experienced two catastrophes in the last three years resulting in
losses of approximately $2.5 billion relating to Hurricane Andrew (net
of reinsurance) and approximately $1.6 billion relating to the
Northridge earthquake, and risks experiencing similar or greater
catastrophes in the future. Allstate's proportion of its total
homeowners' insurance exposure in states having major catastrophe
exposure is higher than many of its competitors and is higher than the
property-liability insurance industry in general.
Although Allstate, consistent with industry practice, prices risks
in light of anticipated catastrophe exposure, the incidence and severity
of catastrophes is unpredictable. Due to the current unavailability of
reinsurance at acceptable rates, Allstate has no reinsurance in place to
lower its exposure to catastrophes at this time. However, Allstate
continues to evaluate the reinsurance market for appropriate coverage at
acceptable rates. Allstate has initiated a strategy to limit, over
time, its insurance exposures in certain regions prone to catastrophe
occurrences. Allstate has declined to renew some policies for property
coverages, although the extent of such nonrenewals is constrained by
state insurance laws and regulations. In addition, Allstate has filed
for selective rate increases as well as for limitations on policy
coverages in certain catastrophe exposure areas, subject to the
requirements of insurance laws and regulations and as limited by
competitive considerations. The extent of any resulting reduction in
Allstate's exposure to catastrophes in certain geographic regions over
time is uncertain. Allstate has worked and is working with Federal and
state governments and regulatory authorities to find a method of
managing catastrophe exposures. Legislation has been enacted in Florida
to strengthen building codes and to provide insurers limited
reimbursement from a state sponsored catastrophe fund in the case of
catastrophic hurricane losses. See Allstate Insurance Group "Analysis
of Operations" beginning on page 56 of the 1994 Annual Report,
incorporated herein by reference to Item 7 hereof.
Life Insurance
Allstate Life markets a broad line of life insurance, annuity and
group pension products. Allstate Life offers life insurance and annuity
pension products countrywide, and accounted for $4.5 billion (or 21.0%)
of Allstate's 1994 statutory premiums. Life insurance includes
traditional products such as whole life and term life insurance, as well
as universal life and other interest-sensitive life products. Annuities
include both deferred annuities, such as variable annuities and fixed
rate single premium deferred annuities, and immediate annuities such as
structured settlement annuities. Allstate Life's group pension products
include guaranteed investment contracts and retirement annuities. In
1994, annuity premiums and deposits represented approximately 50.4% of
Allstate Life's total statutory premiums and deposits.
<PAGE 18>
Allstate Life reaches a broad market of potential insureds
throughout the United States through a variety of distribution channels
including Allstate agents, financial institutions, independent agents
and brokers, specialized brokers and direct marketing techniques.
Allstate Life markets individual life insurance, annuity and pension
products through Allstate agents, financial institutions, independent
agents and brokers, and direct response marketing. Products bearing the
"Allstate" name are generally sold by Allstate agents and specialized
brokers, and through direct marketing techniques, while other products,
many of which are of similar types to those bearing the "Allstate" name,
are distributed through independent insurance agents and brokers and
financial institutions. Allstate Life's products are written by various
ALIC subsidiaries and are sold under various names in addition to
"Allstate" including "Allstate Life Insurance Company of New York,"
"Northbrook Life Insurance Company," "Glenbrook Life Insurance Company,"
"Glenbrook Life and Annuity Company," "Lincoln Benefit Life Company" and
"Surety Life Insurance Company." Life insurance in force was $142.4
billion at December 31, 1994 and $129.0 billion at December 31, 1993.
Allstate Life had $26.6 billion of invested assets (including $2.8
billion of Separate Accounts, but such number excludes unrealized gains
or losses on fixed income securities classified as available for sale),
as of December 31, 1994.
Northbrook Life Insurance Company has entered into a strategic
alliance with Dean Witter Reynolds Inc. for the marketing and
distribution of annuity products through Dean Witter. The arrangement
is not exclusive and does not bar Dean Witter from marketing the
products of other insurers or bar Northbrook Life Insurance Company from
using other brokerage firms to market and distribute its products.
Glenbrook Life Insurance Company has also entered into alliances with 18
banks for the sale of annuity products.
Although Allstate Life's management develops overall strategy and
coordinates certain supporting functions such as investments, finance
and legal, management of each distribution channel is largely
decentralized. Accordingly, management of each distribution channel is
primarily responsible for determining its own product mix and designing
products or product features appropriate for its target market.
Allstate Life believes that its range of channels promotes flexibility,
extends market reach, reduces dependency on any one distribution system,
and allows Allstate Life to focus on distinct, generally non-overlapping
markets.
Property - Liability Insurance Claims and Claims Expense Reserves
Allstate establishes property-liability loss reserves to cover its
estimated ultimate liability for losses and loss adjustment expenses
with respect to reported claims and claims incurred but not yet reported
as of the end of each accounting period. In accordance with applicable
insurance laws and regulations and generally accepted accounting
principles ("GAAP"), no reserves are established until a loss occurs,
including a loss from a catastrophe. Underwriting results of the
property-liability operations are significantly influenced by estimates
of property-liability claims and claims expense reserves (see note 9 of
the Notes to the Consolidated Financial Statements on page 36 of the
1994 Annual Report, incorporated herein by reference to Item 8 hereof).
These reserves are an accumulation of the estimated amounts necessary to
settle all outstanding claims, including claims which are incurred but
not reported, as of the reporting date. The reserve estimates are based
upon the facts in each case and Allstate's experience with similar
cases. Consideration is given to such historical trends as reserving
patterns, loss payments, pending levels of unpaid claims and product mix
as well as court decisions, economic conditions and public attitudes.
The effects of inflation are implicitly considered in the reserving
process. The establishment of reserves, including reserves for
catastrophes, is an inherently uncertain process and the ultimate cost
may vary materially from the recorded amounts. The inherent
uncertainties of estimating insurance reserves are generally greater for
liability coverages (particularly reserves for asbestos and
environmental losses) than for
<PAGE 19>
property coverages, due to the longer period of time that elapses before
a definitive determination of ultimate loss may be made. Establishing
reserves for asbestos and environmental claims is subject to significant
additional uncertainties, including lack of historical data, long
reporting delays, uncertainty as to the number and identity of insureds
with potential exposure, and unresolved legal issues regarding policy
coverage and the extent and timing of any such contractual liability.
Reserve estimates are regularly reviewed and updated, using the
most current information. Any resulting adjustments, which may be
material, are reflected in current operations.
The following tables are summary reconciliations of the beginning
and ending property-liability insurance claims and claims expense
reserve, displayed individually for each of the last three years. The
first table presents reserves on a gross (before reinsurance) basis.
The end of year gross reserve balance is reflected in the Allstate
Insurance Group Summarized Statements of Financial Position on page 59
of the 1994 Annual Report, incorporated herein by reference to Item 8
hereof. The second table presents reserves on a net (after reinsurance)
basis. The total net property-liability insurance claims and claims
expense amount is listed in the Allstate Insurance Group Summarized
Statements of Income on page 56 of the 1994 Annual Report, incorporated
herein by reference to Item 8 hereof.
<TABLE>
<CAPTION>
<S>
Year ended December 31,
<C> <C> <C>
GROSS 1994 1993 1992
($ in millions)
Gross reserve for claims and claims expense,
beginning of year $15,683 $15,299 $13,533
Claims and claims expense
Provision attributable to the current year 15,638 13,641 15,712
Increase (decrease) in provision attributable to prior years (644) (276) 410
Total claims and claims expense 14,994 13,365 16,122
Payments
Claims and claims expense attributable to current year 8,993 7,706 9,538
Claims and claims expense attributable to prior years 4,751 5,275 4,818
Total payments 13,744 12,981 14,356
Gross reserve for Property-liability claims and claims
expense, end of year 16,933 15,683 15,299
Less: ARCO reserve balances not subject to development(a) 349 312 291
Gross reserve for Property-liability claims and claims expense,
end of year, as shown on the loss reserve development table $16,584 $15,371 $15,008
<FN>
(a) Loss development information for ARCO (AIC's indirectly owned
British reinsurance subsidiary) is not available on a comparable basis.
This information is not material ($129.9 million in gross claims and
claims expense in 1994 and $92.2 million in 1994 gross payments), and
was treated as attributable to the current year.
</TABLE>
<PAGE 20>
<TABLE>
<CAPTION>
<S>
Year ended December 31,
<C> <C> <C>
NET 1994 1993 1992
($ in millions)
Reserve for claims and claims expense,
beginning of year $14,241 $13,808 $12,370
Claims and claims expense
Provision attributable to the current year 15,387 13,298 15,296
Decrease in provision attributable to prior years (722) (375) (91)
Total claims and claims expense 14,665 12,923 15,205
Payments
Claims and claims expense attributable to current year 8,803 7,455 9,200
Claims and claims expense attributable to prior years 4,541 5,035 4,567
Total payments 13,344 12,490 13,767
Reserve for Property-liability claims and claims expense, end of year 15,562 14,241 13,808
Less: ARCO reserve balances not subject to development(a) 290 248 223
Reserve for Property-liability claims and claims expense, end of year,
as shown on the loss reserve development table(b) $15,272 $13,993 $13,585
<FN>
(a) Loss development information for ARCO (AIC's indirectly owned British
reinsurance subsidiary) is not available on a comparable
basis. This information is not material ($98.1 million in claims and claims
expense in 1994 and $56.6 million in 1994 payments), and was
treated as attributable to the current year.
(b) Reserves for claims and claims expense are net of reinsurance of $1.31
billion, $1.38 billion and $1.42 billion at December 31,
1994, 1993 and 1992, respectively.
</TABLE>
The year-end 1994 reserves of $16.93 billion for property-
liability claims and claims expense, as determined under GAAP, were
$2.04 billion more than the reserve balance of $14.89 billion recorded
on the basis of statutory accounting principles for reports provided to
state regulatory authorities. The principal difference is the
reinsurance recoverable from third parties totaling $1.37 billion that
reduces reserves for statutory reporting and is recorded as an asset for
GAAP reporting. Additional differences are caused by the reserves of
the Canadian and British subsidiaries which are not included in the
consolidated United States statutory statement.
The loss reserve development table below illustrates the change
over time of reserves established for property-liability claims and
claims expense at the end of various calendar years. The first section
shows the reserves as originally reported at the end of the stated year.
The second section, reading down, shows the cumulative amounts paid as
of the end of successive years with respect to that reserve liability.
The third section, reading down, shows retroactive reestimates of the
original recorded reserve as of the end of each successive year which is
the result of Allstate's expanded awareness of additional facts and
circumstances that pertain to the unsettled claims. The last section
compares the latest reestimated reserve to the reserve originally
established, and indicates whether or not the original reserve was
adequate or inadequate to cover the estimated costs of unsettled claims.
The table also presents the gross reestimated liability as of the end of
the latest reestimation period, with separate disclosure of the related
reestimated reinsurance recoverable. This presentation appears for the
periods in which the income recognition provisions of Statement of
Financial Accounting Standards No. 113 have been applied.
The loss reserve development table is cumulative and, therefore,
ending balances should not be added since the amount at the end of each
calendar year includes activity for both the current and prior years.
<PAGE 21>
<TABLE>
<CAPTION>
<S>
Loss Reserve Development
($ in millions)
December 31(a)
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Gross Reserves for
Property-liability Claims
and Claims Expense $5,999 $6,582 $7,717 $8,941 $10,181 $11,095 $12,241 $13,225 $15,008 $15,371 $16,584
Deduct: Reinsurance
Recoverables 724 778 1,053 1,076 1,180 1,066 1,031 1,069 1,423 1,378 1,312
Net Reserve for
Property-liability Claims
and Claims Expense $5,275 $5,804 $6,664 $7,865 $9,001 $10,029 $11,210 $12,156 $13,585 $13,993 $15,272
Paid (Cumulative) as of:
One Year Later 1,839 2,445 2,758 3,184 3,611 4,349 4,594 4,567 5,035 4,541
Two Years Later 3,180 3,644 4,110 4,727 5,361 6,404 6,774 6,764 7,163
Three Years Later 3,863 4,406 4,957 5,682 6,518 7,653 8,069 8,014
Four Years Later 4,316 4,912 5,524 6,352 7,248 8,410 8,838
Five Years Later 4,642 5,269 5,930 6,803 7,698 8,896
Six Years Later 4,890 5,544 6,223 7,085 8,262
Seven Years Later 5,096 5,756 6,416 7,310
Eight Years Later 5,268 5,902 6,597
Nine Years Later 5,393 6,066
Ten Years Later 5,548
Reserve Reestimated as of:
End of Year 5,275 5,804 6,664 7,865 9,001 10,029 11,210 12,156 13,585 13,993 15,272
One Year Later 5,188 6,007 6,941 7,958 8,996 10,401 11,428 12,065 13,210 13,271
Two Years Later 5,373 6,259 7,038 7,995 9,108 10,693 11,635 11,998 12,866
Three Years Later 5,611 6,387 7,120 8,115 9,414 11,063 11,745 11,992
Four Years Later 5,778 6,480 7,235 8,423 9,773 11,179 11,841
Five Years Later 5,886 6,603 7,524 8,811 9,906 11,319
Six Years Later 6,021 6,887 7,924 8,955 10,063
Seven Years Later 6,285 7,287 8,081 9,126
Eight Years Later 6,671 7,437 8,229
Nine Years Later 6,863 7,635
Ten Years Later 7,060
Initial reserve in
excess of (less
than) reestimated net reserve:
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amount $(1,785) $(1,831) $(1,565) $(1,261) $(1,062) $(1,290) $(631) $164 $719 $722
Percent (33.8) (31.5) (23.5) (16.0) (11.8) (12.9) (5.6) 1.3 5.3 5.2
Gross Reestimated Liability-Latest $14,448 $14,727
Reestimated Recoverable-Latest 1,582 1,456
Net Reestimated Liability-Latest $12,866 $13,271
Gross Cumulative Excess $ 560 $ 644
<FN>
(a) Effective with 1990, this loss reserve development table excludes
ARCO claims and claims expense, due to the unavailability of loss
reserve development information for these claims on a comparable
basis.
</TABLE>
<PAGE 22>
As the table above illustrates, Allstate's net reserves for
property-liability insurance claims and claims expense at the end of
1993 developed favorably in 1994 by $722 million, compared to favorable
development on the gross reserves of $644 million. This relationship is
due to the fact that Allstate's principal property-liability lines, such
as auto and homeowners, are not significantly affected by reinsurance,
whereas long-tail lines, including asbestos and environmental exposures,
involve a higher level of reinsurance protection. The more favorable
development in the net reserves is due to the effect of reinsurance on
increased reserve reestimates on asbestos and environmental claims.
The subsequent reduction in the net reserves established at
December 31, 1993, 1992 and 1991 shown in the foregoing table reflects,
as more fully discussed below, the Company's general reserving policy
which is to maintain a margin of conservatism in the reserves,
particularly the reserves for the most recent accident years for which
the ultimate loss costs are less predictable and therefore more
variable. The principal cause for the initial reserves established at
the end of 1990, and all previous years reflected in the table, needing
to be increased over the time frame in the above table is the cumulative
adverse reserve development on asbestos and environmental damage claims,
virtually all of which relates to 1984 and prior years. There are
significant uncertainties in estimating the amount of Allstate's
asbestos and environmental claims. Among the complications are a lack
of historical data, long reporting delays, uncertainty as to the number
and identity of insureds with potential exposure, and complex unresolved
legal issues regarding policy coverage and the extent and timing of any
such contractual liability. Courts have reached different and sometimes
inconsistent conclusions as to when the loss occurred and what policies
provide coverage; what claims are covered; whether there is an insured
obligation to defend; how policy limits are determined; how policy
exclusions are applied and interpreted; and whether cleanup costs
represent insured property damage. These issues are not likely to be
resolved in the near future. As a result of these issues, the ultimate
cost of these claims may generate losses that vary materially from the
amount currently reserved. See note 9 of the Notes to Consolidated
Financial Statements beginning on page and 36 of the 1994 Annual Report,
incorporated herein by reference to Item 8 hereof.
The following table is derived from the Loss Reserve Development
table above and summarizes the effect of reserve reestimates, net of
reinsurance, on calendar year operations for the same ten-year period
ended December 31, 1994. The total of each column details the amount of
reserve reestimates made in the indicated calendar year and shows the
accident years to which the reestimates are applicable. The amounts in
the total accident year column on the far right represent the cumulative
reserve reestimates for the indicated accident year(s).
<PAGE 23>
<TABLE>
<CAPTION>
<S>
Effect of Reserve Reestimates on
Calendar Year Operations
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cumulative
($ in millions) Reestimates
for Each
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Accident Year
Accident Years
1984 & Prior $(87) $185 $238 $167 $108 $135 $264 $386 $192 $197 $1,785
1985 18 14 (39) (15) (12) 20 14 (42) 1 (41)
1986 25 (31) (11) (8) 5 0 7 (50) (63)
1987 (4) (45) 5 19 (12) (13) 23 (27)
1988 (42) (8) (2) (29) (11) (14) (106)
1989 260 (14) 11 (17) (17) 223
1990 (74) (163) (6) (44) (287)
1991 (298) (177) (102) (577)
1992 (308) (338) (646)
1993 (378) (378)
Total $(87) $203 $277 $ 93 $ (5) $372 $218 $ (91) $(375) $(722) $(117)
</TABLE>
As the table illustrates, Allstate has experienced favorable net
reserve development on the reserves originally established for eight of
the last nine accident years. Favorable calendar year reserve
development in 1994, 1993 and 1992 was consistent with the Company's
above described reserving philosophy, and was also the result of
favorable severity trends in each of the three years which more than
offset adverse development on asbestos and environmental claims. The
favorable severity trend during this three year period was largely due
to a lower than anticipated medical cost inflation rate for personal
line auto injury claims. This trend has emerged over time as actual
claim settlements validated the steady decline in inflation. The level
of 1994 favorable development was further influenced by adjustments of
prior year catastrophe reserves and severity declines on personal line
injury claims that are believed to be attributable to improvements in
the claim settlement process as well as improving trends in commercial
coverages such as workers' compensation and product liability. In the
event these favorable trends continue, additional reserve releases will
be recorded.
Capital Requirements
The capacity for Allstate's growth in premiums, like that of other
insurance companies, is in part a function of its statutory surplus.
For property-liability insurance companies, ratios in excess of 3 to 1
in the amount of net premiums written to the amount of statutory surplus
are considered outside the usual range by insurance regulators and
rating agencies. AIC's premium to surplus ratio grew from 2.3 to 1 at
December 31, 1993 to 2.5 to 1 at December 31, 1994. The principal cause
of the increased ratio was a decline in statutory surplus resulting from
higher catastrophe losses in 1994. Maintaining appropriate levels of
statutory surplus is considered important by Allstate's management,
state insurance regulatory authorities, and the agencies that rate
insurers' claims-paying abilities and financial strength. Failure to
maintain certain levels of statutory capital and surplus could result in
increased scrutiny or, in some cases, action taken by state regulatory
<PAGE 24>
authorities or downgrades in an insurer's ratings. Increased public and
regulatory concerns regarding the financial stability of participants in
the insurance industry have resulted in greater emphasis being placed by
policyholders upon insurance company ratings and have created,
particularly with respect to certain life insurance products, some
measure of competitive advantage for insurance carriers with higher
ratings.
The National Association of Insurance Commissioners ("NAIC") has
adopted new standards for assessing the solvency of insurance companies,
which standards are referred to as risk-based capital ("RBC"). The
requirement consists of a formula for determining each insurer's RBC and
a model law specifying regulatory actions if an insurer's RBC falls
below specified levels. The RBC formula for life insurance companies
establishes capital requirements relating to insurance risk, business
risk, asset risk and interest rate risk. The RBC formula for property-
liability companies includes asset and credit risk, but places more
emphasis on underwriting factors for reserving and pricing. At December
31, 1994, Allstate's RBC for its property-liability and life insurance
operations exceeded the applicable RBC requirement. See Allstate
Insurance Group "Analysis of Financial Condition," beginning on page 60
of the 1994 Annual Report, incorporated herein by reference to Item 7
hereof.
Investments
Allstate follows an investment strategy that combines the goals of
safety, stability, liquidity, growth, and total return. It seeks to
balance preservation of principal with after-tax yield, while
maintaining portfolio diversification. Investment strategies for the
property-liability and life insurance segments vary based on the nature
of the respective insurance operations. The composition of each
portfolio is the result of various interrelated investment
considerations including protection of principal, appreciation
potential, tax consequences, and yield as well as asset-liability
management issues such as cash and duration matching. Because a
substantial portion of Allstate's revenues is generated from its
invested assets, the performance of its investment portfolio could
materially affect Allstate's results of operations and financial
condition.
Geographic Distribution of Insurance
Allstate, through a variety of companies, is authorized to sell
property-liability and life insurance in all 50 states, the District of
Columbia, Puerto Rico and Canada. To a limited extent, Allstate is
engaged, through affiliates, in the insurance business in Japan and the
Republic of Korea and is a worldwide reinsurer. The following table
reflects, in percentages, the principal geographic distribution of
statutory premiums earned for the property-liability insurance business
and statutory premiums for the life insurance business for the year
ended December 31, 1994:
<TABLE>
<CAPTION>
<S>
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CA NY FL TX NJ IL PA MI MD GA VA TOTAL
Property-Liability 12.9 11.2 9.4 6.8 4.9 4.4 4.3 3.4 3.2 2.9 2.7 66.1
CA IL MA MI NE FL TX PA OH VA IN TOTAL
Life 14.3 9.4 7.9 7.0 5.8 5.3 3.6 3.0 2.5 2.4 2.4 63.6
</TABLE>
No other jurisdiction accounted for more than 2.5% of the
statutory premiums for property-liability and 2.2% of the statutory
premiums for life insurance.
<PAGE 25>
In 1991, Allstate announced its decision to withdraw from the
property-liability market in New Jersey, but its application has been
suspended until December 31, 1997 by agreement between Allstate and New
Jersey insurance authorities. In the meantime, Allstate has continued
to write insurance in New Jersey. Although it is licensed to do so,
Allstate is not currently writing private passenger automobile or
homeowners' insurance in Massachusetts.
Seasonality
Although the insurance business generally is not seasonal, claims
and claims expense for the property-liability insurance operations tend
to be higher for periods of severe or inclement weather.
Service Marks
The names "Allstate" and "Allstate Life," the slant "A" Allstate
logo, the slogan "You're in Good Hands With Allstate" and the graphic
"Good Hands" design logo which features cupped hands holding an
automobile and a house, and the "Northbrook" logo design are used
extensively in Allstate's businesses. Allstate's rights in the United
States to the names "Allstate" and "Allstate Life," the Allstate and
Northbrook logos, the "Good Hands" slogan and the "Good Hands" symbol
continue so long as Allstate continues to exercise those rights. These
service marks are the subject of numerous renewable United States and
foreign service mark registrations. The Company believes that these
service marks are material to the business of Allstate.
Competition
Property-Liability Insurance
The personal lines private passenger auto and homeowners business
is highly competitive. As of December 31, 1993 (the most recent date
for which information is available), this industry in the United States
was comprised of approximately 300 insurance groups, doing business
under approximately 1,400 different company names, generating annual
personal lines premiums totaling approximately $115 billion.
Approximately $37 billion of premiums are generated by independent
agencies, and the remaining $78 billion of premiums are generated by
direct writers placing their products directly to the consumer by direct
response, mail order or, like Allstate, primarily through employee
agents. In recent years, direct writers have increased their market
share while the market share of independent agency writers has
decreased.
Allstate believes that AIC and the other four largest (as measured
by 1993 premiums written) personal property and casualty companies,
three of which are direct writers, had nearly 44% of the private
passenger automobile premiums written and approximately 44% of the
homeowner premiums written. The Company believes that in 1993 the
largest 20 companies wrote approximately 66% of the private passenger
automobile premiums written and approximately 67% of the homeowner
premiums written in the United States.
AIC competes principally on the basis of its name recognition,
scope of distribution system, customer service and focus, use of
technology to improve customer service and quality, product features and
breadth of product offerings and price. Additionally, extensive use of
its database to develop proprietary information gives AIC the ability to
segment its market and appropriately price risks.
<PAGE 26>
The commercial property and casualty insurance industry, in
which Business Insurance operates, is highly competitive. The Company
believes that there were approximately 2,000 commercial property and
casualty insurance companies generating approximately $120 billion in
commercial premiums written in 1993, the last year for which comparative
data is available. Business Insurance competes principally on the basis
of its name recognition, scope of its distribution system, customer
service and focus, use of technology to improve customer service and
quality, breadth of product offerings, product features, and price.
Unlike the personal lines industry, the commercial insurance industry is
highly fragmented in terms of market share. In 1993, Allstate's
estimated market share of total commercial lines, based on direct
premiums written, was 1.5%.
The principal sources of PMI's direct competition are (i) other
private mortgage insurers (some of which are affiliates of well
capitalized, diversified public companies, have higher claims-paying
ability ratings and have greater access to capital than PMI) and (ii)
federal and state governmental and quasi-governmental agencies
(principally the Federal Housing Administration ("FHA")). Indirectly,
PMI also competes with mortgage lenders which forego third-party
coverage and retain the full risk of loss on their high LTV loans. The
environment for the nine active insurers which comprise the U.S. private
mortgage insurance industry is both highly dynamic and intensely
competitive.
Life Insurance
There is substantial competition among insurance companies seeking
customers for the types of insurance and annuity products sold by
Allstate Life. Despite some industry consolidation in recent years, the
life insurance market continues to be highly fragmented and competitive.
As of December 31, 1993, there were approximately 2,000 life insurance
companies in the United States, most of which offer one or more products
similar to those offered by Allstate Life and many of which use similar
marketing techniques. In addition, banks and savings and loan
associations in certain jurisdictions compete with Allstate Life in the
sale of life insurance products and, because certain life insurance and
annuity products include a savings or investment component, competition
also comes from brokerage firms, investment advisors and mutual funds,
as well as from banks and other financial institutions.
Allstate Life competes principally on the basis of its name
recognition, scope of its distribution systems, customer service and
focus, breadth of product offerings, product features, its financial
strength, claims-paying ability ratings, and price, and with respect to
variable life and annuity products, investment performance of its
Separate Accounts.
On January 18, 1995, the U.S. Supreme Court held that a bank may
act as an agent to sell fixed and variable annuity contracts and that
such annuities are not "insurance" for purposes of the National Bank Act
(Nationsbank of North Carolina v. Variable Annuity Life Insurance
Company). This decision provides legal support for Allstate Life's
practice of using banks to distribute its annuity products, but another
possible result of this decision could be increased competition for
Allstate Life's products from expanded bank sales of annuities produced
by other insurers or by banks.
Regulation
Allstate is subject to extensive regulation and supervision in the
jurisdictions in which it does business. This regulation has a
substantial effect on the business of Allstate, primarily on Allstate's
personal lines property-liability business. This regulatory oversight
includes, by way of example, matters relating to licensing and
examination, rate setting, trade practices, policy forms, limitations on
the nature and amount of certain investments, claims practices, mandated
participation in shared
<PAGE 27>
markets and guaranty funds, reserve adequacy, insurer solvency,
transactions with affiliates, the amount of dividends that may be paid,
and restrictions on underwriting standards. See notes 16 and 17 of the
Notes to the Consolidated Financial Statements on page 45 of the 1994
Annual Report, incorporated herein by reference to Item 8 hereof.
As a condition of its license to do business in various states,
AIC is required to participate in mandatory property-liability shared
market mechanisms or pooling arrangements which provide various
insurance coverages to individuals or other entities that otherwise are
unable to purchase such coverage voluntarily provided by private
insurers. In addition, some states require automobile insurers to
participate in reinsurance pools for claims that exceed a certain
amount. Currently, there are no mandatory pooling mechanisms applicable
to Allstate Life. The participation by AIC in such shared markets or
pooling mechanisms is generally in amounts related to the amount of
AIC's direct writings for the type of coverage written by the specific
pooling mechanism in the applicable state. AIC incurred an underwriting
loss from participation in such mechanisms, mandatory pools and
underwriting associations of $109 million, $140 million and $152 million
in 1994, 1993 and 1992, respectively. The amount of future losses or
assessments from the personal and commercial lines shared market
mechanisms and pooling arrangements described above cannot be predicted
with certainty. Although it is possible that future losses or
assessments from such mechanisms and pooling arrangements could have a
material adverse effect on results of operations, Allstate does not
expect future losses or assessments to have a material adverse effect on
liquidity or capital resources.
Failures of certain large insurers in recent years have increased
solvency concerns of regulators. Under state insurance guaranty fund
laws, insurers doing business in a state can be assessed, up to
prescribed limits, for certain obligations of insolvent insurance
companies to policyholders and claimants. Allstate's payments to such
guaranty funds for the years 1994, 1993 and 1992 were $56 million, $60
million and $65 million, respectively.
Employees
At December 31, 1994, Allstate employed approximately 46,300
people.
Properties
Allstate's home office complex is located in Northbrook, Illinois.
The complex consists of 10 buildings of approximately 1.96 million
square feet of office space on a 208.7 acre site. The Northbrook
complex serves as the headquarters for PP&C and ALIC. Business
Insurance is headquartered in South Barrington, Illinois, and PMI is
based in San Francisco, California.
Allstate's field business operations are conducted substantially
from approximately 50 offices located principally in metropolitan areas
throughout the United States and Canada. Allstate also has
approximately 280 claim service offices, sales facilities at
approximately 9,600 locations, and approximately 665 automobile damage
inspection locations, most of which are located at claim service offices
and sales facilities.
Allstate's home office complex and most major offices are owned.
Other facilities are leased, in almost all cases for terms of not more
than five years. The Company believes its properties and facilities are
adequate and suited to Allstate's current operations.
<PAGE 28>
Additional Information
Additional information concerning Allstate is included in
Allcorp's Annual Report on Form 10-K for the fiscal year ended December
31, 1994 and 1994 Annual Report to Stockholders, which are incorporated
by reference in this report as Exhibits 99.(a) and 99.(b), respectively.
<PAGE 29>
FINANCE SUBSIDIARIES
To meet certain capital requirements of its businesses, Sears
borrows on a short-term basis through the issuance of notes to, and from
time to time sells customer receivables balances to, Sears Roebuck
Acceptance Corp. ("SRAC"), a wholly-owned finance subsidiary. SRAC
obtains funds primarily from the issuance of commercial paper. SRAC
also obtains funds from term loans and borrowing agreements with bank
trust departments. In addition, on March 17, 1995, SRAC filed a
registration statement with the SEC relating to Debt Securities. Sears
and SRAC have also borrowed through Sears Overseas Finance N.V.
("SOFNV"), a wholly-owned international finance subsidiary, which has
obtained funds from the issuance of long-term debt, primarily in Europe,
in both U. S. dollars and foreign currencies.
Sears DC Corp. ("SDCC"), a wholly-owned finance subsidiary of
Sears, was formed to borrow money and lend the proceeds of such
borrowings to certain former subsidiaries of the Company. These former
subsidiaries have repaid all of their indebtedness to SDCC. SDCC is not
currently issuing additional debt. Pending use of the remaining amounts
received from the former subsidiaries to repay outstanding medium-term
notes at maturity or otherwise, SDCC has loaned such amounts to Sears.
Substantially all the debt and related interest expense of SDCC,
SRAC and SOFNV is borne by the Domestic credit operations.
In addition, various direct and indirect subsidiaries of Sears
have engaged in securitization programs in which credit card receivables
or asset-backed commercial paper are sold in public or private
transactions. See "Domestic Operations - Domestic credit," and
"International Operations," beginning on pages 8 and 12, respectively,
and note 12 of the Notes to Consolidated Financial Statements on page 40
in the 1994 Annual Report, incorporated herein by reference to Item 8
hereof.
<PAGE 30>
HOMART
Homart, a wholly-owned subsidiary of the Company, develops, owns
and manages regional shopping centers and community shopping centers.
HD Delaware Properties, Inc. ("HD Delaware"), a wholly-owned subsidiary
of the Company, owns and manages office buildings. At December 31,
1994, Homart (directly or indirectly) owned or substantially owned and
operated 12 regional shopping centers and five community centers, and
was a partner in joint ventures and limited partnerships that owned and
operated 16 regional shopping centers and one community center. In
addition, Homart (directly or indirectly) managed nine regional shopping
centers for other owners. HD Delaware (directly or indirectly) owned
and operated 15 office buildings and (directly or indirectly) was a
partner in joint ventures that owned and operated two office buildings.
Other commercial properties are being developed by Homart, and by joint
ventures and limited partnerships in which Homart (directly or
indirectly) has an interest.
The Company is pursuing a divestiture of Homart and HD Delaware.
Employees
At December 31, 1994, Homart and HD Delaware employed
approximately 870 people.
Competition
The businesses of Homart and HD Delaware are highly competitive.
Competition in the commercial property development business relates to
site acquisition and securing of tenants, including major department
stores for shopping centers (based primarily on location, rental rates
and service). Shopping center operation also involves competition for
customers with other retail locations (based primarily on location,
facilities, tenants and advertising).
<PAGE 31>
Executive Officers of the Registrant
The following table sets forth the names of the executive officers
of the Company, the positions and offices with the Company held by them,
the date they first became officers of the Company or a subsidiary of
the Company, and their current ages:
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
Date First
Became
Name Position Officer Age
Edward A. Brennan* Chairman of the Board of Directors,
President and Chief Executive Officer1978 61
James M. Denny Vice Chairman and Acting Chief
Financial Officer 1986 62
David Shute Senior Vice President,
General Counsel and Secretary 1981 64
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
Jerry D. Choate Chairman and Chief Executive Officer
Allstate Insurance Group 1981 56
Arthur C. Martinez* Chairman and Chief Executive Officer
Sears Merchandise Group 1992 55
<FN>
* Also a director of Sears, Roebuck and Co.
</TABLE>
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 Allstate spin-off and
during a transition period thereafter. After such period, Mr. Brennan
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 Allstate spin-off and
during a transition period thereafter. Upon Mr. Brennan's retirement,
the Sears Board of Directors expects that Mr. Martinez will succeed him
and be elected as Chairman of the Board of Directors, President and
Chief Executive Officer.
In connection with the Allstate spin-off, Mr. Choate, in his
capacity as Chairman and Chief Executive Officer of Allstate, will no
longer be an executive officer of the Company.
Sometime following the Allstate spin-off, it is expected that Mr.
Buldak will resign as an executive officer of the Company and become
Vice President of Corporate Relations of AIC. Also following the
Allstate spin-off, it is anticipated that the Merchandise Group will
cease to be a separate business group and the officers of the
Merchandise Group listed in the following table will also become
executive officers of the Company with similar titles and functions
(other than the reference to the Merchandise Group in their titles).
The following table sets forth the names of such officers, the positions
and offices with the Merchandise Group held by them, the date they first
became officers of the Company and their current ages:
<PAGE 32>
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
Date First
Became
Name Position Officer Age
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
</TABLE>
No family relationships exist among the above-named individuals.
Each of the officers named above was elected to serve in the
office indicated until the first meeting of the Board of Directors
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, Martinez, Costello,
Davis, Lacy, Mettler, Pagonis and Rucci, these officers have held the
positions set forth in the above tables for at least the last five years
or have served the Company in various executive or administrative
capacities for at least that length of time.
Mr. Blanda joined Sears as Vice President and Controller in
December 1992. Prior to joining Sears he had been a partner in the
accounting and auditing firm of KPMG Peat Marwick since 1983.
Mr. Buldak joined Sears as National Manager, External
Communications, in July 1990. Prior to joining Sears, he had been the
Manager of Public Affairs for The Detroit Edison Company since 1984.
Mr. Martinez joined Sears as Chairman and Chief Executive Officer
of Sears Merchandise Group in September 1992. Prior to joining Sears 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.
<PAGE 33>
Mr. Costello joined Sears as Senior Executive Vice President,
General Manager, Marketing Division, of the Merchandise Group in April
1993. Prior to joining Sears, he had been President of Nielsen
Marketing Research USA.
Mr. Davis joined Sears as Senior Vice President and Chief
Financial Officer of the Merchandise Group in June 1990. Prior to
joining Sears, 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 Sears as Senior Vice President, Finance of the
Merchandise Group effective January 1, 1995. Prior to joining Sears, 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. Mettler joined Sears as President, Apparel Group of the
Merchandise Group in February 1993. Prior to joining Sears, he had been
President and Chief Executive Officer of Robinson's Inc.
Mr. Pagonis joined Sears as Senior Vice President of Logistics of
the Merchandise Group in November 1993. Prior to joining Sears, 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 Sears as Executive Vice President, Administration
of the Merchandise Group in October 1993. Prior to joining Sears, he
had been Senior Vice President, Strategy, Business Development and
External Affairs and previously Senior Vice President Human Resources,
of Baxter International, Inc.
Item 2. Properties
Information regarding the principal properties of the Company is
incorporated herein by reference to the following portions of Item 1
hereof: Sears Merchandise Group (pages 10 - 12); and Allstate Insurance
Group (page 27).
Item 3. Legal Proceedings
On January 26, 1994, the Alabama Department of Environmental
Management alleged infringement of state environmental statutes by Sears
relating to alleged underground gas tanks at six retail stores in that
state. The Department sought civil penalties of $250,000. Sears and
the Department have agreed to settle for civil penalties of $125,000,
pursuant to a signed consent decree. (Sears, Roebuck and Co. v. Alabama
Department of Environmental Management, Docket No. 94-08).
In proceedings entitled In Re: Insurance Antitrust Litigation
(U.S. District Court, N.D. Calif., 1988), AIC and a number of other
insurers and various related entities were sued by various states on the
grounds that defendants conspired to reduce the coverage under revised
commercial general liability forms filed with state insurance regulators
by the Insurance Services Office, a rating bureau. The states requested
unspecified treble damages and other relief. The case was consolidated
with 17 private class actions on behalf of private parties that were
allegedly unable to obtain desired commercial liability coverage as the
result of the defendants' conduct. On January 17, 1995, the District
Court gave preliminary approval to a settlement under which the 32
remaining defendants,
<PAGE 34>
including AIC, agreed to pay the total amount of $36,000,000 to fund
creation of a risk database and a public risk institute to provide
educational services to governmental and business insurance purchasers.
In addition, the settlement will restructure the Insurance Services
Office, the insurance industry's main insurance rating and advisory
organization, to decrease the influence of insurance companies over the
organization.
On January 19, 1995, class action certification was granted in
Gile v. Allstate and Moran v. Allstate and Sears (Alameda County
Superior Court, California), cases originally filed on October 16, 1992
and April 7, 1993, respectively, for purposes of determining whether AIC
violated a provision of the California Labor Code with respect to how
AIC reimburses its California Neighborhood Office Agent office expenses.
The plaintiffs in these cases seek both compensatory and punitive
damages. The Company's ultimate exposure to loss cannot presently be
predicted and no provision for liability has been made in the Company's
consolidated financial statements. Due to the early stage of
development of these proceedings, it is not practicable to presently
develop a meaningful range of potential loss. While the final
resolution of this matter may have a material impact on the Company's
results of operations, management believes this matter will not have a
material adverse effect on the financial position of the Company.
The Massachusetts Attorney General's office has advised Homart
that the Massachusetts Department of Environmental Protection ("DEP")
has investigated alleged releases of asbestos containing materials at
the site of Homart's Shopper's World Center in Framingham, Massachusetts
and relating to the Natick Mall in Natick, Massachusetts. Discussions
with the Attorney General's Office are ongoing. The Company expects
that this matter will not have a material impact on the results of
operation, financial position, liquidity or capital resources of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
None
<PAGE 35> PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
DESCRIPTION OF SEARS COMMON SHARES
The summary contained herein of certain provisions of the Restated
Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), of Sears does not purport to be complete and is
qualified in its entirety by reference to the provisions of such
Certificate of Incorporation filed as Exhibit 3.(a) hereto and
incorporated by reference herein.
The Certificate of Incorporation authorizes the issuance of
1,000,000,000 common shares, par value $0.75 per share, and 50,000,000
preferred shares, par value $1.00 per share. As of January 31, 1995,
3,250,000 8.88% Preferred Shares, First Series (the "8.88% Preferred
Shares") and 7,187,500 Series A Mandatorily Exchangeable Preferred
Shares (the "Series A Preferred Shares"), were outstanding. On March
20, 1995, Sears exchanged its Series A Preferred Shares for 35,672,979
Sears common shares. Additional preferred shares may be issued in
series with rights and privileges as authorized by the Board of
Directors.
Subject to the restrictions on dividends mentioned below and the
rights of the holders of the 8.88% Preferred Shares and any preferred
shares which may hereafter be issued, each holder of common shares is
entitled to one vote per share, to vote cumulatively for the election of
directors, to dividends declared by the Board of Directors, and upon
liquidation to share in the assets of Sears pro rata in accordance with
his or her holdings after payment of all liabilities and obligations.
The holders of common shares have no preemptive, redemption,
subscription or conversion rights. Sears Board of Directors is divided
into three classes serving staggered three-year terms. 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. Directors may be removed only for cause upon
the affirmative vote of at least 75% of the shares entitled to vote.
Such a vote is also required to alter, amend or repeal, or to adopt any
provision inconsistent with, Article 5 of the Certificate of
Incorporation concerning directors, or to fix the number of directors by
shareholder vote. There are no restrictions on repurchases or
redemption of shares by Sears which do not impair its capital, except
for limitations under the terms of outstanding preferred shares and
except that the indentures relating to certain of Sears long-term debt
and an agreement pursuant to which Sears has provided a credit facility
in support of certain tax increment revenue bonds issued by the Village
of Hoffman Estates, Illinois, in connection with the construction of the
headquarters facility for Sears Merchandise Group provide that Sears
will not take certain actions, including the declaration of cash
dividends and the repurchase of shares, which would cause unencumbered
assets plus certain capitalized rentals to drop below 150% of
liabilities plus such capitalized rentals (as such terms are defined in
the indentures and the agreement).
The amount by which such unencumbered assets plus capitalized
rentals exceeds 150% of such liabilities plus capitalized rentals, as
computed under certain of the indenture provisions and those of the
credit facility agreement referred to above, is set forth in note 17 of
the Notes to Consolidated Financial Statements on page 45 of the 1994
Annual Report.
The 8.88% Preferred Shares were sold in the form of depositary
shares, each representing a one-fourth interest in an 8.88% Preferred
Share. In general, holders of the 8.88% Preferred Shares are entitled
to (i) receive, when and as declared by the Board, cumulative cash
dividends, payable quarterly, at a rate of 8.88% per annum on $100 per
share, prior to payment of dividends on the
<PAGE 36>
common shares or the redemption, purchase or other acquisition for
consideration of common shares by Sears and (ii) $100 per share, plus
accrued and unpaid dividends, in the event of any dissolution of Sears,
prior to any payment to the holders of the common shares. The 8.88%
Preferred Shares may be redeemed, at Sears option, on or after November
9, 1996 or, in certain limited circumstances, prior to such date.
Holders of the 8.88% Preferred Shares are not entitled to voting rights
except in limited circumstances.
Information regarding the principal market for Sears common
shares, the number of shareholders, and the prices of, and dividends
paid on, Sears common shares is incorporated herein by reference to the
section headed "Common Stock Market Information and Dividend Highlights"
on page 67 of the 1994 Annual Report and to the information under the
heading "Shareholders' equity - Dividend payments" contained in note 17
of the Notes to Consolidated Financial Statements on page 45 of the 1994
Annual Report.
Item 6. Selected Financial Data
The material under the caption "Ten-Year Summary of Consolidated
Financial Data" on pages 64 - 65 of the 1994 Annual Report is
incorporated herein by reference.
<PAGE 37>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The information contained under the captions "Analysis of
Consolidated Operations" on pages 20 - 22, "Analysis of Consolidated
Financial Condition" on pages 23, 25 and 27, Sears Merchandise Group
"Analysis of Operations" on pages 48 - 52, Sears Merchandise Group
"Analysis of Financial Condition" on pages 53 - 55, Allstate Insurance
Group "Analysis of Operations" on pages 56 - 59, and Allstate Insurance
Group "Analysis of Financial Condition" on pages 60, 61 and 63, of the
1994 Annual Report, is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company and the
summarized financial statements related to the Company's continuing
business groups, including the notes to all such statements, and other
information on pages 20 - 67 (other than that incorporated by reference
to Item 7 hereof) of the 1994 Annual Report is incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None
<PAGE 38>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers of the
Company is incorporated herein by reference to the descriptions under
"Item 1: Election of Directors" on pages 2 - 5 of the 1995 Proxy
Statement and to Item 1 of this Report under the caption "Executive
Officers of the Registrant" on pages 31 - 33.
Item 11. Executive Compensation
Information regarding executive compensation is incorporated by
reference to the material under the captions "Item 1: Election of
Directors," "Directors' Compensation and Benefits," "Executive
Compensation," "Stock Options," "Pension Plan Table," "Employment
Contracts, Termination and Change in Control Arrangements" and
"Compensation Committee Interlocks and Insider Participation" on pages 2
- 5, 6, 7, 8, 9, 10 - 11 and 16, respectively, of the 1995 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information regarding security ownership of certain beneficial
owners and management is incorporated herein by reference to the
material under the heading "Item 1: Election of Directors" on pages 2 -
5 of the 1995 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related
transactions is incorporated herein by reference to the material under
the heading "Certain Transactions" on page 19 of the 1995 Proxy
Statement.
<PAGE 38>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
(a)1 and 2 - An "Index to Financial Statements and Financial
Statement Schedules" has been filed as a part of this Report beginning
on page S-1 hereof.
(a)3 - Exhibits:
An "Exhibit Index" has been filed as a part of this Report
beginning on page E-1 hereof and is incorporated herein by reference.
(b) - Reports on Form 8-K:
A Current Report on Form 8-K for November 10, 1994 was filed
with the Securities and Exchange Commission (the "Commission") on
November 10, 1994 to report, under Item 5, that the Company issued a
press release to announce the proposed Allstate spin-off and divestiture
of Homart.
Signatures
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SEARS, ROEBUCK AND CO.
(Registrant)
/S/James A. Blanda
By:James A. Blanda
Vice President and Controller
March 23, 1995
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Signature Title Date
/S/Edward A. Brennan Director, Chairman of the )
Edward A. Brennan Board of Directors, President )
and Chief Executive Officer )
)
/S/James M. Denny Vice Chairman and Acting )
James M. Denny Chief Financial Officer )
(Principal Financial Officer) )
)
/S/James A. Blanda Vice President )
James A. Blanda and Controller (Principal )
Accounting Officer) )
)
/S/Hall Adams, Jr. Director )
Hall Adams, Jr. )
)
/S/Warren L. Batts Director )
Warren L. Batts )
)
/S/James W. Cozad Director )
James W. Cozad )
)
/S/William E. LaMothe Director )
William E. LaMothe )
)
/S/Arthur C. Martinez Director ) March 23, 1995
Arthur C. Martinez )
)
/S/Michael A. Miles Director )
Michael A. Miles )
)
/S/Sybil C. Mobley Director )
Sybil C. Mobley )
)
/S/Nancy C. Reynolds Director )
Nancy C. Reynolds )
)
/S/Clarence B. Rogers Director )
Clarence B. Rogers )
)
/S/Donald H. Rumsfeld Director )
Donald H. Rumsfeld )
<PAGE S-1>
SEARS, ROEBUCK AND CO.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Year Ended December 31, 1994
The following consolidated financial statements, notes thereto and
related information of Sears, Roebuck and Co. are incorporated
herein by reference to the Company's 1994 Annual Report.
Page*
Consolidated Statements of Income ** 20
Consolidated Statements of Financial Position ** 24
Consolidated Statements of Cash Flows ** 26
Consolidated Statements of Shareholders' Equity ** 28
Notes to Consolidated Financial Statements ** 29
Quarterly Results ** 67
Common Stock Market Information and Dividend Highlights *** 67
Sears Merchandise Group
Summarized Statements of Income ** 48
Summarized Statements of Financial Position ** 53
Summarized Statements of Cash Flows ** 54
Allstate Insurance Group
Summarized Statements of Income ** 56
Summarized Statements of Financial Position ** 59
Summarized Statements of Cash Flows ** 62
* Refers to page number in Company's 1994 Annual Report.
** Incorporated by reference in Item 8 herein.
*** Incorporated by reference in Item 5 herein.
<PAGE S-2>
The following additional financial statement schedules and report and
consent of Independent Certified Public Accountants are furnished
herewith pursuant to the requirements of Form 10-K.
Sears, Roebuck and Co. Page
Schedules required to be filed under the provisions of Regulation S-X
Article 5:
Schedule I - Condensed Financial Information of the Registrant S-3
Schedule II - Valuation and Qualifying Accounts S-9
Schedules required to be filed under the provisions of Regulation S-X
Article 7:
Schedule I - Summary of Investments S-10
Schedule III- Supplementary Insurance Information S-11
Schedule IV - Reinsurance S-12
Schedule VI - Supplemental Insurance Information Concerning
Property - Casualty Insurance Operations S-13
Report of Independent Certified Public Accountants S-14
Consent of Independent Certified Public Accountants S-15
All other schedules are omitted because they are not applicable or not
required.
<PAGE S-3>
SEARS, ROEBUCK AND CO.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
(millions) Year Ended December 31
1994 1993 1992
Revenues
Net sales $ 23,926 $ 21,849 $ 24,400
Finance charge revenues 1,197 1,053 1,410
Total revenues 25,123 22,902 25,810
Costs and Expenses
Cost of sales, buying and occupancy 17,596 15,883 18,094
Selling and administrative expenses 5,930 5,562 6,658
Depreciation and amortization 399 381 370
Provision for uncollectible accounts 245 265 365
Restructuring - - 2,725
Interest (after deduction of income before
income taxes of financing subsidiaries
of $69, $129 and $172) 920 1,118 1,261
Total costs and expenses 25,090 23,209 29,473
Operating income (loss) 33 (307) (3,663)
Other income (loss) 7 14 (23)
Income (loss) before income taxes (benefit) and
equity in net income of subsidiaries and
other affiliates 40 (293) (3,686)
Income taxes (benefit) 90 (109) (1,326)
Equity in net income of subsidiaries
and other affiliates 1,504 2,769 301
Income (loss) before extraordinary loss and
cumulative effect of accounting changes 1,454 2,585 (2,059)
Extraordinary loss related to early extinguishment
of debt - (211) -
Cumulative effect of accounting changes - - (1,873)
Net income (loss) $ 1,454 $ 2,374 $ (3,932)
</TABLE>
|See accompanying notes to condensed financial information and notes to
Consolidated Financial Statements incorporated herein by reference.
<PAGE S-4>
SEARS, ROEBUCK AND CO.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
<S> <C> <C>
(millions) December 31
1994 1993
Assets
Current assets
Accounts and notes receivable $ 8,004 $ 8,534
Less allowance for uncollectible accounts 352 401
7,652 8,133
Cash and invested cash 463 265
Notes due from affiliates 300 148
Merchandise inventories 3,265 2,697
Deferred income taxes 830 1,112
Prepaid expenses and other assets 202 248
Total current assets 12,712 12,603
Investments in and advances to subsidiaries and other
affiliates (including goodwill of $211 and $215) 17,272 16,299
Property and equipment 6,133 5,719
Less accumulated depreciation 3,132 3,029
3,001 2,690
Deferred income taxes 750 661
Notes due from affiliates 220 215
Other assets 287 338
Total assets $ 34,242 $ 32,806
Liabilities
Current liabilities
Short-term borrowings
Notes due to Sears Roebuck Acceptance Corp. $ 6,843 $ 3,404
Notes due to Sears DC Corp. 1,553 2,194
Notes payable to banks - 10
Current maturities of long-term debt 776 1,455
9,172 7,063
Restructuring reserves 184 647
Accounts payable and other liabilities 4,253 4,435
Unearned revenues 728 661
Total current liabilities 14,337 12,806
Long-term debt (note 4) 6,016 5,267
Postretirement benefits 2,564 2,490
Other liabilities 524 579
Total liabilities 23,441 21,142
Commitments and contingent liabilities (notes 1 and 4)
Shareholders' equity (note 2)
Preferred shares ($1.00 par value) 1,561 1,561
Common shares ($.75 par value) 294 294
Capital in excess of par value 2,385 2,354
Retained income 8,918 8,163
Treasury stock (at cost) (1,690) (1,704)
Deferred ESOP expense (558) (614)
Unrealized net capital gains 32 1,674
Cumulative translation adjustments (141) (64)
Total shareholders' equity 10,801 11,664
Total liabilities and shareholders' equity $ 34,242 $ 32,806
</TABLE>
See accompanying notes to condensed financial information and notes to
Consolidated Financial Statements incorporated herein by reference.
<PAGE S-5>
SEARS, ROEBUCK AND CO.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S>
(millions) Year Ended December 31
<C> <C> <C>
1994 1993 1992
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,454 $ 2,374 $ (3,932)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation, amortization and other noncash items 456 465 430
Cumulative effect of accounting changes - - 2,209
Restructuring charges - - 2,725
Extraordinary loss related to early extinguishment of debt - 107 -
Provision for uncollectible accounts 245 265 365
Loss (gain) on sales of property and investments (17) (22) 35
Change in deferred taxes 194 344 (1,890)
Decrease (increase) in receivables (2,246) 51 (220)
Decrease (increase) in merchandise inventories (568) 440 375
Decrease in other operating assets 95 53 222
Decrease in other operating liabilities (528) (447) (30)
Net loss (income) of subsidiaries and other affiliates,
net of distributions (1,225) (1,424) 530
Net cash provided by (used in) operating activities (2,140) 2,206 819
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investments 1 13 19
Proceeds from sales of property and equipment 17 15 3
Purchases of property and equipment (764) (411) (480)
Decrease in notes receivable from affiliates 23 1,123 844
Net transfers from (to) subsidiaries and other affiliates 73 (399) (1,568)
Net cash provided by (used in) investing activities (650) 341 (1,182)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 1,495 595 1,493
Repayments of long-term debt (1,472) (1,116) (983)
Net change in short-term borrowings, primarily 90 days or less 3,549 (1,804) (1,648)
Repayments from ESOP 69 15 10
Mandatorily exchangeable preferred shares issued - - 1,205
Common shares issued for employee stock plans 45 193 81
Dividends paid to shareholders (698) (727) (779)
Net cash provided by (used in) financing activities 2,988 (2,844) (621)
Net increase (decrease) in cash and invested cash $ 198 $ (297) $ (984)
Cash and invested cash at beginning of year $ 265 $ 562 $ 1,546
Cash and invested cash at end of year $ 463 $ 265 $ 562
</TABLE>
See accompanying notes to condensed financial information and notes to
Consolidated Financial Statements incorporated herein by reference.
<PAGE S-6>
SEARS, ROEBUCK AND CO.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
(1) Basis of Presentation
The financial statements of the registrant
should be read in conjunction with the
Consolidated Financial Statements and notes
thereto included in the Sears, Roebuck and
Co. 1994 Annual Report to Shareholders.
The financial statements include only the
accounts of the registrant (a New York
corporation), which include the corporate
operations and certain merchandising and
credit businesses of Sears, Roebuck and Co.
Subsidiaries and other affiliates include
primarily the companies comprising the
Allstate Insurance Group, Homart
Development Co., and financing
subsidiaries. Dean Witter, Discover & Co.
and Coldwell Banker Residential Services
have been included in the results of
operations until their disposition. The
provision for income taxes and profit
sharing expense have been calculated on the
basis described in Notes 1 and 11 of the
Consolidated Financial Statements in the
Sears, Roebuck and Co. 1994 Annual Report
to Shareholders incorporated herein by
reference.
The registrant has established agreements
with certain financing subsidiaries which
ensure a minimum level of earnings at the
subsidiaries in excess of interest and
operating expenses.
Certain reclassifications have been made in
the 1993 and 1992 financial statements of
the registrant to conform to current
accounting classifications.
(2) Dividends to Shareholders
Certain indentures relating to the long-
term debt of Sears, Roebuck and Co., which
represent the most restrictive contractual
limitation on the payment of dividends,
provide that the Company cannot take
specified actions, including the
declaration of cash dividends, which would
cause its consolidated unencumbered assets,
as defined, to fall below 150% of its
consolidated liabilities, as defined. At
December 31, 1994, approximately $8.0
billion could be paid in dividends to
shareholders under the most restrictive
indentures.
(3) Dividends From Subsidiaries
Dividends paid to the registrant by
unconsolidated subsidiaries were $323
million and $1.07 billion and $445 million
for the years ended December 31, 1994, 1993
and 1992, respectively. Dividends paid to
the registrant by 50% or less owned persons
accounted for by the equity method were
immaterial. Unconsolidated subsidiaries
can transfer additional amounts to the
registrant in the form of loans or
advances.
<PAGE S-7>
SEARS, ROEBUCK AND CO.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
(4) Long-term debt is comprised of the following:
(millions) December 31
1994 1993
7% Notes, due 1994 $ - $ 350
12% Notes, due 1994 - 231
8.55% Notes, due 1996 200 200
9% Notes, due 1996 200 200
9-1/4% Notes, due 1997 300 300
8.45% Notes, due 1998 250 250
9-1/4% Notes, due 1998 500 500
8.2% Extendable Notes, due 1999 31 31
9-1/2% Notes, due 1999 200 200
6-1/4% Notes, due 2004 300 -
6% Debentures, $300 million face value,
due 2000 (effective rate 14.8%) 205 194
9.375% Debentures, due 2011 300 300
4.85% to 10.0% Medium-Term Notes, due
1994 to 2021 3,963 3,656
Due to financing subsidiary:
Zero Coupon Note, $500 million face value,
due 1998 (effective rate 13.39%) 302 266
Capitalized lease obligations and notes
payable 41 44
6,792 6,722
Less: Current maturities 776 1,455
Total long-term debt $ 6,016 $ 5,267
As of December 31, 1994, long-term debt maturities for the next
five years are as follows:
1995 $ 776
1996 905
1997 1,298
1998 1,491
1999 569
<PAGE S-8>
SEARS, ROEBUCK AND CO.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
As indicated in Note 12 of the
Consolidated Financial Statements of the
1994 Annual Report to Shareholders the
registrant has guaranteed all of the
borrowings and the related interest
payments of Sears Overseas Finance N.V.
(SOFNV), aggregating $336 million (face
value $500 million) at December 31, 1994.
Under the terms of an agreement dated as
of September 2, 1986, Sears, Roebuck and
Co. agreed to make all payments required
to be made by Sears Roebuck Acceptance
Corp. (SRAC) to SOFNV in accordance with
certain loan agreements between SRAC and
SOFNV. SRAC remains liable to SOFNV
pursuant to such loan agreements.
The registrant has issued a $450 million
demand note payable, due on or before
December 29, 1995, arising from a capital
contribution to Allstate Insurance
Company, which is reflected as a reduction
in Investments in and advances to
subsidiaries and other affiliates. See
note 3 of the Notes to Consolidated
Financial Statements beginning on page 32
of the 1994 Annual Report incorporated
herein by reference to Item 8 hereof.
(5) Supplemental Cash Flow Information
The following is a summary of the
significant noncash investing and
financing activities:
<TABLE>
<CAPTION>
<S>
(millions)
<C> <C> <C>
December 31
1994 1993 1992
Net decrease in notes due to affiliates
for transfers of retail customer
receivables to unconsolidated subsidiary $(762) $(449) $(516)
Transfer of net retail customer receivables
to/(from) unconsolidated subsidiary 1,720 (576) -
Assumption of debt by The Allstate Corporation
in connection with its initial capitalization - 1,800 -
Dividend to common shareholders through a
tax-free distribution of Dean Witter, Discover
& Co. common shares - 2,288 -
Dividend and return of capital received from
SRAC effected through a reduction in the
notes due to SRAC - 2,030 -
Dividend and return of capital received from
Sears DC Corp. (SDC) effected through a
reduction in the notes due to SDC - 487 -
</TABLE>
<PAGE S-9>
SEARS, ROEBUCK AND CO.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C><C>
Additions
(millions) Balance at Charged to Other Balance
Beginning Costs and Additions Deductions at End
Description of Period Expenses (Describe)(B) (Describe)(B) of Period
Year Ended December 31, 1994
Allowance for uncollectible accounts $ 771 $ 543 (A) $ 166 (C) $ 667 (G) $ 813
Allowance for reinsurance recoverable 110 26 - 10 (H) 126
Allowance for losses on mortgage loans
and real estate 102 66 - 61 (I) 107
Total $ 983 $ 635 $ 166 $ 738 $ 1,046
Year Ended December 31, 1993
Allowance for uncollectible accounts $ 609 $ 536 (A) $ 181 (D) $ 555 (G) $ 771
Allowance for reinsurance recoverable 122 9 - 21 (H) 110
Allowance for losses on mortgage loans
and real estate 154 86 1 (F) 139 (I) 102
Total $ 885 $ 631 $ 182 $ 715 $ 983
Year Ended December 31, 1992
Allowance for uncollectible accounts $ 491 $ 569 (A) $ 96 (E) $ 547 (G) $ 609
Allowance for reinsurance recoverable 101 37 - 16 (H) 122
Allowance for losses on mortgage loans
and real estate 46 157 - 49 (I) 154
Total $ 638 $ 763 $ 96 $ 612 $ 885
<FN>
(A)Excludes provision related to Sears Merchandise Group recourse liability for sold accounts of $155, $285 and $341 million
in 1994, 1993 and 1992, respectively.
(B)Excludes charge-offs and recoveries related to Sears Merchandise Group recourse liability for sold accounts.
(C)Includes: (F) Recoveries of Accounts Charged Off
Recoveries of Accounts Charged Off $ 108
Reclass from Recourse on Accounts Sold 58 (G) Uncollectible Accounts Charged Off
$ 166
(H) Write-offs, net of recoveries, of amounts determined
(D)Includes: to be uncollectible.
Recoveries of Accounts Charged Off $ 91
Reclass from Recourse on Accounts Sold 90 (I) Deductions in allowance for losses on mortgage loans
$ 181 represent amounts written off in connection with
foreclosure and the transfer to real estate.
(E)Includes:
Recoveries of Accounts Charged Off $ 75
Reclass from Recourse on Accounts Sold 21
$ 96
</TABLE>
<PAGE S-10>
SEARS, ROEBUCK AND CO.
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(millions)
Carrying Value
in the
Statement of
Fair Financial
Type of Investment Cost Value Position
Fixed income securities:
Available for sale
Bonds:
United States Government and government
agencies and authorities $ 1,095 $ 1,029 $ 1,029
States, municipalities and political
subdivisions 16,265 16,294 16,294
Foreign governments 415 384 384
Public utilities 665 633 633
Convertible bonds and bonds with
warrants attached 141 136 136
All other corporate bonds 6,030 5,799 5,799
Mortgage-backed securities 5,975 5,613 5,613
Redeemable preferred stocks 147 145 145
Total fixed income securities,
available for sale 30,733 30,033 30,033
Held to maturity
Bonds:
United States Government and government
agencies and authorities 1,062 1,004 1,062
Foreign governments 1 1 1
Public utilities 1,115 1,090 1,115
All other corporate bonds 5,223 5,174 5,223
Mortgage-backed securities 607 600 607
Total fixed income securities,
held to maturity 8,008 7,869 8,008
Equity securities:
Common stocks:
Public utilities 397 427 427
Industrial and miscellaneous 3,277 3,793 3,793
Banks, trusts and insurance companies 295 327 327
Nonredeemable preferred stocks 312 305 305
Total equity securities 4,281 4,852 4,852
Total fixed income and equity securities 43,022 $ 42,754 42,893
Mortgage loans 3,234 3,234
Real estate 815 815
Total investments $ 47,071 $ 46,942
</TABLE>
<PAGE S-11>
SEARS, ROEBUCK AND CO.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
<S>
(millions)
<C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31 Year Ended December 31
Reserves
for Claims, Premium Claims,
Deferred Claims Revenue Claims Other Premiums
Policy Expense and Net Expense Policy Operating Written
Acquisition and Policy Unearned Contract Investment and Policy Acquisition Costs and (Excluding
Segment Costs Benefits Premiums Charges Income Benefits Costs Expenses Life)
1994
Property-Liability
Insurance $ 549 $ 16,933 $ 5,863 $ 16,808 $ 1,573 $ 14,665 $ 2,854 $ 1,112 $ 17,009
Life Insurance 1,525 23,198 45 1,053 1,827 2,031 344 170 170
Other - - - - 1 - - 2 -
Total $ 2,074 $ 40,131 $ 5,908 $ 17,861 $ 3,401 $ 16,696 $ 3,198 $ 1,284 $ 17,179
1993
Property-Liability
Insurance $ 503 $ 15,683 $ 5,696 $ 16,323 $ 1,460 $ 12,922 $ 2,869 $ 1,016 $ 16,615
Life Insurance 1,008 21,753 33 1,079 1,858 2,103 410 168 147
Other - - - - 6 - - - -
Total $ 1,511 $ 37,436 $ 5,729 $ 17,402 $ 3,324 $ 15,025 $ 3,279 $ 1,184 $ 16,762
1992
Property-Liability
Insurance $ 498 $ 15,299 $ 5,451 $ 15,738 $ 1,468 $ 15,205 $ 2,809 $ 996 $ 16,011
Life Insurance 1,031 20,583 24 1,128 1,732 2,154 345 144 144
Total $ 1,529 $ 35,882 $ 5,475 $ 16,866 $ 3,200 $ 17,359 $ 3,154 $ 1,140 $ 16,155
</TABLE>
<PAGE S-12>
SEARS, ROEBUCK AND CO.
SCHEDULE IV - REINSURANCE
<TABLE>
<CAPTION>
<S>
(millions)
<C> <C> <C> <C> <C>
Percent of
Ceded to Assumed Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
Year Ended December 31, 1994
Life Insurance in Force $ 153,905 $ 11,649 $ 129 $ 142,385 0.1%
Premiums and Contract Charges:
Life Insurance $ 868 $ 34 $ - $ 834 -
Accident-Health Insurance 224 14 9 219 4.1%
Property-Liability Insurance 16,550 609 867 16,808 5.2%
Total Premiums and
Contract Charges $ 17,642 $ 657 $ 876 $ 17,861 4.9%
Year Ended December 31, 1993
Life Insurance in Force $ 138,422 $ 9,559 $ 124 $ 128,987 0.1%
Premiums and Contract Charges:
Life Insurance $ 903 $ 28 $ 1 $ 876 -
Accident-Health Insurance 217 19 5 203 2.6%
Property-Liability Insurance 15,922 430 831 16,323 5.1%
Total Premiums and
Contract Charges $ 17,042 $ 477 $ 837 $ 17,402 4.8%
Year Ended December 31, 1992
Life Insurance in Force $ 124,040 $ 8,028 $ 122 $ 116,134 0.1%
Premiums and Contract Charges:
Life Insurance $ 948 $ 20 $ 1 $ 929 0.1%
Accident-Health Insurance 208 18 9 199 4.7%
Property-Liability Insurance 15,383 480 835 15,738 5.3%
Total Premiums and
Contract Charges $ 16,539 $ 518 $ 845 $ 16,866 5.0%
</TABLE>
<PAGE S-13>
SEARS, ROEBUCK AND CO.
SCHEDULE VI - SUPPLEMENTAL INSURANCE INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
<TABLE>
<CAPTION>
<S>
(millions)
<C> <C> <C>
December 31
1994 1993 1992
Deferred policy acquisition costs $ 549 $ 503 $ 498
Reserves for unpaid claims and claims expense 16,933 15,683 15,299
Unearned premiums 5,863 5,696 5,451
Year Ended December 31
1994 1993 1992
Earned premiums $ 16,808 $ 16,323 $ 15,738
Net investment income 1,573 1,460 1,468
Claims and claims expense incurred
Current year 15,387 13,297 15,296
Prior year (722) (375) (91)
Amortization of deferred policy acquisition costs 1,866 1,829 1,772
Paid claims and claims expense 13,344 12,490 13,767
Premiums written 17,009 16,615 16,011
</TABLE>
<PAGE S-14>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Sears, Roebuck and Co.
We have audited the consolidated financial
statements of Sears, Roebuck and Co. as of
December 31, 1994 and 1993, and for each of
the three years in the period ended December 31,
1994, and have issued our report thereon
dated February 24, 1995, which report is
unqualified and includes an explanatory
paragraph as to the changes in the accounting
for certain investments in debt securities in
1993 and postretirement benefits in 1992; such
consolidated financial statements and report
are included in the 1994 Sears, Roebuck and
Co. Annual Report to Shareholders and are
incorporated herein by reference. Our audits
also included the financial statement
schedules of Sears, Roebuck and Co., listed in
the index at item 14(a)2. These financial
statement schedules are the responsibility of
the Company s management. Our responsibility
is to express an opinion based on our audits.
In our opinion, such financial statement
schedules, when considered in relation to the
basic consolidated financial statements taken
as a whole, present fairly in all material
respects the information set forth therein.
We have also previously audited, in accordance
with generally accepted auditing standards,
the Consolidated Statements of Financial
Position of Sears, Roebuck and Co. as of
December 31, 1985 through 1992, and the
related Consolidated Statements of Income and
Shareholders Equity for each of the seven
years in the period ended December 31, 1991
and the Consolidated Statement of Changes in
Financial Position for the year ended December 31,
1985 and the Consolidated Statements of
Cash Flows for each of the six years in the
period ended December 31, 1991 (none of which
are presented herein); and we expressed
unqualified opinions on those consolidated
financial statements. Effective January 1,
1986, the Company changed its accounting for
the cost of pension plans and effective
January 1, 1988 the Company changed its
accounting for income taxes.
Our audits were conducted for the purpose of
forming an opinion on the basic consolidated
financial statements taken as a whole. The
additional information set forth under
Operating results and Financial position
and on the lines captioned Book value per
common share (year end), Average common
shares outstanding (millions), Earnings
(loss) per common share and Cash dividends
per common share under Shareholders common
stock investment for each of the ten years in
the period ended December 31, 1994, appearing
under the caption Ten-Year Summary of
Consolidated Financial Data on pages 64 and
65 of the Sears, Roebuck and Co. 1994 Annual
Report to Shareholders is presented for the
purpose of additional analysis and is not a
required part of the basic consolidated
financial statements. This additional
information is the responsibility of the
Company's management. Such information has
been subjected to the auditing procedures
applied in our audits of the basic
consolidated financial statements and, in our
opinion, is fairly stated in all material
respects when considered in relation to the
basic consolidated financial statements taken
as a whole.
Deloitte & Touche LLP
Chicago, Illinois
February 24, 1995
<PAGE S-15>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference
in Registration Statement Nos. 2-64879,
2-80037, 33-18081, 33-23793, 33-29458, 33-
32008, 33-32568, 33-35021, 33-37427,
33-39724, 33-41485, 33-43459, 33-45479, 33-
49992 and 33-55825 of Sears, Roebuck and Co.,
Registration Statement Nos. 33-57205, 33-52836
and 33-51361 of Sears, Roebuck and Co. and The
Savings and Profit Sharing Fund of Sears
Employees, and Registration Statement No. 33-
44671 of Sears, Roebuck and Co. and Sears DC
Corp., of our reports dated February 24, 1995,
which report on the consolidated financial
statements is unqualified and includes an
explanatory paragraph as to the changes in
accounting for certain investments in debt
securities in 1993 and postretirement benefits
in 1992, appearing in, and incorporated by
reference, in the Annual Report on Form 10-K
of Sears, Roebuck and Co. for the year ended
December 31, 1994.
Deloitte & Touche LLP
Chicago, Illinois
March 22, 1995
Exhibit Index
*3.(i) Restated Certificate of Incorporation, as amended to
July 26, 1993.
*3.(ii) By-Laws as amended to February 7, 1995.
4.(i) Forms of restricted stock grants under Registrant's
1990 Employees Stock Plan. Incorporated by reference to Exhibit 4.(i)
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993.**
*4.(ii) Form of restricted stock grants under Registrant's
1994 Employees Stock Plan.
4.(iii) Registrant hereby agrees to furnish to the Commission,
upon request, with the instruments defining the rights of holders of
each issue of long-term debt of the Registrant and its consolidated
subsidiaries.
10.(i)(a) Separation Agreement (including Financial Separation
Agreement) between Registrant and Dean Witter, Discover & Co.
Incorporated by reference to Exhibit 10.3 to Registration Statement No.
33-56104.
10.(i)(b) Separation Agreement dated February 20, 1995 between
Registrant and The Allstate Corporation. Incorporated by reference to
Exhibit 10(a) to The Allstate Corporation's Current Report on Form 8-K
dated February 22, 1995.***
10.(i)(c) Marketing File Separation Agreement dated February 20,
1995 between Registrant and The Allstate Corporation. Incorporated by
reference to Exhibit 10(b) to The Allstate Corporation's Current Report
on Form 8-K dated February 22, 1995.***
10.(i)(d) Research Services Agreement dated February 20, 1995
between Registrant and The Allstate Corporation. Incorporated by
reference to Exhibit 10(c) to The Allstate Corporation's Current Report
on Form 8-K dated February 22, 1995.***
10.(i)(e) Tax Sharing Agreement dated May 14, 1993 between
Registrant and its subsidiaries. Incorporated by reference to Exhibit
10.6 to Amendment No. 3 to The Allstate Corporation's Registration
Statement No. 33-59676.
10.(i)(f) Supplemental Tax Sharing Agreement dated January 27,
1995 between Registrant and The Allstate Corporation. Incorporated by
reference to Exhibit 10(d) to The Allstate Corporation's Current Report
on Form 8-K dated February 22, 1995.***
10.(i)(g) Human Resources Allocation Agreement dated May 27,
1993, among Registrant, The Allstate Corporation and Allstate Insurance
Company. Incorporated by reference to Exhibit 10.14 to The Allstate
Corporation's Registration Statement No. 33-59676.
10.(i)(h) Supplemental Human Resources Allocation Agreement
dated January 27, 1995 between Registrant and The Allstate Corporation.
Incorporated by reference to Exhibit 10(e) to The Allstate Corporation's
Current Report on Form 8-K dated February 22, 1995.***
10.(i)(i) Profit Sharing and Employee Stock Ownership Plan
Allocation Agreement dated January 27, 1995 between Registrant and The
Allstate Corporation. Incorporated by reference to Exhibit 10(f) to The
Allstate Corporation's Current Report on Form 8-K dated February 22,
1995.***
10.(iii)(1) Registrant's 1979 Incentive Compensation Plan.
Incorporated by reference to Exhibit 10.(iii)(1) to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1985.** ****
10.(iii)(2) Registrant's 1978 Employes Stock Plan, as amended.
Incorporated by reference to Exhibit 10.(iii)(2) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1989.** ****
10.(iii)(3) Registrant's Deferred Compensation Plan for Directors,
as amended February 8, 1994. Incorporated by reference to Exhibit
10.(iii)(3) to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993.** ****
10.(iii)(4) Registrant's Annual Incentive Compensation Plan,
amended as of March 9, 1994. Incorporated by reference to Appendix B to
the Registrant's Proxy Statement dated March 23, 1994.** ****
10.(iii)(5) Registrant's Long-Term Incentive Compensation Plan,
amended as of March 9, 1994. Incorporated by reference to Appendix C to
the Registrant's Proxy Statement dated March 23, 1994.** ****
10.(iii)(6) Registrant's 1982 Employees Stock Plan. Incorporated
by reference to Exhibit 4(a)(1) to Registration Statement No. 2-80037 of
the Registrant.****
10.(iii)(7) Description of Registrant's Supplemental Life
Insurance Plan, amended as of December 31, 1986. Incorporated by
reference to the second and third full paragraphs on page 10 of the
Registrant's Proxy Statement dated March 26, 1987.** ****
10.(iii)(8) Registrant's Non-Employee Directors' Retirement Plan,
as amended and restated to October 7, 1992. Incorporated by reference
to Exhibit 10.(b) to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1992.** ****
10.(iii)(9) Description of Registrant's Non-Employee Director Life
Insurance Plan. Incorporated by reference to the eighth paragraph on
page 4 of the Registrant's Proxy Statement dated March 26, 1986.** ****
10.(iii)(10) Registrant's Supplemental Retirement Income Plan, as
amended and restated on November 9, 1994. Incorporated by reference to
Exhibit 10(e) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended October 1, 1994.** ****
10.(iii)(11) Registrant's 1986 Employees Stock Plan, amended as of
May 12,
1994. Incorporated by reference to Exhibit 10.19 to The Allstate
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.*** ****
10.(iii)(12) Registrant's Transferred Executives Pension
Supplement. Incorporated by reference to Exhibit 10.(iii)(13) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988.** ****
10.(iii)(13) Registrant's Supplemental Long-Term Disability Plan.
Incorporated by reference to Exhibit 10.(iii)(17) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1987.** ****
*10.(iii)(14) Registrant's Deferred Compensation Plan, amended to
December 1, 1994.****
10.(iii)(15) Registrant's Management Supplemental Deferred Profit
Sharing Plan. Incorporated by reference to Exhibit 10(b) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended October
1, 1994.** ****
10.(iii)(16) Registrant's Stock Plan for Non-Employee Directors.
Incorporated by reference to Appendix F of the Registrant's Proxy
Statement dated March 25, 1988.** ****
10.(iii)(17) Registrant's 1990 Employees Stock Plan, amended as of
May 12, 1994. Incorporated by reference to Exhibit 10.20 to The
Allstate Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.*** ****
10.(iii)(18) Amendment to the Registrant's Stock Plan for Non-
Employee Directors, adopted on August 14, 1991. Incorporated by
reference to Exhibit 10.(a) to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1991.** ****
10.(iii)(19) Registrant's 1994 Employees Stock Plan. Incorporated
by reference to Appendix A to the Registrant's Proxy Statement dated
March 23,
1994.** ****
10.(iii)(20) Employment Agreement between Registrant and Arthur C.
Martinez dated August 10, 1992. Incorporated by reference to Exhibit
10.(a) to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1992.** ****
10.(iii)(21) The Allstate Corporation Annual Executive Incentive
Compensation Plan. Incorporated by reference to Appendix A to The
Allstate Corporation's Proxy Statement dated March 31, 1994.*** ****
10.(iii)(22) The Allstate Corporation Long-Term Executive Incentive
Compensation Plan. Incorporated by reference to Appendix B to The
Allstate Corporation's Proxy Statement dated March 31, 1994.*** ****
10.(iii)(23) Allstate Insurance Company Supplemental Retirement
Income Plan. Incorporated by reference to Exhibit 10.8 to The Allstate
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.*** ****
10.(iii)(24) The Allstate Corporation Equity Incentive Compensation
Plan. Incorporated by reference to Appendix C to The Allstate
Corporation's Proxy Statement dated March 31, 1994.*** ****
10.(iii)(25) The Allstate Corporation Stock Plan for Non-Employee
Directors. Incorporated by reference to Exhibit 10.12 to The Allstate
Corporation's Registration Statement No. 33-59676.****
10.(iii)(26) The Allstate Corporation Deferred Compensation Plan
for Directors. Incorporated by reference to Exhibit 10.10 to The
Allstate Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993.*** ****
10.(iii)(27) The Allstate Corporation Non-Employee Directors
Retirement Plan. Incorporated by reference to Exhibit 10.11 to The
Allstate Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993.*** ****
10.(iii)(28) The Allstate Corporation Deferred Compensation Plan.
Incorporated by reference to Exhibit 10.14(a) to The Allstate
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.*** ****
10.(iii)(29) Retirement agreement dated August 9, 1994, between
Wayne E. Hedien, former chairman and chief executive officer of The
Allstate Corporation, and The Allstate Corporation. Incorporated by
reference to Exhibit 10.22 to The Allstate Corporation's Annual Report
on Form 10-K for the year ended December 31, 1994.*** ****
10.(iii)(30) Letter dated May 12, 1994, relating to alteration of
pension calculation for an executive officer of the Registrant.
Incorporated by reference to Exhibit 10(d) of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended April 2, 1994.** ****
10.(iii)(31) Description of retention policy that provides varying
levels of severance benefits for Executive Officers of the Company
following the Allstate spin-off. Incorporated by reference to the
material under "The Distribution Proposal - Agreements with Executive
Officers" on page 18 of the Registrant's Proxy Statement dated February
21, 1995 relating to a Special Meeting of Shareholders to be held on
March 31, 1995.** ****
*11. Computation of Earnings per Share.
*12.(a) Computation of ratio of income to fixed charges for
Registrant and consolidated subsidiaries.
*12.(b) Computation of ratio of income to combined fixed
charges and preferred share dividends for Registrant and consolidated
subsidiaries.
*13.(ii) Portions of Registrant's 1994 Annual Report
incorporated by reference into Part I or Part II of Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.
*21. Subsidiaries of the Registrant.
*23. Consent of Deloitte & Touche.
*27. Financial Data Schedules.
28. Information from reports furnished to state insurance
regulatory authorities (Schedule P of the Annual Statements, including
information formerly included in Schedule O). Incorporated by reference
to Exhibit 28 to The Allstate Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993.***
99.(a) The Allstate Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994. Incorporated by
reference.***
99.(b) The Allstate Corporation's 1994 Annual Report to
Stockholders. Incorporated by reference to Exhibit 13 to The Allstate
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.***
* Filed herewith
** SEC File No. 1-416
*** SEC File No. 1-11840
**** A management contract or compensatory plan or arrangement required
to be filed as an exhibit to this report pursuant to Item 14(c) of
Form 10-K.
Exhibit 3(i)
Restated Certificate of Incorporation
of
Sears, Roebuck and Co., as amended to
July 26, 1993
1. NAME
The name of the Corporation is Sears, Roebuck and Co.
2. PURPOSES
The purposes of the Corporation are:
2.1 To manufacture, buy, sell, import, export, distribute and deal in
goods, wares, merchandise and related services of every kind, and any and all
materials or articles for, or used or useful in connection with all or any of
the objects aforesaid.
2.2 To engage in any activity which may promote the interests of
the Corporation, or enhance the value of its property, to the fullest
extent permitted by law.
3. SHARES
3.1 Authorized Shares. The total number of shares which the
Corporation may issue is 1,050,000,000, of which 1,000,000,000 shall be common
shares of a par value of $0.75 each and 50,000,000 shall be
preferred shares of a par value of $1.00 each.
3.2 Preferred Shares. The preferred shares may be issued from
time to time in series. The board of directors is authorized to
establish and designate series and to fix the number of shares and the
relative rights, preferences and limitations as between series, subject to such
limitations as may be prescribed by law. In particular, the
board of directors may establish, designate and fix the following with
respect to each series of preferred shares: establish and specify a
designation of such series; fix the dividend rights of holders of shares of each
such series; fix the terms on which shares of each such series
may be redeemed if the shares of such series are to be redeemable; fix
the rights of the holders of shares of each such series upon dissolution or any
distribution of assets; fix the terms or amount of the sinking
fund, if any, to be provided for the purchase or redemption of shares of each
such series; fix the terms upon which the shares of each such
series may be converted into or exchanged for shares of any other class or
classes or of any one or more series of preferred shares if the
shares of such series are to be convertible or exchangeable; fix the
voting rights, if any, of the shares of each such series; and any other relative
rights, preferences, or limitations of shares of the series
consistent herewith and applicable law.
3.2.1 8.88% Preferred Shares, First Series.
(1) Designation. An aggregate of 3,250,000 preferred shares,
par value $1.00 per share, of the Company are hereby constituted as a
series of preferred shares designated as "8.88% Preferred Shares, First Series"
(hereinafter called "First Series Preferred Shares").
(2) Dividends. (a) The holders of First Series Preferred Shares shall
be entitled to receive a cash dividend per share (payable as set
forth below), out of funds legally available for the purpose, computed
as follows (rounded to the nearest cent):
(i) for the Initial Dividend Period (as hereinafter defined),
the product of (A) 8.88% times (B) a fraction the numerator of which is the
number of days from (and including) the date of the original issue
of the First Series Preferred Shares to (but not including) December 31, 1991,
on the basis of 30-day months, and the denominator of which is 360 times (C)
$100; and
(ii) for each Quarterly Dividend Period thereafter, the product
of (A) 8.88% times (B) .25 times (C) $100.
Such dividends shall be cumulative from the date of original issue of
such shares and shall be payable in arrears, when and as declared by the Board
of Directors, on February 1, May 1, August 1 and November 1 of
each year, commencing on February 1, 1992. Each such dividend shall be paid to
the holders of record of the First Series Preferred Shares as
their names shall appear on the share register of the Company on such
record date, not exceeding 50 days preceding the payment date thereof,
as shall be fixed by the Board of Directors of the Company. Dividends
on account of arrears for any past Dividend Periods (as hereinafter
defined) may be declared and paid at any time, without reference to any regular
dividend payment date, to holders of record on such date, not
exceeding 50 days preceding the payment date thereof, as may be fixed by the
Board of Directors of the Company.
(b) The term:
(i) "Dividend Period" shall mean the Initial Dividend
Period or any Quarterly Dividend Period (collectively referred to as
"Dividend Periods");
(ii) "Initial Dividend Period" shall mean the period from
the date of the original issue of the First Series Preferred Shares
through December 31, 1991; and
(iii) "Quarterly Dividend Period" shall mean each of the
periods commencing on January 1, April 1, July 1 and October 1 in each
year and ending on (and including) the day next preceding the first day of the
next Quarterly Dividend Period, beginning on January 1, 1992.
(c) So long as any of the First Series Preferred Shares are
outstanding, no dividend (other than dividends or distributions paid in common
shares, or in options, warrants or rights to subscribe for or
purchase common shares or another stock ranking junior to the First
Series Preferred Shares as to dividends and other than as provided in
paragraph (d) of this Section (2)) shall be declared or paid or set
aside for payment or other distribution declared or made upon the common shares
or upon any other stock ranking junior to or on a parity with the First Series
Preferred Shares as to dividends, nor shall any common
shares or any other stock of the Company ranking junior to or on a
parity with the First Series Preferred Shares as to dividends be
redeemed, purchased or otherwise acquired for any consideration (or any monies
be paid to or made available for a sinking fund for the
redemption of any shares of any such stock) by the Company (except by
conversion into or exchange for stock of the Company ranking junior to
the First Series Preferred Shares as to dividends) unless, in each case, the
full cumulative dividends on the outstanding First Series Preferred Shares
shall have been paid or set apart for payment for all Dividend
Periods terminating on or prior to the date of such payment or action,
as the case may be.
(d) When dividends are not paid in full, as aforesaid, on the
First Series Preferred Shares and on any other preferred shares ranking on a
parity as to dividends with the First Series Preferred Shares, all dividends
declared on the First Series Preferred Shares and any other
preferred shares ranking on a parity as to dividends with the First
Series Preferred Shares shall be declared ratably in accordance with the
respective dividends which would be payable on the First Series
Preferred Shares and such other preferred shares if all accrued and
unpaid dividends thereon were paid in full. Holders of First Series
Preferred Shares shall not be entitled to any dividends, whether payable in
cash, property or stock, in excess of full cumulative dividends, as
herein provided, on the First Series Preferred Shares. No interest, or sum of
money in lieu of interest, shall be payable in respect of any
dividend payment or payments on the First Series Preferred Shares which may be
in arrears.
(3) Dissolution Preference. (a) In the event of any
liquidation, dissolution, or winding up (hereinafter "Dissolution") of
the Corporation, whether voluntary or involuntary, before any payment or
distribution of the assets of the Corporation (whether capital or
surplus) shall be made to or set apart for the holders of any series or class or
classes of stock of the Company ranking junior to the First
Series Preferred Shares upon Dissolution, the holders of the First
Series Preferred Shares shall be entitled to receive for each share $100 plus an
amount equal to all dividends (whether or not earned or
declared) accrued and unpaid thereon to the date of final distribution
to such holders (subject to the right of the holders of record of any
First Series Preferred Shares on a record date for payment of dividends thereon
to receive a dividend payable on the date of final
distribution), determined by adding (i) dividends accrued and unpaid for any
Dividend Period preceding the Dividend Period in which the date of
final distribution falls plus (ii) the product of (A) 8.88% times (B) a
fraction, the numerator of which is the number of days elapsed from (and
including) the first day of the Dividend Period in which the date of
final distribution falls, to (but not including) the date of final
distribution, on the basis of 30-day months, and the denominator of
which is 360 times (C) $100; but such holders shall not be entitled to
any further payment. If, upon any Dissolution of the Company, the
assets of the Company, or proceeds thereof, distributable among the
holders of the First Series Preferred Shares and any other preferred
shares ranking as to Dissolution on a parity with the First Series
Preferred Shares shall be insufficient to pay in full the preferential
amount aforesaid and Dissolution payments on any other such other
preferred shares, then such assets, or the proceeds thereof, shall be
distributed among the holders of First Series Preferred Shares and any
such other preferred shares ratably in accordance with the respective
amounts which would be payable on such First Series Preferred Shares and any
such other preferred shares if all amounts payable thereon were paid in full.
For the purposes of this Section (3), a sale, lease, exchange or other
disposition of all or substantially all of the property and
assets of the Company, or a consolidation or merger of the Company with one or
more corporations shall not be deemed to be a Dissolution,
voluntary or involuntary.
(b) Subject to the rights of the holders of shares of any series or
class or classes of stock ranking on a parity with or prior to the
First Series Preferred Shares upon Dissolution, upon any Dissolution of the
Company, after payment shall have been made in full to the First
Series Preferred Shares as provided in this Section (3), but not prior
thereto, any other series or class or classes of stock ranking junior to the
First Series Preferred Shares upon Dissolution shall, subject to the respective
terms and provisions (if any) applying thereto, be entitled
to receive any and all assets remaining to be paid or distributed, and
the First Series Preferred Shares shall not be entitled to share
therein.
(4) Redemption. (a) Except as provided in paragraph (b) of
this Section 4, the First Series Preferred Shares may not be redeemed
prior to November 9, 1996. Thereafter, the Company, at its option, may redeem
the First Series Preferred Shares, as a whole or in part, at any time or from
time to time at redemption prices which shall be $100 per
share, plus accrued and unpaid dividends thereon to the date fixed for
redemption (subject to the right of the holders of record of any First
Series Preferred Shares on a record date for payment of dividends
thereon to receive a dividend payable on the date of redemption),
determined by adding (i) dividends accrued and unpaid for any Dividend
Period preceding the Dividend Period in which the date of redemption
falls, plus (ii) the product of (A) 8.88% times (B) a fraction, the
numerator of which is the number of days elapsed from (and including)
the first day of the Dividend Period in which the date of redemption
falls to (but not including) the date of redemption, on the basis of 30-day
months, and the denominator of which is 360 times (C) $100.
(b) Prior to November 9, 1996, the Company at its option may
redeem all, but not less than all, of the outstanding First Series
Preferred Shares if the holders of the First Series Preferred Shares
shall be entitled to vote upon or consent to a merger or consolidation
of the Company as provided in Section (7) and all of the following
conditions have been satisfied: (i) the Company shall have requested
the vote or consent of the holders of the First Series Preferred Shares to the
consummation of such merger or consolidation, stating in such
request that failing the requisite favorable vote or consent the Company will
have the option to redeem the First Series Preferred Shares, (ii)
the Company shall not have received the favorable vote or consent
requisite to the consummation of the transaction within 60 days after
making such written request (which shall be deemed to have been made
upon the mailing of the notice of any meeting of holders of the First
Series Preferred Shares to vote upon granting such consent), and (iii)
such transaction shall be consummated on the date fixed for such
redemption, which date shall be no more than one year after such request is
made. Any such redemption shall be on notice as aforesaid (and on an additional
notice in accordance with paragraph (c) of this Section (4), which may be
contemporaneous with, or included in, the notice provided
for by this paragraph (b)) at the redemption price of (i) $100 per
share, plus (ii) accrued and unpaid dividends thereon to the date fixed for
redemption (subject to the right of the holders of record of any
First Series Preferred Shares on a record date for payment of dividends thereon
to receive a dividend payable on the date of redemption),
determined by adding (i) dividends accrued and unpaid for any Dividend
Period preceding the Dividend Period in which the date of redemption
falls, plus (ii) the product of (A) 8.88% times (B) a fraction, the
numerator of which is the number of days elapsed from (and including)
the first day of the Dividend Period in which the date of redemption
falls, to (but not including) the date of redemption, on the basis of
30-day months, and the denominator of which is 360 times (C) $100.
(c) In the event the Company shall redeem any First Series
Preferred Shares, notice of such redemption shall be given by first
class mail, postage prepaid, mailed not less than 30 nor more than 60
days prior to the redemption date, to each holder of record of the
shares to be redeemed, at such holder's address as the same appears on
the share register of the Company. Each such notice shall state: (1)
the redemption date; (2) the number of shares to be redeemed and, if
less than all the shares held by such holder are to be redeemed, the
number of such shares to be redeemed from such holder; (3) the
redemption price; (4) the place or places where certificates for such
shares are to be surrendered for payment of the redemption price; and
(5) that dividends on the shares to be redeemed will cease to accrue on such
redemption date. Notice having been mailed as aforesaid, from and after the
redemption date (unless default shall be made by the Company
in providing money for the payment of the redemption price) dividends on the
First Series Preferred Shares so called for redemption shall cease
to accrue, and said shares shall no longer be deemed to be outstanding, and all
rights of the holders thereof as shareholders of the Company
(except the right to receive from the Company the redemption price)
shall cease. The Company's obligation to provide monies in accordance
with the preceding sentence shall be deemed fulfilled if, on or before
the redemption date, the Company shall deposit with a bank or trust
company (which may be an affiliate of the Company) having an office in
the Borough of Manhattan, The City of New York, and having a capital and surplus
of at least $50,000,000, funds necessary for such redemption, in trust, with
irrevocable instructions that such funds be applied to the
redemption of the First Series Preferred Shares so called for
redemption. Any interest accrued on such funds shall be paid to the
Company from time to time.
(d) Upon surrender in accordance with said notice of the
certificates for any shares so redeemed (properly endorsed or assigned
for transfer, if the Board of Directors of the Company shall so require and the
notice shall so state), such shares shall be redeemed by the
Company at the redemption price aforesaid. If less than all the
outstanding First Series Preferred Shares are to be redeemed, shares to be
redeemed shall be selected by the Company from outstanding shares not previously
called for redemption by lot or pro rata (as nearly as may be possible) or by
any other method determined by the Company in its sole
discretion to be equitable, except that in any redemption of fewer than all the
outstanding First Series Preferred Shares the Company may redeem all First
Series Preferred Shares held by all holders of a number of
shares not to exceed 100 as may be specified by the Company.
(e) In no event shall the Company redeem less than all the
outstanding First Series Preferred Shares unless full cumulative
dividends shall have been paid or declared and set apart for payment
upon all outstanding First Series Preferred Shares for all Dividend
Periods terminating on or prior to the date fixed for redemption.
(5) Shares to be Retired. All First Series Preferred Shares
redeemed or purchased by the Company shall be retired and cancelled and shall be
restored to the status of authorized but unissued preferred
shares, without designation as to series, and may thereafter be issued, but not
as First Series Preferred Shares.
(6) Conversion or Exchange. The holders of First Series
Preferred Shares shall not have any rights herein to convert such shares into or
exchange such shares for shares of any other class or classes or of any other
series of any class or classes of capital stock (or any
other security) of the Company.
(7) Voting. (a) Except as hereinafter in this Section (7)
expressly provided or as otherwise from time to time required by law,
the First Series Preferred Shares shall have no voting rights.
Whenever, at any time or times, dividends payable on the First Series
Preferred Shares shall be in arrears in an amount equal to at least the
dividends payable for six Quarterly Dividend Periods on the First Series
Preferred Shares at the time outstanding, the holders of the outstanding First
Series Preferred Shares shall have the exclusive right, voting
separately as a class with holders of any one or more other series of
preferred shares ranking on a parity with the First Series Preferred
Shares either as to dividends or the distribution of assets upon
Dissolution and upon which like voting rights have been conferred and
are exercisable, to elect two directors of the Company at the Company's next
annual meeting of shareholders and at each subsequent annual
meeting of shareholders. Such directors shall be elected for terms
expiring at the next succeeding annual meeting of shareholders or until their
respective successors are elected and qualified, unless such terms are sooner
terminated as provided in this paragraph (a) of this Section (7). At elections
for such directors, each holder of First Series
Preferred Shares shall be entitled to vote cumulatively in accordance
with Article 3.5 of the Restated Certificate of Incorporation of the
Company as to the directors to be elected by such holders voting as a
class (the holders of any other series of preferred shares ranking on a parity
being entitled to such number of votes, if any, for each share
held as may be granted to them). The right of the holders of the First Series
Preferred Shares, voting separately as a class, to elect (either alone or
together with the holders of any one or more other series of
preferred shares ranking on a parity) members of the Board of Directors of the
Company as aforesaid shall continue until such time as all
dividends accumulated on the First Series Preferred Shares shall have
been paid in full or set aside for payment by the Company, at which time such
right shall terminate, except as herein or by law expressly
provided, subject to revesting in the event of each and every subsequent failure
to pay dividends in the aggregate amount specified above. Any
such director may be removed from office, with or without cause, only by vote of
holders of the First Series Preferred Shares voting as a class
with holders of any one or more other series of preferred shares ranking on a
parity with the First Series Preferred Shares either as to
dividends or the distribution of assets upon Dissolution and upon which like
voting rights have been conferred and are exercisable, and by such vote as may
be required by law.
(b) Upon any termination of the right of the holders of the
First Series Preferred Shares as a class to vote for directors as herein
provided, the term of office of all directors then in office elected by the
First Series Preferred Shares voting as a class shall terminate
immediately. If the office of any director elected by the holders of the First
Series Preferred Shares voting as a class as herein provided
becomes vacant by reason of death, resignation, retirement,
disqualification, removal from office, or otherwise, the remaining
director elected by the holders of the First Series Preferred Shares
voting as a class as herein provided may choose a successor who shall
hold office for the unexpired term in respect of which such vacancy
occurred.
(c) So long as any First Series Preferred Shares remain
outstanding, the consent of the holders of at least two-thirds of the
First Series Preferred Shares outstanding at the time (voting separately as a
class together with all other series of preferred shares ranking on a parity
with First Series Preferred Shares either as to dividends or
the distribution of assets upon Dissolution and upon which like voting
rights have been conferred and are exercisable) given in person or by
proxy, either in writing or at any special or annual meeting called for the
purpose, shall be necessary to permit, effect or validate any one or more of the
following:
(i) the authorization, creation or issuance, or any increase in the
authorized or issued amount, of any class or series of shares
(including any class or series of preferred shares) ranking prior (as
that term is defined in paragraph (e) of this Section (7)) to the First Series
Preferred Shares; or
(ii) the amendment, alteration or repeal of any of the provisions of the
Restated Certificate of Incorporation in any manner which would
materially and adversely affect any right, preference, privilege or
voting power of the First Series Preferred Shares or of the holders
thereof; provided, however, that any increase in the amount of
authorized preferred shares or the creation and issuance of other series of
preferred shares, in each case ranking on a parity with or junior to the First
Series Preferred Shares with respect to the payment of
dividends and the distribution of assets upon Dissolution shall not be
deemed to materially and adversely affect such rights, preferences,
privileges or voting powers; provided, further, that the creation of a
class or series of shares entitled to vote as a class together with the First
Series Preferred Shares on the matters stated herein and having a voting power
greater than one vote for each $100 of liquidation
preference (exclusive of accrued and unpaid dividends), shall be deemed to
materially and adversely affect the voting power of the Preferred
Shares.
(d) So long as any First Series Preferred Shares remain
outstanding, the consent of the holders of at least a majority of the
First Series Preferred Shares outstanding at the time (voting separately as a
class together with all other series of preferred shares ranking on a parity
with First Series Preferred Shares either as to dividends or
the distribution of assets upon Dissolution and upon which like voting
rights have been conferred and are exercisable) given in person or by
proxy, either in writing or at any special or annual meeting called for the
purpose, shall be necessary to effect the merger or consolidation of the Company
with or into any other corporation, if and only if the plan of merger or
consolidation contains any provision which, if contained in an amendment to the
Company's Restated Certificate of Incorporation,
would entitle the holders of shares of such class or series to vote as a class
thereon.
(e) The foregoing voting provisions shall not apply if, at or
prior to the time when the act with respect to which such vote would
otherwise be required shall be effected, all outstanding shares of the
First Series Preferred Shares shall have been redeemed or sufficient
funds shall have been deposited in trust to effect such redemption.
(f) Any class or classes of shares of the Company shall be
deemed to rank:
(i) prior to the First Series Preferred Shares as to dividends
or as to distribution of assets upon Dissolution if the holders of such class
shall be entitled to the receipt of dividends or of amounts
distributable upon Dissolution in preference or priority to the holders of the
First Series Preferred Shares; and
(ii) on a parity with the First Series Preferred Shares as to
dividends or as to distribution of assets upon Dissolution whether or
not the dividend rates, dividend payment dates, or redemption or
Dissolution prices per share thereof be different from those of the
First Series Preferred Shares, if the holders of such class of shares
and the First Series Preferred Shares shall be entitled to the receipt
of dividends or of amounts distributable upon Dissolution in proportion to their
respective dividend rates or Dissolution prices, without
preference or priority one over the other.
3.2.2.Series A Mandatorily Exchangeable Preferred Shares
(1) Designation. An aggregate of 7,187,500 preferred shares,
par value $1.00 per share, of the Company are hereby constituted as a
series of preferred shares designated as "Series A Mandatorily
Exchangeable Preferred Shares" (hereinafter called "Series A Preferred
Shares").
(2) Dividends. (a) The holders of Series A Preferred Shares
shall be entitled to receive a cash dividend per share (payable as set
forth below), out of funds legally available for the purpose, computed
as follows (rounded to the nearest cent):
(i) for the Initial Dividend Period (as hereinafter defined),
the product of (A) 8.721% times (B) a fraction the numerator of which is the
number of days from (and including) the date of the original
issuance of the Series A Preferred Shares to (but not including) April
1, 1992, on the basis of 30-day months, and the denominator of which is 360
times (C) $172.00; and
(ii) for each Quarterly Dividend Period thereafter, the product
of (A) 8.721% times (B) .25 times (C) $172.00.
Such dividends shall be cumulative from the date of original issuance of such
shares and shall be payable in arrears, when, as and if declared by the Board of
Directors, on each Dividend Payment Date (as hereinafter
defined) commencing on April 1, 1992. Each such dividend shall be paid to the
holders of record of the Series A Preferred Shares as their names shall appear
on the share register of the Company on such record date,
not exceeding 50 days preceding the payment date thereof, as shall be
fixed by the Board of Directors of the Company. Dividends on account of arrears
for any past Dividend Periods (as hereinafter defined) may be
declared and paid at any time, without reference to any regular dividend payment
date, to holders of record on such date, not exceeding 50 days
preceding the payment date thereof, as may be fixed by the Board of
Directors of the Company. Dividends on the Series A Preferred Shares
shall accrue (whether or not declared) on a daily basis from the
previous Dividend Payment Date, except that with respect to the first
dividend, such dividend shall accrue from the date of original issuance of the
Series A Preferred Shares. Dividends will cease to accrue on the Series A
Preferred Shares on the Exchange Date (as defined in paragraph (4)(h)(iii)),
with respect to the Series A Preferred Shares subject to
such exchange on such Exchange Date. Dividends (or cash amounts equal
to accrued and unpaid dividends) payable on the Series A Preferred
Shares for any period shorter than a Quarterly Dividend Period shall be computed
on the basis of a 360-day year of twelve 30-day months. All
dividends paid with respect to Series A Preferred Shares pursuant to
this paragraph (2) shall be paid pro rata to the holders entitled
thereto.
(b) The term:
(i) "Dividend Period" shall mean the Initial Dividend
Period or any Quarterly Dividend Period (collectively referred to as
"Dividend Periods");
(ii) "Dividend Payment Date" shall mean January 1, April 1, July 1
and October 1 of each year, unless any such date shall be or be
declared a national or New York state holiday or banking institutions in New
York shall be closed because of a banking moratorium or otherwise on such
date, in which case the Dividend Payment Date shall be the next
succeeding day on which such banks shall be open;
(iv) "Initial Dividend Period" shall mean the period from
the date of the original issuance of the Series A Preferred Shares
through (but not including) April 1, 1992; and
(v) "Quarterly Dividend Period" shall mean each of the
periods commencing on January 1, April 1, July 1 and October 1 in each
year and ending on (and including) the day next preceding the first day of the
next following Quarterly Dividend Period, beginning on April 1,
1992.
(3) Rank. (a) The Series A Preferred Shares, with respect to
dividend rights and rights upon liquidation, dissolution and winding up, shall
rank prior to the common shares, par value $.75 per share (the
"common shares") of the Company and on a parity with the First Series
Preferred Shares of the Company. All equity securities of the Company
to which the Series A Preferred Shares rank prior with respect to
dividends or upon liquidation, dissolution or winding-up, as the case
may be, including the common shares, are collectively referred to herein as
"Junior Securities"; all equity securities of the Company with which the Series
A Preferred Shares rank on a parity with respect to dividends or upon
liquidation, dissolution or winding-up, as the case may be
(whether or not the dividend rates, dividend payment dates or amounts to be
received upon dissolution, liquidation or winding up are different
therefrom), including the First Series Preferred Shares, are
collectively referred to herein as "Parity Securities"; and all equity
securities of the Company to which the Series A Preferred Shares rank
junior with respect to dividends or upon liquidation, dissolution or
winding-up, as the case may be, are collectively referred to herein as
"Senior Securities." The Series A Preferred Shares shall be subject to the
creation of Junior Securities, Parity Securities and Senior
Securities. The term "equity securities" excludes convertible debt
securities or debt securities redeemable or exchangeable for equity
securities.
(b) So long as any of the Series A Preferred Shares are
outstanding, no dividend (other than dividends or distributions paid in Junior
Securities which rank junior as to dividends, or in options,
warrants or rights to subscribe for or purchase such Junior Securities
and other than as provided in paragraph (3)(c)) shall be declared or
paid or set aside for payment or other distribution declared or made
upon any Junior Securities which rank junior as to dividends or Parity
Securities which rank on a parity as to dividends, nor shall any such
Junior Securities or such Parity Securities be redeemed, purchased or
otherwise acquired for any consideration (or any monies be paid to or
made available for a sinking fund for the redemption of any such
securities) by the Company (except by conversion into or exchange for
Junior Securities which rank junior as to dividends) unless, in each
case, the full cumulative dividends on the Series A Preferred Shares
shall have been declared and paid or set apart for payment for all
Quarterly Dividend Periods terminating on or prior to the date of such
payment or action, as the case may be.
(c) When dividends are not paid in full on the Series A
Preferred Shares and any Parity Securities which rank on a parity with
respect to dividends, all dividends declared on the Series A Preferred
Shares and such Parity Securities shall be declared ratably in
accordance with the respective dividends which would be payable on the
Series A Preferred Shares and such Parity Securities if all accrued and unpaid
dividends thereon were then to be paid in full.
(d) Holders of Series A Preferred Shares shall not be entitled
to any dividends, whether payable in cash, property or stock, in excess of full
cumulative dividends as provided in paragraph (2)(a). No
interest, or sum of money in lieu of interest, shall be payable in
respect of any dividend payment which may be in arrears. Subject to the
foregoing provisions of this paragraph (3) and paragraph (4)(d), the
Board of Directors may declare and the Company may pay or set apart for payment
dividends and other distributions on any of the Junior
Securities or Parity Securities, and may redeem, purchase, exchange,
convert or otherwise retire any Junior Securities or Parity Securities, and the
holders of the Series A Preferred Shares shall not be entitled
to share therein. Any dividend payment made on Series A Preferred
Shares shall first be credited against the earliest accrued but unpaid
dividend due with respect to the Series A Preferred Shares.
(4) Exchanges. (a) Mandatory Exchange on Final Exchange Date. Unless
earlier exchanged in accordance with the provisions hereof, on
April 1, 1995 (the "Final Exchange Date), the Company shall be obligated to
exchange the following consideration for each outstanding Series A
Preferred Share:
(i) subject to paragraph (4)(d)(iv), a number of common shares at the
Common Equivalent Rate (determined as provided in paragraph (4)(d)) in effect on
the Final Exchange Date; and
(ii) the right to receive an amount in cash equal to all accrued and
unpaid dividends on such Series A Preferred Share to and including
such Exchange Date, whether or not declared, out of funds legally
available for the payment of dividends; provided, however, to the extent that,
on the Final Exchange Date, the Company shall (x) not have funds
legally available for the payment of such accrued and unpaid dividends
in cash, or (y) be prohibited from paying such dividends in cash by the terms of
any Senior Security, Parity Security or any then-outstanding
indebtedness or other contractual obligation of the Company, then the
Company shall issue, in lieu of such cash payment, that number of common shares
determined by dividing the amount of such accrued and unpaid
dividends by the Current Market Price (as defined in paragraph
(4)(d)(vi)) of the common shares determined as of the Trading Date
immediately preceding the Final Exchange Date.
The Company shall at all times reserve and keep available, free from
preemptive rights, out of the aggregate of its authorized but unissued
common shares, for the purpose of effecting the exchange of the Series A
Preferred Shares pursuant to this paragraph (4)(a), the full number of
common shares required to be delivered pursuant to paragraph (4)(a)(i)
upon such mandatory exchange of all outstanding Series A Preferred
Shares, and shall adjust such reserve promptly following any adjustment in the
Common Equivalent Rate.
(b) Automatic Exchange Upon the Occurrence of Certain Events. On the
business day (as defined in paragraph (4)(h)(1)) immediately prior
to the effectiveness of a merger or consolidation of the Company (other than a
merger or consolidation of the Company with or into a direct or
indirect wholly-owned subsidiary of the Company) (the "Settlement Date") that
would result in the exchange of common shares for, or the
conversion of common shares into, other securities or other property
(whether of the Company or any other entity) or the right to receive
such other securities or other property (any such merger or
consolidation is referred to herein as a "Merger or Consolidation"), the Company
shall exchange the following consideration for each outstanding Series A
Preferred Share:
(i) subject to paragraphs (4)(d)(iii) and (4)(d)(iv), a number of common
shares at the Common Equivalent Rate in effect on the Settlement Date; plus
(ii) the right to receive an amount in cash equal to all accrued and
unpaid dividends on such Series A Preferred Share to and including
the Settlement Date, whether or not declared, out of funds legally
available for the payment of dividends; plus
(iii) the right to receive an amount in cash initially equal to
$21.00, declining by $.018851 on each day following the date of original
issuance of the Series A Preferred Shares (computed on the basis of a
360-day year of twelve 30-day months) to $1.13 on February 1, 1995, and equal to
zero thereafter, in each case determined with reference to the Settlement Date,
out of funds legally available therefor.
At the option of the Company, the Company may satisfy its obligation
with respect to some or all of the cash consideration described in
clauses (ii) and (iii) above by delivery of a number of common shares to be
determined by dividing the amount of cash consideration that the
Company has elected to pay in common shares by the Current Market Price (as
defined in paragraph (4)(d)(vi)) of the common shares determined as of the
second Trading Date (as defined in paragraph (4)(h)(vi))
immediately preceding the Notice Date (as defined in paragraph
(4)(h)(iv)) relating to such exchange.
In the event that in connection with an exchange of Series A Preferred
Shares pursuant to paragraph (4)(a) or (4)(b) the Company is required to or
elects to deliver common shares in lieu of any cash amount required
to be paid pursuant to paragraph (4)(a)(ii) or paragraphs (4)(b)(ii) or (iii),
respectively, and there shall have occurred an adjustment
pursuant to paragraph (4)(d)(iv) as a result of a merger or
consolidation with or into a direct or indirect wholly-owned subsidiary prior to
the Exchange Date relating to such exchange, the form of
consideration deliverable by the Company in lieu of such cash amount
shall consist of, in lieu of common shares, the kind of securities or
other property received by the holders of common shares as a result of
such merger or consolidation (provided, however, that if by virtue of
the structure of such merger or consolidation, a holder of common shares is
required to make an election with respect to the nature and kind of
consideration to be received in such merger or consolidation, then the
form of consideration so deliverable by the Company in lieu of common
shares shall consist of the kind of securities or other property
received by a holder of common shares as a result of such merger or
consolidation if such holder of common shares had failed to exercise any such
rights of election (however, if the nature or kind of consideration is not the
same for each non-electing share, then for purposes of this
proviso the kind so receivable in lieu of common shares upon such
transaction for each non-electing share will be the kind so receivable
per share by the plurality of the non-electing shares)), in the same
relative proportions (if more than one kind of securities or other
property was so received), with an aggregate market price (determined
for any security or other property, to the extent possible, in the
manner that the Current Market Price is determined for the common
shares, and otherwise determined by the Board of Directors of the
Company, whose determination shall be conclusive), determined as of the Trading
Date immediately preceeding the Final Exchange Date (in the case of an exchange
pursuant to paragraph (4)(a)) or as of the second Trading Date immediately
preceding the Notice Date relating to such exchange (in the case of an exchange
pursuant to paragraph (4)(b)), equal to the cash amount that the Company has
elected or is required to pay in such
securities or other property.
(c) Optional Exchange by the Company. At any time and from time to time
prior to the Final Exchange Date, the Company shall have the
right to exchange the consideration specified in this paragraph (4)(c)
for any or all of the outstanding Series A Preferred Shares (subject to the
notice provisions set forth in paragraph (4)(i)). Upon the Exchange Date
relating to any such optional exchange, each Series A Preferred
Share to be so exchanged shall be exchanged for (i) a number of common
shares equal to the Optional Exchange Price (as defined in paragraph
(4)(h)(v)) in effect on such Exchange Date divided by the Current Market Price
of the common shares determined as of the second Trading Date
immediately preceding the Notice Date relating to such exchange and (ii) a cash
amount equal to all accrued and unpaid dividends on such Series A Preferred
Share to and including the Exchange Date, whether or not
declared, out of funds legally available for the payment of dividends;
provided that if there shall have occurred an adjustment pursuant to
paragraph (4)(d)(iv) prior to such Exchange Date, each Series A
Preferred Share so exchanged shall be exchanged for, in lieu of common
shares as described in paragraph (4)(c)(i), the kind of securities or
other property received by the holders of common shares as a result of
the merger or consolidation with or into a direct or indirect wholly-
owned subsidiary which gave rise to such adjustment (provided, however, that if
by virtue of the structure of such merger or consolidation, a
holder of common shares is required to make an election with respect to the
nature and kind of consideration to be received in such merger or
consolidation, then the form of consideration deliverable upon exercise of such
option by the Company shall consist of the kind of securities or other property
received by a holder of common shares as a result of such merger or
consolidation if such holder of common shares had failed to
exercise any such rights of election (however, if the nature or kind of
consideration is not the same for each non-electing share, then for
purposes of this proviso the kind so receivable upon such transaction
for each non-electing share will be the kind so receivable per share by the
plurality of the non-electing shares)), in the same relative
proportions (if more than one kind of securities or other property was
so received) in either case with an aggregate market price (determined, for any
security or other property, to the extent possible, in the
manner that the Current Market Price is determined for the common
shares, and otherwise determined by the Board of Directors of the
Company, whose determination shall be conclusive), as of the second
Trading Date immediately preceding the Notice Date related to such
exchange, equal to the Optional Exchange Price in effect on the Exchange Date.
If fewer than all the outstanding Series A Preferred Shares are
to be subject to any exchange pursuant to this paragraph (4)(c), shares to be
exchanged shall be selected by the Company from outstanding Series A Preferred
Shares not previously exchanged by lot or pro rata (as
nearly as may be practicable without creating fractional shares) or by
any other method determined by the Board of Directors of the Company in its sole
discretion to be equitable. Notwithstanding any provision to
the contrary set forth herein, the Company may not effect an exchange of less
than all of the outstanding Series A Preferred Shares pursuant to
this paragraph (4)(c) unless, on or prior to the Exchange Date for such
exchange, full cumulative dividends have been paid or declared and set
apart for payment on all outstanding Series A Preferred Shares for all
Quarterly Dividend Periods ending prior to such Exchange Date.
(d) Common Equivalent Rate; Adjustments. The Common Equivalent
Rate to be used to determined the number of common shares to be
delivered on the exchange of the Series A Preferred Shares for common
shares pursuant to paragraph (4)(a) or (b) shall be initially four
common shares for each Series A Preferred Share; provided, however, that such
Common Equivalent Rate shall be subject to adjustment from time to time as
provided below in this paragraph (4)(d). All adjustments to the Common
Equivalent Rate shall be calculated to the nearest 1/100th of a
common share. Such rate in effect at any time is herein called the
"Common Equivalent Rate."
(i) If the Company shall either:
(A) pay a dividend or make a distribution with respect to common shares in
common shares,
(B) subdivide or split the outstanding common shares into a greater
number of shares,
(C) combine the outstanding common shares into a smaller number of
shares, or
(D) issue by reclassification of the common shares any additional
common shares of the Company,
then, in any such event, the Common Equivalent Rate in effect
immediately prior thereto shall be adjusted so that the holder of a
Series A Preferred Share shall be entitled to receive, on the exchange
of such Series A Preferred Share, the number of common shares of the
Company which such holder would have owned or been entitled to receive
pursuant to paragraph (4)(a)(i), after the happening of any of the
events described above had such Series A Preferred Share been exchanged pursuant
to paragraph (4)(a) immediately prior to such event or any
record date with respect thereto. Such adjustment shall become
effective at the opening of business on the business day next following the
record date for determination of shareholders entitled to receive
such dividend or distribution in the case of a dividend or distribution, and
shall become effective immediately after the effective date thereof in case of
a subdivision, split, combination or reclassification; and
any common shares issuable in payment of a dividend shall be deemed to
have been issued immediately prior to the close of business on the
record date for such dividend for purposes of calculating the number of
outstanding common shares under clauses (ii) and (iii) below. Such
adjustments shall be made successively.
(ii) If the Company shall, after the date hereof, issue rights or
warrants to all holders of its common shares entitling them (for a
period not exceeding 45 days from the date of such issuance) to
subscribe for or purchase common shares at a price per share less than
the Current Market Price of the common shares (as defined in paragraph
(4)(d)(vi)) on the record date for the determination of shareholders
entitled to receive such rights or warrants, then in each case the
Common Equivalent Rate shall be adjusted by multiplying the Common
Equivalent Rate in effect immediately prior thereto by a fraction, of
which the numerator shall be the number of common shares outstanding on the date
of issuance of such rights or warrants, immediately prior to
such issuance, plus the number of additional common shares offered for
subscription or purchase pursuant to such rights or warrants, and of
which the denominator shall be the number of common shares outstanding
on the date of issuance of such rights or warrants, immediately prior to such
issuance, plus the number of common shares which the aggregate
offering price of the total number of common shares so offered for
subscription or purchase pursuant to such rights or warrants would
purchase at such Current Market Price (determined by multiplying such
total number of shares by the exercise price of such rights or warrants and
dividing the product so obtained by such Current Market Price).
Such adjustment shall become effective at the opening of business on the
business day next following the record date for the determination of
shareholders entitled to receive such rights or warrants. To the extent that
common shares are not delivered after the expiration of such rights or warrants,
the Common Equivalent Rate shall be readjusted to the
Common Equivalent Rate which would then be in effect had the adjustments made
upon the issuance of such rights or warrants been made upon the
basis of delivery of only the number of common shares actually
delivered. Such adjustments shall be made successively.
(iii) If the Company shall pay a dividend or make a distribution to all
holders of its common shares of evidences of its indebtedness or other assets
(including shares of capital stock of the Company (other
than common shares) but excluding any distributions and dividends
referred to in clause (i) above, or any regular quarterly cash
dividends), or shall issue to all holders of its common shares rights or
warrants to subscribe for or purchase securities (other than those
rights or warrants referred to in clause (ii) above), then in each such case,
the Common Equivalent Rate shall be adjusted by multiplying the
Common Equivalent Rate in effect on the record date mentioned below by a
fraction, of which the numerator shall be the Current Market Price of
the common shares (as defined in paragraph (4)(d)(vi)) on the record
date for the determination of shareholders entitled to receive such
dividend or distribution, and of which the denominator shall be such
Current Market Price per common share less the fair value (as determined by the
Board of Directors of the Company, whose determination shall be
conclusive) as of such record date of the portion of the assets or
evidences of indebtedness so distributed, or of such subscription rights or
warrants, applicable to one common share. Such adjustment shall
become effective on the opening of business on the business day next
following the record date for the determination of shareholders entitled to
receive such dividend or distribution.
(iv) If there shall occur a merger or consolidation of the
Company with or into a direct or indirect wholly-owned subsidiary of the Company
that results in the exchange of the common shares for, or the
conversion of common shares into, other securities or other property
(whether of the Company or any other entity) or the right to receive
such other securities or other property, then the Series A Preferred
Shares will thereafter no longer be subject to exchange for common
shares pursuant to paragraphs (4)(a)(i) and (b)(i), but instead will be subject
to exchange for the kind and amount of securities or other
property which the holder of such Series A Preferred Shares would have
had the right to receive as a holder of common shares immediately after such
merger or consolidation if such Series A Preferred Shares had been exchanged for
common shares pursuant to paragraph (4)(a) immediately
before the effective time of such merger or consolidation; provided,
however, that if by virtue of the structure of such merger or
consolidation, a holder of common shares is required to make an election with
respect to the nature and kind of consideration to be received in
such merger or consolidation, then the Series A Preferred Shares shall, after
such merger or consolidation, be subject to exchange for the kind and amount of
securities or other property which the holder of such
Series A Preferred Shares would have had the right to receive as a
holder of common shares immediately after such merger or consolidation
if (x) such Series A Preferred Shares had been exchanged for common
shares pursuant to paragraph (4)(a)(i) immediately before the effective time of
such merger or consolidation and (y) if such holder of common
shares had failed to exercise any such rights of election (however, if
the nature or kind of consideration is not the same for each non-
electing share, then for purposes of this proviso the kind so receivable upon
such transaction for each non-electing share will be the kind so
receivable per share by the plurality of the non-electing shares). If
this paragraph (4)(d)(iv) applies, then no adjustment in respect of the same
merger or consolidation shall be made pursuant to the other
provisions of this paragraph (4)(d).
(v) Anything in this paragraph (4) notwithstanding, the Company
shall be entitled to make such upward adjustments in the Common
Equivalent Rate, in addition to those required by this paragraph (4), as the
Company in its sole discretion may determine to be advisable, in
order that any share dividends, subdivision of shares, distribution of
rights to purchase shares or securities, or a distribution of securities
convertible into or exchangeable or redeemable for shares (or any
transaction which could be treated as any of the foregoing transactions pursuant
to Section 305 of the Internal Revenue Code of 1986, as
amended) hereafter made by the Company to its shareholders shall not be
taxable. If the Company determines that such an adjustment to the
Common Equivalent Rate should be made, an adjustment shall be made
effective as of such date as is determined by the Board of Directors of the
Company. The determination of the Board of Directors of the Company as to
whether such an adjustment to the Common Equivalent Rate should be made pursuant
to the foregoing provisions of this paragraph (4)(d)(v),
and, if so, as to what adjustment should be made and when, shall be
conclusive, final and binding on the Company and all shareholders of the
Company.
(vi) As used in this paragraph (4), the "Current Market Price" of the
common shares on any date shall be the average of the daily Closing Prices (as
defined in paragraph (4)(h)(ii)) for the five consecutive
Trading Dates ending on and including the date of determination of the
Current Market Price; provided, however, that, except for a
determination in connection with an exchange pursuant to paragraph 4(a), if the
Closing Price for the Trading Date next following such five-day
period (the "next-day closing price") is less than 95% of such average, then the
Current Market Price per common share on such date of
determination shall be the next-day closing price; and provided,
further, that, if any event that would result in an adjustment of the
Common Equivalent Rate occurs during such five-day period or, for the
purposes of calculating the Current Market Price in connection with any exchange
of Series A Preferred Shares or any determination of an amount in cash payable
in lieu of a fraction of a common share, if any event
that would result in an adjustment of the Common Equivalent Rate occurs during
the period beginning on the first day of such five-day period and ending on the
applicable Exchange Date, the Current Market Price as
determined pursuant to the foregoing will be appropriately adjusted to
reflect the occurrence of such event.
(vii) In any case in which paragraph (4)(d) shall require that an
adjustment to the form or amount of any Exchange Consideration (as
defined in paragraph (4)(j)) become effective at the opening of
business on the business day next following a record date and an
Exchange Date occurs after such record date, but before the occurrence
of the event giving rise to such adjustment, the Company may in its sole
discretion elect to defer until after the occurrence of such event the
issuance of any portion of the Exchange Consideration the form or amount of
which is affected by such adjustment.
(viii) Before taking any action which would cause an adjustment
to the Common Equivalent Rate that would cause the Company to issue
common shares for consideration below the then par value (if any) of the common
shares upon exchange of the Series A Preferred Shares, the
Company will take any corporate action which may, in the opinion of its counsel,
be necessary in order that the Company may validly and legally issue fully paid
and nonassessable common shares at such adjusted Common Equivalent Rate.
(ix) If, at any time, as a result of an adjustment made pursuant to
paragraph (4)(d)(iv) the Series A Preferred Shares shall become
exchangeable for any consideration other than common shares, thereafter the form
and amount of such other consideration so issuable upon
exchange of the Series A Preferred Shares shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the common shares
contained in this paragraph (4)(d).
(e) Notice of Adjustments. Whenever the Common Equivalent Rate
and/or the kind or amount of securities or other property issuable upon exchange
of the Series A Preferred Shares is adjusted as herein
provided, the Company shall:
(i) forthwith compute such adjustment in accordance with this
paragraph (4) and prepare a certificate signed by the Chief Financial
Officer, any Vice President, the Treasurer or Controller of the Company setting
forth the terms of such adjustment, the method of calculation
thereof in reasonable detail and the facts requiring such adjustment and upon
which such adjustment is based, and file such certificate forthwith with the
transfer agent or agents for the Series A Preferred Shares and the common
shares; and
(ii) mail a notice to the holders of record of the outstanding
Series A Preferred Shares at or prior to the time the Company mails an
interim statement to its shareholders covering the fiscal quarter during which
the facts requiring such adjustment occurred, but in any event
within 45 days of the end of such fiscal quarter stating that such
adjustment has been made, the facts requiring such adjustment and the
facts upon which such adjustment is based and setting forth the terms of such
adjustment.
(f) No Fractional Shares. (i) No fractional shares or scrip
representing fractional common shares shall be issued upon the exchange of any
Series A Preferred Shares. Instead of any fractional interest in a common share
which would otherwise be deliverable upon the exchange of a Series A Preferred
Share, the Company shall either (A) pay to the
holder of such share (a "Fractional Shareholder") an amount in cash
(computed to the nearest cent) equal to the same fraction of the Current Market
Price of the common share determined as of the second Trading
Date immediately preceding the relevant Notice Date or, in the case of
an exchange pursuant to paragraph (4)(a), the Trading Date immediately
preceding the Final Exchange Date or (B) follow the procedures set forth in
paragraph (4)(f)(ii). If more than one Series A Preferred Share
shall be surrendered for exchange at one time by the same holder, the
number of full common shares issuable upon exchange thereof shall be
computed on the basis of the aggregate number of Series A Preferred
Shares so surrendered.
(ii) The Company may, in lieu of paying cash to Fractional
Shareholders as provided in paragraph (f)(i), issue, in full payment of the
Company's obligation with respect to such fractional interests,
common shares equal to the aggregate of such fractional interests of
such Fractional Shareholder and other Fractional Shareholders
(aggregated over a reasonable period of time, but not in any event more than 20
business days, and rounded upwards to the nearest whole share)
to an agent (the "Transfer Agent") appointed by the Company for such
Fractional Shareholders for sale promptly by the Transfer Agent on
behalf of the Fractional Shareholders. The Transfer Agent will remit
promptly to such Fractional Shareholders their proportionate interest in the net
proceeds (following the deduction of applicable transaction
costs and computed to the nearest cent) from such sale.
(iii) In the event that, as a result of any adjustment pursuant to
paragraph (4)(d)(iv), the Series A Preferred Shares are exchanged for
securities other than common shares, the Company may treat any
fractional interests in such securities in the same manner as is
provided in paragraphs (4)(f)(i) and (ii) with respect to fractional
common shares.
(g) Cancellation. Series A Preferred Shares that have been
acquired by the Company in an exchange pursuant to this paragraph (4)
will initially be held in the Company's treasury, to the extent that
capital or earned surplus at such time (calculated after any change to
any surplus account resulting from payment of cash or delivery of
property by the Company in such exchange) is at least equal to the
aggregate par value of the common shares issued in exchange for such
Series A Preferred Shares. To the extent that capital or earned surplus is not
at least equal to such value at such time, such Series A
Preferred Shares will be cancelled and will assume the status of
authorized but unissued preferred shares. Shares held in the Company's treasury
may thereafter, at the option of the Company, be resold (if
consistent with the terms thereof) or cancelled. If cancelled, such
shares will assume the status of authorized but unissued preferred
shares and may thereafter be reissued in the same manner as other
authorized but unissued preferred shares.
(h) Definitions. As used in this paragraph (4):
(i) the term "business day" shall mean any day other than a
Saturday, Sunday, or a day on which banking institutions in the State of New
York are authorized or obligated by law or executive order to close;
(ii) the term "Closing Price" on any day shall mean the closing
sale price regular way on such day or, in case no such sale takes place on such
day, the average of the reported closing bid and asked prices
regular way, in each case on the New York Stock Exchange Consolidated
Tape (or any successor composite tape reporting transactions on national
securities exchanges), or, if the common shares are not listed or
admitted to trading on such Exchange, on the principal national
securities exchange on which the common shares are listed or admitted to trading
(which shall be the national securities exchange on which the
greatest number of common shares have been traded during the five
consecutive Trading Dates ending on and including the date of
determination of the Current Market Price), or, if not listed or
admitted to trading on any national securities exchange, the average of the
closing bid and asked prices of the common shares on the over-the-
counter market on the day in question as reported by the National
Association of Securities Dealers Automated Quotation System, or a
similarly generally accepted reporting service, or if not so available
as determined in good faith by the Board of Directors, on the basis of
such relevant factors as it in good faith considers, in the reasonable
judgment of the Board of Directors, appropriate;
(iii) the term "Exchange Date" shall mean the date upon which an exchange
of Series A Preferred Shares pursuant to paragraph (4)(a),
(4)(b) or (4)(c) shall become effective, which (x) in the case of an
exchange pursuant to paragraph (4)(a) shall be the Final Exchange Date, (y) in
the case of an exchange pursuant to paragraph (4)(b) shall be the Settlement
Date and (z) in the case of an exchange pursuant to paragraph (4)(c) shall, with
respect to the shares to be so exchanged, be the date specified as the Exchange
Date in the notice with respect thereto
provided pursuant to paragraph (4)(i), provided that in each case the
Exchange Date shall not be deemed to have occurred unless and until the Company
shall have deposited with the Exchange Agent (as hereinafter
defined) common shares, funds and such other property as may be
deliverable upon such exchange sufficient to effect such exchange as
contemplated by paragraph (4)(j).
(iv) the term "Notice Date" with respect to any notice given by
the Company in connection with an exchange of any of the Series A
Preferred Shares shall be the commencement of the mailing of such notice to the
holders of Series A Preferred Shares in accordance with paragraph (4)(i);
(v) the term "Optional Exchange Price" shall mean the per share price
(payable in common shares) at which the Company may exchange
common shares (and/or other property as provided in this paragraph (4)) for
Series A Preferred Shares pursuant to paragraph (4)(c) hereof, which shall be
initially equal to $257.00, declining by $.018851 on each day
following the date of issuance of the Series A Preferred Shares
(computed on the basis of a 360-day year of twelve 30-day months) to
$237.13 on February 1, 1995 and equal to $236.00 thereafter, in each
case determined with reference to the Exchange Date for such exchange;
(vi) the term "Trading Date" shall mean a date on which the New
York Stock Exchange (or any successor to such Exchange) is open for the
transaction of business.
(i) Notice of Exchange. The Company will provide notice of any
exchange (including any potential exchange to be effected pursuant to
paragraph (4)(b) but excluding, except as provided in the last sentence of this
paragraph (4)(i), the mandatory exchange required to be effected pursuant to
paragraph (4)(a)) of Series A Preferred Shares to holders of record of the
Series A Preferred Shares to be exchanged not less than 30 nor more than 60
days prior to the date fixed for such exchange, as the case may be; provided,
however, that if the timing of the effectiveness of a Merger or Consolidation
makes it impracticable to provide at least 30 days' notice, the Company shall
provide such notice as soon as
practicable prior to such effectiveness. Such notice shall be provided by
mailing notice of such exchange first class postage prepaid, to each holder of
record of the Series A Preferred Shares to be exchanged, at
such holder's address as it appears on the stock register of the
Company; provided, however, that no failure to give such notice nor any defect
therein shall affect the validity of the proceeding for the
exchange of any Series A Preferred Shares to be exchanged. Each such
notice shall state, as appropriate, the following:
(i) the Exchange Date;
(ii) that all outstanding Series A Preferred Shares are to be
exchanged or, in the case of an exchange of fewer than all outstanding
Series A Preferred Shares pursuant to paragraph (4)(c), the number of
such shares held by such holder to be exchanged;
(iii) in the case of an exchange pursuant to paragraph (4)(c),
the Optional Exchange Price, the number of common shares deliverable
upon exchange of each Series A Preferred Share to be exchanged and the
Current Market Price used to calculate such number of common shares,
subject to any subsequent adjustments pursuant to paragraph (4)(d);
(iv) whether the Company is exercising any option to deliver
common shares in lieu of cash (and, in the case of an exchange pursuant to
paragraph (4)(b), the Current Market Price to be used to calculate
the number of such common shares) and, if the Company is exercising such option
in respect of less than all the cash that is deliverable by the
Company upon such exchange, the portion of such cash in lieu of which
common shares will be delivered;
(v) the place or places where certificates representing such
Series A Preferred Shares are to be surrendered for exchange; and
(vi) that dividends on the Series A Preferred Shares to be
exchanged will cease to accrue on such Exchange Date.
In the event that, with respect to the exchange of Series A
Preferred Shares pursuant to paragraph (4)(a), the Company determines
that the accrued and unpaid dividends on the Series A Preferred Shares
that are to be paid upon such exchange will be required to be paid in
whole or in part in common shares as provided in paragraph (4)(a)(ii),
the Company shall give notice thereof no later than ten days prior to
the Final Exchange Date to the holders of record of the Series A
Preferred Shares; provided, however, that no failure to give such notice nor any
defect therein shall affect the validity of the proceeding for
the exchange of Series A Preferred Shares pursuant to paragraph (4)(a).
(j) Deposit of Shares and Funds. The Company's obligation to
deliver common shares and provide funds (or other property, as
contemplated by paragraphs (4)(b) and (4)(d)(iv)) upon an exchange of
the Series A Preferred Shares in accordance with this paragraph (4)
shall be deemed fulfilled if, on or before the Exchange Date for such
exchange, the Company shall deposit, with a bank or trust company, or an
affiliate of a bank or trust company, having an office or agency in New York
City and having a capital and surplus of at least $50,000,000 (the "Exchange
Agent"), such number of common shares and/or such other
property as are required to be delivered by the Company pursuant to this
paragraph (4) upon the occurrence of such exchange (including any
payment in respect of fractional share amounts pursuant to paragraph
(4)(f)(i)) together with funds (or, to the extent required or permitted by
paragraphs (4)(a) or (4)(b), as applicable, common shares, other
property and/or funds) sufficient to pay all accrued and unpaid
dividends (subject to the rights of any holder pursuant to paragraph
(4)(m) below) on the Series A Preferred Shares to be exchanged as
required by this paragraph (4) (the "Exchange Consideration"), in trust for the
account of the holders of the shares to be exchanged (and so as to be and
continue to be available therefor), with instructions and
authority to the Exchange Agent that such shares, funds and/or other
property be applied solely to the exchange of the Series A Preferred
Shares subject to such exchange. Any interest accrued on such funds
shall be paid to the Company from time to time. Any common shares,
funds and/or other property so deposited and unclaimed at the end of two years
from such Exchange Date shall be repaid and released to the
Company, after which the holder or holders of such Series A Preferred
Shares so exchanged shall look only to the Company for delivery of such common
shares, funds and/or other property.
(k) Exchange of Certificates; Status. Upon an Exchange Date,
dividends shall cease to accrue on any Series A Preferred Shares subject to
exchange on such Exchange Date, such Series A Preferred Shares shall no longer
be deemed outstanding, all rights of the holders thereof as
shareholders of the Company shall cease and thereupon the certificate or
certificates theretofore representing such Series A Preferred Shares
shall represent only the right to receive the Exchange Consideration
payable in respect thereof. From and after the Exchange Date, each
holder of a certificate which immediately prior to the Exchange Date
represented outstanding Series A Preferred Shares subject to such
exchange shall be entitled to receive in exchange therefor, upon and
only upon surrender thereof to an Exchange Agent, a certificate or
certificates representing the number of whole common shares included in the
Exchange Consideration and a check representing any cash amount
included in the Exchange Consideration plus any cash amount payable
pursuant to paragraph (4)(f) in lieu of any fractional share included in the
Exchange Consideration and any other property included in the
Exchange Consideration as a result of any adjustment provided for in
paragraph (4)(d)(iv). In the event that fewer than all Series A
Preferred Shares represented by such surrendered certificate are subject to such
exchange, a new certificate shall be issued at the expense of
the Company representing the Series A Preferred Shares not so exchanged. No
interest will be payable with respect to any Exchange Consideration. No holder
of a certificate or certificates which immediately prior to
the Exchange Date represented outstanding Series A Preferred Shares
shall be a holder of the common shares issuable in exchange therefor, or
have any rights as a holder of such common shares, including without
limitation voting rights or the right to receive any dividend or other
distribution from the Company with respect to any such common shares,
until surrender of such certificate or certificates that prior to the
Exchange Date represented Series A Preferred Shares for a certificate or
certificates representing such common shares; provided that, upon such
surrender, there shall be paid to the holder, with respect to the number of
whole common shares issued upon such surrender, an amount equal to
any dividends or other distributions (without interest) theretofore
payable to the holders of common shares as of any record date on or
after the Exchange Date, but which were not paid to such holder in
respect of such common shares by reason of the failure to deliver
certificates that represented Series A Preferred Shares. The Company
shall not be liable to any holder of Series A Preferred Shares for any
common shares (or dividends or distributions with respect thereto), cash in lieu
of fractional shares or other cash amounts or any other property included in the
Exchange Consideration which is delivered to a public
official pursuant to any applicable abandoned property, escheat or
similar law.
(l) Agreement of Holders. By purchasing or otherwise acquiring Series
A Preferred Shares, the holders thereof irrevocably consent to
and agree with the Company to the exchange and repurchase of such Series A
Preferred Shares upon the Final Exchange Date or any earlier Exchange Date upon
the terms and subject to the conditions set forth in this
paragraph (4). The holders of the Series A Preferred Shares further
agree to accept from the Company, as full payment, discharge and
satisfaction of the obligations of the Company with respect to the
Series A Preferred Shares, the Exchange Consideration delivered by the
Company in exchange for the Series A Preferred Shares in accordance with the
terms of this paragraph (4). The foregoing agreements of the
holders of Series A Preferred Shares constitute a contract between the
Company and each holder of Series A Preferred Shares, enforceable
against the Company and each such holder in accordance with the terms
hereof.
(m) Dividend Payments. The holders of Series A Preferred Shares at the
close of business on a dividend record date shall be entitled to receive the
dividend payable on such shares on the corresponding
Dividend Payment Date; provided, however, that, with respect to shares
subject to exchange on an Exchange Date occurring between such record
date and the Dividend Payment Date, that portion of the accrued and
unpaid dividends on such shares which is included in the dividend
payable on such Dividend Payment Date shall be paid on such Exchange
Date to the holders of record of such shares on such record date, and
the holders of such shares on the Exchange Date which were not holders
of record of such shares on such record date shall not be entitled to
such portion of the accrued and unpaid dividends on such shares as a
part of the Exchange Consideration payable upon exchange of such shares.
(n) Payment of Taxes. The Company will pay any and all
documentary, stamp or similar issue or transfer taxes payable in respect of the
issue or delivery of common shares or other securities on the
exchange of Series A Preferred Shares pursuant to this paragraph (4);
provided, however, that the Company shall not be required to pay any tax which
may be payable in respect of any registration of transfer involved in the issue
or delivery of common shares or other securities in a name other than that of
the registered holder of Series A Preferred Shares
exchanged or to be exchanged, and no such issue or delivery shall be
made unless and until the person requesting such issue has paid to the
Company the amount of any such tax or has established, to the
satisfaction of the Company, that such tax has been paid.
(o) Allocation of Stated Capital. Upon the issuance of and
receipt of payment for the Series A Preferred Shares, the Company shall allocate
to the stated capital of the Series A Preferred Shares $2.00
per Series A Preferred Share so issued (which amount shall be in
addition to the stated capital represented by the par value of the
Series A Preferred Shares). Upon any Exchange Date, the Company shall
reserve available capital or earned surplus for allocation to stated
capital for the common shares issuable with respect to the Series A
Preferred Shares exchanged on such Exchange Date to the extent that the stated
capital of any Series A Preferred Shares cancelled in such
exchange is less than the aggregate par value of the common shares
issuable in such exchange.
(5) Dissolution Preference. (a) In the event of any liquidation,
dissolution, or winding up (hereinafter "Dissolution") of the Company,
whether voluntary or involuntary, before any payment or distribution of the
assets of the Company (whether capital or surplus) shall be made to or set apart
for the holders of any Junior Securities which rank junior with respect to
Dissolution, the holders of the Series A Preferred
Shares shall be entitled to receive for each share $172.00 plus an
amount equal to all dividends (whether or not earned or declared)
accrued and unpaid thereon to the date of final distribution to such
holders (subject to the right of the holders of record of any Series A
Preferred Shares on a record date for payment of dividends thereon to
receive such dividend on the date of final distribution), determined by adding
(i) dividends accrued and unpaid for any Dividend Period
preceding the Dividend Period in which the date of final distribution
falls plus (ii) the product of (A) 8.721% times (B) a fraction, the
numerator of which is the number of days elapsed from (and including)
the first day of the Dividend Period in which the date of final
distribution falls, to (but not including) the date of final
distribution, on the basis of 30-day months, and the denominator of
which is 360 times (C) $172.00; but such holders shall not be entitled
to any further payment. If, upon any Dissolution of the Company, the
assets of the Company, or proceeds thereof, distributable among the
holders of the Series A Preferred Shares and any Parity Securities which rank on
a parity with respect to Dissolution shall be insufficient to
pay in full the preferential amount aforesaid and Dissolution payments
on any such Parity Securities, then such assets, or the proceeds
thereof, shall be distributed among the holders of Series A Preferred
Shares and any such Parity Securities ratably in accordance with the
respective amounts which would be payable on such Series A Preferred
Shares and any such Parity Securities if all amounts payable thereon
were paid in full. For the purposes of this paragraph (5), a sale,
lease, exchange or other disposition of all or substantially all of the property
and assets of the Company, or a consolidation or merger of the Company with one
or more corporations, shall not be deemed to be a
Dissolution.
(b) Subject to the rights of the holders of Senior Securities
which rank senior with respect to Dissolution and Parity Securities
which rank on a parity with respect to Dissolution, upon any Dissolution of the
Company, after payment shall have been made in full to the Series A Preferred
Shares and any Parity Securities which rank on a parity with respect to
Dissolution as provided in this paragraph (5), but not prior thereto, any Junior
Securities which rank junior with respect to
Dissolution shall, subject to the respective terms and provisions (if
any) applying thereto, be entitled to receive any and all assets
remaining to be paid or distributed, and the Series A Preferred Shares
and any such Parity Securities shall not be entitled to share therein.
(6) Voting Rights. (a) The holders of record of Series A
Preferred Shares shall not be entitled to any voting rights except as
hereinafter provided in this paragraph (6) or as otherwise required by
law. The holders of Series A Preferred Shares shall be entitled to vote on all
matters submitted to a vote of the holders of common shares,
voting together with the holders of common shares (and any other
securities upon which like voting rights have been conferred and are
then exercisable) as one class. Each Series A Preferred Share shall be entitled
to one vote per share, without regard to the Common Equivalent Rate or any
adjustments thereto. At elections for directors as
aforesaid, each holder of Series A Preferred Shares shall be entitled to vote
cumulatively in accordance with Article 3.5 of the Restated
Certificate of Incorporation, as amended, of the Company as to the
directors to be elected by such holders voting together with the holders of
common shares and any other securities upon which like voting rights have been
conferred and are then exercisable.
(b) (i) If at any time or times dividends payable on the Series A
Preferred Shares shall be in arrears and unpaid in an amount equal to
the dividends payable for six quarterly periods, then the number of
directors constituting the Board of Directors, without further action,
shall be increased by two (2) and the holders of Series A Preferred
Shares shall have the right, voting separately as a class with holders
of any Parity Securities upon which like voting rights have been
conferred and are then exercisable, to elect the directors of the
Company to fill such newly created directorships, the remaining
directors to be elected by the other class or classes of shares entitled to vote
therefor, at each meeting of shareholders held for the purpose
of electing directors. While holders of Series A Preferred Shares are
entitled to elect two directors, they shall not be entitled to
participate with the holders of common shares in the election of any
other directors, but shall continue to be entitled to vote with the
holders of common shares upon each other matter coming before any
meeting of the shareholders.
(ii) Such directors shall be elected for terms expiring at the
next succeeding annual meeting of shareholders or until their respective
successors are elected and qualified, unless such terms are sooner
terminated as provided in this paragraph (6). The right of the holders of the
Series A Preferred Shares, voting separately as a class, to elect (either alone
or together with the holders of any Parity Securities)
members of the Board of Directors of the Company as aforesaid shall
continue until such time as all dividends in arrears and unpaid on the
Series A Preferred Shares shall have been paid in full or set aside for payment
by the Company, at which time such right shall terminate, except as herein or by
law expressly provided, subject to revesting in the
event of each and every subsequent failure to pay dividends in the
aggregate amount specified above. Any such director may be removed from office,
with or without cause, only by vote of holders of the Series A
Preferred Shares voting as a class with holders of any Parity Securities upon
which like voting rights have been conferred and are then
exercisable, and by such vote as may be required by law.
(iii) At elections for directors as aforesaid, each holder of
Series A Preferred Shares shall be entitled to vote cumulatively in
accordance with Article 3.5 of the Restated Certificate of
Incorporation, as amended, of the Company as to the directors to be
elected by such holders voting as a class with the holders of any Parity
Securities upon which like voting rights have been conferred and are
then exercisable (the holders of any Parity Securities being entitled to the
number of votes, if any, for each share held as may be granted to
them).
(iv) Upon any termination of the right of the holders of the
Series A Preferred Shares voting as a class (together with Parity
Securities upon which like voting rights have been conferred and are
then exercisable) to vote for directors as herein provided, the term of office
of all directors then in office elected by the holders of Series A Preferred
Shares and such Parity Securities so voting shall terminate immediately. Upon
such termination the number of directors constituting the Board of Directors
shall, without further action, be reduced by two (2). If the office of any
director elected as herein provided becomes
vacant by reason of death, resignation, retirement, disqualification,
removal from office, or otherwise, the remaining director elected by the holders
of the Series A Preferred Shares voting as a class as herein
provided, may choose a successor who shall hold office for the unexpired term in
respect of which such vacancy occurred.
(c) So long as any Series A Preferred Shares remain outstanding, the
consent of the holders of at least two-thirds of the Series A
Preferred Shares outstanding at the time (voting separately as a class
together with all other Parity Securities upon which like voting rights have
been conferred and are then exercisable by the terms of such Parity Securities
with respect to such matters) given in person or by proxy,
either in writing or at any special or annual meeting called for the
purpose, shall be necessary to permit, effect or validate any one or
more of the following:
(i) the authorization, creation or issuance, or any increase in the
authorized or issued amount, of any Senior Securities; or
(ii) the amendment, alteration or repeal of any of the provisions of the
Restated Certificate of Incorporation, as amended, in any manner which would
materially and adversely affect any right, preference,
privilege or voting power of the Series A Preferred Shares or of the
holders thereof; provided, however, that any increase in the amount of
authorized preferred shares or the creation and issuance of Parity
Securities or Junior Securities shall not be deemed to materially and
adversely affect such rights, preferences, privileges or voting powers;
provided, further, that the creation of a class or series of shares
entitled to vote as a class together with the Series A Preferred Shares on the
matters stated in paragraphs 6(b) or 6(c) and having a voting
power greater than one vote for each $100 of Dissolution preference
(exclusive of accrued and unpaid dividends) shall be deemed to
materially and adversely affect the voting power of the Series A
Preferred Shares.
(d) So long as any Series A Preferred Shares remain outstanding, the
consent of the holders of at least a majority of the Series A
Preferred Shares outstanding at the time (voting separately as a class
together with all other Parity Securities upon which like voting rights have
been conferred and are then exercisable) given in person or by
proxy, either in writing or at any special or annual meeting called for the
purpose, shall be necessary to effect the merger or consolidation of the Company
with or into any other corporation, if and only if the plan of merger or
consolidation contains any provision which, if contained in an amendment to the
Company's Restated Certificate of Incorporation, as amended, would entitle the
holders of shares of such class or series to vote as a class thereon.
(e) The foregoing voting provisions shall not apply if, at or
prior to the time when the act with respect to which such vote would
otherwise be required shall be effected, all outstanding shares of the
Series A Preferred Shares shall have been exchanged in accordance with
paragraph (4) hereof.
(7) Savings Provision. If any term or provision hereof is held by a
court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms and provisions hereof shall
remain in full force and effect and shall in no way be affected,
impaired or invalidated.
3.3 Common Shares. The holders of common shares, subject to law
and to the rights of the preferred shares, shall have the exclusive
right to vote for the election of directors and on all other matters
requiring shareholder action, each common share being entitled to one
vote.
3.4 Preemptive Rights. The holders of shares of the Corporation
shall have no preemptive rights to purchase any shares or any other
securities of the Corporation.
3.5 Cumulative Voting. At all elections for directors of the
Corporation, each shareholder entitled to vote for the election of
directors shall be entitled to as many votes as shall equal the number
of shares owned by said shareholder multiplied by the number of
directors to be elected. A shareholder may cast all of such votes for a single
director or may distribute them among the number to be voted for or any two or
more of them.
3.6 Share Distributions. The board of directors may from time to time
authorize the distribution of shares of any class or series to the holders of
the same or of any other class or series of shares.
4. BYLAWS
The board of directors may adopt, amend or repeal the bylaws of
the Corporation.
5. DIRECTORS
5.1 Number of Directors. The number of directors of the
Corporation shall be fixed and may from time to time be increased or
decreased by the board of directors, but in no event shall the number of
directors be less than 9 or more than 30.
5.2 Classified Directors. Notwithstanding anything to the
contrary in the by-laws, the directors shall be classified with respect to the
time for which they severally hold office into three classes, as nearly equal in
number as possible, with each director in each class to hold office until his or
her successor is elected and qualified. At the annual meeting held in 1988, the
three classes of directors shall be
elected to serve terms expiring in 1989, 1990 and 1991, respectively.
At each annual meeting of shareholders beginning with the meeting to be held in
1989, the successors of the class of directors whose term
expires at that meeting shall be elected to hold office for a term
expiring at the annual meeting of shareholders to be held in the third
year following the year of their election, with each director in each
such class to hold office until his or her successor is elected and
qualified. Any newly created directorship or any decrease in
directorships shall be so apportioned among the classes as to make all
classes as nearly equal in number as possible. When the number of
directors is increased by the board and any newly created directorships are
filled by the board, there shall be no classification of the
additional directors until the next annual meeting of shareholders.
5.3 Vacancies. Any vacancies on the board of directors may be
filled by the affirmative vote of a majority of the remaining directors then in
office, even though less than a quorum of the board of
directors. No decrease in the number of directors constituting the
board of directors shall shorten the term of any incumbent director.
5.4 Removal. 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.
5.5 Preferred Shares. Notwithstanding the foregoing, whenever the holders
of any one or more series of preferred shares issued by the
Corporation shall have the right to vote separately by series to elect
directors at an annual or special meeting of shareholders, the election, terms
of office, filling of vacancies and other features of such
directorships shall be governed by the terms of this Restated
Certificate of Incorporation applicable thereto, and such directors so
elected shall not be divided into classes pursuant to this Article 5
unless expressly provided by such terms.
5.6 Required Vote. Notwithstanding anything contained in this
certificate to the contrary, the affirmative vote of a least 75% of the shares
entitled to vote shall be required to alter, amend or repeal, or adopt any
provision inconsistent with, this Article 5, or to fix
(including by increase or decrease) the number of directors of the
Corporation by vote of the Corporation's shareholders.
6. MISCELLANEOUS
6.1 Office. The office of the Company it to be located in the
County of Westchester of the State of New York.
6.2 Service of Process. The Secretary of State of New York is
designated as an agent of the Corporation upon whom process against the
Corporation may be served in any action or proceeding against it within the
State of New York. The post office address to which the Secretary
of State shall mail a copy of any process against the Corporation served upon
him is Sears, Roebuck and Co., Sears Tower, Chicago, Illinois
60684, Attention: Secretary.
7. LIMITATION
A director shall not be personally liable to the Corporation or
its shareholders for damages for any breach of duty in such capacity,
unless a judgement 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 New York Business Corporation Law. The
foregoing sentence shall not eliminate or limit the liability of any director
for any act or omission occurring prior to the adoption of this Article 7.
If the New York Business Corporation Law is amended after
adoption of this Article by the shareholders to authorize corporations
to further limit director liability, this Article shall be construed to limit
director liability to the fullest extent permitted by the New York Business
Corporation Law as so amended. No amendment to or repeal of
this Article 7, and no modification to its provisions, shall apply to,
or have any effect upon, the liability or alleged liability of any
director with respect to any acts or omissions of such director prior to such
amendment, repeal or modification.
Exhibit 3(ii)
By-Laws
of
Sears, Roebuck and Co.
as amended to
February 7, 1995
Article I
MEETINGS OF SHAREHOLDERS
Section 1. Place of Meetings. All meetings of the shareholders
shall be held at such place within or without the State of New York as
shall be fixed by the Board of Directors from time to time.
Section 2. Annual Meetings. The annual meeting of the
shareholders for the election of directors and for the transaction of
such other business as may properly be brought before the meeting shall be
held at such time as is specified in the notice of the meeting on
either the second Wednesday in May of each year or on such other date as
may be fixed by the Board of Directors prior to the giving of the notice
of such meeting. The Board of Directors acting by resolution may
postpone and reschedule any previously scheduled annual meeting of
shareholders.
Nominations of persons for election to the Board of Directors of
the Company and the proposal of business to be considered by the
shareholders may be made at an annual meeting of shareholders (a)
pursuant to the Company's notice of meeting, (b) by or at the direction of
the Board of Directors or (c) by any shareholder of the Company who
was a shareholder of record at the time of giving of notice provided for
in this By-Law, who is entitled to vote at the meeting and who complied
with the notice procedures set forth in this By-Law.
For nominations or other business to be properly brought before an
annual meeting by a shareholder pursuant to clause (c) of the foregoing
paragraph of this By-Law, the shareholder must have given timely notice
thereof in writing to the Secretary of the Company. To be timely, a
shareholder's notice shall be delivered to the Secretary at the
principal executive offices of the Company not less than 60 days nor
more than 90 days prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that the date of
the annual meeting is advanced by more than 30 days or delayed by more
than 60 days from such anniversary date, notice by the shareholder to be
timely must be so delivered not earlier than the 90th day prior to such
annual meeting and not later than the close of business on the later of
the 60th day prior to such annual meeting or the 10th day following the
day on which public
announcement of the date of such meeting is first
made. Such shareholder's notice shall set forth (a) as to each person
whom the shareholder proposes to nominate for election or reelection as a
director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or
is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
(including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); (b) as to
any other business that the shareholder proposes to bring before the
meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such shareholder
and the beneficial owner, if any, on whose behalf the proposal is made;
(c) as to the shareholder giving the notice and the beneficial owner, if
any, on whose behalf the nomination or proposal is made (i) the name and
address of such shareholder, as they appear on the Company's books, and of
such beneficial owner and (ii) the class and number of shares of the
Company which are owned beneficially and of record by such shareholder
and such beneficial owner.
Notwithstanding anything in the second sentence of the preceding
paragraph to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Company is increased and
there is no public announcement naming all of the nominees for Director or
specifying the size of the increased Board of Directors made by the
Company at least 70 days prior to the first anniversary of the preceding
year's annual meeting, a shareholder's notice required by this By-Law
shall also be considered timely, but only with respect to nominees for
any new positions created by such increase, if it shall be delivered to
the Secretary at the principal executive offices of the Company not
later than the close of business on the 10th day following the day on
which such public announcement is first made by the Company.
Only such persons who are nominated in accordance with the
procedures set forth in these By-Laws shall be eligible to serve as
directors and only such business shall be conducted at an annual meeting
of shareholders as shall have been brought before the meeting in
accordance with the procedures set forth in this By-Law. The chairman
of the meeting shall have the power and duty to determine whether a
nomination or any business proposed to be brought before the meeting was
made in accordance with the procedures set forth in this By-Law and, if
any proposed nomination or business is not in compliance with this By-
Law, to declare that such defective proposal shall be disregarded.
For purposes of this By-Law, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document
publicly filed by the Company with the Securities and Exchange
Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act.
Notwithstanding the foregoing provisions of this By-Law, a
shareholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to
the matters set forth in this By-Law. Nothing in this By-Law shall be
deemed to affect any rights of shareholders to request inclusion of
proposals in the Company's proxy statement pursuant to Rule 14a-8 under
the Exchange Act.
Section 3. Special Meetings. Special meetings of the
shareholders for any purpose or purposes shall be called to be held at
any time upon the request of the Chairman of the Board of Directors, the
President or a majority of the members of the Board of Directors or of
the Executive Committee then in office. Business transacted at all
special meetings shall be confined to the specific purpose or purposes
of the persons authorized to request such special meeting as set forth
in this Section 3 and only such purpose or purposes shall be set forth
in the notice of such meeting. The Board of Directors acting by
resolution may postpone and reschedule any previously scheduled special
meeting of shareholders.
Nominations of persons for election to the Board of Directors may be
made at a special meeting of shareholders at which directors are to
be elected (a) pursuant to the Company's notice of meeting (b) by or at
the direction of the Board of Directors or (c) by any shareholder of the
Company who is a shareholder of record at the time of giving of notice
provided for in this By-Law, who shall be entitled to vote at the
meeting and who complies with the notice procedures set forth in this
By-Law. Nominations by shareholders of persons for election to the
Board of Directors may be made at such a special meeting of shareholders
if the shareholder's notice required by the third paragraph of Section 2
of Article I of these By-Laws shall be delivered to the Secretary at the
principal executive offices of the Company not earlier than the 90th day
prior to such special meeting and not later than the close of business
on the later of the 60th day prior to such special meeting or the 10th
day following the day on which public announcement is first made of the
date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting.
Only such persons who are nominated in accordance with the
procedures set forth in these By-Laws shall be eligible to serve as
directors and only such business shall be conducted at a special meeting
of shareholders as shall have been brought before the meeting in
accordance with the procedures set forth in this By-Law. The chairman
of the meeting shall have the power and duty to determine whether a
nomination or any business proposed to be brought before the meeting was
made in accordance with the procedures set forth in this By-Law and, if
any proposed nomination or business is not in compliance with this By-
Law, to declare that such defective proposal shall be disregarded.
Notwithstanding the foregoing provisions of this By-Law, a
shareholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to
the matters set forth in this By-Law. Nothing in this By-Law shall be
deemed to affect any rights of shareholders to request inclusion of
proposals in the Company's proxy statement pursuant to Rule 14a-8 under
the Exchange Act.
Section 4. Notice of Meetings. Written notice of the time,
place, and purpose or purposes of each annual and special meeting of
shareholders shall be signed by the Secretary and served by mail upon
each shareholder of record entitled to vote at such meeting not less
than ten nor more than fifty days before the date of the meeting.
Notice of an annual or special meeting of shareholders shall be deemed
to be served when deposited in the United States mail, postage prepaid,
addressed to each shareholder at his address as it appears on the stock
records of the Company or at such other address as he may have filed
with the Secretary of the Company for such purpose.
Section 5. Quorum. At any meeting of the shareholders, the
holders of record of one-third of the total number of shares of the
Company entitled to vote, present in person or represented by proxy,
shall constitute a quorum for the purpose of transacting business.
Section 6. Organization and Adjournment. The Chairman of the
Board of Directors or in the Chairman's absence, the President, or, if
both of such officers are absent, an officer designated by the Executive
Committee, shall act as chairman of the meeting. The Secretary, or in
the Secretary's absence an Assistant Secretary, or if neither the
Secretary nor any Assistant Secretary be present, any person designated by
the chairman of the meeting, shall act as secretary of the meeting. Any
annual or special meeting of shareholders may be adjourned by the
chairman of the meeting or pursuant to resolution of the Board of
Directors without notice other than by announcement at the meeting. At
any adjourned meeting at which a quorum is present, any business may be
transacted that might have been transacted at the meeting as originally
convened.
Section 7. Voting. At each meeting of the shareholders, each
holder of shares entitled to vote at such meeting shall be entitled to
vote in person or by proxy appointed by an instrument in writing signed by
such shareholder or by the shareholder's duly authorized attorney
and, except as provided in the Certificate of Incorporation of the
Company with respect to cumulative voting, shall have one vote for each
share standing in the shareholder's name on the books of the Company
upon each matter submitted to a vote at the meeting. The vote upon the
election of directors shall be by ballot. If a quorum is present at any
meeting of shareholders, the vote of the holders of a majority of the
shares cast by the holders of shares entitled to vote on the matter
shall be sufficient for the transaction of any business, except that
directors shall be elected by a plurality of shares cast by the holders of
shares entitled to vote in the election, unless, in either case,
otherwise provided by law or by the Certificate of Incorporation.
Section 8. Inspectors of Election. Prior to each meeting of
shareholders, the Board of Directors shall appoint three Inspectors, who
shall not be directors or officers of the Company or candidates for the
office of director. Such Inspectors shall count and report to the
meeting the votes cast on all matters submitted to a vote at such
meeting. In the case of failure of the Board of Directors to make such
appointments, or in the case of failure of any Inspector so appointed to
act, the chairman of the meeting shall make such appointments or fill
such vacancies; provided, however, that if any shareholder shall demand an
election, such Inspector or Inspectors shall be elected by the votes cast
in person or by proxy of the holders of record of a plurality of
the shares voted at the meeting and the chairman of the meeting shall
conduct such an election. Each Inspector shall be entitled to a
reasonable compensation from the Company for his services. The
Inspectors appointed to act at any meeting of the shareholders, before
entering upon the discharge of their duties, shall be sworn faithfully
to execute the duties of Inspectors at such meeting with strict
impartiality and according to the best of their ability, and the oath so
taken shall be subscribed by them.
Article II
BOARD OF DIRECTORS
Section 1. Number, Qualification and Term of Office. The
business of the Company shall be managed under the direction of a Board of
Directors, each of whom shall be at least 18 years of age. The
number of directors of the Company shall be fixed and may from time to
time be increased or decreased by the Board of Directors, but in no
event shall the number of directors be less than 9 or more than 30.
Section 2. Vacancies. Any vacancies on the Board of Directors
may be filled by the affirmative vote of a majority of the remaining
directors then in office, even though less than a quorum of the Board of
Directors. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director.
Section 3. Resignations. Any director may resign at any time by
giving written notice to the Chairman of the Board of Directors, or to
the President, or to the Secretary of the Company. Such resignation
shall take effect on the date of receipt of such notice unless a later
effective date is specified therein. The acceptance of such resignation
by the Board of Directors shall not be necessary to make it effective.
Section 4. Place of Meetings. The Board of Directors may hold
its meetings at such place or places, within or without the State of New
York, as the Board of Directors may from time to time determine or as
may be specified in the notice of any meeting.
Section 5. Annual Meetings. A meeting of the Board of Directors to
be known as the annual meeting of the Board of Directors shall be
held following the meeting of the shareholders at which such Board of
Directors is elected, at such place as shall be fixed by the Board of
Directors, for the purpose of electing the officers of the Company and
the committees of the Board of Directors, and of transacting such other
business as may properly come before the meeting. It shall not be
necessary to give notice of this meeting.
Section 6. Other Meetings. Meetings of the Board of Directors
shall be held on such dates as from time to time may be determined by
the Board of Directors or whenever called upon the direction of the
Chairman of the Board of Directors or of the President or by the
Secretary upon the written request of one-third of the directors in
office, which request shall state the date, place and purpose of such
meeting.
Section 7. Notice of Meetings. Written, telephonic, telegraphic or
facsimile transmission notice of each meeting except the annual
meeting shall be given by the Secretary to each director, by personal
delivery, by telephone, or by regular or express mail, or telegram or
facsimile transmission addressed to the director at his or her usual
business address, or to the address where the director is known to be,
at least three days (excluding Saturdays, Sundays, and holidays) prior
to the meeting in case of notice by regular mail and at least three
hours prior to the meeting in case of notice by personal delivery,
express mail, telephone, telegram, or facsimile transmission. All
notices which are given by regular mail shall be deemed to have been
given when deposited in the United States mail, postage prepaid. Any
director may waive notice of any meeting, and the attendance of a
director at any meeting shall constitute a waiver of notice of such
meeting. Any and all business may be transacted at any meeting and the
purpose thereof need not be specified in the notice or waiver of notice of
such meeting.
Section 8. Organization, Quorum, Written Consents and Meetings by
Telephone or Similar Equipment. Unless the Board of Directors shall by
resolution otherwise provide, the Chairman of the Board of Directors, or
in the Chairman's absence, the President, or, if both of such officers
are absent, a director chosen by a majority of the directors present,
shall act as chairman at meetings of the Board of Directors; and the
Secretary, or in the Secretary's absence an Assistant Secretary, or in
the absence of an Assistant Secretary, such person as may be designated by
the chairman of the meeting, shall act as secretary at such meetings.
A majority of the directors in office at the time (but not less
than one-third of the entire Board of Directors) shall constitute a
quorum necessary for the transaction of business, and, except as
otherwise provided in these By-Laws, the action of a majority of the
directors present at any meeting at which a quorum is present shall be
the act of the Board of Directors. If at any meeting of the Board of
Directors a quorum is not present, a majority of the directors present
may adjourn the meeting from time to time.
Any action required or permitted to be taken by the Board of
Directors or any committee thereof may be taken without a meeting if all
members of the Board of Directors or the committee consent in writing to
the adoption of a resolution authorizing the action. The resolution and
the written consent thereto by the members of the Board of Directors or
committee shall be filed with the minutes of the proceedings of the
Board of Directors or committee.
Any one or more members of the Board of Directors or any committee
thereof may participate in a meeting of such Board of Directors or
committee by means of a conference telephone or similar communications
equipment allowing all persons participating in the meeting to hear each
other at the same time. Participation by such means shall constitute
presence in person at a meeting.
Section 9. Compensation. Each director not an officer of the
Company, or of any subsidiary or affiliated company, may receive such
compensation for his or her services as a director and as a committee
member as shall be fixed from time to time by resolution of the Board of
Directors and shall be reimbursed for expenses of attendance at meetings
of the Board of Directors and of any committee of which he or she is a
member.
Article III
COMMITTEES
Section 1. Creation and Organization. The Board of Directors, at
its annual meeting, or any adjournment thereof, shall, or at any other
meeting may, elect from among its members, by the vote of a majority of
its members, an Audit Committee, a Compensation Committee, an Executive
Committee, a Finance Committee, a Nominating Committee and a Public
Issues Committee, which shall be the standing committees of the Board of
Directors, and such other committees as shall be determined by the Board
of Directors. The Board of Directors also shall designate the chairman of
each such committee.
The Secretary of the Company shall act as secretary of each
committee meeting, or in the Secretary's absence, an Assistant Secretary
shall act as secretary thereof, or in the absence of an Assistant
Secretary, any person as may be designated by the chairman of the
committee shall act as secretary of the meeting and keep the minutes of
such meeting.
The Board of Directors, by the vote of a majority of its members,
may remove the chairman or any member of any committee, and may fill
from among the directors vacancies in any committee caused by the death,
resignation, or removal of any person elected thereto.
Each committee may determine its own rules of procedure,
consistent with these By-Laws. Meetings of any committee may be called
upon direction of the Chairman of the Board of Directors, the President,
or the chairman of the committee. Notice of each meeting shall be given
to each member of the committee, by personal delivery, telephone,
telegram, facsimile transmission, or regular or express mail addressed
to the member at his or her usual business address, or to the address
where the member is known to be, at least three days (excluding
Saturdays, Sundays, and holidays) prior to the meeting in case of notice
by regular mail, and at least three hours prior to the meeting in case
of notice by personal delivery, express mail, telephone, telegram, or
facsimile transmission. All notices which are given by regular mail
shall be deemed to have been given when deposited in the United States
mail, postage prepaid. Notice of meetings of any committee may be
waived by any member of the committee. At meetings of each committee,
the presence of a majority of such committee shall be necessary to
constitute a quorum for the transaction of business, and, if a quorum is
present at any meeting, the action taken by a majority of the members
present shall be the act of the committee. Each committee shall keep a
record of its acts and proceedings, and all action shall be reported to
the Board of Directors at the next meeting of the Board of Directors
following such action. Each committee shall annually consider whether
amendments to the section of Article III of these By-Laws relating to
the composition and function of such committee appear to be in the best
interests of the Company. Each committee shall report on such
recommendations to the Board of Directors at its first regular meeting
each year and each committee except the Nominating Committee shall
report on such recommendations to the Nominating Committee annually no
later than October.
Section 2. Executive Committee. The Executive Committee shall
consist of the Chairman of the Board of Directors and of such number of
other directors, a majority of whom shall not be officers or employees
of the Company or its affiliates, not less than four, as shall from time
to time be prescribed by the Board of Directors.
The Executive Committee, unless otherwise provided by resolution
of the Board of Directors, shall between meetings of the Board of
Directors have all the powers of the Board of Directors and may perform
all of the duties thereof, except that the Executive Committee shall
have no authority as to the following matters: (i) submission to
shareholders of any action that requires shareholders' authorization
under the New York Business Corporation Law; (ii) compensation of
directors; (iii) amendment or repeal of these By-Laws or the adoption of
new By-Laws; (iv) amendment or repeal of any resolution of the Board of
Directors that by its terms may not be so amended or repealed; (v)
action in respect of dividends to shareholders; (vi) election of
officers, directors or members of committees of the Board of Directors.
Any action taken by the Executive Committee shall be subject to revision
or alteration by the Board of Directors, provided that rights or acts of
third parties vested or taken in reliance on such action prior to their
receipt of written notice of any such revision or alteration shall not
be adversely affected by such revision or alteration.
Section 3. Audit Committee. The Audit Committee shall consist of
such number of directors, who shall not be officers or employees of the
Company or any of its affiliates, not less than three, as shall from
time to time be prescribed by the Board of Directors.
The Audit Committee shall review, with management, the Company's
independent public accountants and its internal auditors, upon
completion of the audit, the annual financial statements of the Company,
the independent public accountants' report thereon, the other relevant
financial information to be included in the Company's Annual Report on
Form 10-K and its annual report to shareholders. After such review, the
Committee shall report thereon to the Board of Directors.
The Audit Committee shall: (1) review recommendations made by
the Company's independent public accountants and internal auditors to
the Audit Committee or the Board of Directors with respect to the
accounting methods and the system of internal control used by the
Company, and shall advise the Board of Directors with respect thereto;
(2) examine and make recommendations to the Board of Directors with
respect to the scope of audits conducted by the Company's independent
public accountants and internal auditors; (3) review reports from the
Company's independent public accountants and internal auditors
concerning compliance by management with governmental laws and
regulations and with the Company's policies relating to ethics,
conflicts of interest, perquisites and use of corporate assets.
The Audit Committee shall meet with the Company's independent
public accountants and/or internal auditors without management present
whenever the Audit Committee shall deem it appropriate. The Committee
shall review with the General Counsel of the Company the status of legal
matters that may have a material impact on the Company's financial
statements.
The Audit Committee shall each year make a recommendation, based
on a review of qualifications, to the Board of Directors for the
appointment of independent public accountants to audit the financial
statements of the Company and to perform such other duties as the Board of
Directors may from time to time prescribe. As part of such review of
qualifications, the Audit Committee shall consider management's plans
for engaging the independent public accountants for management advisory
services to determine whether such services could impair the public
accountants' independence.
The Audit Committee shall have the power to conduct or authorize
special projects or investigations which the Committee considers
necessary to discharge its duties and responsibilities. It shall have
the power to retain independent outside counsel, accountants or others
to assist it in the conduct of any investigations and may utilize the
Company's General Counsel and internal auditors for such purpose.
Section 4. Compensation Committee. The Compensation Committee
shall consist of such number of directors, who shall not be officers or
employees of the Company or any of its affiliates, not less than three, as
shall from time to time be prescribed by the Board of Directors. As
authorized by the Board of Directors, the Compensation Committee shall
make recommendations to the Board of Directors with respect to the
compensation of directors and the administration of the salaries,
bonuses, and other compensation to be paid to the officers of the
Company, including the terms and conditions of their employment, shall
review the compensation of the Chief Executive Officer, and shall
administer all stock option and other benefit plans (unless otherwise
specified in plan documents) affecting officers' direct and indirect
remuneration.
Section 5. Finance Committee. The Finance Committee shall
consist of such number of directors, a majority of whom shall not be
employees of the Company or any of its affiliates, not less than three, as
shall from time to time be prescribed by the Board of Directors.
The Finance Committee shall review the financial affairs,
policies, practices and condition of the Company, its subsidiaries, and
related employee benefit plans, as appropriate. The Committee shall, on
its own initiative or upon referral from the Board of Directors,
investigate, analyze and consider the current and future financial
practices of the Company, its subsidiaries, and related employee benefit
plans, except to the extent within the authority of another committee of
the Board of Directors, and report and make such recommendations to the
Board of Directors as deemed appropriate.
From time to time, the Committee shall review areas including but
not limited to the following: Dividend policy and total shareholder
return; financing plans; capital allocation, structure, and markets
access; asset/liability management; and the design, funding and
investment policies of employee benefit plans.
Section 6. Nominating Committee. The Nominating Committee shall
consist of such number of directors, who shall not be officers or
employees of the Company or any of its affiliates, not less than three, as
shall from time to time be prescribed by the Board of Directors.
The Nominating Committee shall review and recommend to the Board
of Directors prior to the annual shareholders' meeting each year: (a)
the appropriate size and composition of the Board of Directors; (b) a
proxy statement and form of proxy; (c) policies and practices on
shareholder voting; (d) plans for the annual shareholders' meeting; and
(e) nominees: (i) for election to the Board of Directors for whom the
Company should solicit proxies; (ii) to serve as proxies in connection
with the annual shareholders' meeting; (iii) for election to all
committees of the Board of Directors; and (iv) for election or approval as
Corporate Officers and Chairmen and Chief Executive Officers and at
least five others of the most senior officers of each of the Company's
Business Groups.
The Nominating Committee shall annually assess the performance of
the Board and review the management organization of the Company and
succession plans for the Chairmen and Chief Executive Officers of the
Company and its Business Groups, including consultation with the
Chairman of the Board of Directors regarding the persons he or she
considers qualified to fill any vacancy that may occur in such
positions. In the event of any such vacancy, the Nominating Committee
shall recommend to the Board of Directors a nominee to fill such
vacancy.
Section 7. Public Issues Committee. The Public Issues Committee
shall consist of such number of directors, not less than three, as shall
from time to time be prescribed by the Board of Directors. A majority
of the members shall not be officers or employees of the Company or any of
its affiliates.
The Public Issues Committee shall concern itself with current
problems and future trends in respect to public issues that may affect
the Company and shall review and discuss such issues with the
appropriate representatives of management of the Company and provide
guidance as to the Company's policies and positions with respect
thereto.
Article IV
OFFICERS
Section 1. Officers. The Board of Directors shall, at its annual
meeting, and may at any other meeting, or any adjournment thereof, elect
from among its members a Chairman of the Board of Directors and a
President. The Board of Directors may also elect at such meeting one or
more Vice Chairmen and one or more Vice Presidents, who may have special
designations, and shall elect at such meeting a Treasurer, a Controller
and a Secretary, who also may have special designations.
The Board of Directors may elect or appoint such other officers
and agents as it shall deem necessary, or as the business of the Company
may require, each of whom shall hold office for such period, have such
authority and perform such duties as the Board of Directors may
prescribe from time to time.
Any two or more offices, except the offices of Chairman of the
Board of Directors and Secretary, the offices of President and Secretary
and the offices of Treasurer and Controller, may be held by the same
person, but no officer shall execute, acknowledge or verify any
instrument in more than one capacity.
Section 2. Term of Office. Each officer elected by the Board of
Directors shall hold office until the next annual meeting of the Board
of Directors and until his or her successor is elected, or until such
earlier date as shall be prescribed by the Board of Directors at the
time of his or her election. Any officer may be removed at any time,
with or without cause, by the vote of a majority of the members of the
Board of Directors.
Section 3. Vacancies. A vacancy in any office caused by the
death, resignation, retirement, or removal of the person elected
thereto, or by any other cause, may be filled for the unexpired portion of
the term by election of the Board of Directors at any meeting. In
case of the absence or disability, or refusal to act of any officer of
the Company, or for any other reason that the Board of Directors shall
deem sufficient, the Board of Directors may delegate, for the time
being, the powers and duties, or any of them, of such officer to any
other officer or to any director, consistent with the limitations in
Section 1.
Section 4. The Chairman of the Board of Directors. The Chairman of
the Board of Directors shall be the chief executive officer of the
Company and shall have general direction over the affairs of the
Company, subject to the control and direction of the Board of Directors.
The Chairman shall, when present, preside as chairman at all meetings of
the shareholders and of the Board of Directors. The Chairman may call
meetings of the shareholders and of the Board of Directors and of the
committees whenever he or she deems it necessary. The Chairman shall,
in the absence or incapacity of the President, perform all duties and
functions and exercise all the powers of the President. The Chairman
shall have such other powers and perform such other duties as from time to
time may be prescribed by the Board of Directors.
Section 5. The President. The President shall have general
direction over the day-to-day business of the Company, subject to the
control and direction of the Chairman of the Board of Directors. The
President shall keep the Chairman of the Board of Directors fully
informed concerning the activities of the Company under his supervision.
The President shall, in the absence or incapacity of the Chairman of the
Board of Directors, perform all duties and functions and exercise all
the powers of the Chairman of the Board of Directors. In the absence of
the Chairman of the Board of Directors, the President shall preside at
meetings of the shareholders and of the Board of Directors. The
President shall have such other powers and perform such other duties as
are incident to the office of President and as from time to time may be
prescribed by the Board of Directors.
Section 6. Vice Chairmen and Vice Presidents. Each Vice Chairman
and each Vice President shall have such powers and perform such duties
as from time to time may be assigned to him or her by the Board of
Directors or be delegated to him or her by the Chairman of the Board of
Directors or by the President. The Board of Directors may assign to any
Vice Chairman or Vice President general supervision and charge over any
territorial or functional division of the business and affairs of the
Company. In the absence or incapacity of the Chairman of the Board of
Directors and the President, the powers, duties, and functions of the
President shall be temporarily performed and exercised by such one of
the Vice Chairmen or Vice Presidents as shall be designated by the Board
of Directors or, if not designated by the Board of Directors, by the
Executive Committee or, if not designated by the Executive Committee, by
the President.
Section 7. Treasurer. The Treasurer shall have responsibility
for the custody and safekeeping of all funds and securities of the
Company; shall make disbursements of Company funds upon appropriate
vouchers and supervise the handling of balances and maintain proper
relationships with banks; shall keep full and accurate accounts of the
transactions of his or her office in books belonging to the Company and
render to the Board of Directors, whenever it may require, an account of
his or her transactions as Treasurer; and in general shall have such
other powers and perform such other duties as are incident to the office
of Treasurer and as from time to time may be prescribed by the Board of
Directors, the Chairman of the Board of Directors, or the President.
Section 8. Controller. The Controller shall have general charge,
control, and supervision over the accounting and auditing affairs of the
Company. The Controller or such persons as the Controller shall
designate shall have responsibility for the custody and safekeeping of
all permanent records and papers of the Company. The Controller shall
have responsibility for the preparation and maintenance of the books of
account and of the accounting records and papers of the Company; shall
supervise the preparation of all financial statements and reports on the
operation and condition of the business; shall have responsibility for
the establishment of financial procedures, records, and forms used by
the Company; shall have responsibility for the filing of all financial
reports and returns, except tax returns, required by law; shall render
to the Chairman of the Board of Directors, the President, or the Board
of Directors, whenever they may require, an account of the Controller's
transactions; and in general shall have such other powers and perform
such other duties as are incident to the office of Controller and as
from time to time may be prescribed by the Board of Directors, the
Chairman of the Board of Directors, or the President.
Section 9. Secretary. The Secretary shall attend and keep the
minutes of meetings of the shareholders, of the Board of Directors, and of
all committees of the Company in books of the Company provided for
that purpose; may sign with the Chairman of the Board of Directors, the
President, any Vice Chairman or any Vice President, or the Manager of
any Department, in the name of the Company, contracts and other
instruments authorized by the Board of Directors or by the Executive
Committee, and in proper cases shall affix the corporate seal thereto;
shall see that notices are given and corporate records and reports are
properly kept and filed by the Company as required by these By-Laws or
as required by law; and in general shall have such other powers and
perform such other duties as are incident to the office of Secretary and
as from time to time may be prescribed by the Board of Directors, the
Chairman of the Board of Directors, or the President.
Section 10. Compensation. The salaries and other compensation of
all officers elected by the Board of Directors shall be fixed from time to
time by or under the direction of the Board of Directors.
Article V
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Indemnification. Any person (hereinafter called an
"Indemnitee") made, or threatened to be made, a party to, or who is
otherwise involved in, any action, suit or proceeding whether civil,
criminal, administrative or investigative, by reason of the fact that
such Indemnitee, or his or her testator or intestate, is or was a
director or officer of the Company, or, while a director or officer of
the Company and at the request of the Company, is or was serving another
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise in any capacity, shall be indemnified by the Company to
the full extent permitted by applicable law, against judgments, fines,
amounts paid in settlement and all expenses, including attorneys' fees,
actually incurred as a result of such action, suit or proceeding, or any
appeal therein.
Without limitation of the foregoing, the Company shall be deemed
to have requested an Indemnitee to serve an employee benefit plan where
the performance by such person of his or her duties to the Company also
imposes duties on, or otherwise involves services by, such person to the
plan or participants or beneficiaries of the plan. Excise taxes
assessed on an Indemnitee with respect to an employee benefit plan
pursuant to applicable law shall be considered fines.
Section 2. Partial Indemnity. If an Indemnitee is entitled under
any provision of this Article V to indemnification by the Company for
some or a portion of the amounts indemnified against, but not for the
total amount thereof, the Company shall nevertheless indemnify such
Indemnitee for the portion thereof to which such Indemnitee is entitled.
Section 3. Advancement of Expenses. The Company shall, from time
to time, reimburse or advance to any Indemnitee the funds necessary for
payment of expenses incurred in connection with any action, suit or
proceeding referred to in Section 1, upon receipt of a written
undertaking by or on behalf of such Indemnitee to repay such amounts if
and to the extent that such repayment is required pursuant to applicable
law.
Section 4. Corporate Action; Judicial Review. Upon receipt of a
request to be indemnified, or for the reimbursement or advancement of
expenses, the Company shall promptly proceed in good faith to take all
actions necessary to a determination of whether or not the Indemnitee is
entitled to such payment pursuant to this Article V. If such a request is
not paid in full by the Company within thirty days after receipt of a
written claim therefor, the Indemnitee may at any time thereafter bring
suit against the Company to recover the unpaid amount of the claim and, if
successful in whole or in part, the Indemnitee also shall be entitled to
be reimbursed by the Company for the expenses actually incurred,
including attorneys' fees, of prosecuting such claim. Neither a
determination that such payments are improper under the circumstances,
nor the failure of the Company (including its Board of Directors,
Independent Counsel (as hereinafter defined) or shareholders) to have
made a determination, prior to the commencement of such action, that
such payments are proper under the circumstances, shall be a defense to
the action or shall create a presumption that the Indemnitee is not
entitled to the payment requested. Notwithstanding any other provision of
this Article V, in any action hereunder by the Indemnitee against the
Company to secure indemnification or reimbursement or advancement of
expenses, to the extent permitted by applicable law, the Company shall
bear the burden of proof that the Indemnitee is not entitled to such
payments.
Section 5. Contract Right. The right to indemnification and to
the reimbursement or advancement of expenses pursuant to this Article V
(a) is a contract right provided in consideration of services to the
Company, with respect to which an Indemnitee may bring suit as if the
provisions of this Article V were set forth in a separate written
contract between the Company and such Indemnitee, (b) is intended to be
retroactive and shall, to the extent permitted by applicable law, be
available with respect to events occurring prior to the adoption hereof,
and (c) shall continue to exist after any future rescission or
restrictive modification hereof with respect to any alleged cause of
action that accrues, or any other incident or matter that occurs, prior to
such rescission or modification. It is the intent of the Company to
irrevocably establish hereby the right of Indemnitees to all
indemnification that is not prohibited by applicable law.
Section 6. Change in Control. If there has been a Change in
Control of the Company (as hereinafter defined) within five years prior to
any request for indemnification or reimbursement or advancement of
expenses pursuant to this Article V, then with respect to all matters
thereafter arising concerning the rights of Indemnitees to payments
pursuant to this Article V or under any other agreement not inconsistent
with this Article V now or hereafter in effect, the Company shall seek
legal advice as specified below only from Independent Counsel (as
hereinafter defined) selected by the Indemnitee and approved by the
Company (which approval shall not be unreasonably withheld). Such
Independent Counsel shall determine whether and to what extent the
Indemnitee would be permitted to be indemnified under applicable law,
which determination shall include an opinion as to whether any requisite
standard of conduct under applicable law has been met, and shall render a
written opinion to the Company and the Indemnitee to such effect. To the
extent permitted by applicable law, the Company shall be required by this
Section 6 to authorize indemnification to the extent such opinion
of Independent Counsel indicates that indemnification is permitted under
applicable law; provided, however, that nothing in this Section 6 shall be
deemed to abrogate the duties of any director of the Company to
participate in any determination required to be made under applicable
law as to whether such payments shall be made. The Company agrees to
pay the reasonable fees of such Independent Counsel and to indemnify
such counsel fully against any and all expenses, claims, liabilities and
damages arising out of or relating to this Article V or the engagement
of such Independent Counsel pursuant hereto.
A "Change in Control of the Company" shall be deemed to have
occurred if (a) any "person" (as such term is used in Section 13(d) of
the Securities Exchange Act of 1934) is or becomes the beneficial owner
(as defined in Rule 13d-3 under such Act), directly or indirectly, of
securities of the Company representing 25% or more of the combined
voting power of the Company's then outstanding voting shares, or (b)
during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the
Company cease for any reason to constitute at least a majority thereof
unless the election of each director who was not a director at the
beginning of the period was approved by a vote of a least 75% of the
directors then still in office who were directors at the beginning of
the period.
"Independent Counsel" shall refer to an attorney-at-law who at the
time of his or her selection shall not have otherwise performed services
for the Company or the Indemnitee within the previous five years.
Independent Counsel shall not be any person who, under the standards of
professional conduct to which he or she is legally subject, would have a
conflict of interest in representing either the Company or the
Indemnitee in connection with the determination of the Indemnitee's
rights under this Article V; nor shall Independent Counsel be any person
who has been sanctioned or censured for ethical violations of such
standards of professional conduct.
Section 7. Period of Limitations. To the extent such limitation is
permitted by applicable law, no legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company or
any affiliate of the Company against an Indemnitee, Indemnitee's spouse,
heirs, testators, intestates, executors, administrators or personal or
legal representatives after the expiration of three years from the date of
accrual of such cause of action, and any claim or cause of action of the
Company or any affiliate shall be extinguished and deemed released
unless asserted by the timely filing of a legal action within such three
year period; provided, however, that if any shorter period of
limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
Section 8. Non-exclusivity. The rights of Indemnitees under the
foregoing provisions of this Article V shall be in addition to any other
rights such persons may have under a resolution of the shareholders of
the Company, a resolution of its directors, the Certificate of
Incorporation of the Company as amended or restated from time to time,
the New York Business Corporation Law, the common law, any insurance
policy, any agreement or otherwise. In addition to the foregoing
provisions of this Article V, indemnification and reimbursement and
advancement of expenses may be authorized pursuant to this Article V by a
resolution of the shareholders of the Company, a resolution of its
directors or an agreement providing for such indemnification. The
Company shall not be liable under this Article V to make any payment to an
Indemnitee to the extent that such person has otherwise actually
received payment of the amounts otherwise indemnifiable hereunder.
Section 9. Applicable Law. Any Indemnitee entitled to
indemnification or to the reimbursement or advancement of expenses as a
matter of right pursuant to this Article V may elect, to the extent
permitted by law, to have the right of indemnification (or reimbursement
or advancement of expenses) interpreted on the basis of the applicable
law in effect at the time of the occurrence of the event or events
giving rise to the action, suit or proceeding, or on the basis of the
applicable law in effect at the time indemnification (or reimbursement
or advancement of expenses) is sought.
Article VI
STOCK CERTIFICATES AND TRANSFER OF STOCK
Section 1. Certificates of Stock. Certificates representing
shares of the Company shall be in such form, consistent with law, as
shall be approved by the Board of Directors. They shall be signed by
the Chairman of the Board of Directors or President or a Vice Chairman
or a Vice President, and by the Secretary or Treasurer or by an
Assistant Secretary or Assistant Treasurer, and shall be sealed with the
corporate seal of the Company. Such seal may be an engraved or printed
facsimile, and the signature of such officers of the Company, or any of
them, may be printed facsimiles if such certificates are countersigned
by a Transfer Agent or registered by a Registrar other than the Company
itself or an employee thereof. In case any officer who shall have
signed any such certificate, or whose facsimile signature shall have
been used thereon, shall cease to be such officer before such
certificate shall have been issued by the Company, such certificate may be
issued by the Company with the same effect as if such officer had not
ceased to be such at the date of the issuance of such certificate. The
signature of the Transfer Agent and Registrar on a certificate
representing shares of the Company may also be a printed facsimile when
the same entity acts in the dual capacity.
Section 2. Transfer of Certificated Stock. Certificated shares
of the Company shall be transferred on the books of the Company only
upon surrender of the certificate or certificates therefor to the
Treasurer of the Company, or to any authorized Transfer Agent, properly
endorsed or accompanied by proper assignments duly executed by the
registered holder thereof in person or by his or her attorney duly
authorized in writing; except that with respect to certificates alleged to
have been lost, stolen, or destroyed, a new certificate may be issued
without cancellation of the original certificate, but only upon
production of such evidence of the loss, theft, or destruction of the
original certificate, and upon delivery to the Company of a bond of
indemnity in such amount and upon such terms as the Board of Directors, in
its discretion, may require. Until so transferred on the books of
the Company, the Company shall deem and treat the registered holder of
each certificate for shares as the owner of such shares for all
purposes.
Section 3. Transfer Agent and Registrar; Regulations. The
Company shall maintain one or more transfer offices or agencies, each
under control of a Transfer Agent, where the shares of the Company may
be transferable, and also one or more registry offices or agencies, each
under control of a Registrar, where such shares may be registered, and
no certificate for shares of the Company shall be valid unless
countersigned by such Transfer Agent and registered by such Registrar.
The Board of Directors may make such additional rules and regulations as
it may deem expedient concerning the issue, transfer, and registration
of certificates for shares of the Company.
Section 4. Record Date of Shareholders. The Board of Directors
may from time to time fix in advance a date, not more than fifty nor
less than ten days preceding the date of any meeting of shareholders,
and not more than fifty days prior to the date for the payment of any
dividend, or the date for the allotment of any rights, or the date when
any change or conversion or exchange of shares shall become effective,
or the date for any other action by the shareholders, as a record for
the determination of the shareholders entitled to notice of, and to vote
at, any such meeting and any adjournment thereof, or entitled to receive
payment of any such dividend, or to any such allotment of rights, or to
exercise the rights in respect of any such change, conversion, or
exchange of shares, or to take any other action, and only such
shareholders as shall be shareholders of record on the date so fixed
shall be entitled to such notice of, and to vote at, such meeting and
any adjournment thereof, or to receive payment of such dividend, or to
receive such allotment of rights, or to exercise such rights, or to take
such other action, as the case may be, notwithstanding any transfer of
any shares on the books of the Company after any such record date so
fixed.
Section 5. Uncertificated Shares. The Board of Directors may in
its discretion authorize the issuance of shares which are not
represented by certificates and provide for the registration and
transfer thereof on the books and records of the Company or any Transfer
Agent or Registrar so designated.
Section 6. Shareholder Records. The names and addresses of the
persons to whom shares are issued, and the number of shares and the
dates of issue and any transfer thereof, whether in certificated or
uncertificated form, shall be entered on records kept for that purpose.
The stock transfer records and the blank stock certificates shall be
kept by the Transfer Agent, or by the Treasurer, or such other officer
as shall be designated by the Board of Directors for that purpose.
Every certificate surrendered for transfer or exchange shall be
cancelled.
Article VII
FISCAL YEAR
The fiscal year of the Company shall begin on January 1 in 1994,
and thereafter shall begin on the day after the Saturday closest to
December 31 in each year, and shall end on the Saturday closest to
December 31 in 1994 and each year thereafter.
Article VIII
SEAL
The corporate seal of the Company shall be circular in form and
shall contain the name of the Company and the words "New York," "1906,"
and "Seal." The Secretary shall have custody of the seal, and a
duplicate of the seal may be kept and used by any Assistant Secretary.
Article IX
AMENDMENTS
These By-Laws may be amended or repealed by the vote of a majority
of the directors present at any meeting at which a quorum is present or by
the vote of the holders of the shares of the Company at the time
entitled to vote in the election of directors at any meeting of the
shareholders at which a quorum is present.
Exhibit 4(ii)
This document constitutes part of a prospectus covering securities
that have been registered under the Securities Act of 1933.
[Date of Grant]
[Name of grantee]:
I am pleased to inform you that, pursuant to action taken by Sears,
Roebuck and Co. (the "Company") under the 1994 Employees Stock Plan (the
"Plan"), you were granted _______ common shares of the Company, which
are restricted.
Your restricted shares may not be sold, transferred, pledged or
otherwise assigned and shall, except to the extent exchangeable for
unrestricted common shares of the Company as hereinafter provided, be
automatically cancelled upon termination of your employment with the
Company and its subsidiaries that are included in the Company's
consolidated federal income tax return. Your restricted shares shall be
exchangeable for unrestricted common shares of the Company and
certificates shall be issued to you on ________.1 Prior to such accrual
date, your restricted shares shall be exchangeable for unrestricted
common shares of the Company and certificates shall be issued to you
upon the occurrence of any of the following accrual events, subject to
the provisions set forth below: (i) a Change of Control (as defined in
Appendix A); (ii) death; (iii) total and permanent disability; (iv)
normal retirement; or (v) early retirement with Company approval after
attaining age 60; provided, however, that, if any accrual event shall
occur less than six months after the date of grant of your restricted
shares, your restricted shares shall become exchangeable for
unrestricted common shares of the Company and certificates shall be
issued to you at the end of such six months, but only if you are still
employed by the Company or any of its subsidiaries.
In the event of a spin-off or other distribution of any assets of the
Company or any subsidiary or all or any portion of the interest of the
Company in any subsidiary to the shareholders of the Company (other than
regular quarterly cash dividends), the Company may make such provision
with respect to your rights as a holder of restricted shares under the
Plan (including without limitation adjustments to the number of your
restricted shares and limitations on your rights to receive any such
distribution) as the Company may deem appropriate and equitable or in
accordance with the purposes of the Plan and the grant of your
restricted shares (including without limitation the termination and
forfeiture of your restricted shares prior to the record date for any
such distribution and the replacement of such terminated and forfeited
1. Five years after the date of grant of the restricted shares.
restricted shares after such record date with a number of restricted
shares adjusted to reflect the dilutive effects of such distribution).
Until your restricted shares become unrestricted as set forth above, no
certificates for your restricted shares will be issued to you, and your
restricted shares will be evidenced by certificates held by or on behalf
of the Company, in book-entry form, or otherwise, as determined by the
Company. As a holder of restricted shares, you are otherwise entitled
to all the rights (including voting and dividend rights) of a holder of
an equivalent number of unrestricted common shares of the Company.
Under existing laws and regulations, in general, the fair market value
of the shares granted hereunder on the date such shares become
exchangeable for unrestricted common shares of the Company will be
subject to federal income tax at ordinary rates and to social security
tax and their respective withholding requirements, and may be subject to
state and local taxes and withholding requirements. The payment of all
federal, state and local taxes is your personal responsibility.
However, the Company, at its discretion, may require you to deposit with
it an amount equal to any required withholding. You may elect that all
or any portion of any such withholding required to be deposited when the
shares granted hereunder become exchangeable for unrestricted common
shares of the Company shall be satisfied by having the Company withhold
a portion of the whole shares granted hereunder, subject to the
provisions set forth below. Such shares shall be valued at their fair
market value on the date such shares become exchangeable for
unrestricted common shares of the Company. The fair market value of
common shares of the Company on any date shall be the mean (adjusted to
the next higher full cent to eliminate any fractional cent) between the
high and low prices per share for the Company's common shares as
reported in a summary of composite transactions for stocks listed on the
New York Stock Exchange on such date or, if the New York Stock Exchange
is not open for trading on such date, the average of the means between
the high and low prices per share for the Company's common shares, as so
reported, on the nearest date before and the nearest date after such
date on which the New York Stock Exchange is open for trading (adjusted
to the next higher full cent to eliminate any fractional cent). In
addition, if you are an officer of the Company subject to Section 16(b)
of the Securities Exchange Act of 1934, your election to have shares
withheld to satisfy such tax withholding requirements may be subject to
certain restrictions. Your Officers' Stock Manual will include a
detailed explanation of these restrictions.
A summary explanation of the restricted stock program can be found in
your Executive Compensation Binder. Questions regarding details of the
program should be directed to David Wells, Acting Corporate Director,
Compensation, of the Company.
Sincerely,
Exhibit 10(iii)(14)
Sections 1.2(k) and 1.2(o) of the Plan hereby are amended to read as
follows:
(k) "Hardship" shall mean severe financial hardship to the
Participant resulting from a sudden and unexpected illness or accident
of the Participant or of a dependent (as defined in Section 152(a) of
the Internal Revenue Code of 1986, as amended) of the Participant, loss
of the Participant's property due to casualty, or other similar
extraordinary and unforeseeable circumstances arising as a result of
events beyond the control of the Participant. The circumstances that
will constitute an unforeseeable emergency will depend upon the facts of
each case, but, in any case, payment may not be made to the extent that
such hardship is or may be relieved--
1) through reimbursement or compensation by insurance or otherwise,
2) by liquidation of the Participant's assets, to the extent the
liquidation of such assets would not itself cause severe financial
hardship, or
3) by cessation of deferrals under the Plan.
Examples of what are not considered to be unforeseeable emergencies
include the need to send a Participant's child to college or the desire
to purchase a home.
(o) "Plan Year" shall mean the calendar year.
The second sentence of Section 4.3(c) of the Plan hereby is amended to
read as follows:
On the last day in the month the amounts in the Participant's
Subaccount shall be adjusted by a percentage factor based on the total
return (including dividends) of the Industrial Index from the date the
amount was credited to the Subaccount for amounts credited during the
month or from the last day of the preceding month for amounts in the
Subaccount on such day.
Section 4.3(e) of the Plan hereby is amended to read as follows:
(e) Transfers between Subaccounts. Except for the limitations
in the following paragraph applicable only to certain transfers by
Section 16(a) Participants, transfers between Subaccounts may be made
once for each calendar quarter at the request of the Participant upon
application to the Committee, and shall be effective as of the first day
of the calendar quarter subsequent to the quarter in which the Company
receives such Participant's request to transfer.
Section 5.4(b) of the Plan hereby is amended to read as follows:
(b) Except for distribution elections under Section 5.1(d), each
Participant may from time to time revise the terms of distribution of
the Participant's Account by submitting a revised written notice of
his/her desired form of payment, provided that (i) the revised written
notice of his/her desired form of payment shall be filed by the
Participant with the Committee or its representative no less than twelve
months prior to the date on which payment would commence to be made in
the absence of such revised written notice, but in any event no later
than the day before the date of the Participant's Separation from
Service and (ii) in any event, distribution of the Participant's Account
shall not commence earlier than twelve months after the
Participant's revised notice of his/her desired form of payment is
filed with the Committee or its representative.
Exhibit 11
SEARS, ROEBUCK AND CO.
AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31
(millions, except per common share data) 1994 1993 1992
EARNINGS (LOSS)
Income (loss) from continuing operations $ 1,244 $ 2,420 $ (2,311)
Discontinued operations 15 165 252
Extraordinary gain (loss) 195 (211) -
Cumulative effect of accounting changes - - (1,873)
Net income (loss) 1,454 2,374 (3,932)
Preferred share dividends (29) (29) (29)
Net income (loss) applicable to common shares $ 1,425 $ 2,345 $ (3,961)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES (1)
Primary 388.9 382.9 369.6
Fully dilutive effect of stock options -
after application of treasury stock method (2) - - -
Maximum number of common and common
equivalent shares outstanding 388.9 382.9 369.6
EARNINGS (LOSS) PER COMMON SHARE (1)
PRIMARY
Income (loss) from continuing operations $ 3.12 $ 6.25 $ (6.33)
Discontinued operations 0.04 0.43 0.68
Extraordinary gain (loss) 0.50 (0.55) -
Cumulative effect of accounting changes - - (5.07)
Net income (loss) $ 3.66 $ 6.13 $ (10.72)
FULLY DILUTED (3)
Income (loss) from continuing operations $ 3.12 $ 6.25 $ (6.33)
Discontinued operations 0.04 0.43 0.68
Extraordinary gain (loss) 0.50 (0.55) -
Cumulative effect of accounting changes - - (5.07)
Net income (loss) $ 3.66 $ 6.13 $ (10.72)
<FN>
(1) Series A Mandatorily Exchangeable Preferred Shares are considered common
shares for purposes of computing weighted average number of common shares.
(2) The maximum dilution of earnings per common share assumes the exercise of
all outstanding stock options. The treasury stock method has been applied based
upon the higher of the closing price at fiscal year end or the average price of
the common shares during the respective years. In 1992, stock options were
anti-dilutive.
(3) Fully diluted earnings per common share are not disclosed in the Company's
financial statements in accordance with APB Opinion No. 15 since the maximum
dilutive effect is less than 3%.
</TABLE>
Exhibit 12. (a)
COMPUTATION OF RATIO OF INCOME TO FIXED CHARGES
SEARS, ROEBUCK AND CO. AND CONSOLIDATED SUBSIDIARIES
<TABLE>
<CAPTION>
<S>
<C> <C> <C> <C> <C>
Year Ended December 31
1994 1993 1992 1991 1990
(millions, except ratios)
Fixed Charges
Interest and amortization of debt discount
and expense on all indebtedness $1,339 $1,400 $1,389 $1,568 $1,651
Add interest element implicit in rentals 208 200 256 244 233
1,547 1,600 1,645 1,812 1,884
Interest capitalized 1 3 23 22 16
Total fixed charges $1,548 $1,603 $1,668 $1,834 $1,900
Income (loss)
Income (loss) from continuing operations $1,244 $2,420 ($2,311) $883 $646
Add undistributed net loss
of unconsolidated companies (17) (1) (24) (10) (10)
1,261 2,421 (2,287) 893 656
Add
Fixed charges (excluding interest capitalized) 1,547 1,600 1,645 1,812 1,884
Income taxes (benefit) 358 404 (1,965) (57) (402)
Income (loss) before fixed charges and
income taxes $3,166 $4,425 ($2,607) $2,648 $2,138
Ratio of income to fixed charges 2.05 2.76 (A) 1.44 1.13
<FN>
(A) As a result of the loss for the year ended December 31, 1992, earnings did
not cover fixed charges by $4,275 million.
</TABLE>
Exhibit 12. (b)
COMPUTATION OF RATIO OF INCOME TO COMBINED FIXED CHARGES AND PREFERRED SHARE
DIVIDENDS SEARS, ROEBUCK AND CO. AND CONSOLIDATED SUBSIDIARIES
<TABLE>
<CAPTION>
<S>
<C> <C> <C> <C> <C>
Year Ended December 31
1994 1993 1992 1991 1990
(millions, except ratios)
Fixed Charges
Interest and amortization of debt discount
and expense on all indebtedness $1,339 $1,400 $1,389 $1,568 $1,651
Add interest element implicit in rentals 208 200 256 244 233
1,547 1,600 1,645 1,812 1,884
Preferred dividend factor 175 159 120 4 -
Interest capitalized 1 3 23 22 16
Total fixed charges $1,723 $1,762 $1,788 $1,838 $1,900
Income (loss)
Income (loss) from continuing operations $1,244 $2,420 ($2,311) $883 $646
Add undistributed net loss
of unconsolidated companies (17) (1) (24) (10) (10)
1,261 2,421 (2,287) 893 656
Add
Fixed charges (excluding interest capitalized
and preferred dividend factor) 1,547 1,600 1,645 1,812 1,884
Income taxes (benefit) 358 404 (1,965) (57) (402)
Income (loss) before fixed charges and
income taxes $3,166 $4,425 ($2,607) $2,648 $2,138
Ratio of income to combined fixed charges
and preferred share dividends 1.84 2.51 (A) 1.44 1.13
<FN>
(A) As a result of the loss for the year ended December 31, 1992, earnings did
not cover fixed charges and preferred share dividends by $4,395 million.
</TABLE>
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
Consolidated STATEMENTS
of INCOME
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
................................................................................
millions, except per common share data 1994 1993 1992
................................................................................
<S> <C> <C> <C>
REVENUES $54,559 $51,486 $53,110
................................................................................
EXPENSES
Costs and expenses 51,390 47,898 53,253
Restructuring (note 6) 154 -- 2,782
Interest 1,339 1,400 1,389
................................................................................
Total expenses 52,883 49,298 57,424
................................................................................
Operating income (loss) 1,676 2,188 (4,314)
Other income (loss) 36 149 (71)
Gain on sales of subsidiaries' stock (note 4) -- 635 91
................................................................................
Income (loss) before income taxes (benefit) and
minority interest 1,712 2,972 (4,294)
Income taxes (benefit) (note 10) 358 404 (1,965)
Minority interest (110) (148) 18
................................................................................
INCOME (LOSS) FROM CONTINUING OPERATIONS 1,244 2,420 (2,311)
Discontinued operations (note 5) 15 165 252
................................................................................
Income (loss) before extraordinary gain (loss) and
cumulative effect of accounting changes 1,259 2,585 (2,059)
Extraordinary gain (loss) related to early
extinguishment of debt (note 12) 195 (211) --
Cumulative effect of accounting changes (note 2) -- -- (1,873)
................................................................................
Net income (loss) $ 1,454 $ 2,374 $(3,932)
................................................................................
EARNINGS (LOSS) PER COMMON SHARE, after allowing for
dividends on preferred shares (note 1)
Income (loss) from continuing operations $3.12 $6.25 $ (6.33)
Discontinued operations 0.04 0.43 0.68
................................................................................
Income (loss) before extraordinary gain (loss) and
cumulative effect of accounting changes 3.16 6.68 (5.65)
Extraordinary gain (loss) 0.50 (0.55) --
Cumulative effect of accounting changes -- -- (5.07)
................................................................................
Net income (loss) $3.66 $6.13 $(10.72)
................................................................................
Average common and common equivalent shares
outstanding 388.9 382.9 369.6
................................................................................
</TABLE>
See accompanying notes and the summarized Group financial statements.
ANALYSIS OF CONSOLIDATED OPERATIONS
The consolidated statements of income present the results of all the businesses
of Sears, Roebuck and Co. Refer to note 18 to the consolidated financial
statements for the relative contributions to the consolidated results. Further
analysis is provided in the Sears Merchandise Group and Allstate Insurance Group
summarized financial results and discussions beginning on page 48. In November
1994, the Company announced its intention to:
. distribute to the Company's common shareholders its 80.2% ownership interest
of The Allstate Corporation, and
. pursue a divestiture of Homart Development Co. and affiliated entities
(Homart).
The distribution is expected to occur in the middle of 1995, subject to
shareholder approval at a special meeting on Mar. 31, 1995, market conditions,
final approval by the Company's Board of Directors, any required regulatory
approvals and a favorable tax ruling or opinion on the tax-free nature of the
distribution. Refer to note 3 to the consolidated financial statements for
further information.
In September 1992, the Company announced a strategic repositioning. The
highlights of the repositioning, which was completed in 1993, were as follows:
. Dean Witter, Discover & Co. was spun-off as a separate company in June 1993,
following the primary initial public offering of 19.9% of its common stock in
March 1993.
20
<PAGE>
------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ANALYSIS OF CONSOLIDATED OPERATIONS CONTINUED
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------.
The Allstate Corporation completed a primary initial public offering of 19.9%
of its common stock in June 1993, resulting in a gain of $635 million to the
Company.
. The sales of the Coldwell Banker residential services businesses, consisting
of the residential brokerage and relocation businesses and mortgage banking
operations, were completed in the fourth quarter of 1993.
The repositioning decision was followed by a restructuring charge in the
fourth quarter of 1992, which related primarily to the streamlining of
Merchandise Group operations to focus on profitable core retail operations.
Refer to note 6 to the consolidated financial statements for further
discussion.
The consolidated financial statements present the results of Dean Witter,
Discover & Co., the Coldwell Banker residential services businesses and Homart
as discontinued operations as discussed in note 5 to the consolidated financial
statements.
Consolidated revenues were $54.56 billion in 1994, an increase of $3.07
billion, or 6.0%, compared with 1993 revenues of $51.49 billion. Sears
Merchandise Group revenues increased $2.58 billion, or 8.5%, in 1994, to $33.02
billion compared with 1993 revenues of $30.44 billion, reflecting improvements
in domestic merchandising. Allstate Insurance Group revenues of $21.46 billion
increased $518 million, or 2.5%, in 1994 compared with 1993 revenues of $20.95
billion, due to growth in premium and investment income.
Consolidated revenues increased $3.11 billion, or 6.4%, to $51.49 billion in
1993 compared with 1992 revenues of $48.38 billion, excluding revenues of $4.73
billion from Merchandise Group exited businesses. Sears Merchandise Group
revenues of $30.44 billion increased $2.23 billion, or 7.9%, in 1993 compared
with 1992 revenues of $28.21 billion, excluding exited businesses, reflecting
improvements in domestic merchandising. Allstate's revenues were $20.95 billion
in 1993, an increase of $718 million, or 3.6%, compared with 1992 revenues of
$20.23 billion, due to growth in premium and investment income.
Operating income was $1.68 billion in 1994 compared with operating income of
$2.19 billion in 1993. The change between years was primarily due to losses of
$1.63 billion from the California earthquake. Excluding the earthquake, 1994
operating income rose $1.12 billion, or 50.9%, compared with 1993. The
Merchandise Group's operating income of $1.52 billion in 1994 rose $438 million,
or 40.5%, compared with 1993 operating income of $1.08 billion. The increase was
principally due to higher revenues, lower selling and
administrative expenses as a percent of revenues and a lower provision for
uncollectible accounts. Allstate's operating income of $1.85 billion, excluding
the California earthquake losses, increased $476 million, or 34.6%, over 1993
operating income of $1.38 billion, due primarily to improved underwriting
results and stronger life operating income.
Operating income increased $6.50 billion in 1993 compared with 1992,
reflecting the impact on 1992 operations of $2.78 billion of restructuring
charges, Hurricane Andrew losses of $2.50 billion and an operating loss of $387
million from domestic merchandising exited businesses. Excluding the
restructuring charges, Hurricane Andrew losses and domestic merchandising exited
businesses, 1993 operating income rose $833 million, or 61.5%, over 1992
operating income of $1.36 billion. The Merchandise Group's operating income was
$1.08 billion, an increase of $370 million, or 52.0%, over 1992 operating income
of $711 million, adjusted for restructuring charges and exited
businesses. This increase was primarily due to higher domestic merchandising
results. Allstate's operating income rose $301 million, or 28.0%, over 1992
operating income of $1.08 billion excluding Hurricane Andrew, due to improved
underwriting results and higher investment income.
Interest expense declined $61 million in 1994 and increased $11 million in
1993. Interest expense at Corporate decreased $274 million to $25 million in
1994, compared with $299 and $537 million in 1993 and 1992, respectively.
Corporate interest expense reflects interest on debt that has either not been
specifically allocated to a business group or supports Corporate investments.
The decrease in Corporate interest expense in 1994 and 1993 was primarily due
to the paydown of debt from the proceeds of the strategic repositioning
transactions and a reduction in Corporate investments. The reduction in
Corporate interest expense was partially offset by increases in the Merchandise
Group's interest expense of $212 and $154 million for 1994 and 1993,
respectively. These increases were primarily due to the higher level of debt
needed to fund increases in owned retail customer receivables.
Since the Company uses securitizations of retail customer receivables as a
significant funding source, its total funding costs include interest expense and
funding cost of securitized receivables. The changes in funding cost were as
follows:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
millions 1994 1993
-----------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in interest expense $ (61) $ 11
Decrease in funding cost of securitized receivables(/1/) (173) (114) ---------
--------------------------------------------------------------
Funding cost reductions $(234) $(103) ---------
--------------------------------------------------------------
</TABLE>
(1) Funding costs of securitized receivables are reported as a reduction of
revenues in the statement of income.
Funding costs declined in 1994 and 1993 primarily due to lower funding needs
resulting from the strategic repositioning. The effective interest rate
associated with the funding costs declined in 1994 and increased in 1993
primarily due to changes in the funding mix.
21
<PAGE>
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-------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
ANALYSIS OF CONSOLIDATED OPERATIONS CONTINUED
------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Other income decreased in 1994 primarily due to lower gains from property sales
and sales of investments. In 1993, other income increased primarily due to
higher gains from property sales, security sales and improved joint venture
results. Improved joint venture results in 1993 reflect the first year of
operations for Advantis and a lower Prodigy loss. A summary of other income
(loss) by type follows:
<TABLE>
-----------------------------------------------------------------------
<CAPTION>
millions 1994 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C>
Gain on sales of property $22 $ 63 $ 18
Gain (loss) on sales/writedowns of securities -- 54 (30)
Equity in joint ventures and unconsolidated companies 19 25 (75)
Other gains (losses), net (5) 7 16
-----------------------------------------------------------------------
Total $36 $149 $(71) ---------
--------------------------------------------------------------
</TABLE>
During 1992, the Company sold a minority interest in Sears Mexico through an
initial public offering and recognized a gain of $96 million ($55 million after-
tax). In addition, a $5 million loss resulted from a primary offering of common
stock by Sears Canada that diluted the Company's ownership.
Income tax expense in 1994 and 1993 was 20.9% and 13.6% of pretax income
respectively. The 1992 income tax benefit on operations was 45.8% of pretax
loss. These rates differed from the statutory rate mainly due to tax-exempt
securities income. The rates vary between years primarily due to the relative
proportion of tax-exempt income included in pretax income. The 1993 rate was
also favorably impacted by an $87 million tax credit and the gain from the
initial public offering of The Allstate Corporation. The tax credit resulted
from the adjustment of deferred tax assets due to the 1% increase in the federal
income tax rate resulting from the Omnibus Budget Reconciliation Act of 1993.
Income taxes were not provided on the gain from the Allstate primary initial
public offering as it was realized on a tax-free basis.
The following table summarizes the impact on income from continuing
operations of certain significant items in 1994, 1993 and 1992, net of taxes and
minority interest.
<TABLE>
----------------------------------------------------------
<CAPTION>
millions 1994 1993 1992
----------------------------------------------------------
<S> <C> <C> <C>
Restructuring $ (80) $ -- $(1,745)
California earthquake (846) -- --
Gain on sales of subsidiaries' stock -- 635 50
Tax rate change -- 87 --
Hurricane Andrew -- -- (1,650)
Merchandising exited businesses -- -- (244)
----------------------------------------------------------
</TABLE>
Income from continuing operations in 1994 was $1.24 billion, compared with
$2.42 billion in 1993. Results reflect the impact of the California earthquake
and a restructuring charge at Allstate in 1994 and the gain on the Allstate
initial public offering and deferred tax asset adjustment in 1993. Excluding the
significant items noted in the table, 1994 income from continuing
operations increased $472 million, or 27.8%, to $2.17 billion from $1.70 billion
in 1993 and 1993 income from continuing operations increased $420 million, or
32.9%, from 1992 income of $1.28 billion.
Results for 1994 also included a $195 million extraordinary gain related to
the early extinguishment of debt associated with the Company's transfer of Sears
Tower and all related assets and liabilities to a third party as trustee of a
trust in November 1994. The elimination of the related mortgages reduced
Corporate debt by $845 million and will result in annual interest savings of
approximately $75 million.
An extraordinary loss of $211 million related to the early extinguishment of
debt was included in 1993 results. This extraordinary loss included the call of
a $300 million, 7% deep-discount bond issue ($66 million) and payments to
terminate interest rate swaps associated with retired commercial paper that was
allocated to the funding of discontinued operations ($145 million). The 7% deep-
discount bond issue carried an effective yield of 14.6%, and the interest rate
swaps, which converted variable to fixed-rate debt, carried an average fixed
rate of 9.2%.
In 1992, net income included a $1.87 billion, or $5.07 per common share,
cumulative effect of accounting changes related to the adoption of new
accounting for postretirement and postemployment benefits.
Reported earnings have been impacted by inflation; however, there is no simple
way of separating those effects. Competitive and regulatory conditions
permitting, the Company modifies the prices charged for its goods and services
in order to recognize cost changes as incurred or as anticipated. By also
attempting to control costs and efficiently utilize resources, the Company
strives to minimize the effects of inflation on its operations.
22
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Below, and on pages 25 and 27, is a discussion of consolidated financial
condition, liquidity, and capital resources. Summarized statements of financial
position and cash flows and supplemental analyses for the business groups can be
found beginning on page 48.
---
QUALITY AND LIQUIDITY OF ASSETS
The Company's significant financial capacity and flexibility are exemplified by
the quality and liquidity of its assets and by its ability to access multiple
sources of capital.
At Dec. 31, 1994, Allstate Insurance Group comprised 67% of total
consolidated assets, Sears Merchandise Group comprised 32% and Corporate assets
and the net assets of discontinued operations comprised 1%.
Allstate Insurance Group
The financial position of Allstate is highly liquid, with over 71% of total
assets in fixed income securities, equity securities, short-term investments and
cash. Nearly 95% of the $38.04 billion of fixed income securities are rated
investment grade. The equity securities portfolio of $4.85 billion is recorded
at fair value, with unrealized gains of $571 million, and well-diversified.
Mortgage loans of $3.23 billion are diversified geographically and by property
type. Separate Accounts of $2.80 billion are carried at fair value.
1994 ASSETS CHART
Sears Merchandise Group
The Merchandise Group's retail customer receivables portfolio includes $18.20
billion of owned receivable balances and $4.46 billion of receivables sold
through securitization. Domestic and international accounts represent $17.04 and
$1.16 billion of the owned portfolio, respectively. The portfolio is
geographically diversified in the U.S., Canada and Mexico. The Group extends and
monitors retail customer credit based on extensive use of proprietary and
commercially available credit histories and scoring models. The Group promptly
recognizes uncollectible accounts and emphasizes maintenance of an adequate loss
allowance, which is assessed using multiple modeling approaches based on
portfolio risk characteristics. Domestic accounts are systematically written off
at 210 days delinquent or upon receipt of a bankruptcy notice.
Merchandise inventories are primarily valued on the last-in, first-out or LIFO
method. Inventories would have been $692 million higher at Dec. 31, 1994 if
valued on the first-in, first-out or FIFO method.
---
CAPITAL RESOURCES
Strong fundamental operating results and the breadth and depth of capital
resources of the Company contributed to a strengthening financial position in
1994.
FUNDING BY BUSINESS CHART
Total net funding for the Company at Dec. 31, 1994 was $21.40 billion compared
with $21.66 billion at Dec. 31, 1993. Net funding includes debt reflected on the
statement of financial position and investor certificates related to retail
customer receivables sold through securitizations, less investments related to
funding. At Dec. 31, 1994, the Merchandise Group's total net funding was $20.49
billion, which was used primarily to fund retail customer receivables, and
Allstate's total net funding was $869 million. During 1994, the Company
eliminated debt of $845 million through the transfer of Sears Tower and all
related assets and liabilities to a third party as trustee of a trust. Debt was
reduced by $1.54 billion as a result of the classification of
23
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
Consolidated STATEMENTS
of FINANCIAL POSITION
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
................................................................................
millions 1994 1993
................................................................................
<S> <C> <C>
ASSETS
Investments (note 7)
Fixed income securities
Available for sale, at fair value (amortized cost $30,733
and $28,549) $30,033 $30,955
Held to maturity, at amortized cost (fair value $7,869 and
$8,857) 8,008 7,933
...............................................................................
38,041 38,888
Equity securities, at fair value (cost $4,281 and $3,626) 4,852 4,555
Mortgage loans 3,234 3,563
Real estate 815 747
...............................................................................
Total investments 46,942 47,753
................................................................................
Receivables
Retail customer 18,201 15,906
Insurance premium installment and other receivables 3,768 4,113
...............................................................................
Total receivables 21,969 20,019
................................................................................
Cash and invested cash 1,421 1,819
Merchandise inventories 4,044 3,518
Property and equipment, net 5,041 5,223
Deferred income taxes (note 10) 3,334 2,369
Other assets 5,872 5,490
Net assets of discontinued operations (note 5) 473 452
Separate Accounts 2,800 2,282
................................................................................
TOTAL ASSETS $91,896 $88,925
................................................................................
LIABILITIES
Insurance reserves $40,136 $37,444
Long-term debt (note 12) 10,854 11,640
Short-term borrowings (note 12) 6,190 4,636
Unearned revenues 7,259 7,009
Postretirement benefits (note 11) 3,413 3,302
Accounts payable and other liabilities 8,509 8,614
Separate Accounts 2,800 2,282
................................................................................
TOTAL LIABILITIES 79,161 74,927
................................................................................
MINORITY INTEREST 1,934 2,334
COMMITMENTS AND CONTINGENT LIABILITIES (notes 9, 13, 14, 16,
17)
SHAREHOLDERS' EQUITY (note 17)
Preferred shares ($1 par value, 50 shares authorized)
8.88% Preferred Shares, First Series (3.25 shares issued and
outstanding) 325 325
Series A Mandatorily Exchangeable Preferred Shares (7.1875
shares issued and outstanding) 1,236 1,236
Common shares ($.75 par value, 1,000 shares authorized, 351.7
and 350.8 shares outstanding) 294 294
Capital in excess of par value 2,385 2,354
Retained income 8,918 8,163
Treasury stock (at cost) (1,690) (1,704)
Deferred ESOP expense (note 11) (558) (614)
Unrealized net capital gains (note 7) 32 1,674
Cumulative translation adjustments (141) (64)
................................................................................
TOTAL SHAREHOLDERS' EQUITY 10,801 11,664
................................................................................
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $91,896 $88,925
................................................................................
</TABLE>
See accompanying notes and the summarized Group financial statements.
24
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Homart as a discontinued operation. Funding related to customer receivables of
the Merchandise Group grew during the year as gross customer receivables
increased, reflecting the continuing strength of the SearsCharge business. The
Company's debt-to-equity ratio, excluding unrealized net capital gains, was 1.6
at Dec. 31, 1994 and 1993.
FUNDING SOURCES CHART
The Company accesses a variety of capital markets to preserve flexibility and
diversify its funding sources. The broad access to capital markets also allows
the Company to effectively manage liquidity and repricing risk. Liquidity risk
is the measure of the Company's ability to fund maturities and provide for the
operating needs of its businesses. Repricing risk is the impact on net income
due to changes in interest rates. The Company's cost of funds is affected by a
variety of general economic conditions, including the level and volatility of
interest rates. To aid in the management of repricing risk, the Company uses
off-balance-sheet instruments, such as interest rate swaps and caps. The
Company has policies that centrally govern the use of off-balance-sheet
instruments.
The current debt ratings of the Company appear in the table below. The Company
believes that its debt ratings continue to afford cost-effective access to the
capital markets and it will continue to obtain funds on a competitive and cost-
effective basis if the proposed Allstate distribution occurs.
<TABLE>
----------------------------------------------------------------------
<CAPTION>
Moody's Duff & Fitch
Investors Phelps Investors
Services, Standard Credit Service
Inc. & Poor's Rating Co. Inc.
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 NR NR
----------------------------------------------------------------------
</TABLE>
NR--Not rated.
The Company issues commercial paper through Sears Roebuck Acceptance Corp.
(SRAC) and through the Sears Credit Corp. (SCC) entities. SRAC's total
commercial paper outstandings were $4.91 and $2.48 billion at Dec. 31, 1994 and
1993, respectively. The increase in 1994 supported the Company's 1994
refinancing goal of raising the percentage of floating-rate funding to total
funding from the level at Dec. 31, 1993. Commercial paper outstandings
decreased by $6.04 billion in 1993 due to the paydown of commercial paper from
strategic repositioning proceeds and lower funding needs to support continuing
businesses. With ratings in the highest category from three nationally
recognized debt rating agencies, SRAC is a tier one issuer of commercial paper,
which broadens access within the commercial paper market.
Commercial paper issuance is supported by SRAC's $4.50 billion syndicated
credit facility that expires in 1999 and $600 million in uniform bilateral
credit agreements. In 1994, SRAC borrowed $845 million of term loans with
original maturities between two and five years.
The commercial paper issued by SCC is collateralized by SearsCharge
receivables and allows for the cost-effective management of certain of the
Company's term securitization issues. At Dec. 31, 1994 and 1993, SCC commercial
paper outstandings were $1.75 billion, supported by syndicated credit
facilities of $1.82 billion.
The Company uses a continuously offered medium-term note program to average
interest rates on a portion of its term senior unsecured financings. Variable-
rate notes totaling $705 million were issued in 1994 at an average maturity of
2.3 years. Fixed-rate issuances in 1994 totaled $476 million with a weighted
average coupon of 6.6% and an average term of 4.3 years. The Company also issues
larger discrete senior debt offerings from time to time. In January 1994, it
issued $300 million of 6.25% notes, due in 2004.
The Company securitizes credit card receivables to access intermediate-term
investors in a cost-effective manner. These securities are rated in the highest
category by the national rating agencies. The Company issued $1.31 billion of
domestic, fixed-rate term securitizations in 1994 at an average coupon of 7.1%.
As of Dec. 31, 1994, there were $7.22 billion of investor certificates
outstanding, which were backed by $3.95 billion of sold domestic retail customer
receivables and $3.27 billion of other investments.
On Mar. 20, 1995, the Company will exchange all of its 28.8 million Series A
Mandatorily Exchangeable Preferred Shares (PERCS) for 35.7 million common shares
of the Company. The exchange will not dilute earnings per share as the PERCS are
reflected in the Company's earnings per share calculation.
25
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SEARS, ROEBUCK AND CO.
Consolidated STATEMENTS
of CASH FLOWS
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
Year Ended December 31
................................................................................
millions 1994 1993 1992
................................................................................
<S> <C> <C> <C> CASH
FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,454 $ 2,374 $(3,932)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation, amortization and other noncash items 649 671 832
Cumulative effect of accounting changes -- -- 2,934
Restructuring charges 154 -- 2,782
Extraordinary (gain) loss related to early extin-
guishment of debt (319) 107 --
Provision for uncollectible accounts 698 821 910
Gain on sales of subsidiaries' stock -- (635) (91)
Gain on sales of property and investments (224) (293) (126)
Increase in insurance reserves 2,692 1,555 4,221
Change in deferred income taxes 187 199 (2,782)
Increase in retail customer receivables (3,199) (2,868) (1,325)
Decrease (increase) in merchandise inventories (594) 514 357
Increase in other operating assets (545) (1,705) (1,217)
Increase in other operating liabilities 992 1,313 691
Discontinued operations (15) (165) (215)
...............................................................................
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,930 1,888 3,039
................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of securities:
Fixed income securities available for sale 5,200 -- --
Fixed income securities held to maturity 5 -- --
Fixed income securities -- 5,927 5,157
Equity securities 1,944 1,574 1,352
Maturities of securities:
Fixed income securities available for sale 3,042 -- --
Fixed income securities held to maturity 949 -- --
Fixed income securities -- 5,424 2,974
Mortgage loans 399 233 113
Purchases of securities:
Fixed income securities available for sale (10,211) -- --
Fixed income securities held to maturity (1,116) -- --
Fixed income securities -- (15,426) (10,001)
Equity securities (2,359) (1,769) (1,566)
Mortgage loans (221) (306) (382)
Change in other investments (24) 316 26
Proceeds from sales of property and equipment 60 41 28
Purchases of property and equipment (1,120) (668) (957)
Discontinued operations--net (6) 986 (447)
...............................................................................
NET CASH USED IN INVESTING ACTIVITIES (3,458) (3,668) (3,703)
................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 2,817 1,557 1,348
Repayments of long-term debt (2,717) (2,516) (1,678)
Increase (decrease) in short-term borrowings, pri-
marily 90 days or less 1,617 159 (938)
Proceeds from sales of subsidiaries' stock -- 2,287 162
Repayments from ESOP 69 15 10
Mandatorily exchangeable preferred shares issued -- -- 1,205
Common shares issued for employee stock plans 45 193 81
Dividends paid to shareholders (698) (727) (779)
...............................................................................
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 1,133 968 (589)
................................................................................
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND IN-
VESTED CASH (3) (1) (3)
................................................................................
NET DECREASE IN CASH AND INVESTED CASH (398) (813) (1,256)
CASH AND INVESTED CASH AT BEGINNING OF YEAR 1,819 2,632 3,888
................................................................................
CASH AND INVESTED CASH AT END OF YEAR $ 1,421 $ 1,819 $ 2,632
................................................................................
</TABLE>
See accompanying notes and the summarized Group financial statements.
26
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ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION CONTINUED
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OPERATING, INVESTING AND FINANCING ACTIVITIES
Cash flows from operating activities consist primarily of net income adjusted
for certain noncash expense items, including depreciation and the provision for
uncollectible accounts, increases in insurance reserves and changes in
receivables, inventories and deferred taxes.
Cash provided by operations in 1994 increased $42 million, compared with 1993.
An increase in insurance reserves due to the California earthquake and an
increase in other operating liabilities were partially offset by the reduction
in net income and increases in retail customer receivables, merchandise
inventories and other operating assets. The increase in other operating
liabilities in 1994 was primarily due to the increase in Separate Accounts and
unearned revenues, which was partially offset by a decrease in the
restructuring reserve. Net liquidations of outstanding domestic pass-through
certificates increased owned receivables by $1.23 billion in 1994. The increase
in other operating assets in 1994 was due primarily to the increase in Separate
Accounts.
Cash provided by operations declined $1.15 billion in 1993 compared with 1992.
The decline was primarily due to an increase in retail customer
receivables. Net liquidations of outstanding domestic pass-through certificates
increased owned receivables by $1.94 billion in 1993. Cash payments in 1993
related to the restructuring reserve were mainly offset by the decrease in the
corresponding deferred tax asset and the liquidation of exited businesses'
inventories.
Net cash used in investing activities declined in 1994 primarily due to larger
investment purchases in 1993 due to a higher level of funds available as a
result of the Allstate initial public offering. The payment of claims relating
to the California earthquake also reduced the 1994 level of investment
purchases. A higher level of expenditures for property and equipment at the
Merchandise Group related to the store remodeling program was partially offset
by Allstate's reduced investment purchases.
The most significant investing activities in 1993 were the growth of
Allstate's investment portfolio and purchases of property and equipment.
Increases in Allstate's investments were funded by insurance premium receipts,
the sale of investment-oriented products and borrowings by The Allstate
Corporation and a portion of the proceeds from the initial public offering of
The Allstate Corporation.
Net cash provided by financing activities in 1994 increased primarily due to
increases in short-term borrowings supporting higher owned retail customer
receivable balances, resulting from the decrease in receivables sold through
securitizations.
In 1993, financing activities consisted primarily of sales of subsidiaries'
stock and repayment of debt from proceeds of the Company's strategic
repositioning. Cash used in financing activities was also affected by an
increased level of debt due to the increase in the amount of owned retail
customer receivables.
The Company paid cash dividends of $1.60 per common share in 1994, the 59th
consecutive year of payout. It is currently expected that, if the proposed
Allstate distribution occurs, 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. It is expected that the Company will
pay approximately $0.92 of this amount. The payment of common dividends is
dependent upon the Company's earnings and internal investment opportunities.
27
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SEARS, ROEBUCK AND CO.
Consolidated STATEMENTS
of SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
Year Ended December 31
..............................................................................
....... 1994 1993 1992 1994
1993 1992
..............................................................................
....... $ millions shares in
thousands <S> <C> <C> <C> <C> <C>
<C> 8.88% PREFERRED SHARES, FIRST
SERIES (note 17)
Balance, beginning of year $ 325 $ 325 $ 325 3,250 3,250
3,250 Issued during year -- -- -- -- -
- --
..............................................................................
....... Balance, end of year $ 325 $ 325 $ 325 3,250
3,250 3,250
..............................................................................
....... SERIES A MANDATORILY
EXCHANGEABLE
PREFERRED SHARES (note 17)
Balance, beginning of year $ 1,236 $ 1,236 $ -- 7,188 7,188
--Issued during year -- -- 1,236 -- --
7,188
..............................................................................
....... Balance, end of year $ 1,236 $ 1,236 $ 1,236 7,188
7,188 7,188
..............................................................................
....... COMMON SHARES
Balance, beginning of year $ 294 $ 291 $ 290 391,752 387,514
386,057 Stock options exercised and
other changes -- 3 1 558 4,238
1,457
..............................................................................
....... Balance, end of year 294 294 291 392,310
391,752 387,514
..............................................................................
....... CAPITAL IN EXCESS OF PAR VALUE
Balance, beginning of year 2,354 2,195 2,154
Stock options exercised and
other changes 31 159 41
..............................................................................
....... Balance, end of year 2,385 2,354 2,195
..............................................................................
....... RETAINED INCOME
Balance, beginning of year 8,163 8,772 13,514
Net income (loss) 1,454 2,374 (3,932)
Preferred share dividends
(note 17) (137) (137) (120)
Common share dividends ($1.60,
$1.60 and $2.00 per share) (562) (558) (690)
Distribution of Dean Witter,
Discover & Co. shares -- (2,288) --
..............................................................................
Balance, end of year 8,918 8,163 8,772
..............................................................................
TREASURY STOCK (AT COST)
Balance, beginning of year (1,704) (1,734) (1,746) (40,904) (41,670) (41,961)
Reissued under compensation plans 14 30 12 334 766 291
..............................................................................
Balance, end of year (1,690) (1,704) (1,734) (40,570) (40,904) (41,670)
..............................................................................
DEFERRED ESOP EXPENSE (note 11)
Balance, beginning of year (614) (700) (740)
Reductions 56 86 40
..............................................................................
Balance, end of year (558) (614) (700)
..............................................................................
UNREALIZED NET CAPITAL GAINS
(note 7)
Balance, beginning of year 1,674 428 365
Net increase (decrease) (1,642) 1,246 63
..............................................................................
Balance, end of year 32 1,674 428
..............................................................................
CUMULATIVE TRANSLATION
ADJUSTMENTS
Balance, beginning of year (64) (40) 26
Net unrealized loss during
year (77) (24) (66)
..............................................................................
Balance, end of year (141) (64) (40)
..............................................................................
TOTAL COMMON SHAREHOLDERS'
EQUITY AND
SHARES OUTSTANDING $ 9,240 $10,103 $ 9,212 351,740 350,848 345,844
..............................................................................
TOTAL SHAREHOLDERS' EQUITY $10,801 $11,664 $10,773
..............................................................................
</TABLE>
See accompanying notes.
28
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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------------------------------------------------------------------------------1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Sears, Roebuck and
Co. and all significant domestic and international companies in which the
Company has more than a 50% equity ownership. Investments in companies in
which the Company has a 20% to 50% ownership are accounted for using the
equity method. Dean Witter, Discover & Co. (Dean Witter), the Coldwell Banker
residential services businesses and Homart Development Co. and affiliated
entities (Homart) are presented as discontinued operations.
Included as an integral part of the consolidated financial statements are
separate summarized financial statements of the Company's business groups, Sears
Merchandise Group and Allstate Insurance Group (Allstate) beginning on page 48.
Refer to note 3 for information regarding the Allstate distribution proposal.
Although not a part of the financial statements, also included with the
consolidated statements and the summarized group statements are unaudited
analyses of operations and financial condition and a ten-year summary of
consolidated financial data.
Certain reclassifications have been made in the 1993 and 1992 financial
statements to conform to current accounting classifications.
---
FISCAL YEAR
In 1994, the Company changed its fiscal year-end from Dec. 31 to a 52 or 53 week
year ending on the Saturday closest to Dec. 31. Allstate's year-end continues to
be Dec. 31.
---
MERCHANDISE SALES AND SERVICES
Revenues from merchandise sales and services are net of returns and allowances
and exclude sales tax. Revenues from licensed departments, which previously were
recorded based on net commissions received, are included on a gross basis.
Included in merchandise sales and services are gross revenues from licensed
departments of $1.07, $1.03 and $1.15 billion for 1994, 1993 and 1992,
respectively.
---
MAINTENANCE AGREEMENTS
The Company sells extended service contracts with terms of coverage between 12
and 36 months. Revenue and incremental direct acquisition costs from the sale of
these contracts are deferred and amortized on a straight-line basis over the
lives of the contracts. Costs related to servicing the contracts are expensed as
incurrred.
---
STORE PRE-OPENING EXPENSES
Costs associated with the opening of new stores are expensed in the year
incurred.
SALE OF SUBSIDIARY'S STOCK
Gains or losses are recognized on the sale of a subsidiary's stock based on the
difference between the offering price and the Company's carrying amount of such
stock, unless the sale is part of a broader corporate reorganization.
---
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share is computed based on the weighted average
number of common and common equivalent shares (dilutive stock options)
outstanding and after adjustment for dividends of $29 million in 1994, 1993 and
1992 on the 8.88% Preferred Shares. The Series A Mandatorily Exchangeable
Preferred Shares (PERCS) are considered common stock due to their mandatory
conversion into common stock and the dividends thereon are not deducted from net
income (loss) for purposes of calculating earnings (loss) per common share.
Refer to note 17 for discussion of the Company's election to exchange the
PERCS on March 20, 1995.
For the year ended Dec. 31, 1992, the inclusion of the PERCS as common shares
resulted in an anti-dilutive impact on the loss per common share calculation.
Excluding the PERCS from common shares, the loss from continuing operations and
net loss per common share would have been $7.03 and $11.73, respectively. The
net loss applicable to common shares, including all preferred share
dividends, for the year ended Dec. 31, 1992 was $4.05 billion.
---
CASH AND INVESTED CASH
Cash and invested cash is defined to include all highly liquid investments with
maturities of three months or less.
---
RETAIL CUSTOMER RECEIVABLES
Retail customer receivables at Dec. 31, 1994 include approximately $8.3 billion
of domestic accounts and $382 million of Canadian accounts which will not become
due within one year. These receivables are expected to earn finance charge
revenue at annual percentage rates ranging from 9.75% to 21.0% for domestic
accounts and 28.8% for Canadian accounts.
Retail customer receivables are shown net of an allowance for uncollectible
accounts. When receivables are securitized and sold with recourse, the portion
of the allowance for uncollectible accounts pertaining to such receivables is
transferred to a recourse liability at the date of sale. Factors such as prior
account loss experience, changes in the volume of the account portfolio and
overall portfolio quality are considered in determining the allowance and the
recourse liability.
29
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SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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MERCHANDISE INVENTORIES
Merchandise inventories of domestic operations are valued primarily at the lower
of cost (using the last-in, first-out or LIFO method) or market by application
of internally developed price indices to estimate the effects of inflation in
merchandise inventories.
The LIFO adjustment to cost of sales was a credit of $34 million in 1994,
compared with a charge of $5 million in 1993 and a credit of $18 million in
1992. Partial liquidation of merchandise inventories valued under the LIFO
method in all three years resulted in credits of $3, $74 and $39 million in
1994, 1993 and 1992, respectively. If the first-in, first-out (FIFO) method of
inventory valuation had been used instead of the LIFO method, merchandise
inventories would have been $692 and $726 million higher at Dec. 31, 1994 and
1993, respectively.
Merchandise inventories of international operations, Western Auto and Puerto
Rico, which represent approximately 16% of merchandise inventories, are stated
at the lower of cost (using the first-in, first-out or FIFO method) or market.
---
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is provided principally by the straight-line method over the
estimated useful lives of the related assets, generally 5 to 10 years for
equipment and 40 to 50 years for real property. Accumulated depreciation was
$5.08 and $5.09 billion at Dec. 31, 1994 and 1993, respectively.
---
INCOME TAXES
The consolidated federal income tax return of Sears, Roebuck and Co. includes
results of the domestic operations of both the continuing business groups and
discontinued operations. Tax liabilities and benefits are allocated as
generated by the respective businesses, whether or not such benefits would be
currently available on a separate return basis.
---
INVESTMENTS
Fixed income securities which the Company has the ability and positive intent to
hold to maturity are carried at amortized cost. Fixed income securities which
are available for sale and equity securities are carried at fair value. The
difference between amortized cost and fair value, less deferred income taxes, a
portion of deferred policy acquisition costs and minority interest, is reflected
as a component of shareholders' equity. Provisions are made to write down the
value of fixed income securities for declines in value that are other than
temporary. Mortgage loans are carried at outstanding principal balance, net of
unamortized premium or discount and valuation reserves. Valuation reserves are
based on the estimated uncollectible amounts, considering the cash flows and
estimated fair value of the underlying collateral, borrower financial strength
and other factors.
Accrual of income is suspended for fixed income securities and mortgage loans
that are in default or when the receipt of interest payments is in doubt.
Realized capital gains and losses are determined on a specific identification
basis.
Real estate acquired through foreclosure and held for sale is carried at the
lower of fair value or depreciated cost, less a valuation allowance for
estimated selling expenses.
---
PROPERTY-LIABILITY INSURANCE ACCOUNTING
Premiums are deferred and earned on a pro rata basis over the terms of the
policies.
Certain costs of acquiring insurance business, principally agents'
compensation and premium taxes, are deferred and amortized to income as premiums
are earned. Future investment income is considered in determining the
recoverability of deferred policy acquisition costs.
The reserve for claims and claims expense is the estimated amount necessary to
settle both reported and unreported claims of insured losses, based upon the
facts in each case and the Company's experience with similar cases. Estimated
amounts of salvage and subrogation are deducted from the reserve for claims and
claims expense. The establishment of appropriate reserves, including reserves
for catastrophes, is an inherently uncertain process. Reserve estimates are
reviewed regularly and updated using the most current information available.
Any resulting adjustments, which may be material, are reflected in current
operations.
On a statutory basis, capital of the property-liability operations was $6.53
and $7.15 billion at Dec. 31, 1994 and 1993, respectively. Statutory net income
(loss) of the property-liability operations was $146 million, $1.12 and $(1.06)
billion for 1994, 1993 and 1992, respectively.
The Company's insurance operations prepare their statutory financial
statements in accordance with the accounting principles and practices
prescribed or permitted by the insurance departments of the applicable state of
domicile. The Company's insurance operations do not follow any permitted
statutory accounting practices that have a material effect, individually or in
the aggregate, on statutory surplus or risk-based capital of any of the
Company's insurance subsidiaries.
30
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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LIFE INSURANCE ACCOUNTING
The Company writes traditional life, accident and disability insurance. The
Company also writes long-duration insurance contracts with terms that are not
fixed and guaranteed and single premium life insurance contracts, which are
considered universal life-type contracts. The Company also sells long-duration
contracts that do not involve significant risk of policyholder mortality or
morbidity (principally single and flexible premium annuities, guaranteed
investment contracts and structured settlement annuities, when sold without life
contingencies) which are considered investment contracts. Limited payment
contracts (policies with premiums paid over a period shorter than the contract
period) primarily consist of group annuities and structured settlement
annuities, when sold with life contingencies.
Premiums for traditional life insurance are recognized as revenue when due.
Accident and disability premiums are earned on a pro rata basis over the policy
period. Revenues on universal life-type contracts are comprised of contract
charges and fees and are recognized when assessed against the policyholder
account balance. Revenues on investment contracts include contract charges and
fees for contract administration and surrenders. These revenues are recognized
when levied against the contract balances. Gross premium in excess of the net
premium on limited payment contracts are deferred and recognized over the
contract period.
Reserve for life insurance policy benefits, which relates to traditional life,
group annuities and structured settlement annuities with life
contingencies, disability and accident insurance, is computed on the basis of
assumptions as to future investment yields, mortality, morbidity, terminations
and expenses. These assumptions, which for traditional life are applied using
the net level premium method, include provisions for adverse deviation and
generally vary by such characteristics as plan, year of issue and policy
duration. Reserve interest rates generally range from 4.0% to 11.7%. Policy
benefit reserves for accident insurance include claim reserves and unearned
premium.
Contractholder funds are reserves for universal life-type and investment
contracts. Reserves for these contracts are equal to the account balance that
accrues to the benefit of the contractholder. Credited interest rates on
contractholder funds ranged from 3.0% to 12.7% for fixed-rate contracts and 2.5%
to 11.3% for variable-rate contracts.
Certain costs of acquiring insurance business, principally agents'
compensation, certain underwriting costs and direct mail solicitation expenses,
are deferred and amortized to income. For traditional life, limited payment
contracts and accident and disability, these costs are amortized in proportion
to the estimated revenues on such business. For universal life-type and
investment contracts, the costs are amortized in relation to the present value
of estimated gross profits on such business. Changes in the amount or timing of
estimated gross profits will result in adjustments in the cumulative
amortization of these costs. To the extent that unrealized gains or losses on
available for sale securities would result in an adjustment of deferred policy
acquisition costs had those gains or losses actually been realized, the related
unamortized deferred policy acquisition costs are recorded as a reduction of the
unrealized gains or losses included in shareholders' equity.
On a statutory basis, capital of the life operations was $1.45 and $1.19
billion at Dec. 31, 1994 and 1993, respectively. Statutory net income of the
life operations was $56, $89 and $196 million for 1994, 1993 and 1992,
respectively. Refer to property-liability insurance accounting for a discussion
of the Company's statutory financial statements.
---
SEPARATE ACCOUNTS
The Company issues flexible premium deferred variable annuity contracts, the
assets and liabilities of which are legally segregated as assets and
liabilities of the Separate Accounts. The assets of the Separate Accounts are
carried at fair value. Investment income and gains and losses of the Separate
Accounts accrue directly to the contractholders and are, therefore, not included
in the Company's operating results. Revenues to the Company from the Separate
Accounts consist of administration fees and mortality and expense risk charges.
31
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SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The Company utilizes various off-balance-sheet financial instruments to manage
the interest rate and market risk associated with its investment portfolio and
borrowings, fund its investment commitments and improve its asset/liability
management. The counterparties to these instruments are major financial
institutions with credit ratings of primarily AA.
Investment-related
Amounts receivable or payable under interest rate swap, commodity swap, and
interest rate cap and floor agreements are accrued and reported in income. The
cost of interest rate cap and floor agreements and debt warrants are reported as
fixed income securities and amortized as an offset to investment income over the
life of the agreements. The cost of options on equity securities are amortized
as a realized capital loss over the option period. Any gains upon disposition of
options on equity securities are recognized in income. The remaining unamortized
premiums of debt warrants exercised are amortized against income over the life
of the related securities.
Gains and losses on open futures and forward contracts designated as hedges of
anticipatory transactions are deferred. Once the anticipated transactions are
completed, the deferred gains or losses are amortized in income over the lives
of the related securities or included in the recognition of gain or loss from
disposition. Gains and losses on early contract terminations that modify the
characteristics of designated securities are amortized to income over the
securities' remaining life. Otherwise, immediate recognition of gain or loss
occurs.
Debt-related
Interest rate swap agreements modify the interest characteristics of a portion
of the Company's debt. The differential to be paid or received is accrued as
interest rates change and recognized as an adjustment to interest expense in the
statement of income. The related accrued receivable or payable is included in
other assets or liabilities. The fair values of the swap agreements are not
recognized in the financial statements.
Interest rate caps are used to lock in a maximum rate if rates rise, but
enable the Company to otherwise pay lower market rates. The cost of interest
rate caps is amortized to interest expense over the life of the caps.
Payments received due to the interest rate caps reduce interest expense. The
unamortized cost of the interest rate caps is included in other assets.
2. ACCOUNTING CHANGES
Effective Dec. 31, 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 115 requires securities that are available for sale be
carried at fair value, with changes in net unrealized gains and losses recorded
directly to shareholders' equity. Previously, fixed income securities classified
as available for sale were carried at the lower of amortized cost or fair value,
determined in the aggregate. The adoption of SFAS No. 115 had no impact on net
income, but increased shareholders' equity by $1.18 billion at Dec. 31, 1993.
Effective Jan. 1, 1992, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions" and SFAS No. 112,
"Employers' Accounting for Postemployment Benefits," for all domestic and
foreign postretirement and postemployment benefit plans by immediately
recognizing the transition amounts. The Company previously expensed the cost of
these benefits, which consist of health care and life insurance, as claims were
incurred.
---
3. DISTRIBUTION PROPOSAL
In November 1994, the Company announced it intends to distribute in a tax-free
dividend to the Company's common shareholders its 80.2% ownership interest of
The Allstate Corporation. The distribution proposal will be considered at a
special shareholders' meeting to be held on Mar. 31, 1995. The distribution is
expected to occur in mid-1995, but is subject to market conditions, final
approval by the Company's Board of Directors, any required regulatory approvals
and a favorable tax ruling or opinion on the tax-free nature of the
distribution.
The following pro forma condensed consolidated statement of income for the
year ended Dec. 31, 1994 assumes Allstate had been treated as a discontinued
operation as of the end of the year.
32
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<TABLE>
---------------------------------------------------------------------
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------
millions, except per common share data 1994
---------------------------------------------------------------------
<S> <C>
REVENUES
Merchandise sales and services $29,450
Credit revenues 3,575
---------------------------------------------------------------------
Total revenues 33,025
---------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales, buying and occupancy 21,568
Selling and administrative 7,513
Depreciation and amortization 541
Provision for uncollectible accounts 698
Interest 1,279
---------------------------------------------------------------------
Total costs and expenses 31,599
---------------------------------------------------------------------
Operating income 1,426
Other income 59
---------------------------------------------------------------------
Income before income taxes and minority interest 1,485
Income taxes 614
Minority interest (14)
---------------------------------------------------------------------
Income from continuing operations $ 857
---------------------------------------------------------------------
Earnings from continuing operations per common share $ 2.13
Average common and common equivalent shares outstanding 388.9
---------------------------------------------------------------------
</TABLE>
The Company has historically not classified its statement of financial
position because of its significant insurance operations. The following pro
forma condensed consolidated balance sheet presents a classified balance sheet
assuming Allstate was treated as a discontinued operation on Dec. 31, 1994.
<TABLE>
-------------------------------------------------------------------------------
<CAPTION>
millions December 31, 1994
-----------------------------------------------------------------------------------
<S> <C>
ASSETS
Current assets
Cash and invested cash $ 548
Retail customer receivables 18,201
Other receivables 321
Inventories 4,044
Deferred income taxes 998
Other current assets 303
-----------------------------------------------------------------------------------
Total current assets 24,415
-----------------------------------------------------------------------------------
Property and equipment, net 4,253
Deferred income taxes 607
Other assets 806
Net assets of discontinued operations 7,231
-----------------------------------------------------------------------------------
TOTAL ASSETS $37,312
-----------------------------------------------------------------------------------
LIABILITIES
Current liabilities
Short-term borrowings $ 6,190
Current portion of long-term debt and capitalized lease
obligations 1,141
Accounts payable and other current liabilities 6,582
-----------------------------------------------------------------------------------
Total current liabilities 13,913
-----------------------------------------------------------------------------------
Long-term debt and capitalized lease obligations 8,844
Postretirement benefits, minority interest and other liabilities 3,754
-----------------------------------------------------------------------------------
TOTAL LIABILITIES 26,511
-----------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 10,801
-----------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY $37,312
-----------------------------------------------------------------------------------
</TABLE>
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; nor is the pro forma information intended to be
indicative of the Company's future results of operations or financial position.
If the distribution is approved by the Board, shareholders' equity will be
reduced by approximately the Company's investment in Allstate. At Dec. 31, 1994,
the Company's investment in Allstate was $6.76 billion. In addition, the Savings
and Profit Sharing Fund of Sears Employees, which includes an Employee Stock
Ownership Plan (the ESOP) will be split into two different plans, a plan for
employees of the Company and its affiliates other than Allstate and a plan for
Allstate employees. The ESOP will be split with 50% of the unallocated shares in
the ESOP and 50% of the ESOP debt being transfered to the Allstate plan. In
connection with this transfer, Allstate will purchase from the Company 50% of
the Company's remaining loan to the ESOP. The purchase price is expected to be
$327 million. See note 11 for further information on the ESOP. In addition, the
Company will repay a $450 million note payable to Allstate related to a capital
contribution in 1990.
---
4. SALES OF SUBSIDIARIES' STOCK
In June 1993, The Allstate Corporation completed a primary initial public
offering of 89.5 million, or 19.9%, of its common shares at an initial offering
price of $27 per share. The proceeds from the sale, net of expenses, amounted to
$2.29 billion and resulted in a gain of $635 million. Income taxes have not been
provided on the gain as it was realized on a tax-free basis.
In March 1992, the Company and Sears, Roebuck de Mexico, S.A. de C.V. (Sears
Mexico) sold, in a series of transactions, common stock of Sears Mexico
representing 25% of the Company's ownership. These transactions resulted in an
after-tax gain of $55 million.
In September 1992, Sears Canada Inc. (Sears Canada), a subsidiary of the
Company, completed a primary offering of common stock diluting the Company's
ownership in Sears Canada to 61.2%, resulting in a $5 million loss to the
Company.
33
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
5. DISCONTINUED OPERATIONS
Income from discontinued operations was as follows:
<TABLE>
---------------------------------------------------------------
<CAPTION>
Year Ended December 31
---------------------------------------------------------------
millions 1994 1993 1992
---------------------------------------------------------------
<S> <C> <C> <C>
Operating income, less income tax expense
of $1, $165 and $151 $15 $229 $252
Loss on disposal, including income tax expense
of $22 -- (64) --
---------------------------------------------------------------
Total $15 $165 $252
---------------------------------------------------------------
</TABLE>
The Company is pursuing a divestiture of Homart. The Company anticipates that
the divestiture will be completed by Dec. 30, 1995 and no loss is expected to be
incurred.
In March 1993, Dean Witter completed a primary initial public offering of
19.9% of its common stock. The Company did not recognize a gain on this
transaction. On June 18, 1993, the Company's Board of Directors approved a
tax-free spin-off of Dean Witter to the Company's common shareholders. Sears
common shareholders of record on June 28, 1993 received, effective June 30,
1993, .39 shares of Dean Witter for each Sears common share owned. This
transaction resulted in a noncash dividend to Sears common shareholders totaling
$2.29 billion.
In May 1993, the Company entered into separate agreements to sell the Coldwell
Banker residential business and the mortgage banking operations. A $64 million
after-tax loss was recorded in the second quarter of 1993 primarily due to
adverse income tax effects related to the sale of Sears Savings Bank. These
sales were completed in the fourth quarter of 1993.
The operating results of the discontinued operations are summarized below:
<TABLE>
---------------------------------------------------------------------
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------
millions 1994 1993 1992
---------------------------------------------------------------------
<S> <C> <C> <C>
Dean Witter
Revenues -- $2,832 $5,233
Income -- 248 434
Coldwell Banker residential services businesses
Revenues -- $1,204 $1,523
Income (loss) -- (8) 74
Homart
Revenues $266 $ 234 $ 222
Income (loss) 15 (11) (256)
---------------------------------------------------------------------
</TABLE>
---
6. RESTRUCTURING
During 1994, approximately 600 Allstate employees accepted a voluntary early
retirement program offer. The total pretax cost of the program was $154 million.
The Merchandise Group recorded a pretax charge in the fourth quarter of 1992
of $2.65 billion related to discontinuing its domestic catalog operations,
offering a voluntary early retirement program to certain salaried associates,
closing unprofitable retail department and specialty stores, streamlining or
discontinuing various unprofitable merchandise lines and the writedown of
underutilized assets to market value. Corporate also recorded a $24 million
pretax charge related to offering termination and early retirement programs to
certain associates.
During the first quarter of 1992, the Merchandise Group recorded a $106
million pretax charge for severance costs related to cost reduction programs for
commission sales and headquarters staff in domestic merchandising.
---
7. INVESTMENTS
The amortized cost, unrealized gains and losses, and fair value of fixed income
securities were as follows:
<TABLE>
---------------------------------------------------------------
<CAPTION>
millions December 31, 1994
---------------------------------------------------------------
Gross
Unrealized
Amortized -------------- Fair
AVAILABLE FOR SALE Cost Gains (Losses) Value
---------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agencies $ 1,095 $ 3 $ (69) $ 1,029
Municipal 16,265 614 (585) 16,294
Corporate 6,836 69 (337) 6,568
Foreign government 415 3 (34) 384
Mortgage-backed securities 5,975 28 (390) 5,613
Redeemable preferred stock 147 1 (3) 145
---------------------------------------------------------------
Total $30,733 $718 $(1,418) $30,033
---------------------------------------------------------------
<CAPTION>
HELD TO MATURITY
---------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agencies $ 1,062 $ 27 $ (85) $ 1,004
Corporate 6,338 121 (195) 6,264
Foreign government 1 -- -- 1
Mortgage-backed securities 607 12 (19) 600
---------------------------------------------------------------
Total $ 8,008 $160 $ (299) $ 7,869
---------------------------------------------------------------
</TABLE>
<TABLE>
----------------------------------------------------------------
<CAPTION>
millions December 31, 1993
----------------------------------------------------------------
Gross
Unrealized
Amortized --------------- Fair
AVAILABLE FOR SALE Cost Gains (Losses) Value
----------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agencies $ 781 $ 47 $ (3) $ 825
Municipal 15,670 1,817 (12) 17,475
Corporate 5,901 386 (32) 6,255
Foreign government 364 16 (5) 375
Mortgage-backed securities 5,625 209 (19) 5,815
Redeemable preferred stock 208 4 (2) 210
----------------------------------------------------------------
Total $28,549 $2,479 $(73) $30,955
----------------------------------------------------------------
<CAPTION>
HELD TO MATURITY
----------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agencies $ 853 $ 161 $ (8) $ 1,006
Corporate 6,198 689 (12) 6,875
Foreign government 1 -- -- 1
Mortgage-backed securities 881 95 (1) 975
----------------------------------------------------------------
Total $ 7,933 $ 945 $(21) $ 8,857
----------------------------------------------------------------
</TABLE>
34
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The scheduled maturities for fixed income securities were as follows at Dec. 31,
1994:
<TABLE>
--------------------------------------------------------------
<CAPTION>
Available for
Sale Held to Maturity
millions ----------------- ----------------
Amortized Fair Amortized Fair
Due in Cost Value Cost Value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year or less $ 1,026 $ 1,056 $ 448 $ 447
1-5 years 5,421 5,555 2,028 2,000
6-10 years 6,037 5,966 1,985 1,917
After 10 years 12,274 11,843 2,940 2,905
--------------------------------------------------------------
24,758 24,420 7,401 7,269
Mortgage-backed securities 5,975 5,613 607 600
--------------------------------------------------------------
Total $30,733 $30,033 $8,008 $7,869
--------------------------------------------------------------
</TABLE>
Actual maturities may differ from those scheduled due to prepayments by the
issuers.
Unrealized capital gains and losses on fixed income securities available for
sale and equity securities included in shareholders' equity at Dec. 31, 1994
were as follows:
<TABLE>
-----------------------------------------------------------------------
<CAPTION>
Gross Net
Unrealized Unrealized
Amortized Fair --------------- Gains/
millions Cost Value Gains (Losses) (Losses)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed income securities
available for sale $30,733 $30,033 $ 718 $(1,418) $(700)
Common stocks 3,969 4,547 719 (141) 578
Preferred stocks 312 305 2 (9) (7)
-----------------------------------------------------------------------
$35,014 $34,885 $1,439 $(1,568) $(129)
-----------------------------------------------------------------------
Deferred income taxes, deferred policy acquisition costs
and minority interest 161
-----------------------------------------------------------------------
Total $ 32
-----------------------------------------------------------------------
</TABLE>
The change in unrealized capital gains and losses, net of applicable income
taxes, deferred policy acquisition costs and minority interest, for fixed income
securities and equity securities carried at fair value was a decrease of $1.64
billion for the year ended Dec. 31, 1994 and an increase of $1.25 billion and
$63 million for the years ended Dec. 31, 1993 and 1992, respectively. The change
in net unrealized capital gains and losses on fixed income securities carried at
amortized cost or the lower of amortized cost or fair value was a decrease of
$1.06 billion, $1.24 billion and $74 million for the years ended Dec. 31, 1994,
1993 and 1992, respectively.
Investment income by investment type for Allstate was as follows:
<TABLE>
-------------------------------------------------------------------
<CAPTION>
Year Ended December 31
-------------------------------------------------------------------
millions 1994 1993 1992
-------------------------------------------------------------------
<S> <C> <C> <C>
Fixed income securities $2,917 $2,820 $2,735
Equity securities 134 112 100
Mortgage loans 321 354 331
Other 103 113 92
-------------------------------------------------------------------
Investment income, before expense 3,475 3,399 3,258
Investment expense 74 75 58
-------------------------------------------------------------------
Investment income, less investment expense $3,401 $3,324 $3,200
-------------------------------------------------------------------
</TABLE>
Allstate realized capital gains and losses on investments were as follows:
<TABLE>
-------------------------------------------------------------
<CAPTION>
Year Ended December 31
-------------------------------------------------------------
millions 1994 1993 1992
-------------------------------------------------------------
<S> <C> <C> <C>
Fixed income securities $ 31 $137 $ 216
Equity securities 240 180 112
Other investments (69) (97) (166)
-------------------------------------------------------------
Realized capital gains 202 220 162
Income taxes 70 77 55
-------------------------------------------------------------
Realized capital gains, net of tax $132 $143 $ 107
-------------------------------------------------------------
</TABLE>
Gross gains of $132, $197 and $225 million and gross losses of $105, $29 and
$36 million were realized on sales of fixed income securities during 1994, 1993
and 1992, respectively.
The pretax income effect of provisions for investment losses, principally
provisions for other than temporary declines in value on fixed income
securities and valuation reserves on mortgage loans was $92, $253 and $270
million in 1994, 1993 and 1992, respectively.
Valuation reserves on mortgage loans and real estate were $97 and $93 million
at Dec. 31, 1994 and 1993, respectively.
35
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
------------------------------------------------------------------------------8.
REINSURANCE
The Company assumes and cedes insurance to participate in the reinsurance
market, limit maximum losses and minimize exposure on large risks. Reinsurance
ceded arrangements do not discharge the Company as the primary insurer. The
effects of reinsurance on premiums written and earned were as follows:
<TABLE>
-----------------------------------------------------------------------------
<CAPTION>
Year Ended December 31
-----------------------------------------------------------------------------
millions
1994 1993 1992
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Property-liability premiums written
Direct $16,746 $16,194 $15,652
Assumed 880 857 860
Ceded (617) (436) (501)
-----------------------------------------------------------------------------
Property-liability premiums written,
net of reinsurance $17,009 $16,615 $16,011
-----------------------------------------------------------------------------
Property-liability premiums earned
Direct $16,550 $15,922 $15,383
Assumed 867 831 835
Ceded (609) (430) (480)
-----------------------------------------------------------------------------
Property-liability premiums earned,
net of reinsurance $16,808 $16,323 $15,738
-----------------------------------------------------------------------------
Life insurance premiums and contract charges
Direct $ 1,092 $ 1,120 $ 1,156
Assumed 9 6 10
Ceded (48) (47) (38)
-----------------------------------------------------------------------------
Life insurance premiums and contract charges, net
of reinsurance $ 1,053 $ 1,079 $ 1,128
-----------------------------------------------------------------------------
</TABLE>
The recoverable amounts at Dec. 31, 1994 and 1993 include $121 and $117
million related to losses paid by the Company and billed to reinsurers and $1.75
and $1.80 billion estimated by the Company with respect to unpaid losses which
are not billable until the losses are paid. Amounts recoverable from pools,
associations and facilities included above were $297 and $339 million at Dec.
31, 1994 and 1993, respectively. No amount due or estimated due from any one
reinsurer was in excess of $130 and $132 million at Dec. 31, 1994 and 1993,
respectively.
Amounts recoverable are regularly evaluated by the Company and an allowance
for uncollectible reinsurance is provided when collection is in doubt. The
pretax income effect of provisions for uncollectible reinsurance were $26, $9
and $37 million in 1994, 1993 and 1992, respectively. The allowance for
uncollectible reinsurance was $126 and $110 million at Dec. 31, 1994 and 1993,
respectively.
9. RESERVE FOR PROPERTY-LIABILITY INSURANCE CLAIMS AND CLAIMS EXPENSE
Activity in the reserve for property-liability insurance claims and claims
expense was as follows:
<TABLE>
----------------------------------------------------------------
<CAPTION>
millions 1994 1993 1992
----------------------------------------------------------------
<S> <C> <C> <C>
Reserve at Jan. 1 $15,683 $15,299 $13,533
Less reinsurance recoverables 1,442 1,490 1,162
----------------------------------------------------------------
Net reserve at Jan. 1 14,241 13,809 12,371
Incurred claims and claims expense:
Current year 15,387 13,297 15,296
Prior years (722) (375) (91)
----------------------------------------------------------------
Total incurred 14,665 12,922 15,205
----------------------------------------------------------------
Claims and claims expense paid:
Current year 8,803 7,455 9,200
Prior years 4,541 5,035 4,567
----------------------------------------------------------------
Total paid 13,344 12,490 13,767
----------------------------------------------------------------
Net reserve at Dec. 31 15,562 14,241 13,809
Plus reinsurance recoverables 1,371 1,442 1,490
----------------------------------------------------------------
Reserve at Dec. 31 (1) $16,933 $15,683 $15,299
----------------------------------------------------------------
</TABLE>
(1) Loss development information for Allstate's British reinsurance subsidiary
is not available on a comparable basis. In 1994, the net claims and claims
expense was $98 million and net payments were $57 million. These amounts
were treated as attributable to the current year.
Favorable reserve development in 1994, 1993 and 1992 with respect to prior
years was consistent with the Company's conservative reserving philosophy and
the result of favorable severity trends (average cost per claim) which more than
offset adverse development on asbestos and environmental claims. If the
favorable trends continue, additional reserve releases will occur.
Insurance reserves for asbestos and environmental claims are subject to
greater uncertainties than those presented by other types of claims. Management
believes that its exposure to asbestos and environmental claims have been
effectively limited to risks assumed as well as primary commercial coverages
written prior to 1986. Reserves for asbestos and environmental claims were $1.64
and $1.61 billion at Dec. 31, 1994 and 1993, respectively. Reinsurance
recoverable for these claims were $785 and $756 million at Dec. 31, 1994 and
1993, respectively. Net asbestos and environmental losses paid in 1994 and 1993
as a percent of ending reserves at Dec. 31, 1994 and 1993 were 9.3% and 5.2%,
respectively.
While management believes that its reserves for asbestos and environmental
claims are appropriately established, due to the inconsistencies of court
coverage decisions, plaintiffs' expanded theories of liability, the risks
inherent in major litigation and other uncertainties, the ultimate cost of these
claims may vary materially from the amounts currently recorded, resulting in an
increase in the loss reserves. Due to the uncertainties and factors described
above, management believes it is not practicable to develop a meaningful range
for any such additional reserves that may be required.
36
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
10. INCOME TAXES
Income (loss) before income taxes (benefit) and minority interest was as
follows:
<TABLE>
---------------------------------
<CAPTION>
Year Ended December 31
---------------------------------
millions 1994 1993 1992
---------------------------------
<S> <C> <C> <C>
Domestic $1,633 $2,902 $(4,244)
Foreign 79 70 (50)
---------------------------------
Total $1,712 $2,972 $(4,294)
---------------------------------
</TABLE>
Federal, state and foreign taxes were as follows:
<TABLE>
-------------------------------------------------------------
<CAPTION>
Year Ended December 31
-------------------------------------------------------------
millions 1994 1993 1992
-------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax
Current $ 245 $ 196 $ (414)
Deferred (7) 135 (1,367)
State income tax
Current 45 (5) (14)
Deferred 38 57 (152)
Foreign income tax
Current 49 12 (4)
Deferred (12) 9 (14)
-------------------------------------------------------------
Income tax provision (benefit) $ 358 $404 $(1,965)
-------------------------------------------------------------
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
rate was as follows:
<TABLE>
------------------------------------------------
<CAPTION>
Year Ended December 31
------------------------------------------------
1994 1993 1992
------------------------------------------------
<S> <C> <C> <C>
Statutory federal income
tax rate (benefit) 35.0% 35.0% (34.0)%
State income taxes, net
of federal income taxes 3.2 1.1 (2.6)
Tax-exempt income (20.5) (12.0) (9.0)
Gain on The Allstate
Corporation initial
public offering -- (7.5) --
Deferred income taxes
adjustment for rate
change -- (2.9) --
Other 3.2 (0.1) (0.2)
------------------------------------------------
Effective income tax rate
(benefit) 20.9% 13.6% (45.8)%
------------------------------------------------
</TABLE>
Deferred taxes were recorded based upon differences between the financial
statement and tax bases of assets and liabilities and available tax
carryforwards. The following deferred taxes were recorded:
<TABLE>
<CAPTION>
------------------------------------------------
December 31
------------------------------------------------
Assets/(Liabilities) in millions 1994 1993
------------------------------------------------
<S> <C> <C>
Insurance loss reserves $1,087 $ 993
Unearned maintenance income 294 336
Loan loss reserves 362 346
Unearned insurance premiums 436 422
Alternative minimum tax credit 571 452
Postretirement benefit liability 1,359 1,304
Restructuring reserves 237 400
Other deferred tax assets 908 986
Fixed assets (573) (435)
Policy acquisition costs (568) (499)
Prepaid pension (187) (183)
LIFO (169) (134)
Unrealized securities gains (11) (1,120)
Other deferred tax liabilities (412) (499)
------------------------------------------------
Total $3,334 $2,369
------------------------------------------------
</TABLE>
U.S. income and foreign withholding taxes were not provided on certain
unremitted earnings of international affiliates which the Company considers to
be permanent investments. The cumulative amount of unremitted income
for which income taxes have not been provided totaled $341 million at Dec. 31,
1994. Upon remittance of these earnings, taxes of $160 million would be paid.
Income taxes of $293, $(456) and $262 million were paid (refunded) in 1994, 1993
and 1992, respectively. The Company has $571 million of tax credits that can be
carried forward indefinitely resulting from alternative minimum tax payments.
Net operating loss carryforwards from Canadian operations of $11 and $43
million will expire in 1999 and 2000, respectively.
37
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
11. BENEFIT PLANS
Expenses for retirement and savings-related benefit plans were as follows:
<TABLE>
-------------------------------------------------------------------
<CAPTION>
Year Ended December 31
-------------------------------------------------------------------
millions 1994 1993 1992
-------------------------------------------------------------------
<S> <C> <C> <C>
Savings and Profit Sharing Fund of Sears Employees
Defined contribution $ 75 $127 $ 1
Additional ESOP expense (benefit) 5 (23) 68
Pension plans 50 45 94
Retiree insurance benefits 302 312 300
Other plans 9 18 18
-------------------------------------------------------------------
Total $441 $479 $481
-------------------------------------------------------------------
</TABLE>
---
PROFIT SHARING FUND
Most domestic employees are eligible to become members of The Savings and Profit
Sharing Fund of Sears Employees (the Fund). Beginning in 1994, Company
contributions are calculated separately for Allstate employees and for
employees of other participating companies. The Company contribution is based on
6% of consolidated income of Allstate as defined for Allstate employees and 6%
of consolidated income, as defined, for the remaining participating
companies for all other employees. Company contributions are limited to 70% of
eligible deposits. Contributions are allocated to participating companies based
on eligible deposits made by their employees.
In 1993 and 1992, the Company contributed up to 35% of eligible deposits by
Fund participants, and at the Company's discretion an additional contribution of
up to 35% of eligible deposits. Total Company contributions could not exceed 6%
of consolidated income, as defined.
The Fund includes an Employee Stock Ownership Plan (the ESOP) to prefund a
portion of the Company's anticipated contribution through 2004. The Company
loaned the ESOP $800 million which it used to purchase 21.9 million (increased
to 27.2 million as a result of the Dean Witter spin-off) Sears common shares in
the open market. The loan is repaid with dividends on ESOP shares and Company
contributions. The additional ESOP expense (benefit) included in the benefit
plan expense table was computed as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Year Ended December 31
-------------------------------------------------------------------------
millions
1994 1993 1992
-------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense recognized by ESOP $ 64 $ 71 $ 72
Less dividends accrued on ESOP shares (43) (40) (46)
Cost of shares allocated to employees
and plan expenses 56 71 42
-------------------------------------------------------------------------
77 102 68
-------------------------------------------------------------------------
Reduction of defined contribution
due to ESOP (72) (125)
---------------------------------------------------------------------------
Additional ESOP expense (benefit) $ 5 $ (23) $ 68
-------------------------------------------------------------------------
</TABLE>
The Company contributed $91, $45 and $36 million to the ESOP in 1994, 1993 and
1992, respectively. At Dec. 31, 1994, total committed to be released, allocated
and unallocated ESOP shares were 2.0, 5.6 and 19.6 million,
respectively. Refer to note 3 for a discussion of the proposed split of the
ESOP.
---
PENSION PLANS
Substantially all domestic full-time and certain part-time employees are
eligible to participate in noncontributory defined benefit plans after meeting
age and service requirements. Substantially all Canadian employees are
eligible to participate in contributory defined benefit plans. Pension benefits
are based on length of service, compensation and, in certain plans, Social
Security or other benefits. Funding for the various plans of the Company is
determined using various actuarial cost methods, and amounted to $200, $134 and
$127 million for 1994, 1993 and 1992, respectively.
Pension expense was comprised of the following:
<TABLE>
<CAPTION>
-----------------------------------------------------------
Year Ended December 31
-----------------------------------------------------------
millions 1994 1993 1992
-----------------------------------------------------------
<S> <C> <C> <C>
Benefits earned during the period $212 $177 $192
Interest on projected benefit obligation 385 418 395
Actual return on plan assets 15 (808) (331)
Net amortization and deferral (562) 258 (162)
-----------------------------------------------------------
Pension expense $50 $ 45 $ 94
-----------------------------------------------------------
</TABLE>
The weighted average discount rate and rate of increase in compensation used
in determining the actuarial present value of the projected benefit obligations
were 9.0% and 4.75% in 1994, 7.5% and 4.5% in 1993 and 8.5% and 5.5% in
38
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
1992. The expected long-term rate of return on plan assets used in determining
net periodic pension cost was 9.5% in 1994, 1993 and 1992.
The plans' funded status was as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
December 31
-----------------------------------------------------------------------------
1994 1993
------------------------------------------------------------------------------
Assets Accumu- Assets Accumu-
exceed lated exceed lated
accumu- benefits accumu- benefits
lated exceed lated exceed
millions benefits assets benefits assets
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations
Vested benefit obligation $3,421 $ 111 $4,620 $ 151
------------------------------------------------------------------------------
Accumulated benefit obligation $3,663 $ 113 $4,920 $ 169
------------------------------------------------------------------------------
Projected benefit obligation (PBO) $4,325 $ 130 $5,719 $ 260
Plan assets at fair value, primarily
publicly traded stocks and bonds 4,338 6 5,618
------------------------------------------------------------------------------
PBO less than (in excess of) plan
assets 13 (124) (101) (260)
Unrecognized net loss 547 29 888 49
Unrecognized prior service cost (2) 14 -- 19
Unrecognized transitional (asset)
obligation (98) -- (197) 1
Adjustment required to recognize
minimum liability -- (32) -- (33) -
-----------------------------------------------------------------------------
Prepaid (accrued) pension
cost in the Statement of Financial
Position at Dec. 31 $ 460 $(113) $ 590 $(224) -
-----------------------------------------------------------------------------
</TABLE>
Included in the Company's 1992 restructuring charges were pension termination
costs and settlement charges of $233 and $141 million, respectively, which were
partially offset by curtailment gains of $75 million.
---
RETIREE INSURANCE BENEFITS
The Company provides certain health care and life insurance benefits for retired
employees. Generally, qualified employees may become eligible for these benefits
if they retire in accordance with the Company's established retirement policy
and are continuously insured under the Company's group plans or other approved
plans for 10 or more years immediately prior to retirement. The Company shares
the cost of the retiree medical benefits with retirees based on years of
service. The Company's share is subject to a 5% limit on annual medical
inflation after retirement. The Company's postretirement benefit plans are not
funded. The Company has the right to modify or terminate these plans.
Postretirement benefit expense was comprised of the following:
<TABLE>
------------------------------------------------------
<CAPTION>
Year Ended December 31
------------------------------------------------------
millions 1994 1993 1992
------------------------------------------------------
<S> <C> <C> <C>
Benefits earned during the period $ 58 $ 48 $ 52
Interest on accumulated postretirement
benefit obligation 244 264 248
------------------------------------------------------
Postretirement benefit expense $302 $312 $300
------------------------------------------------------
</TABLE>
Included in the Company's 1992 restructuring charges were postretirement
termination costs of $76 million and postretirement curtailment losses of $61
million.
The plans' funded status was as follows:
<TABLE>
-----------------------------------------------------------------------
<CAPTION>
December 31
-----------------------------------------------------------------------
millions 1994 1993
-----------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees $2,384 $2,699
Fully eligible active plan participants 258 355
Other active plan participants 438 641
-----------------------------------------------------------------------
Accumulated postretirement benefit obligation 3,080 3,695
Unrecognized gain (loss) 333 (393)
-----------------------------------------------------------------------
Accrued postretirement benefit cost in the Statement of
Financial Position at Dec. 31 $3,413 $3,302
-----------------------------------------------------------------------
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 9.0% in 1994 and 7.5% in 1993.
The weighted average health care cost trend rate used in measuring the
postretirement benefit expense was 12.5% in 1995 gradually declining to 6% in
2007 and remaining at that level thereafter. A one percentage point increase in
the assumed health care cost trend rate for each year would increase the
accumulated postretirement benefit obligation by $75 million and would increase
the annual postretirement benefit expense by $11 million.
39
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
12. BORROWINGS
Short-term borrowings consisted of:
<TABLE>
-----------------------------------------------------------------------------
<CAPTION>
December 31
-----------------------------------------------------------------------------
millions 1994 1993
-----------------------------------------------------------------------------
<S> <C> <C>
Commercial paper $5,919 $4,133
Bank loans 98 107
Agreements with bank trust departments 87 140
Other loans (principally foreign) 86 256
-----------------------------------------------------------------------------
Total short-term borrowings $6,190 $4,636
Weighted average interest rate at Dec. 31 6.1% 4.2%
Weighted average interest rate at Dec. 31, including
effects of swaps and caps 6.5% 5.2%
-----------------------------------------------------------------------------
</TABLE>
At Dec. 31, 1994, the Company had credit agreements totaling $8.01 billion.
SRAC's credit facilities totaled $5.10 billion, including $4.50 billion in
syndicated credit agreements and $600 million in uniform credit agreements with
individual banks. The Sears Credit Corp. entities, in support of asset-backed
commercial paper, had $1.82 billion in credit lines. The Allstate Corporation
and Sears Canada had credit agreements totaling $1.00 billion and $95 million,
respectively. These syndicated and uniform credit agreements provide for loans
at prevailing interest rates and mature at various dates through September 1999.
The Company pays commitment fees in connection with these credit agreements.
The Company had interest rate swap agreements which established fixed rates on
$752 and $824 million of short-term variable rate debt at Dec. 31, 1994 and
1993, resulting in weighted average interest rates of 9.1% and 9.0%,
respectively. The weighted average maturity of agreements in effect on Dec. 31,
1994 was approximately fifteen years. Due to interest rate caps, the Company had
maximum weighted average interest rates of 9.0% on $450 million of debt at Dec.
31, 1994 and 7.7% on $900 million of debt at Dec. 31, 1993. The weighted average
maturity of cap agreements in effect on Dec. 31, 1994 was approximately two
years.
Long-term debt was as follows:
<TABLE>
------------------------------------------------------------------------------
<CAPTION>
millions December 31
------------------------------------------------------------------------------
ISSUE 1994 1993
------------------------------------------------------------------------------
<S> <C> <C>
SEARS, ROEBUCK AND CO.
6.25% to 9.5% Notes, due 1994 to 2004 $ 1,950 $ 2,231
8.2% Extendable Notes, due 1999 31 31 6%
Debentures, $300 million face value, due 2000, effective
rate 14.8% 205 194
9.375% Debentures, due 2011 300 300
4.85% to 10.0% Medium-Term Notes,
due 1994 to 2021 3,963 3,656
Capitalized lease obligations 40 43
SEARS ROEBUCK ACCEPTANCE CORP.
6.05% to 6.6% term loans, due 1996 to 1999 845 --
SEARS DC CORP.
5.19% to 9.26% Medium-Term Notes,
due 1994 to 2012 1,521 2,148
SEARS OVERSEAS FINANCE N.V. (GUARANTEED BY
SEARS, ROEBUCK AND CO.)
Zero Coupon Bonds, $400 million face value,
due 1994, effective rate 12.8% -- 382
Zero Coupon Bonds, $500 million face value,
due 1998, effective rate 12.0% 336 300
THE ALLSTATE CORPORATION
5 7/8% and 6 3/4% Notes, due 1998 and 2003 600 600
7 1/2% Debentures, due 2013 250 250
Floating rate notes, due 2009 19 --
SEARS CANADA INC.
9 1/4% to 11 3/4% Debentures, due 1994 to 2000 328 357
Notes, mortgages, bonds and capitalized leases 138 237
SEARS CANADA RECEIVABLES TRUST
5.65% to 8.95% Receivables Trusts,
due 1997 to 2004 302 113
SEARS ACCEPTANCE CO. LTD.
9 5/8% to 15 1/8% Secured Debentures,
due 1994 to 2000 59 99
SEARS, ROEBUCK DE MEXICO, S.A. DE C.V.
16% Bank Notes, due 1996 120 --
Notes payable to banks 21 38
OTHER SUBSIDIARIES
Participating mortgages, $850 million face value, due 2005,
effective rate 8.7%, collateralized by Sears Tower and
related properties -- 835
Notes and capitalized leases 41 41
Long-term debt attributed to discontinued operations, 7.0%
weighted average rate (215) (215) -
-----------------------------------------------------------------------------
Total long-term debt $10,854 $11,640
------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On Nov. 7, 1994, the Company transferred Sears Tower and all related assets and
liabilities to a third party as trustee of a trust and was released from the
related non-recourse mortgages encumbering the building. The second mortgagee is
the residual beneficiary of the trust. The Company is the current income
beneficiary, but cannot receive distributions as beneficiary until all debt
which encumbers Sears Tower is repaid. An affiliate of the second
mortgagee is responsible for operating Sears Tower. As a result of this
transfer, assets and long-term debt were reduced by $501 and $845 million,
respectively, and other liabilities were increased by $25 million, resulting in
an after-tax extraordinary gain of $195 million ($319 million pretax) related to
the early extinguishment of debt.
During the second quarter of 1993, the Company recorded an extraordinary loss
of $145 million after taxes ($234 million pretax) related primarily to payments
to terminate interest rate swaps associated with retired commercial paper that
was allocated to the funding of discontinued operations.
In the third quarter of 1993, the Company recorded an extraordinary loss of
$66 million after taxes ($107 million pretax) related to the call of 7% deep-
discount debentures due to mature Nov. 15, 2001.
As of Dec. 31, 1994, long-term debt maturities for the next five years were as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Year Ended December 31 millions
-----------------------------------------------------------------------------
<S> <C>
1995 $1,141
1996 1,726
1997 1,957
1998 2,014
1999 1,126
-----------------------------------------------------------------------------
</TABLE>
The Company's continuing operations paid interest of $1.3 billion for each
year ended Dec. 31, 1994, 1993 and 1992, respectively. Interest capitalized was
$1, $3 and $23 million for the years ended Dec. 31, 1994, 1993 and 1992.
13. LEASE AND SERVICE AGREEMENTS
The Company leases certain stores, office facilities, computers and automotive
equipment.
Operating and capital lease obligations are based upon contractual minimum
rates and, for certain stores, amounts in excess of these minimum rates are
payable based upon specified percentages of sales. Certain leases include
renewal or purchase options. Operating lease rentals were $626, $600 and $769
million, including contingent rentals of $62, $53 and $48 million, for the years
ended Dec. 31, 1994, 1993 and 1992.
Minimum fixed lease obligations, excluding taxes, insurance and other expenses
payable directly by the Company, for leases in effect as of Dec. 31, 1994 were:
<TABLE>
-----------------------------------------------------------------------------
<CAPTION>
millions Capital Operating
Year Ended December 31 leases leases
-----------------------------------------------------------------------------
<S> <C> <C>
1995 $ 33 $ 289
1996 32 204
1997 30 158
1998 30 136
1999 29 121
After 1999 346 474
-----------------------------------------------------------------------------
Minimum payments 500 $1,382
-----------------------------------------------------------------------------
Executory costs (principally taxes) 39
Imputed interest 291
-------------------------------------------------------------------
Present value of minimum lease payments, principally long-
term $170
-------------------------------------------------------------------
</TABLE>
The Company has a minority interest in Advantis, which began operations in
December 1992. Advantis provides data and voice networking and information
processing services to the Company. Total expenses incurred by the Company for
these services during the years ended Dec. 31, 1994 and 1993 were $409 and $427
million, respectively. The Company has committed to purchase services of at
least $380 million annually through 2002.
41
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
14. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets, incurs various financial liabilities and enters into agreements
involving off-balance-sheet financial instruments. The fair value estimates of
financial instruments presented below are not necessarily indicative of the
amounts the Company might pay or receive in actual market transactions.
Potential taxes and other transaction costs have also not been considered in
estimating fair value. As a number of the Company's significant assets,
including merchandise inventories, property and equipment, real estate and
deferred income taxes, and liabilities, including property-liability, universal
life and traditional life insurance reserves, are not considered financial
instruments, the disclosures below do not reflect the fair value of the Company
as a whole.
---
FINANCIAL ASSETS
The Company had the following financial assets:
<TABLE>
--------------------------------------------------------------------------
<CAPTION>
December 31
--------------------------------------------------------------------------
1994 1993
--------------------------------------------------------------------------
Carrying Fair Carrying Fair
millions Value Value Value Value
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed income securities $38,041 $37,902 $38,888 $39,812
Equity securities 4,852 4,852 4,555 4,555
Mortgage loans 3,234 3,184 3,563 3,622
Retail customer receivables 18,201 19,758 15,906 18,058
Insurance premium installment
and other receivables 3,768 3,768 4,113 4,113
Cash and invested cash 1,421 1,421 1,819 1,819
Separate Accounts 2,800 2,800 2,282 2,282
Other 296 296 354 354
--------------------------------------------------------------------------
</TABLE>
Fair values for fixed income and equity securities are based on quoted market
prices when available. Non-quoted fixed income securities are valued based on
discounted cash flows using current interest rates for similar securities.
Mortgage loans are valued based on discounted estimated cash flows or the
estimated fair value of the underlying collateral. Discount rates are selected
using current rates at which similar loans would be made.
Retail customer receivables are valued by discounting estimated cash flows.
The estimated cash flows reflect the historical cardholder payment experience
and are discounted at a risk-adjusted market rate.
Insurance premium installment receivables and other financial assets are
short-term in nature and as such, their carrying value approximates fair value.
Assets of the Separate Accounts are recorded at fair value.
FINANCIAL LIABILITIES
The Company had the following financial liabilities:
<TABLE>
-------------------------------------------------------------------------------
<CAPTION>
December 31
-------------------------------------------------------------------------------
1994 1993
-------------------------------------------------------------------------------
Carrying Fair Carrying Fair
millions Value Value Value Value
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Contractholder funds on investment contracts $14,772 $14,429 $14,164 $14,432
Long-term debt (excluding capitalized
leases) 10,684 10,629 11,672 12,638
Short-term borrowings 6,190 6,190 4,636 4,636
Separate Accounts 2,800 2,800 2,282 2,282
Other 4,873 4,873 4,729 4,729
-------------------------------------------------------------------------------
</TABLE>
The fair value of contractholder funds on investment contracts is based on the
terms of the underlying contracts. Funds related to contracts with no stated
maturities are valued at the underlying fund balance less applicable surrender
charges. The fair value of funds related to all other investment contracts is
estimated based on discounted cash flows using interest rates currently offered
for contracts with similar terms and durations.
Long-term debt and other long-term financial liabilities are valued based on
quoted market prices when available or discounted cash flows, using interest
rates currently available to the Company on similar borrowings. Short-term
borrowings and other short-term financial liabilities are short-term in nature
and as such, their carrying value approximates fair value. Separate Accounts
liabilities are carried at the fair value of the underlying assets.
---
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The Company is a party to off-balance-sheet financial instruments to manage
market and interest rate risk, fund its investment commitments and improve its
asset/liability management. These financial instruments involve, to varying
degrees, elements of market, credit and interest rate risk in excess of amounts
recognized in the statement of financial position. The Company does not require
collateral or other security to support the financial instruments with credit
risk, unless noted otherwise.
42
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Investment-related
The Company had the following off-balance-sheet financial instruments related to
its investment activities at Dec. 31, 1994 and 1993:
<TABLE>
---------------------------------------------------------------------
<CAPTION>
December 31, 1994
---------------------------------------------------------------------
Contract or
Notional Fair Carrying
millions Amount Value Value
---------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate swap agreements:
Pay floating rate, receive fixed rate $408 $(14) $(7)
Pay fixed rate, receive floating rate 10 1 1
Interest rate cap and floor agreements 358 6 5
Commodity swap agreements 32 2 --
Financial futures and forward contracts 444 (2) 2
Options and warrants 225 28 25
Commitments to invest 277 N/A --
Commitments to extend mortgage loans 75 1 --
Financial guarantees 23 (5) --
---------------------------------------------------------------------
<CAPTION>
December 31, 1993
---------------------------------------------------------------------
Contract or
Notional Fair Carrying
millions Amount Value Value
---------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate swap agreements:
Pay floating rate, receive fixed rate $303 $ 9 $ 4
Pay fixed rate, receive floating rate 48 (7) --
Interest rate cap and floor agreements 63 4 4
Commodity swap agreements 32 -- --
Financial futures and forward contracts 383 5 1
Options and warrants 202 19 19
Commitments to invest 183 N/A --
Commitments to extend mortgage loans 90 1 --
Financial guarantees 31 (4) --
---------------------------------------------------------------------
N/A--Not available.
</TABLE>
The fair value of interest rate swap, cap and floor, and commodity swap
agreements, financial futures and forward contracts, options and warrants are
based on either quoted market or dealer prices. At Dec. 31, 1994, the carrying
value of swaps, caps and floors relating to fixed income securities classified
as available for sale is the same as fair value. For all other swaps, caps and
floors, and all other options and warrants, carrying value represents the amount
of unamortized premium.
The Company generally enters into interest rate swap agreements for
investment purposes to change the interest rate characteristics of existing
assets to match the corresponding liabilities. Gross unrealized gains and losses
on open swap positions were $2 and $15 million at Dec. 31, 1994 and $12 and $10
million at Dec. 31, 1993. For pay floating rate, receive fixed rate swaps, the
Company paid a weighted average rate of 4.3% and received a weighted average
rate of 5.9% in 1994. For pay fixed rate, receive floating rate swaps, the
Company paid a weighted average rate of 7.0% and received a weighted average
rate of 5.4% in 1994. At Dec. 31, 1994, interest rate swap agreements with
notional amounts of $35, $298 and $85 million had maturity dates within one
year, from two to five years and greater than five years, respectively. The
Company purchases interest rate cap and floor agreements to offset rising or
falling interest rates relative to certain existing assets in conjunction with
its asset/liability management. At Dec. 31, 1994, none of these
instruments mature within one year and 81% mature in years seven through ten.
The Company enters into commodity swap transactions to mitigate market risk on
certain fixed income and equity securities. The Company generally utilizes
future and forward contracts to hedge its market or interest rate risk
related to anticipatory investment purchases and sales. Hedges of anticipatory
transactions pertain to identified transactions which are probable to occur and
generally are completed within ninety days.
The Company purchases options on equity securities to achieve equity
appreciation. In certain instances, counterparties are required to post
collateral to minimize credit risk. Debt warrants are purchased to protect
against call risk on fixed income securities.
Commitments to invest generally represent commitments to make equity
investments in various limited partnerships. The Company enters these
agreements to allow for additional participation in certain investments. It is
not practicable to estimate the fair value of these commitments.
Commitments to extend mortgage loans, which are secured by the underlying
properties, are valued based on fees charged by other institutions to make
similar commitments to similar borrowers. The contract amounts represent credit
risk, with creditworthiness evaluated on a case-by-case basis. Commitments to
extend mortgage loans generally have fixed expiration dates or other
termination clauses.
Financial guarantees written represent conditional commitments to repurchase
notes from a creditor upon default by the debtor. The Company enters these
agreements primarily to provide financial support for certain equity
investments. The fair value of financial guarantees are based on estimates of
payments that may occur over the lives of the guarantees.
43
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Debt-related
The Company had the following off-balance-sheet financial instruments related to
its outstanding borrowings at Dec. 31, 1994 and 1993:
<TABLE>
------------------------------------------------------------------
<CAPTION>
December 31, 1994
------------------------------------------------------------------
Contract or
Notional Fair Carrying
millions Amount Value Value
------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate swap agreements:
Pay floating rate, receive fixed rate $805 $ (37) $ --
Pay fixed rate, receive floating rate 752 (180) --
Interest rate cap agreements 450 2 --
------------------------------------------------------------------
<CAPTION>
December 31, 1993
------------------------------------------------------------------
Contract or
Notional Fair Carrying
millions Amount Value Value
------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate swap agreements:
Pay fixed rate, receive floating rate $824 $(384) $ --
Interest rate cap agreements 900 1 --
------------------------------------------------------------------
</TABLE>
The Company uses interest rate swaps and caps to manage the interest rate risk
associated with its borrowings and to manage the Company's allocation of fixed
and variable rate debt. For pay floating rate, receive fixed rate swaps, the
Company paid a weighted average rate of 5.13% and received a weighted average
rate of 6.76% in 1994. For pay fixed rate, receive floating rate swaps, the
Company paid a weighted average rate of 9.03% and received a weighted average
rate of 4.63% in 1994. The fair value of interest rate swaps and caps are based
on prices quoted from dealers. At Dec. 31, 1994, the Company had unrealized
gains and losses relating to such instruments of $2 and $217 million,
respectively. At Dec. 31, 1993, the Company's unrealized gains and losses were
$1 and $384 million, respectively. If a counterparty fails to meet the terms of
a swap or cap agreement, the Company's exposure is limited to the net amount
that would have been received, if any, over the agreement's
remaining life. At Dec. 31, 1994, interest rate swap agreements with notional
amounts of $36, $733 and $788 million had maturity dates within one year, from
two to five years and greater than five years, respectively. At Dec. 31, 1994,
interest rate cap agreements with notional amounts of $250 and $200 million had
maturity dates within one year and from two to five years, respectively.
Credit-related
The Company had outstanding securitized retail customer receivables sold with
recourse of $3.95 and $5.17 billion at Dec. 31, 1994 and 1993, respectively.
These receivables represent conditional commitments of the Company to guarantee
performance to a third party. A portion of the securitized receivables are
collateralized by personal property. The Company's credit risk exposure was
contractually limited to $473 and $616 million at Dec. 31, 1994 and 1993,
respectively. The Company had accrued liabilities associated with this credit
exposure included in the statement of financial position of $170 and $244
million at Dec. 31, 1994 and 1993, respectively.
The Company had a financial guaranty of $78 and $75 million at Dec. 31, 1994
and 1993, respectively. This guaranty represents a commitment by the Company to
guarantee the performance of certain municipal bonds that were issued in
connection with the Sears Merchandise Group's headquarters building. No amounts
were accrued in the statement of financial position for any potential loss
associated with this guaranty at Dec. 31, 1994 and 1993.
---
15. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The Company invests in state and municipal bond holdings and grants credit to
customers throughout the nation. The five states in which the Company had the
largest amount of retail customer receivables, including those sold with
recourse, state and municipal bond holdings and mortgage loans were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
December 31
--------------------------------------------------------------------------
millions 1994 1993
--------------------------------------------------------------------------
<S> <C> <C>
California $4,121 $3,931
Texas 3,690 3,633
Florida 2,944 3,201
Illinois 2,712 2,513
New York 2,696 2,390
--------------------------------------------------------------------------
</TABLE>
44
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
16. REGULATIONS AND LEGAL PROCEEDINGS
Various legal and regulatory actions and governmental proceedings are pending
against the Company, many involving routine litigation incidental to the
businesses. Other matters contain allegations which are nonroutine and involve
compensatory, punitive or antitrust treble damage claims in very large amounts,
as well as other types of relief.
The consequences of these matters are not presently determinable but, in the
opinion of management, the ultimate liability in excess of reserves currently
recorded will not have a material effect on the results of operations,
financial position, liquidity or capital resources of the Company, except for
possibly the class action suits described below.
Allstate's insurance businesses are subject to the effects of a changing
social, economic and regulatory environment. Public and regulatory initiatives
have varied and included efforts to restrict premium rates, restrict the ability
to cancel policies in connection with management of catastrophe exposure, impose
underwriting standards and expand overall regulation. The ultimate changes and
eventual effects, if any, of these initiatives are uncertain.
Two class action suits have been brought against Allstate by certain former
California sales agents. These cases are coordinated and pending before the same
judge in Alameda County, California. The plaintiffs allege that Allstate
violated the California Labor Code with respect to how Allstate reimburses its
California Neighborhood Office Agent office expenses. The plaintiffs in both
cases seek both compensatory and punitive damages. Due to the early stage of
development of these proceedings, it is not practicable to presently develop a
meaningful range of potential loss. While the final resolution of this matter
may have a material impact on Allstate's results of operations, management
believes the matter will not have a material adverse effect on Allstate's
financial position.
Allstate is a defendant, along with a number of other insurers and entities,
in antitrust litigation filed by the attorneys general of various states. In
October 1994, the defendants in this case, including Allstate, agreed to pay $36
million in settlement of the antitrust litigation. The settlement agreement is
subject to court approval.
17. SHAREHOLDERS' EQUITY
DIVIDEND PAYMENTS
Certain indentures relating to the long-term debt of Sears, Roebuck and Co.,
which represent the most restrictive contractual limitation on the payment of
dividends, provide that the Company cannot take specified actions, including the
declaration of cash dividends, which would cause its consolidated
unencumbered assets, as defined, to fall below 150% of its consolidated
liabilities, as defined. At Dec. 31, 1994, approximately $8.0 billion could be
paid in dividends to shareholders under the most restrictive indentures. The
capital of certain foreign operations and Allstate Life Insurance Company at
Dec. 31, 1994 included $422 million which, if distributed, would be subject to
taxes of $188 million. It is not contemplated that distributions will be made
in an amount which would require such tax payments.
The Illinois Insurance Holding Company Systems Act permits Allstate Insurance
Company to pay, without regulatory approval, dividends to Sears 80.2% owned
subsidiary, The Allstate Corporation, during any 12-month period in an amount up
to the greater of 10% of surplus (as regards policyholders) or its net income
(as defined) as of the preceding Dec. 31. Approximately $650 million of
Allstate's retained income at Dec. 31, 1994 had no restriction relating to
distribution during 1995 which would require prior approval.
As of Dec. 31, 1994, subsidiary companies could remit to Sears, Roebuck and
Co. in the form of dividends approximately $5.0 billion, after payment of all
related taxes, without prior approval of regulatory bodies or violation of
contractual restrictions.
45
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PREFERRED SHARES
The 8.88% Preferred Shares, First Series (8.88% Preferred Shares) were issued in
the form of 13 million depositary shares having cumulative dividends of $2.22
annually and a liquidation preference of $25 per depositary share, plus accrued
and unpaid dividends. On or after Nov. 9, 1996, the Company may, at its option,
redeem the 8.88% Preferred Shares, in whole or in part, at any time at a
redemption price of $25 per depositary share, plus accrued and unpaid dividends
to the redemption date.
The Series A Mandatorily Exchangeable Preferred Shares (PERCS) were issued in
the form of 28.75 million depositary shares having an annual, cumulative
dividend of $3.75 per depositary share. The PERCS have voting rights
(equivalent to one-fourth of a vote for each depositary share) and a
liquidation preference of $43 per depositary share. The Company has elected to
exchange the PERCS for common shares on Mar. 20, 1995. Holders of depositary
shares will receive 1.24 common shares for each depositary share. The total
number of common shares deliverable upon exchange is 35.7 million.
In the event that dividends payable on either series of preferred stock are in
arrears for six quarterly periods, holders of such stock together shall have the
right to elect two additional directors of the Company until all cumulative
dividends have been paid or set apart for payment. Additionally, dividends
cannot be paid on the Company's common shares if dividends on either series of
preferred shares are in arrears.
---
STOCK OPTION PLANS
Options to purchase common stock of the Company have been granted to employees
under various plans at prices equal to the fair market value of the stock on the
dates the options were granted. In addition, the Company may pay to the optionee
in connection with certain options an amount generally equal to the maximum
statutory corporate federal income tax rate then in effect (not to exceed 46%)
times the difference between the market price and the option price. Options are
generally exercisable in not more than four equal, annual
cumulative installments beginning one year after the date of grant, and
generally expire in 10 or 12 years.
Changes in stock options were as follows:
<TABLE>
-------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31
-------------------------------------------------------------------------------
thousands of shares 1994 1993 1992
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance 6,800 11,335 13,305
Granted 6,351 2,281 220
Exercised (953) (5,689) (1,728)
Canceled or expired (675) (2,587) (462)
Adjustment due to Dean Witter
distribution -- 1,460 --
-------------------------------------------------------------------------------
Ending balance 11,523 6,800 11,335
-------------------------------------------------------------------------------
Reserved for future
grant at year-end 8,855 2,551 3,059
Exercisable 3,480 2,894 7,722 -
------------------------------------------------------------------------------
Option prices per share:
Granted $46.32-$51.19 $34.01-$58.00 $41.25-$45.75
Exercised 20.09- 39.68 19.90- 47.57 26.69- 43.13
Canceled or expired 22.91- 48.57 22.91- 57.88 26.69- 51.25
-------------------------------------------------------------------------------
Exercise prices of ending balance $19.90-$58.00 $19.90-$58.00 $25.94-$57.88 -
------------------------------------------------------------------------------
</TABLE>
In 1993, the number and exercise price of outstanding stock options were
adjusted to account for the dilutive effect of the spin-off of Dean Witter.
During 1994 and 1993, Allstate issued options to purchase common stock of The
Allstate Corporation to its employees. At Dec. 31, 1994 and 1993, there were 3.0
and 2.7 million shares, respectively, under option at exercise prices from
$24.75 to $31.69 per share. The options vest ratably over a three-year period
and expire 10 years after the grant date.
46
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
18. SUMMARY OF BUSINESS GROUP DATA
The Company operates primarily in two businesses-retailing and insurance. While
the consolidated financial statements reflect the total financial resources and
operating results of the Company, analysis of the operations of the industry
components within the Company is facilitated by separate business group
statements. Therefore, beginning on page 48 are supplemental summarized
financial statements and analyses of operations and financial condition. The
following three-year summary of pertinent business group data, derived from the
accompanying statements, includes a further refinement within industry segments.
Corporate assets are principally investments, real estate and ventures not
included in the business groups. Corporate results include revenues and expenses
of such operations, and items of an overall holding company nature including the
portion of administrative costs and interest not allocated to the Company's
businesses.
<TABLE>
---------------------------------------------------------------------------
<CAPTION>
millions 1994 1993 1992
---------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
---------------------------------------------------------------------------
Sears Merchandise Group
Domestic operations $29,376 $26,776 $29,108
International operations 3,649 3,668 3,835
---------------------------------------------------------------------------
Sears Merchandise Group total 33,025 30,444 32,943
--------------------------------------------------------------------------
Allstate Insurance Group
Property-liability 18,607 18,013 17,458
Life 2,856 2,927 2,770
Corporate 1 6 --
---------------------------------------------------------------------------
Allstate Insurance Group total 21,464 20,946 20,228
---------------------------------------------------------------------------
Corporate 110 169 229
---------------------------------------------------------------------------
Intergroup transactions (40) (73) (290)
---------------------------------------------------------------------------
Total $54,559 $51,486 $53,110
---------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) AND
MINORITY INTEREST
---------------------------------------------------------------------------
Sears Merchandise Group
Domestic operations $ 1,484 $ 1,141 $ 384
International operations 60 39 54
Restructuring -- -- (2,758)
---------------------------------------------------------------------------
Sears Merchandise Group total 1,544 1,180 (2,320)
---------------------------------------------------------------------------
Allstate Insurance Group
Property-liability 108 1,205 (1,551)
Life 334 247 126
Restructuring (154) -- --
Corporate (61) (76) --
---------------------------------------------------------------------------
Allstate Insurance Group total 227 1,376 (1,425)
---------------------------------------------------------------------------
Corporate (59) (219) (549)
Gain on The Allstate Corporation initial public
offering -- 635 --
---------------------------------------------------------------------------
Total $ 1,712 $ 2,972 $(4,294)
---------------------------------------------------------------------------
</TABLE>
<TABLE>
---------------------------------------------------------------------------
<CAPTION>
millions 1994 1993 1992
---------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME (LOSS)
---------------------------------------------------------------------------
Sears Merchandise Group
Domestic operations $ 897 $ 744 $ 229
International operations (7) 8 29
Restructuring -- -- (1,730)
Cumulative effect of accounting changes -- -- (1,505)
---------------------------------------------------------------------------
Sears Merchandise Group total 890 752 (2,977)
---------------------------------------------------------------------------
Allstate Insurance Group
Property-liability 398 1,188 (589)
Life 225 163 89
Corporate (39) (50) --
Restructuring (100) -- --
Minority interest (96) (141) --
Cumulative effect of accounting changes -- -- (325)
---------------------------------------------------------------------------
Allstate Insurance Group total 388 1,160 (825)
---------------------------------------------------------------------------
Corporate (34) (127) (345)
Gain on The Allstate Corporation initial public
offering -- 635 --
---------------------------------------------------------------------------
Discontinued operations 15 165 215
---------------------------------------------------------------------------
Extraordinary gain (loss) 195 (211) --
---------------------------------------------------------------------------
Total $ 1,454 $ 2,374 $(3,932)
---------------------------------------------------------------------------
ASSETS
---------------------------------------------------------------------------
Sears Merchandise Group
Domestic operations $27,035 $24,995 $24,405
International operations 2,527 2,691 2,564
---------------------------------------------------------------------------
Sears Merchandise Group total 29,562 27,686 26,969
---------------------------------------------------------------------------
Allstate Insurance Group
Property-liability 32,612 32,709 28,523
Life 28,716 26,577 23,576
Corporate 41 72 --
---------------------------------------------------------------------------
Allstate Insurance Group total 61,369 59,358 52,099
---------------------------------------------------------------------------
Corporate 527 1,974 2,910
---------------------------------------------------------------------------
Intergroup eliminations and reclassifications (35) (545) (1,580)
---------------------------------------------------------------------------
Net assets of discontinued operations 473 452 3,549
---------------------------------------------------------------------------
Total $91,896 $88,925 $83,947
-------------------------------------------------------------------------
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-- SEARS MERCHANDISE
GROUP
Summarized
STATEMENTS
of
INCOME
-----------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-- Year Ended December
31
...............................................................................
millions 1994 1993 1992
..............................................................................
<S> <C> <C> <C>
REVENUES
Merchandise sales and services $29,451 $27,171 $29,829
Credit revenues 3,574 3,273 3,114
..............................................................................
Total revenues 33,025 30,444 32,943
..............................................................................
COSTS AND EXPENSES
Cost of sales, buying and occupancy 21,568 19,918 22,218
Selling and administrative 7,468 7,088 8,108
Depreciation and amortization 517 493 494
Provision for uncollectible accounts 698 821 910
Restructuring -- -- 2,758
Interest 1,255 1,043 889
..............................................................................
Total costs and expenses 31,506 29,363 35,377
..............................................................................
Operating income (loss) 1,519 1,081 (2,434)
Other income 25 99 23
Gain on sales of subsidiaries' stock -- -- 91
..............................................................................
Income (loss) before income taxes (benefit) and
minority interest 1,544 1,180 (2,320)
Income taxes (benefit) 640 421 (830)
..............................................................................
904 759 (1,490)
Minority interest (14) (7) 18
..............................................................................
Income (loss) before cumulative effect of
accounting changes 890 752 (1,472)
Cumulative effect of accounting changes -- -- (1,505)
..............................................................................
GROUP INCOME (LOSS) $ 890 $ 752 $(2,977)
..............................................................................
</TABLE>
See notes to Consolidated financial statements.
ANALYSIS OF OPERATIONS
Operating results for the Sears Merchandise Group are reported for two business
segments: domestic operations and international operations. Domestic operations
are comprised of domestic merchandising and domestic credit operations. Domestic
merchandising includes the core merchandising and product services and direct
response businesses in the United States and Puerto Rico. International
operations consists of similar merchandising and credit operations conducted in
Canada through Sears Canada Inc. (Sears Canada), a 61.1% owned subsidiary, and
in Mexico through Sears Roebuck de Mexico; S.A. de C.V. (Sears Mexico), a 75.2%
owned subsidiary.
Group revenues for 1994, 1993, and 1992 were as follows:
<TABLE>
--------------------------------------------------
<CAPTION>
millions 1994 1993 1992
--------------------------------------------------
<S> <C> <C> <C>
Domestic operations:
Domestic merchandising
Continuing businesses $26,127 $23,806 $21,549
Exited businesses -- -- 4,732
--------------------------------------------------
26,127 23,806 26,281
Domestic credit 3,249 2,970 2,827
--------------------------------------------------
Total domestic operations 29,376 26,776 29,108
International operations 3,649 3,668 3,835
--------------------------------------------------
Group revenues $33,025 $30,444 $32,943
--------------------------------------------------
</TABLE>
Group revenues in 1994 increased $2.58 billion, or 8.5%. Domestic revenues
rose $2.60 billion, or 9.7%, primarily due to strong durable goods and apparel
sales during the year. International revenues declined $19 million, or 0.5%,
due to adverse changes in exchange rates. In local currencies, international
revenues increased 5.5%.
48
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ANALYSIS OF OPERATIONS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
In 1993, Group revenues decreased $2.50 billion, or 7.6%, primarily due to the
impact of exited businesses. Exited businesses included the domestic catalog
operations, Sears Business Centers, selected retail department and specialty
stores and certain home improvement services. Excluding exited businesses,
domestic revenues increased $2.40 billion, or 9.8%, primarily due to more
focused and aggressive merchandising and marketing strategies and enhanced
customer service. International revenues declined 4.4%, reflecting a weak
Canadian economy and an unfavorable Canadian exchange rate.
Group income for 1994, 1993 and 1992 was as follows:
<TABLE>
---------------------------------------------
<CAPTION>
millions 1994 1993 1992
---------------------------------------------
<S> <C> <C> <C>
Domestic operations $897 $744 $(2,967)
International operations (7) 8 (10)
---------------------------------------------
Group income $890 $752 $(2,977)
---------------------------------------------
</TABLE>
Group income for 1994 increased 18.4% to $890 million from $752 million in
1993. Income in 1993 included a $56 million tax credit from the adjustment of
deferred tax assets due to the 1% increase in the federal income tax rate
resulting from the Omnibus Budget Reconciliation Act of 1993. Excluding the tax
adjustment from 1993 results, 1994 Group income increased 28.0% over 1993.
Domestic income increased $153 million, or 20.7%, primarily due to higher
revenues, a decreased ratio of selling and administrative expenses to revenues
and a lower provision for uncollectible accounts. The lower 1994 results for
international operations were due to Sears Mexico's merchandise inventory
repositioning program and the peso devaluation.
Group income in 1993 increased $3.73 billion over a 1992 loss of $2.98
billion. The 1992 loss included $1.73 billion in after-tax restructuring
charges, a $1.50 billion noncash after-tax charge to record the cumulative
effect of changes in accounting for certain postretirement and postemployment
benefits, after-tax losses of $244 million from exited businesses and a $50
million net gain on the sales of subsidiaries' stock.
The Group made several reclassifications to the 1993 and 1992 statements of
income to conform to the 1994 classifications. Revenues from licensed
departments, which previously were recorded based on net commissions received,
are included on a gross basis. Refer to note 1 of the consolidated financial
statements for further information. Distribution costs which previously were
recorded in selling and administrative expenses, are included in cost of sales,
buying and occupancy. Depreciation and amortization expense, which previously
was recorded in cost of sales, buying and occupancy and selling and
administrative expense, is included as a separate caption in the Group's
statement of income.
DOMESTIC OPERATIONS
Supplementary domestic merchandising information:
<TABLE>
-------------------------------------------------------------------------------
<CAPTION>
millions, except number of stores 1994 1993 1992(1)
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Department store revenues $21,090 $19,433 $17,673
Free-standing store revenues 3,184 2,649 2,301
-------------------------------------------------------------------------------
Core merchandising revenues 24,274 22,082 19,974
Other revenues 1,853 1,724 1,575
-------------------------------------------------------------------------------
Domestic merchandise sales and services $26,127 $23,806 $21,549
-------------------------------------------------------------------------------
Number of department stores 800 799 859
Number of free-standing stores 1,140 1,018 842
-------------------------------------------------------------------------------
Core merchandising stores 1,940 1,817 1,701(2)
Core merchandising revenues per selling square foot $ 346 $ 321 $ 289
-------------------------------------------------------------------------------
</TABLE>
(1) Includes continuing businesses only.
(2) 1992 store counts include 113 stores which were part of the restructuring
actions announced in January 1993 and exclude the closed catalog and
specialty merchandising operations.
In 1994 and 1993, the Group's revenue growth strategy focused on improving the
productivity of its department stores. The success of this strategy can be
measured in the comparable store sales percentages which have remained strong
over the past two years, as shown in the following chart:
COMPARABLE STORE SALES CHART
In addition to strong comparable store sales increases, core merchandising
revenues per selling square foot have also shown steady increases in 1994 and
1993, up 7.8% and 11.1%, respectively.
Department store revenues increased 8.5% in 1994, which built on a 10.0%
increase in 1993. This strong revenue performance reflects the continued
revitalization and repositioning of the Group's base business, the department
stores. Actions taken to drive this revenue growth included the exiting of
unprofitable merchandise and service lines, the remodeling and modernization of
240 department stores in 1993 and 1994, the conversion of 2.9 million square
feet of non-selling space and 1.5 million square feet of selling space formerly
occupied by furniture departments to apparel selling
49
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS MERCHANDISE GROUP
ANALYSIS OF OPERATIONS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
space and a more target customer focused merchandise selection.
Increased sales of home-related products paced the growth in department store
revenues in 1994. Brand Central contributed the greatest share of the increase
in home product sales on the strength of excellent consumer demand for
appliances and home electronics. Strong consumer demand coupled with good in-
stock inventory positions resulted in double digit sales growth for the home
improvement business during 1994 as well.
Despite weak fashion industry conditions, apparel sales, which are entirely
department store based, increased significantly in 1994. Sales gains were
strongest in women's dresses and juniors, fine jewelry and cosmetics. These
departments benefited the most from the store remodeling and selling floor space
expansion programs in 1994. Men's apparel and footwear also provided significant
sales gains during 1994.
Automotive revenues declined in 1994 as a result of the discontinuation of
unprofitable product lines and services, which were partially offset by gains in
the base automotive product lines--tires and batteries.
In 1993, the increase in department store revenues was led by double-digit
percentage increases in women's, children's and men's apparel, accessories and
jewelry, footwear and electronics. The gains were primarily attributable to more
competitive values, an extensive brand advertising campaign and a greater
emphasis on customer service. Automotive department revenues declined against
1992 due to the elimination of unprofitable operations.
With the department stores making considerable progress, the Group has also
planned the expansion of a variety of free-standing store concepts such as the
Homelife furniture stores, Sears Hardware stores, Dealer stores and Western Auto
stores.
Free-standing store revenues in 1994 increased 20.2% over 1993. Dealer stores,
which are primarily independently-owned and operated and focus on a home-related
product assortment, contributed the largest portion of the revenue growth. The
Group opened 98 new Dealer stores in 1994 and 192 new stores in 1993. Western
Auto, a wholly-owned subsidiary which participates in the retail and wholesale
automotive products and services business, also contributed to the revenue
growth with increases from its free-standing formats. The Group opened 22 new
Homelife stores and 11 Sears Hardware stores in 1994 which also helped drive
revenue increases over 1993.
In 1993, free-standing store revenues increased 15.1% over 1992. The growth in
revenues was attributable to increases at Western Auto, a new revenue stream
from the creation of the Dealer store concept in 1993 and growth at the Homelife
stores.
Other revenues, which are generated by the product services and direct
response businesses, increased 7.5% in 1994 and 9.5% in 1993. Increases in
product services maintenance agreement sales, which benefitted from strong
appliance sales, and higher revenues at direct response, on the addition of 12
new specialty catalogs, accounted for the 1994 and 1993 revenue growth.
Supplementary domestic credit information:
<TABLE>
-------------------------------------------------------------------------
<CAPTION>
millions 1994 1993 1992
-------------------------------------------------------------------------
<S> <C> <C> <C>
Gross revenues $ 3,600 3,486 3,446
Funding cost on securitized receivables $ (351) (516) (619)
Net revenues $ 3,249 2,970 2,827
SearsCharge sales as a % of sales (1) 58.3% 58.0 54.5
Gross customer receivables $21,325 20,351 20,287
Balances sold at Dec. 31 $ 3,946 5,174 7,116
Owned customer receivables at Dec. 31 $17,379 15,177 13,171
Average gross receivables $20,094 19,649 19,510
Average owned receivables $15,718 13,471 12,428
Average account balance (dollars) $ 842 795 752
-------------------------------------------------------------------------
</TABLE>
(1) For department and Homelife stores only.
In 1994, gross credit revenues increased 3.3% due to increased merchandise
sales and a lower liquidation rate. The increase in domestic credit revenues
comes despite the Group's decision in 1993 to provide customers a choice of
payment vehicles by accepting third party payment products in the retail stores.
Despite the strategic decision to accept third party credit cards, the
percentage of merchandise sales and services transacted with the SearsCharge
card in 1994 was comparable to that experienced in 1993. The Group has
implemented a variety of marketing initiatives to offset any negative impact on
SearsCharge market share relative to the acceptance of third party payment
products. In 1993, gross credit revenues increased 1.2% compared with 1992
reflecting the strong merchandise sales performance and higher gross receivable
balances.
In 1994, the Group established Sears National Bank, a credit card bank limited
to engaging in credit card operations, to provide a more unified pricing
environment. The Bank is subject to certain restrictions applicable to credit
card banks under federal law. In 1994, the Bank became the issuer of the
SearsCharge card in the state of Arizona and plans to expand to other states in
1995.
50
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ANALYSIS OF OPERATIONS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Key operating measures for domestic operations:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
millions 1994 1993 1992(1)
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Gross margin $7,093 6,548 5,871
Percent of merchandise sales and services 27.1% 27.5 27.2
Selling and administrative expense $6,680 6,288 5,936
Percent of total revenues 22.7% 23.5 24.4
Interest expense $1,095 883 733
Funding cost on securitized receivables $ 351 516 619
Total funding costs $1,446 1,399 1,352
Provision for uncollectible accounts $ 650 795 872
Operating income $1,465 1,117 779
Percent of total revenues 5.0% 4.2 3.2
Net credit charge-offs to average gross customer
receivables 3.32% 3.45 3.57
Gross credit customer receivables delinquent sixty
days or more 3.86% 3.55 2.99
Allowance for uncollectible accounts as a percentage
of gross credit customer receivables at Dec. 31 4.31% 4.72 4.23
-----------------------------------------------------------------------------
</TABLE>
(1) Includes continuing businesses only.
Gross margin as a percentage of merchandise sales declined slightly in 1994 to
27.1% from 27.5% in 1993. The decline is attributable to the strong 1994 sales
performance in the Brand Central and home improvement departments, which provide
a lower gross margin rate than domestic merchandising as a whole. The gross
margin rate in these businesses was further pressured due to competition from
specialty retailers. The gross margin rate on apparel sales was
successfully maintained in 1994, despite the heavy promotional environment that
plagued the apparel industry throughout 1994. Automotive department gross margin
rates improved in 1994 due to the discontinuation of unprofitable product lines
and services and the strategic sourcing initiatives that lowered product costs.
In 1993, gross margin as a percent of merchandising sales and services
increased to 27.5% from 27.2% in 1992 as a decrease in buying and occupancy
costs as a percent of merchandise sales and services was partially offset by
higher markdowns due to a continued emphasis on growing market share by offering
competitive values.
SELLING AND ADMINISTRATIVE EXPENSES AS % OF REVENUE CHART
Domestic selling and administrative expenses as a percent of revenues in 1994
improved approximately 80 basis points to 22.7% from 23.5%. The improvement in
the selling and administrative expense ratio reflects the Group's continued
emphasis on controlling expenses and leveraging its fixed cost base with strong
revenue growth. Store operating costs continued to decline as a percent of
revenues in 1994.
In 1993, selling and administrative expenses applicable to continuing domestic
operations as a percent of revenues declined approximately 90 basis points to
23.5% from 24.4% in 1992. The improvement was primarily attributable to a
reduction in payroll as a percent of revenues related to previously announced
restructuring initiatives, partially offset by higher advertising costs.
Total funding costs, comprised of interest expense and the funding cost of
securitized receivables, increased 3.3% as compared to 1993 reflecting the
growth in gross credit receivables. In 1993, total funding costs increased 3.6%
reflecting higher effective interest rates attributable to a change in the
funding mix resulting from the Company's repositioning.
The provision for uncollectible accounts was 18.2% lower than 1993 due to
favorable customer receivable write-off trends. Despite the improvement in
write-offs, delinquencies trended upward in the fourth quarter of 1994 and the
Group responded by increasing its collection staff and implementing additional
collection strategies. In 1993, the provision for uncollectible accounts
declined 8.9% primarily due to a decline in customer bankruptcies.
OPERATING INCOME CHART
A key measure of domestic operations' improved profit performance is growth in
operating income. The improvement from 1992 through 1994 resulted from strong
merchandising revenue growth, a relatively stable gross margin rate, the
reduction in selling and administrative expenses as a percent of revenues and
the strong credit performance.
51
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, MERCHANDISE GROUP
ANALYSIS OF OPERATIONS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
INTERNATIONAL OPERATIONS
Revenues in local currencies increased 5.5% in 1994. The improvement in local
currency revenues was attributable to a 1.7% revenue increase at Sears Canada
coupled with a 27.5% increase at Sears Mexico as sales benefited from the
opening of two new stores. Revenues in U.S. dollars declined slightly against
1993 due mainly to an unfavorable Canadian exchange rate.
Gross margin as a percent of revenues in 1994 increased to 23.8% from 20.9% in
1993 due to improved inventory control at Sears Canada partially offset by lower
gross margins at Sears Mexico as a result of a repositioning of that business.
Selling and administrative expense as a percent of revenues was slightly lower
at 21.6% in 1994 compared with 21.8% in 1993, as expense reductions at Sears
Canada were partially offset by cost increases at Sears Mexico. Operating income
as a percent of revenues improved approximately 250 basis points over 1993 due
primarily to improved performance at Sears Canada partially offset by lower
operating income at Sears Mexico stemming from the merchandise inventory
repositioning.
In 1993, revenues in local currency increased 1.4% as compared to 1992. Local
currency revenue increases at Sears Mexico, which benefited from the opening of
three new retail stores were partially offset by lower local currency revenues
at Sears Canada due to a soft Canadian economy. Revenues in U.S. dollars
declined in 1993 due to an unfavorable Canadian exchange rate. Gross margin as a
percent of revenues declined to 20.9% in 1993 as compared with the 1992 gross
margin rate of 21.4% due to increased inventory shrinkage at Sears Canada,
primarily in the catalog business. Selling and administrative expenses as a
percent of revenues decreased to 21.8% from 22.5% in 1992 due to cost
containment efforts at Sears Canada. Operating income as a percent of revenues
improved approximately 140 basis points in 1993 over 1992 due largely to
improved results at Sears Canada.
During 1992, a net after-tax gain of $50 million was recorded as the Company
sold a minority interest in Sears Mexico and Sears Canada completed a primary
offering of common stock.
52
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Summarized STATEMENTS
of FINANCIAL POSITION
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
................................................................................
millions 1994 1993
................................................................................
<S> <C> <C>
ASSETS
Current assets
Cash and invested cash $ 445 $ 215
Retail customer receivables 19,033 16,695
Less: Allowance for uncollectible accounts and unearned
finance charges 832 789
................................................................................
18,201 15,906
Other receivables 266 1,346
Inventories 4,044 3,518
Prepaid expenses and deferred charges 274 328
Deferred income taxes 966 1,213
................................................................................
Total current assets 24,196 22,526
Property and equipment
Land 355 361
Buildings and improvements 3,717 3,598
Furniture, fixtures and equipment 3,729 3,626
Capitalized leases 229 239
................................................................................
8,030 7,824
Less accumulated depreciation 4,065 4,064
................................................................................
Total property and equipment, net 3,965 3,760
Deferred income taxes 685 616
Other assets 716 784
................................................................................
TOTAL ASSETS $29,562 $27,686
................................................................................
LIABILITIES
Current liabilities
Short-term borrowings $ 6,151 $ 4,433
Restructuring reserves 184 647
Accounts payable and other liabilities 4,603 4,468
Unearned revenues 780 762
Other taxes 474 403
................................................................................
Total current liabilities 12,192 10,713
Long-term debt and capitalized lease obligations 9,978 9,955
Postretirement benefits 2,795 2,729
Minority interest and other 816 866
................................................................................
TOTAL LIABILITIES 25,781 24,263
................................................................................
CAPITAL 3,781 3,423
................................................................................
TOTAL LIABILITIES AND CAPITAL $29,562 $27,686
................................................................................
</TABLE>
See notes to Consolidated financial statements.
ANALYSIS OF FINANCIAL CONDITION
The Group has ready access to liquidity with cash and invested cash,
receivables and inventories comprising over 77% of the Group's assets at Dec.
31, 1994. The $20.6 billion net funding portfolio at Dec. 31, 1994, comprised of
$16.1 billion in debt and $4.5 billion of securitized receivables, was primarily
used to fund the Group's $23.5 billion of gross credit card
receivables.
Net cash used in operating activities was $330 million in 1994, compared with
$986 million in 1993. The improvement in operating cash flow is attributable to
higher income and lower cash payments relative to the restructuring reserve less
the corresponding reduction in the deferred income tax asset associated with
those payments. Offsetting this improvement was the growth in owned retail
customer receivables and the
53
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, MERCHANDISE GROUP
Summarized STATEMENTS
of CASH FLOWS
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
................................................................................
millions 1994 1993 1992
<S>..................................................<C>......<C>......<C>......
CASH FLOWS FROM OPERATING ACTIVITIES
Group income (loss) $ 890 $ 752 $ (2,977)
Adjustments to reconcile group income (loss) to
net cash used in operating activities
Depreciation and amortization 517 493 494
Cumulative effect of accounting changes -- -- 2,430
Restructuring charges -- -- 2,758
Provision for uncollectible accounts 698 821 910
Gain on sales of property and investments (22) (73) (86)
Change in deferred income taxes 218 416 (2,053)
Increase in retail customer receivables (3,199) (2,868) (1,325)
Decrease (increase) in merchandise inventories (594) 514 357
Change in net other operating assets and
liabilities 1,162 (1,041) (908)
................................................................................
NET CASH USED IN OPERATING ACTIVITIES (330) (986) (400)
................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchases of property and equipment (894) (487) (585)
Net (purchases) sales of investments (9) 80 10
................................................................................
NET CASH USED IN INVESTING ACTIVITIES (903) (407) (575)
................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in long-term debt 138 1,530 67
Net increase in short-term borrowings, primarily
90 days or less 1,781 215 1,165
Proceeds from sales of subsidiaries' stock -- -- 162
Net capital transfers to Corporate (453) (421) (235)
................................................................................
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,466 1,324 1,159
................................................................................
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
INVESTED CASH (3) (1) (3)
................................................................................
NET INCREASE (DECREASE) IN CASH AND INVESTED
CASH 230 (70) 181
CASH AND INVESTED CASH AT BEGINNING OF YEAR 215 285 104
................................................................................
CASH AND INVESTED CASH AT END OF YEAR $ 445 $ 215 $ 285
</TABLE>
................................................................................
See notes to Consolidated financial statements.
ANALYSIS OF FINANCIAL CONDITION CONTINUED
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
increased investment in inventory, which was partially offset by the
corresponding increase in merchandise payables. Inventories on a FIFO basis
totaled $4.74 billion as of Dec. 31, 1994, as compared to $4.24 billion at Dec.
31, 1993. The increase in inventory levels reflects the expansion of selling
space in the department stores and the growth of the free-standing store
businesses. The following inventory turnover chart reflects core merchandising's
improvement in managing inventory productivity over the past few years.
INVENTORY TURNOVER CHART
54
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ANALYSIS OF FINANCIAL CONDITION CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
In the fourth quarter of 1992, the Group recorded a pretax restructuring
charge of $2.65 billion to streamline its domestic merchandising operations by
focusing on profitable core retail operations. The restructuring program
included discontinuing domestic catalog operations, a voluntary early retirement
incentive program, closing 113 unprofitable retail department and specialty
stores, streamlining or discontinuing various unprofitable merchandise lines and
the write-down of underutilized assets to market value.
The restructuring program was intended to reduce operating costs and improve
the Group's competitive position and earnings potential. The restructuring
program eliminated approximately 50,000 full-time and part-time positions. The
following represents the reserve activity during 1994 and 1993:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
millions 1994 1993
------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $647 $2,150
Cash charges 247 1,216
Non-cashcharges 216 287
------------------------------------------------------------------------
Ending balance $184 $ 647
------------------------------------------------------------------------
</TABLE>
For 1994, the cash charges related primarily to employee termination
benefits. For 1993, the cash charges related primarily to operating losses
associated with the catalog and other exited businesses. The remaining reserve
balance at Dec. 31, 1994 related primarily to commitments remaining under
contractual obligations. Management believes that the remaining reserve balance
at Dec. 31, 1994 is adequate.
The Group is currently in the middle of a five-year, $4 billion capital
expenditure program, which began in 1993. The program is primarily focused on
expanding the Group's revenue opportunities. The capital expended during the
past three years has been used as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------
millions 1994 1993 1992
--------------------------------------------------------
<S> <C> <C> <C>
Department stores, primarily remodel and
expansion efforts $673 $306 $339
Free-standing formats 106 82 70
Cost and productivity initiatives 141 109 179
--------------------------------------------------------
Total capital expenditures $920 $497 $588
--------------------------------------------------------
</TABLE>
The Group plans capital expenditures for 1995 of approximately $1.2 billion
(including leases) which includes the remodeling and upgrade of merchandise
presentations in approximately 109 existing department stores, 17 new
department stores, 50 new Sears Hardware stores, 30 new Homelife stores and 62
new Western Auto stores.
Net cash provided by financing activities was $1.47 billion in 1994 compared
to $1.32 billion in 1993, due primarily to increased debt levels, which were
required to fund the growth in credit receivables.
55
<PAGE>
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ALLSTATE INSURANCE GROUP
Summarized STATEMENTS
of INCOME
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
................................................................................
millions 1994 1993 1992
<S>...................................................<C>......<C>......<C>.....
REVENUES
Property-liability insurance premiums (net of
reinsurance ceded of $609, $430 and $480) $16,808 $16,323 $15,738
Life insurance premium income and contract
charges (net of reinsurance ceded of $48, $47
and $38) 1,053 1,079 1,128
Investment income, less investment expense 3,401 3,324 3,200
Realized capital gains 202 220 162
................................................................................
Total revenues 21,464 20,946 20,228
................................................................................
COSTS AND EXPENSES
Property-liability insurance claims and claims
expense (net of reinsurance recoveries of $330,
$443 and $917) 14,665 12,922 15,205
Life insurance policy benefits (net of
reinsurance recoveries of $29, $26 and $22) 2,031 2,103 2,154
Policy acquisition costs (including amortization
of $2,019, $2,047 and $1,944) 3,198 3,279 3,154
Early retirement program 154 -- --
Interest 59 82 --
Other operating costs and expenses 1,130 1,184 1,140
................................................................................
Total costs and expenses 21,237 19,570 21,653
................................................................................
Income (loss) before income taxes (benefit) 227 1,376 (1,425)
Income taxes (benefit) (257) 75 (926)
................................................................................
The Allstate Corporation income (loss) before
cumulative effect of accounting changes 484 1,301 (499)
Minority interest (96) (141) --
Cumulative effect of accounting changes -- -- (326)
................................................................................
GROUP INCOME (LOSS) $ 388 $ 1,160 $ (825)
</TABLE>
................................................................................
See notes to Consolidated financial statements.
ANALYSIS OF OPERATIONS
Allstate's revenues totaled $21.46, $20.95 and $20.23 billion for 1994, 1993 and
1992, respectively. Revenues increased 2.5% in 1994 due to increases in
property-liability earned premiums and investment income which were partially
offset by a decrease in life insurance premium income and contract charges and
lower realized capital gains. Revenues increased 3.6% in 1993 due to increases
in property-liability premiums earned, investment income and realized capital
gains which were partially offset by a decrease in life insurance premium income
and contract charges.
Allstate's 1994 income was $388 million, after minority interest of $96
million, compared with $1.16 billion, after minority interest of $141 million,
in 1993 and a loss of $825 million in 1992. The decline in income in 1994 from
1993 resulted primarily from a significant increase in catastrophe losses,
including losses of $846 million after taxes and minority interest from the
California earthquake, which more than offset the benefit of favorable
property-liability trends in claim severity and expense reductions, and improved
life operating income. Income in 1994 also includes a charge of $80 million
after taxes and minority interest for the cost of an early retirement program
offer accepted by approximately 600 employees during the fourth quarter. The
program provides one year of salary continuation and related benefits during the
salary continuation period, and an enhanced retirement benefit. Allstate
estimates that this program will result in annual cost savings of approximately
$28 million after taxes and minority interest, commencing in 1996.
Improved income in 1993 over 1992 resulted from stronger operating income from
both the property-liability and life operations and higher realized capital
gains. Income in 1993 also benefited from a nonrecurring tax credit of $28
million resulting from the adjustment of deferred tax assets due to the 1%
increase in the federal income tax rate imposed by the Omnibus Budget
Reconciliation Act of 1993. The loss in 1992 resulted from a $1.65 billion
after-tax loss from Hurricane Andrew and a onetime $326 million after-tax 56
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ANALYSIS OF OPERATIONS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
charge as the result of a change in accounting for certain postretirement
benefits and postemployment benefits.
---
PROPERTY-LIABILITY OPERATIONS
Premiums written in 1994 increased 2.4% over 1993 levels, which in turn,
increased 3.8% over 1992. The increases were due to an increase in average
premium. Average premium increased primarily due to a shift to newer and more
expensive autos, rate increases and the effect of policy provisions adjusting
for inflation. In general, rate increases are limited by competition, favorable
loss cost trends and regulatory factors.
Over the past two years, policies in force have remained relatively unchanged
as increases in areas targeted for growth and improved retention of existing
customers were substantially offset by policy reductions in catastrophe exposure
areas. Premiums earned increased 3.0% and 3.7% in 1994 and 1993, respectively.
Supplementary income statement information:
<TABLE>
------------------------------------------------------------------------------
<CAPTION>
millions 1994 1993 1992
------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums written $17,009 $16,615 $16,011
------------------------------------------------------------------------------
Premiums earned $16,808 $16,323 $15,738
Claims and claims expense 14,665 12,922 15,205
Other costs and expenses 3,834 3,885 3,805
Early retirement program 132 -- --
------------------------------------------------------------------------------
Underwriting loss (1,823) (484) (3,272)
Net investment income 1,573 1,460 1,468
Realized capital gains,after-tax 147 149 167
Income tax benefit on operations (excluding tax on
realized capital gains) (415) (63) (1,049)
Cumulative effect of accounting changes -- -- (312) -
-----------------------------------------------------------------------------
Income (loss) $ 312 $ 1,188 $ (900) -
-----------------------------------------------------------------------------
Catastrophe losses $ 1,988 $ 546 $ 3,300
------------------------------------------------------------------------------
Claims and claims expense ("loss") ratio 87.2% 79.2% 96.6%
Expense ratio 23.6 23.8 24.2
------------------------------------------------------------------------------
Combined ratio 110.8% 103.0% 120.8%
------------------------------------------------------------------------------
Effect of catastrophe losses on combined ratio 11.8% 3.3% 21.0%
------------------------------------------------------------------------------
</TABLE>
The underwriting loss increased in 1994 from 1993 primarily due to a
significant increase in catastrophe losses, including the California
earthquake, which more than offset the favorable trends in claim severity
(average cost per claim) for auto injury coverages and a lower expense ratio.
The Northridge, California earthquake resulted in the second highest total
losses from a single catastrophe incurred by Allstate in its history. Since
Allstate's preliminary provision for losses on February 1, 1994 and based on its
ongoing evaluation of ever increasing claim data and changing
circumstances, Allstate revised its provision for earthquake losses a number of
times. Allstate's cumulative provision for earthquake losses was $1.63 billion
($846 million after taxes and minority interest). The establishment of reserves
is an inherently uncertain process and there can be no assurance that ultimate
losses with respect to the California earthquake will not exceed recorded
reserves. However, management believes the possibility of additional material
loss is remote.
Underwriting results in 1993 improved from 1992 with decreases in both the
loss ratio and expense ratio. The improvement in the loss ratio was
attributable to lower catastrophe losses partially offset by modest increases in
severity and frequency. Underwriting results in 1992 include losses from
Hurricane Andrew of $2.5 billion, net of reinsurance.
P-L COMBINED RATIO
CHART
Catastrophes are an inherent risk of the property-liability insurance business
which have contributed, and will continue to contribute, to material year-to-
year fluctuations in Allstate's results of operations and financial condition.
The level of catastrophe loss experienced in any year cannot be predicted and
could be material to the results of operations and financial condition. Due to
the current unavailability of reinsurance at acceptable rates, Allstate has no
reinsurance in place to lower its exposure to
catastrophes at this time. However, Allstate continues to evaluate the
reinsurance market for appropriate coverage at acceptable rates. Allstate has
initiated a strategy to limit, over time, its insurance exposures in certain
regions prone to catastrophe occurrences. Allstate has declined to renew some
policies for property coverages, although the extent of such nonrenewals is
constrained by state insurance laws and regulations. In addition, Allstate has
filed for selective rate increases as well as for limitations on policy
coverages in catastrophe exposure areas, subject to the requirements of
insurance laws and regulations and as limited by competitive considerations.
While management believes that these actions will reduce Allstate's exposure to
catastrophes in certain geographic regions, the extent of such reductions is
uncertain.
Changes in claim severity are generally influenced by inflation in the medical
and auto repair sectors of the economy and company loss control initiatives.
Injury claims are affected by medical cost inflation while non-injury claims are
affected largely by auto repair cost inflation. Management
57
<PAGE>
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ALLSTATE INSURANCE GROUP
ANALYSIS OF OPERATIONS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
believes that the favorable injury severity trends in 1994 and 1993 are due in
part to Allstate initiatives. These include initiatives to improve the claims
settlement process, medical management programs and the use of special
investigative units to reduce fraud. Injury coverage severity declined slightly
in 1994 from 1993. Although injury coverage severity in 1993 was higher than
1992, the rate of increase was lower than the corresponding increase in the
inflation rate for the Medical Care index as measured by the Bureau of Labor
Statistics during the same time period. For non-injury coverages, Allstate
monitors its rate of increase in average cost per claim against the Auto
Maintenance and Repair (AMR) index. Although 1994 and 1993 rates of increase in
non-injury severity were higher than the AMR index, they did not deviate
significantly from historical trends.
Auto injury frequencies decreased slightly during 1994, while non-injury
frequency trends were up due to adverse weather experienced during the first
quarter of the year. Frequencies for both injury and non-injury coverages
increased slightly in 1993. Excluding claims related to catastrophes, frequency
for homeowners coverages decreased in 1994 and 1993, while the severity of
claims increased slightly.
The cost of the early retirement program added eight-tenths of a percentage
point to the 1994 expense ratio. Excluding the cost of this program, the expense
ratio steadily declined over the three-year period as management continued to
improve efficiency and control the growth of back-office operation expenses.
Pretax investment income increased 7.7% in 1994 from 1993 due to growth in
investment balances that more than offset a decline in portfolio yields. Pretax
investment income decreased slightly in 1993 from 1992, primarily due to a
decline in portfolio yields, which were partially offset by the benefit of
higher investment balances. Year-to-year fluctuations in realized capital gains
are largely a function of timing of sales decisions reflecting management's view
of individual securities and overall market conditions.
---
LIFE OPERATIONS
Premium income is recognized as revenue for traditional life products and
annuities with life contingencies, and contract charges are recognized as
revenue for universal life contracts and investment contracts. Therefore,
premium income and contract charges are significantly influenced by the type of
products sold. Premium income and contract charges decreased 2.4% in 1994 and
4.3% in 1993. The decreases were due to lower sales of structured settlements
with life contingencies and group pension retirement annuities, which were
partially offset by higher contract charges resulting from growth in universal
life insurance inforce and variable annuity and other investment contract
account balances.
Supplementary income statement information:
<TABLE>
----------------------------------------------------------------
<CAPTION>
millions 1994 1993 1992
----------------------------------------------------------------
<S> <C> <C> <C>
Statutory premiums $4,539 $4,086 $3,851
----------------------------------------------------------------
Premium income and contract charges $1,053 $1,079 $1,128
Net investment income 1,827 1,858 1,732
Benefits and expenses 2,523 2,681 2,643
Early retirement program 22 -- --
----------------------------------------------------------------
Income from operations 335 256 217
Income tax on operations 109 87 68
----------------------------------------------------------------
Net operating income 226 169 149
Realized capital losses, after-tax (15) (6) (60)
Cumulative effect of accounting changes -- -- (14)
----------------------------------------------------------------
Income $ 211 $ 163 $ 75
----------------------------------------------------------------
</TABLE>
Because of the manner in which life premiums and contract charges are
recognized under generally accepted accounting principles, statutory premiums
are a better measure of sales volume. Statutory premiums, which include premiums
and deposits for all products, increased 11.1% in 1994 from 1993 due to higher
sales of guaranteed investment contracts and increased sales and renewals of
life insurance policies. Sales of guaranteed investment contracts may vary based
on management's assessment of market opportunities. Increased sales of annuities
through banks were offset by reduced sales of structured settlements and other
individual annuities. In 1993, statutory premiums increased 6.1% from 1992
levels. Sales of individual annuity products,
including variable annuities, and sales and renewals of life insurance
increased during the period. Premiums from group pension products decreased in
1993.
Pretax net investment income decreased 1.6% in 1994 compared with 1993
primarily due to reduced portfolio yields, which were partially offset by the
impact of increased invested assets. Invested assets grew 7.7% and 5.6% for 1994
and 1993, respectively. Higher levels of invested assets resulted in a 7.2%
increase in investment income in 1993. Investment income was also
favorably impacted in 1993 by adjustments totaling $23 million resulting from
accelerated discount accretion on certain mortgage-backed securities.
LIFE OPERATING INCOME
CHART
58
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Summarized STATEMENTS
of FINANCIAL POSITION
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
..............................................................................
.........................................
millions 1994 1993
.......................................................................................................................
<S> <C> <C>
ASSETS
Investments
Fixed income securities
Available for sale, at fair value (amortized cost $30,733 and
$28,549) $30,033 $30,955 Held to maturity, at
amortized cost (fair value $7,869 and $8,857)
8,008 7,933
..............................................................................
.........................................
38,041 38,888
Equity securities, at fair value (cost $4,281 and $3,626)
4,852 4,554 Mortgage loans
3,234 3,563
Real estate
814 722 Short-term
806 673
Other
432 391
..............................................................................
......................................... Total investments
48,179 48,791
Premium installment receivables
2,316 1,964 Deferred policy acquisition costs
2,074 1,511
Reinsurance recoverables
1,867 1,916 Property and equipment, net
788 822
Accrued investment income
710 705 Deferred income taxes
1,728 444
Cash
68 81 Other assets
839 842
Separate Accounts
2,800 2,282
..............................................................................
......................................... TOTAL ASSETS
$61,369 $59,358
..............................................................................
......................................... LIABILITIES
Reserve for property-liability
insurance claims and claims expense $16,933
$15,683 Reserve for life insurance policy benefits
5,224 4,942 Contractholder funds
17,974
16,811 Unearned premiums
5,908 5,729 Claim payments outstanding
607
492 Other liabilities and accrued expenses
2,628 2,269 Debt
869
850 Separate Accounts
2,800 2,282
..............................................................................
......................................... TOTAL LIABILITIES
52,943 49,058
..............................................................................
......................................... MINORITY INTEREST
1,666 2,049
CAPITAL
6,760 8,251
..............................................................................
......................................... TOTAL LIABILITIES AND CAPITAL
$61,369 $59,358
..............................................................................
......................................... </TABLE>
See notes to Consolidated financial statements.
ANALYSIS OF OPERATIONS CONTINUED
Net operating income increased 33.9% in 1994 from 1993, which in turn increased
13.6% from 1992. Net operating income in 1994 included a $14 million charge
related to the cost of the early retirement program and in 1993 included an $18
million charge resulting from management's decision to discontinue use of a
policy processing system. The increases in 1994 and 1993 were primarily due to
increased volume of contract charges on individual annuity products and lower
operating expenses. Additionally, net operating income in 1992 was adversely
affected by foregone interest on commercial mortgage loans.
Realized capital losses after taxes increased in 1994 compared with 1993. While
the life operations experienced significantly lower asset writedowns in 1994,
realized capital gains from sales of securities and bond calls were also
significantly lower than the prior year. Realized capital gains in 1993 included
the effect of sales related to repositioning a portion of the
investment portfolio to improve the matching of assets with related
liabilities. Realized capital losses after taxes were lower in 1993 compared to
1992 due to lower commercial mortgage loan losses and higher gains from bond
calls and sales of securities.
59
<PAGE>
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-------------------------------------------------------------------------------
ALLSTATE INSURANCE GROUP
ANALYSIS OF FINANCIAL CONDITION
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
CAPITAL
The capacity for Allstate's growth in property-liability premiums is in part a
function of its operating leverage. The premium to surplus ratio for Allstate
Insurance Company, Allstate's property-liability subsidiary, was 2.5x and 2.3x
at Dec. 31, 1994 and 1993, respectively. The increase resulted from a decline in
statutory surplus resulting from higher catastrophe losses in 1994.
The National Association of Insurance Commissioners has adopted a new standard
for assessing the solvency of insurance companies, which are referred to as
risk-based capital (RBC). The requirement consists of a formula for determining
each insurer's RBC and a model law specifying regulatory actions if an insurer's
RBC falls below specified levels. The RBC formula for property-liability
companies includes asset and credit risk, but places more emphasis on
underwriting factors for reserving and pricing. The RBC formula for life
insurance companies establishes capital requirements relating to insurance,
business, asset and interest rate risks. At Dec. 31, 1994, risk-based capital
for each of Allstate's individual property-liability and life companies was in
excess of the required capital levels.
In January 1995, Allstate announced that it intends to sell up to 70% of the
common stock of The PMI Group, Inc., an indirect wholly-owned subsidiary, in an
initial public offering. This decision is in keeping with its strategic
direction to focus on its core property-liability and life insurance businesses
and to realize the return on its long-term investment. Concurrently with the
initial public offering, Allstate will offer exchangeable notes due in 1998
which are mandatorily exchangeable into shares of PMI Group common stock
(subject to Allstate's right to deliver cash in lieu of such shares). Upon the
mandatory exchange, all or substantially all of Allstate's remaining ownership
interest in PMI Group will be eliminated. The foregoing offerings are subject to
market and other conditions, and there can be no assurance that the
offerings will be consummated.
---
INVESTMENTS
Allstate follows an investment strategy that combines the goals of safety,
stability, liquidity, growth and total return. It seeks to balance preservation
of principal with after-tax yield while maintaining portfolio diversification.
Investment strategies for the property-liability and life insurance segments
vary based on the nature of the respective insurance operations.
Invested assets contributed income constituting 15.8% and 15.9% of total
revenues in 1994 and 1993, respectively. The composition of the investment
portfolio at Dec. 31, 1994 is presented in the table below.
-------------------------------------------------------------
<TABLE>
<CAPTION>
Property-
millions Liability Life Total
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed income
securities
Available for
sale $19,705 79.6% $10,328 44.2% $30,033 62.4%
Held to
maturity -- -- 8,008 34.2 8,008 16.6
Equities 4,124 16.6 728 3.1 4,852 10.1
Mortgage loans 68 0.3 3,167 13.6 3,235 6.7
Real estate 459 1.8 355 1.5 814 1.7
Short-term 389 1.6 404 1.7 793 1.6
Other 25 0.1 406 1.7 431 0.9
-------------------------------------------------------------
Total $24,770 100.0% $23,396 100.0% 48,166 100.0%
-------------------------------------------------------------
Corporate 13 --
-------------------------------------------------------------
$48,179 100.0%
-------------------------------------------------------------
</TABLE>
---
FIXED INCOME SECURITIES
The fixed income securities portfolio consists of tax-exempt municipal bonds,
publicly traded corporate bonds, private placement securities, mortgage-backed
securities and U.S. Government bonds. Allstate generally holds its fixed income
securities long-term, but has classified the majority of these securities as
available for sale, which are carried in the statement of financial condition at
fair value, to allow maximum flexibility in portfolio management. At Dec. 31,
1994, unrealized capital losses on the available for sale portfolio totaled $700
million compared to unrealized capital gains of $2.41 billion at Dec. 31, 1993.
The significant change in the unrealized gain/loss position of the fixed income
available for sale securities portfolio was attributable to rising interest
rates.
FIXED INCOME SECURITIES
AVAILABLE FOR SALE
CHART
60
<PAGE>
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ANALYSIS OF FINANCIAL CONDITION CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
FIXED INCOME SECURITIES
HELD TO MATURITY
CHART
Nearly 95% of the $38.04 billion of fixed income securities are rated
investment grade. Included among the securities that are rated below investment
grade are securities that were purchased at investment grade but have since been
downgraded, high yield bonds and certain private placements of debt. The
majority of these securities are included in the available for sale portfolio
and are carried in the statement of financial position at fair value. The net
unrealized loss on below investment grade securities was $12 million at Dec. 31,
1994.
At Dec. 31, 1994 and 1993, $6.22 and $6.70 billion, respectively, of the fixed
income securities portfolio were invested in mortgage-backed securities. These
securities provide higher-than-average credit quality and liquidity. Allstate
mitigates credit risk by primarily purchasing securities with
underlying collateral that is guaranteed by U.S. Government entities.
Mortgage-backed securities are subject to risks associated with repayment of
principal. This may result in the securities having a different actual maturity
than anticipated at the time of purchase. Securities that have an amortized cost
greater than par which are backed by mortgages that repay faster (or slower)
than expected will incur a reduction (or increase) in yield. Those securities
that have an amortized cost lower than par that repay faster (or slower) than
expected will generate an increase (or decrease) in yield. The degree to which a
security is susceptible to changes in yields is influenced by the difference
between its amortized cost and par, the relative sensitivity to repayment of the
underlying mortgages backing the securities in a changing interest rate
environment, and the repayment priority of the securities in the overall
securitization structure. Prepayment of principal may result in a loss on
certain high-risk mortgage-backed securities. At Dec. 31, 1994, Allstate held $2
million of these higher risk securities.
Allstate attempts to limit repayment risk by purchasing securities whose cost
is below or does not significantly exceed par, and by purchasing structured
securities with repayment protection to provide a more certain cash flow to the
investor. At Dec. 31, 1994, the amortized cost of the mortgage-backed
securities portfolio was below par value by $155 million.
Allstate closely monitors its fixed income portfolio for declines in value that
are other than temporary. Securities are placed on non-accrual status when they
are in default or when the receipt of interest payments is in doubt. The total
pretax income effect of provisions for losses attributable to fixed income
securities for 1994, 1993 and 1992 was $26, $136 and $77 million, respectively.
The high level of writedowns in 1993 reflects changes in
estimated future cash flows for certain mortgage-backed securities. The fair
value of total problem, restructured and potential problem fixed income
securities at Dec. 31, 1994 was $95, $23 and $161 million, respectively. These
securities are carried at fair value. Potential problem fixed income securities
included $24 million of Orange County, California securities.
---
MORTGAGE LOANS
Allstate's $3.23 billion investment in mortgage loans at Dec. 31, 1994 is
comprised primarily of loans secured by first mortgages on developed commercial
real estate, and is primarily held in the life operations. Geographical and
property diversification are key considerations used to manage Allstate's
mortgage loan risk. Property diversification at Dec. 31, 1994 was 37% retail,
22% office building, 19% warehouse, 14% apartment complexes and 8% other. The
portfolio is geographically diversified throughout the U.S. and Canada.
Allstate closely monitors its commercial mortgage loan portfolio on a loan-by-
loan basis. Loans with an estimated collateral value less than the loan balance
as well as loans with other characteristics indicative of higher than normal
credit risk are reviewed by financial and investment management at least
quarterly for purposes of establishing valuation reserves and placing loans on
non-accrual status. The underlying collateral values are estimated using
discounted cash flow projections, and are updated as conditions change or at
least annually. The total pretax income effect of provisions for loan losses was
$62, $84 and $157 million in 1994, 1993 and 1992, respectively.
61
<PAGE>
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-------------------------------------------------------------------------------
ALLSTATE INSURANCE GROUP
Summarized STATEMENTS
of CASH FLOWS
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
................................................................................
millions 1994 1993 1992
................................................................................
<S> <C> <C> <C> CASH
FLOWS FROM OPERATING ACTIVITIES
Group income (loss) $ 388 $ 1,160 $ (825)
Adjustments to reconcile Group income (loss) to
net cash
provided by operating activities
Depreciation, amortization and other noncash
items 52 26 112
Cumulative effect of accounting changes -- -- 494
Early retirement program 154 -- --
Realized capital gains (202) (220) (162)
Increase in policy benefit and other insurance
reserves 1,779 1,156 2,182
Increase in deferred income taxes (173) (142) (620)
Change in other operating assets and
liabilities (7) 613 (368)
................................................................................
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,991 2,593 813
................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales
Fixed income securities 5,205 5,927 5,157
Equity securities 1,944 1,574 1,352
Investment maturities
Fixed income securities 3,991 5,424 2,974
Mortgage loans 399 233 113
Investment purchases
Fixed income securities (11,327) (15,426) (10,001)
Equity securities (2,359) (1,769) (1,566)
Mortgage loans (221) (306) (382)
Net change in short-term investments (139) 423 (235)
Change in other investments (40) (48) (33)
Net purchases of property and equipment (132) (76) (120)
................................................................................
NET CASH USED IN INVESTING ACTIVITIES (2,679) (4,044) (2,741)
................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt assumed from Sears -- (1,800) --
Proceeds from issuance of debt 19 850 --
Proceeds from issuance of common stock -- 2,287 --
Payments received under investment contracts 2,839 2,359 2,771
Interest credited to investment contracts 924 959 1,034
Payments on maturity of investment contracts and
other charges (2,847) (2,919) (1,766)
Dividends paid to Sears (260) (330) (202)
................................................................................
NET CASH PROVIDED BY FINANCING ACTIVITIES 675 1,406 1,837
................................................................................
NET DECREASE IN CASH (13) (45) (91)
CASH AT BEGINNING OF YEAR 81 126 217
................................................................................
CASH AT END OF YEAR $ 68 $ 81 $ 126
................................................................................
</TABLE>
See notes to Consolidated financial statements.
62
<PAGE>
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ANALYSIS OF FINANCIAL CONDITION CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Allstate defines problem commercial mortgage loans as loans that are in
foreclosure, loans for which a principal or interest payment is over 60 days
past due, or are current with interest payments, but considered in-substance
foreclosed. Restructured commercial mortgage loans have modified terms and
conditions that were not at prevailing market rates or terms at the time of
restructuring. Potential problem commercial mortgage loans are current with
interest payments, or less than 60 days delinquent as to contractual principal
and interest payments, but because of other facts and circumstances, management
has serious doubts regarding the borrower's ability to pay future interest and
principal which causes management to believe these loans may be classified as
problem or restructured in the future. Interest foregone on problem and
restructured loans was $4, $6 and $17 million for 1994, 1993 and 1992,
respectively.
The following table summarizes the net carrying values of problem,
restructured and potential problem commercial mortgage loans at Dec. 31, 1994
and 1993.
------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
millions 1994 1993
------------------------------------------------------------
<S> <C> <C>
Problem $127 $ 92
Restructured 161 161
Potential problem 222 383
------------------------------------------------------------
Total net carrying value $510 $636
------------------------------------------------------------
Reserves $ 92 $ 91
------------------------------------------------------------
Reserves as a % of gross carrying value (1) 15.3% 12.5%
</TABLE>
------------------------------------------------------------
(1) Calculated as total reserves divided by the gross carrying value, which is
the total net carrying value plus the reserves.
In 1994, overall real estate market conditions generally stabilized
nationwide, and some geographic regions showed improvement. The decline in the
industry delinquency rates, which began in 1993, continued throughout 1994. The
net carrying value of problem, restructured and potential problem loans
decreased primarily due to loan foreclosures and discounted loan payoffs, write-
offs and improved loan circumstances consistent with the improvement in certain
real estate markets. Problem loans experienced a net increase due to potential
problem loans moving to the problem loan category. Contributing to the decrease
in potential problem loans was improvement in the circumstances surrounding
certain loans. Allstate's restructured loans carrying value remained constant as
loans added were offset by loans which met the
restructured contractual obligations, were paid off early, or moved into the
problem category. Allstate expects to continue to extend the maturity and adjust
the interest rates to market of certain maturing loans where the borrower is
unable to obtain financing elsewhere. If interest rates continue to rise, it
will likely be more difficult to obtain market-adjusted rates on maturing
mortgages and may result in an increase of restructured loans. Management's
commercial mortgage loan monitoring procedures as well as the frequency of
estimating collateral values for each loan provide a reasonable basis for
establishing reserves. Management is encouraged by the positive real estate
market trends in some geographic locations; however, further declines in certain
market or specific property conditions may cause changes in estimates of cash
flows and may result in additional losses. While Allstate believes its
commercial mortgage loans were carried at appropriate levels at Dec. 31, 1994,
no assurance can be given that further additions to the reserves will not be
required.
---
CLAIMS AND CLAIM EXPENSE RESERVES
Underwriting results of the property-liability operations are significantly
influenced by estimates of claims and claims expense reserves. Allstate
regularly updates its reserve estimates as new facts become known and further
events occur that may impact the resolution of unsettled claims.
Reserves for asbestos and environmental claims are subject to greater
uncertainties than those presented by other types of claims. Reserves for
asbestos were $486 and $503 million, net of reinsurance recoverable of $293 and
$283 million, at Dec. 31, 1994 and 1993, respectively. Reserves for
environmental claims were $370 and $354 million, net of reinsurance recoverable
of $492 and $473 million, for the same periods.
Pending asbestos and environmental claims were approximately 16,200 and 15,500
at Dec. 31, 1994 and 1993, respectively. Approximately 2,700 and 3,000 new
claims were reported during 1994 and 1993, respectively. Approximately 2,000 and
1,450 claims were closed during 1994 and 1993, respectively, of which
approximately 1,400 and 1,250 claims were settled without payment.
Refer to note 9 of the consolidated financial statements for further
discussion on reserves for asbestos and environmental claims.
---
LIQUIDITY
Allstate's operations generate substantial positive cash flow from operations as
a result of premiums and deposits received in advance of the time claims and
policyholder benefits are paid. Positive operating cash flows, along with the
portion of the investment portfolio that is held in cash and highly liquid
securities, have historically met the liquidity requirements of the operations.
Catastrophe claims, the timing and amount of which are inherently
unpredictable, may create increased liquidity requirements. Allstate was able to
meet the cash requirements of the California earthquake with operating cash
flows.
Under a shelf registration filed with the Securities and Exchange Commission,
Allstate may issue up to $650 million of debt or preferred stock. In addition,
at Dec. 31, 1994, Allstate had unused lines of credit of $1.00 billion.
63
<PAGE>
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SEARS, ROEBUCK AND CO.
Ten-year SUMMARY
of CONSOLIDATED FINANCIAL DATA
-------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
$ millions, except per common
share data 1994 1993 1992
...............................................................................
OPERATING RESULTS
...............................................................................
<S> <C> <C> <C>
Revenues $54,559 $51,486 $53,110
Costs and expenses 51,390 47,898 53,253
Restructuring 154 -- 2,782
Interest 1,339 1,400 1,389
Operating income (loss) 1,676 2,188 (4,314)
Other income (loss) 36 784 20
Income (loss) before income taxes
(benefit) and minority interest 1,712 2,972 (4,294)
Income taxes (benefit)
Current operations 358 404 (1,965)
Fresh start and deferred tax
benefits -- -- --
Income (loss) from continuing
operations 1,244 2,420 (2,311)
Income (loss) from discontinued
operations 15 165 252
Extraordinary gain (loss) 195 (211) --
Cumulative effect of accounting
changes -- -- (1,873)
Net income (loss) 1,454 2,374 (3,932)
................................................................................
FINANCIAL POSITION
................................................................................
Investments $46,942 $47,753 $40,304
Receivables 21,969 20,019 18,116
Property and equipment, net 5,041 5,223 5,479
Merchandise inventories 4,044 3,518 4,048
Net assets of discontinued
operations 473 452 3,549
Total assets 91,896 88,925 83,947
Insurance reserves 40,136 37,444 35,889
Short-term borrowings 6,190 4,636 4,469
Long-term debt 10,854 11,640 12,432
Total debt 17,044 16,276 16,901
Percent of debt to equity 158% 163% 157%
Shareholders' equity $10,801 $11,664 $10,773
................................................................................
SHAREHOLDERS' COMMON STOCK
INVESTMENT
................................................................................
Book value per common share (year-
end) $ 26.91 $ 29.58 $ 27.89
Shareholders 262,387 291,320 337,892
Average common shares outstanding
(millions) 389 383 370
Earnings (loss) per common share
Income (loss) from continuing
operations $3.12 $6.25 $(6.33)
Income (loss) from discontinued
operations .04 .43 .68
Extraordinary gain (loss) .50 (.55) --
Cumulative effect of accounting
changes -- -- (5.07)
Net income (loss) 3.66 6.13 (10.72)
Cash dividends declared per common
share $1.60 $1.60 $2.00
Cash dividend payout percent 43.7% 26.1% N/M
Market price--common stock (high-
low) 55 1/8-42 1/8 60 1/8-39 7/8 48-37
Closing market price at year-end 46 52 7/8 45 1/2
Price/earnings ratio (high-low) 15-12 10-7 N/M
................................................................................
</TABLE>
Operating results and financial position reflect Homart Development Co. and
affiliated entities, Dean Witter, Discover & Co. and the Coldwell Banker
residential services businesses as discontinued operations. See note 5 to the
consolidated financial statements. Operating results for 1990 and prior years
also reflect the group life-health business of Allstate Insurance Group and the
commercial division of Coldwell Banker as discontinued operations.
Financial position for 1994 and 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. See note 2 to
the consolidated financial statements. Net income in 1988 reflects adoption of
new income tax accounting rules.
64
<PAGE>
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--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
.........................................................................................................
1991 1990 1989 1988 1987 1986 1985
.........................................................................................................
.........................................................................................................
<S> <C> <C> <C> <C> <C> <C> <C>
$51,592 $50,889 $49,049 $45,784 $41,691 $38,687 $36,393
49,181 48,681 45,952 42,800 38,419 35,836 33,771
-- 265 -- 751 105 -- --
1,568 1,651 1,570 1,338 1,164 1,218 1,280
843 292 1,527 895 2,003 1,633 1,342
(22) (38) (82) (25) (33) 108 152
821 254 1,445 870 1,970 1,741 1,494
(57) (263) 181 (40) 461 424 271
-- (139) -- -- (172) -- --
883 646 1,221 879 1,644 1,292 1,193
396 256 288 31 (11) 47 101
-- -- -- -- -- -- --
-- -- -- 544 -- -- --
1,279 902 1,509 1,454 1,633 1,339 1,294
..............................................................................
..............................................................................
$37,724 $31,785 $27,268 $23,103 $19,340 $15,742 $13,136
16,677 18,215 18,419 17,186 16,586 14,584 14,119
5,846 5,488 5,022 4,748 4,399 4,267 4,251
4,459 4,074 4,358 3,716 4,115 4,013 4,115
2,887 2,581 2,398 2,390 2,331 1,874 1,509
77,845 71,050 63,935 57,420 52,124 45,676 41,359
31,612 27,184 22,331 18,521 14,257 11,075 8,876
1,775 7,462 6,880 4,359 3,996 1,545 2,106
16,398 10,782 8,434 8,274 8,507 8,871 9,023
18,173 18,244 15,314 12,633 12,503 10,416 11,129
128% 142% 112% 90% 92% 80% 95%
$14,188 $12,824 $13,622 $14,055 $13,541 $13,017 $11,776
..............................................................................
..............................................................................
$ 40.29 $ 37.38 $ 39.77 $ 37.75 $ 35.77 $ 33.90 $ 31.66
342,851 345,071 348,597 351,999 328,446 319,686 326,201
344 343 351 379 378 369 363
$2.56 $1.88 $3.48 $2.32 $4.33 $3.46 $3.23
1.15 .75 .82 .08 (.03) .12 .28
-- -- -- -- -- -- --
-- -- -- 1.44 -- -- --
3.71 2.63 4.30 3.84 4.30 3.58 3.51
$2.00 $2.00 $2.00 $2.00 $2.00 $1.76 $1.76
53.9% 76.0% 46.5% 52.1% 46.5% 49.2% 50.1%
43 1/2-24 3/8 41 7/8-22 48 1/8-36 1/2 46-32 1/4 59 1/2-29 3/4 50 3/8-35 7/8 41 1/8-30 7/8
37 7/8 25 3/8 38 1/8 40 7/8 33 1/2 39 3/4 39
12-7 16-8 11-8 12-8 14-7 14-10 12-9
..............................................................................
</TABLE>
Operating results and financial position for 1986 and thereafter
may not be comparable to 1985 due to adoption of new pension
accounting rules.
Series A Mandatorily Exchangeable Preferred Shares are considered
common shares for purposes of calculating book value per common
share, average common shares outstanding and earnings (loss) per
common share. See note 1 to the consolidated financial statements.
The percent of debt to equity for 1994 and 1993 is calculated using
equity excluding unrealized net capital gains.
N/M--Not meaningful.
65
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SEARS, ROEBUCK AND CO.
MANAGEMENT'S Report
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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The financial statements, including the financial analysis and all other
information in this annual report, were prepared by management which is
responsible for their integrity and objectivity. Management believes the
financial statements, which require the use of certain estimates and judgments,
fairly and accurately reflect the Company's financial position and operating
results, in accordance with generally accepted accounting principles. All
financial information in this annual report is consistent with the financial
statements.
Management maintains a system of internal controls which it believes provides
reasonable assurance that, in all material respects, assets are maintained and
accounted for in accordance with management's authorizations and transactions
are recorded accurately in the books and records. The concept of reasonable
assurance is based on the premise that the cost of internal controls should not
exceed the benefits derived. To assure the effectiveness of the internal control
system, the organizational structure provides for defined lines of
responsibility and delegation of authority. The Company's formally stated and
communicated policies demand of employees high ethical standards in their
conduct of its business. These policies address, among other things, potential
conflicts of interest; compliance with all domestic and foreign laws, including
those related to financial disclosure; and the confidentiality of proprietary
information. As a further enhancement of the above, the Company's comprehensive
internal audit program is designed for continual evaluation of the adequacy and
effectiveness of its internal controls and measures adherence to established
policies and procedures.
Deloitte & Touche LLP, independent certified public accountants, have audited
the financial statements of the Company and their report is presented below.
Their audit also includes a study and evaluation of the Company's control
environment, accounting systems and control procedures. The independent
accountants and internal auditors advise management of the results of their
reviews, and make recommendations to improve the system of internal controls.
Management evaluates the audit recommendations and takes appropriate action.
The Audit Committee of the Board of Directors is comprised entirely of directors
who are not employees of the Company. The committee reviews audit plans,
internal control reports, financial reports and related matters and meets
regularly with the Company's management, internal auditors and
independent accountants. The independent accountants and the internal auditors
advise the committee of any significant matters resulting from their audits of
our financial statements and internal controls and have free access to the
committee without management being present.
Edward A. Brennan
Chairman and Chief Executive Officer
James M. Denny
Vice Chairman and Acting Chief Financial Officer
James A. Blanda
Vice President and Controller
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Sears, Roebuck and Co.
We have audited the accompanying Consolidated Statements of Financial Position
of Sears, Roebuck and Co. as of December 31, 1994 and 1993, and the related
Consolidated Statements of Income, Shareholders' Equity and Cash Flows for each
of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sears, Roebuck and Co. as of
December 31, 1994 and 1993, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1994 in conformity
with generally accepted accounting principles.
As discussed in note 2 to the consolidated financial statements, the Company
changed its method of accounting for certain investments in debt securities in
1993 and postretirement benefits in 1992.
Deloitte & Touche LLP
February 24, 1995 Chicago, Illinois
66
<PAGE>
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Quarterly RESULTS (Unaudited)
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter Year
..............................................................................
millions, except per
common share data 1994 1993 1994 1993 1994 1993 1994 1993 1994 1993
..................................................................................................................
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues,prior basis $12,266 $11,298 $13,008 $12,157 $13,206 $12,719 $15,440 $14,664 $53,920 $50,838
Discontinued operations 61 53 62 55 67 56 74 67 264 231
Reclassification of
revenues of licensed
departments 235 211 205 208 203 192 260 268 903 879
As restated 12,440 11,456 13,151 12,310 13,342 12,855 15,626 14,865 54,559 51,486
..................................................................................................................
Operating income (loss),
prior basis (389) 318 786 599 470 518 753 671 1,620 2,106
Discontinued operations (15) (16) (16) (31) (11) (15) (14) (20) (56) (82)
As restated (374) 334 802 630 481 533 767 691 1,676 2,188
..................................................................................................................
Income (loss) from continuing operations,
prior basis (98) 317 503 1,093 364 454 490 545 1,259 2,409
Discontinued operations 5 (8) (10) (18) 17 (5) 3 20 15 (11)
As restated:
Income (loss) from
continuing operations (103) 325 513 1,111 347 459 487 525 1,244 2,420
Net income (loss) $ (98) $ 435 $ 503 $ 1,006 $ 364 $ 388 $ 685 $ 545 $ 1,454 $ 2,374
..................................................................................................................
Earnings (loss) per common
share, prior basis
Continuing operations $ (0.27) $ 0.82 $ 1.27 $ 2.86 $ 0.91 $ 1.15 $ 1.24 $ 1.39 $ 3.16 $ 6.22
Discontinued operations 0.01 (0.02) (0.03) (0.04) 0.04 (0.01) 0.01 0.05 0.04 (0.03)
As restated:
Income (loss) from
continuing operations $ (0.28) $ 0.84 $ 1.30 $ 2.90 $ 0.87 $ 1.16 $ 1.23 $ 1.34 $ 3.12 $ 6.25
Net income (loss) $ (0.27) $ 1.13 $ 1.27 $ 2.63 $ 0.91 $ 0.98 $ 1.74 $ 1.39 $ 3.66 $ 6.13
..................................................................................................................
Revenues, operating income, net income and
related per common share amounts for 1994 and 1993 have been restated to reflect
Homart Development Co. and
affiliated entities as a discontinued business.
The fourth quarter pretax LIFO adjustments were credits of $58 and $31 million
in 1994 and 1993, compared with charges of $24 and $36 million for the first
nine months of the respective years.
Fourth quarter 1994 results included an $80 million charge (after taxes and
minority interest) for Allstate's early retirement program. See note 6 to the
consolidated financial statements.
Fourth quarter 1994 results included an extraordinary gain of $195 million
related to the early extinguishment of debt. Second and third quarter 1993
results included extraordinary losses related to early extinguishment of debt of
$145 and $66 million, respectively. See note 12 to the consolidated financial
statements.
Second quarter 1993 results included a $635 million gain on the initial public
offering of The Allstate Corporation.
Total of quarterly earnings per common share may not equal the annual amount as
net income per common share is calculated independently for each quarter.
COMMON STOCK MARKET INFORMATION AND DIVIDEND HIGHLIGHTS (Unaudited)
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter Year
..................................................................................................................
dollars 1994 1993 1994 1993 1994 1993 1994 1993 1994 1993
..................................................................................................................
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock price range
High 55 1/8 55 3/4 51 7/8 56 1/4 51 1/8 57 3/4 52 3/8 60 1/8 55 1/8 60 1/8
Low 42 7/8 43 7/8 42 1/8 50 3/8 45 5/8 39 7/8 43 1/2 51 3/8 42 1/8 39 7/8
Close 43 1/8 54 3/4 48 55 48 53 7/8 46 52 7/8 46 52 7/8
Cash dividends declared .40 .40 .40 .40 .40 .40 .40 .40 1.60 1.60
..................................................................................................................
</TABLE>
Stock price ranges are for transactions reported in a summary of
composite transactions for stocks listed on the New York Stock
Exchange (trading symbol - S), which is the principal market for
the Company's common stock.
The 1993 third quarter stock prices reflect the when-issued price
for the Company's common stock due to the Dean Witter spin-off.
The number of registered common shareholders at Feb. 28, 1995 was
262,605.
In addition to the New York Stock Exchange, the Company's common
stock is listed on the following exchanges: Chicago; Pacific, San
Francisco; London, England; Basel, Geneva, Lausanne and Zurich,
Switzerland; Amsterdam, The Netherlands; Tokyo, Japan; Paris,
France; and Frankfurt, Germany.
67
<PAGE>
APPENDIX
GRAPHIC AND IMAGE MATERIAL
Chart (1st Chart on PAGE 23)
Two three-dimensional pie charts showing composition of 1994 assets for the
Allstate Insurance Group and Sears Merchandise Group. Top chart shows 1994
Allstate assets as follows: Fixed Income Securities, 62%; Equity Securities, 8%;
Mortgage Loans, 5%; Other Investments, 3%; Separate Accounts, 5%; and Other
Assets, 17%. Bottom chart shows 1994 Sears Merchandise Group assets as follows:
Net Receivables, 63%; Inventory, 14%; Property and Equipment, 13%; and Other
Assets, 10%.
Chart (2nd Chart on PAGE 23)
Three-dimensional pie chart showing the dollar amount (in billions) of funding
by business at year-end 1994 as follows: Domestic Operations, $18.8 net of
investments; International Operations, $1.7; and Allstate, $0.9. Total funding
at year-end 1994 was $21.4 billion.
Chart (PAGE 25)
Three-dimensional pie chart showing the percentage of various funding sources at
year-end 1994 as follows: Unsecured Commercial Paper, 22%; Asset-Backed
Commercial Paper, 8%; Securitization, 20%; Medium Term Notes, 26%; Senior
Unsecured, 18%; and Other, 6%.
Chart (PAGE 49)
Three-dimensional bar graph showing Domestic Operations' comparable store sales
growth for 1992 through 1994 as follows: 1992, 3.6%; 1993, 8.9%; and 1994, 8.3%.
Chart (1st Chart on PAGE 51)
Three-dimensional bar graph showing Domestic Operations selling and
administrative expense percent to revenues for 1992 through 1994 as follows:
1992, 24.4% (continuing businesses only); 1993, 23.5%; and 1994, 22.7%. <PAGE>
Chart (2nd Chart on PAGE 51)
Three-dimensional bar graph showing Domestic Operations operating income percent
to revenues for 1992 through 1994 as follows: 1992, 3.2% (continuing businesses
only); 1993, 4.2%; and 1994, 5.0%.
Chart (PAGE 54)
Three-dimensional bar graph showing core merchandising inventory turnover for
1992 through 1994 as follows: 1992, 3.37; 1993, 3.69; and 1994, 3.74.
Chart (PAGE 57)
Three-dimensional stacked bar graph showing the property-liability combined
ratio excluding catastrophe losses and the impact of catastrophes losses on the
combined ratio, respectively, for 1992 through 1994 as follows: 1992, 99.8 and
21.0; 1993, 99.7 and 3.3; and 1994, 99.0 and 11.8. The total combined ratio was
as follows: 1992, 120.8; 1993, 103.0; and 1994, 110.8.
Chart (PAGE 58)
Three-dimensional bar graph showing life operating income (in millions) for 1992
through 1994 as follows: 1992, $149; 1993, $169; and 1994, $226.
Chart (PAGE 60)
Three-dimensional pie chart showing the percentage distribution of fixed income
securities available for sale as follows: U.S. Government Bonds, 3.4%; Municipal
Bonds, 54.3%; Publicly-Traded Corporate Bonds, 13.3%; Privately-Placed Corporate
Bonds, 8.5%; Mortgage-Backed Securities, 18.7%; and Other, 1.8%.
Chart (PAGE 61)
Three-dimensional pie chart showing the percentage distribution of fixed income
securities held to maturity as follows: Privately-Placed Corporate Bonds, 66.9%;
Publicly-Traded Corporate Bonds, 12.2%; U.S. Government Bonds, 13.3%; and
Mortgage-Backed Securities, 7.6%.
Exhibit 21
Subsidiaries
The significant subsidiaries of Sears, Roebuck and Co., the names under which
such subsidiaries do business, and the states or countries in which each was
organized, were as follows at December 31, 1994:
Place of
Name Organization
Consolidated Subsidiaries:
Allstate Holdings, Inc. Delaware
The Allstate Corporation Delaware
Allstate Insurance Company Illinois
Allstate Life Insurance Company Illinois
Homart Holding Company of Delaware, Inc. Delaware
Homart Development Co. Delaware
HD Delaware Properties, Inc. Delaware
Sears Canada Inc. Canada
Sears Acceptance Company Inc. Canada
Sears Roebuck de Mexico, S.A. de C.V. Mexico
Sears Credit Corp. I Delaware
Sears Credit Corp. II Delaware
Sears Credit Corp. A Delaware
Sears Credit Corp. B Delaware
Sears DC Corp. Delaware
Sears Overseas Finance N.V. Netherlands Antilles
Sears Receivables Financing Group, Inc. Delaware
Sears Roebuck Acceptance Corp. Delaware
Western Auto Supply Company Delaware
189 other companies Various
The Company owns 20% to 50% of the outstanding voting securities of 61
companies which are accounted for on an equity method.
The Company has investments in a number of other corporations representing
substantial percentages (but not more than 20 percent) of their outstanding
capital stock. The Company disclaims control of any such companies.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME, FINANCIAL POSITION AND CASH FLOWS AND GROUP
SUMMARIZED STATEMENTS OF INCOME FROM THE 1994 ANNUAL REPORT TO SHAREHOLDERS
INCORPORATED HEREIN BY REFERENCE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 1,421
<SECURITIES> 42,893
<RECEIVABLES> 19,013
<ALLOWANCES> 812
<INVENTORY> 4,044
<CURRENT-ASSETS> 0<F1>
<PP&E> 10,124
<DEPRECIATION> 5,083
<TOTAL-ASSETS> 91,896
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 10,854
<COMMON> 294
1,236
325
<OTHER-SE> 8,946
<TOTAL-LIABILITY-AND-EQUITY> 91,896
<SALES> 29,451
<TOTAL-REVENUES> 54,559
<CGS> 21,568
<TOTAL-COSTS> 38,264
<OTHER-EXPENSES> 12,582
<LOSS-PROVISION> 698
<INTEREST-EXPENSE> 1,339
<INCOME-PRETAX> 1,712
<INCOME-TAX> 358
<INCOME-CONTINUING> 1,244
<DISCONTINUED> 15
<EXTRAORDINARY> 195
<CHANGES> 0
<NET-INCOME> 1,454
<EPS-PRIMARY> 3.66
<EPS-DILUTED> 3.66
<FN>
<F1>(1) Not applicable
</FN>
</TABLE>
